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Equity shares are among the more popular high-risk investment instruments available in India. When individuals choose to invest in equity shares of a company, they undertake the maximum entrepreneurial risk or reward associated with the particular business venture.
Now, when individuals choose to purchase shares or any other capital asset like bonds, stocks or even real estate, they do so in the hope of availing returns from these investments. Capital gain is the profit that is resultant from the sale of such investment instruments when sale price of the asset is greater than purchase price.
Capital gains can be of two types –short term capital gains and long term capital gains on shares. Following is an expansion on what is LTCG, how to calculate them and the tax implications on these gains.
A long term capital gain is profit generated from sale of any qualifying investment option that has been owned by an investor for more than 12 months at the time of sale of asset. It is determined by the difference in value of sale price and purchase price of assets owned for over 12 months. This gain is, therefore, the net profit that investors enjoy while selling this asset.
When it comes to qualifying investment options, listed equity shares are included in those qualifying investment options, which if held over 12 months, generate LTCG on shares. However, in case of unlisted equity shares, holding period of an asset should be around 24 to 36 months or more to be considered as long-term capital assets.
As far as profitability on investment is considered, most investors prefer to invest in the long-term assets to earn long term capital gain on equity shares as they also offer tax benefits over earnings from short term capital assets.
Before learning the process of calculation of long term capital gain on shares, it is crucial to be familiar with several important terms. These are –
- Sale value
- Cost of acquisition
- Expenditure related to sale or transfer
- Holding period
Sale Value –
Sale value denotes value receivable or received on the sale of any capital asset. In case of shares, it is given by gross selling price of an asset, excluding Securities Transaction Tax (STT) and brokerage charges.
Cost of Acquisition –
For equity shares purchased before 1st February 2018, the cost of acquisition is calculated through the following steps –
- Fair market value of an investment is calculated by multiplying the number of purchased shares with their highest price, as on 31st January 2018.
- The lesser value between the fair market value and the actual sale value of the investment is chosen.
- It is then compared with purchase value of the share, and the higher value between the two is chosen. This value is the cost of acquisition of the asset.
For shares not traded on 31st January. 2018, the highest value on the preceding trading day is taken into account.
Expenditure Related to Sale or Transfer –
These expenses include registry and brokerage charges and other expenses that are incurred on the sale of an asset. With equity shares where Securities Transaction Tax is charged on sale transaction, the STT charges cannot be deducted in the computation of long term capital gains on shares.
Indexation helps to incorporate the time value of money (with adjustment of the inflation factor) in the calculation of LTCG on shares to ensure that the gains are computed according to the current value of money. Indexation uses the Cost Inflation Index (CII) with 1.4.2001 as the base year.
Holding period is given by number of months during which equity shares were with the assesse. This period starts from date of acquisition of an asset and ends on the day preceding date of transfer of the equity share.
With above factors in mind, the standard format of calculating long term capital gains on shares under Income Tax Act, 1961 is given by the table below –
|COMPUTATION OF LTCG|
|Less:||Indexed cost of acquisition of an asset||xxx|
|Less:||Indexed cost of asset improvement||xxx|
|Less:||Expenses incurred concerning transfers or sale||xxx|
|Long term capital gain||xxx|
Illustrations for Calculation of LTCG on Equity Share for Different Scenarios –
Case 1 – If an equity share is acquired on January 1st 2018 at Rs. 500 and its fair market value is Rs. 700 on January 31st 2019, and the share is sold on April 1st, 2019 at Rs. 850, the following will be the calculation of LTCG on this share –
Since actual cost of acquisition < fair market value on January 31st, 2019, fair market value will be considered the cost of acquisition of said asset.
Therefore, long term capital gain, in this case, will be Rs. (850-700) = Rs. 150 (without considering the other factors like cost of asset improvement, expenses from sale and transfer, etc.)
Case 2 – If an equity share is acquired on January 1st, 2018, at Rs. 500 and fair market value is Rs. 700 on January 31st, 2019 and share is sold on April 1st, 2019 at Rs. 600, the LTCG will be given as follows –
Here, actual cost of acquisition < fair market value on January 31st, 2019. However, sale value is less than the fair market value as of January 31st, 2019. Thus, sale value of Rs. 600 will be considered to be cost of acquisition, and thus, the LTCG will be NIL.
Case 3 – If an equity share is acquired on January 1st, 2018, at Rs. 500 and its fair market value is Rs. 300 on January 31st, 2019 and the share is sold on April 1st, 2019 at Rs. 600, the LTCG will be given by –
Here, the fair market value on 31st January 2019 < actual cost of acquisition. Therefore, the actual cost of Rs. 500 is considered cost of acquisition; and LTCG will be Rs. (600-500) = Rs. 100.
Case 4 – if equity share is acquired on January 1st, 2018, at Rs. 500 and its fair market value is Rs. 700 on January 31st, 2018 and it is sold on April 1st, 2019 at Rs. 300, LTCG will be as follows –
Here, actual cost of acquisition < fair market value on January 31st, 2019. Also, sale value is less than fair market value and cost of acquisition. Thus, actual cost of Rs. 500 will be considered cost of acquisition in this case. Thus, investors will incur long term capital loss of Rs. (300- 500) = Rs. 200 loss in this case.
Tax Implications on Long Term Capital Gains from Shares
Previously, the LTCG on equity shares were exempt from taxation under Section 10 (38) of the Income Tax Act, 1961. However, the Annual Budget of 2018 proposed the withdrawal of Section 10 (38) and alternatively introduced Section 112A to decide the tax implication of LTCG on the sale of equity shares.
Under this Section, the LTCG on share is taxed at the concessional rate of 10% for the gains exceeding the amount of Rs. 1 Lakh. Here, the amount does not include the benefits of indexation, as well as, the benefits of calculation of capital gain in foreign currency, for non-residents.
Compared to gains from short term capital assets which is taxed at 15%, the long term capital gains make for a much better investment option.
|Tax Type||Tax applicable|
|Long term capital gains tax||10% over and above Rs. 1 Lakh on sale of equity shares.|
|Short term capital gains tax||15%, when securities transaction tax is applicable.|
Now, this imposition of tax on long term capital gains on shares is probably an effort on the government’s part to compensate for the shortage in GST collections. This tax is imposed on the already existing Securities Transaction Tax which had been in effect since 2004, to check the instances of tax evasion on capital gains. Thus, even though it is still beneficial over STCG, the imposition of Section 112A has made investors rethink their investment decisions to an extent, in recent times.