What is the new long-term capital gains tax on equity oriented mutual funds and

stocks? This new 10 per cent tax on long-term capital gains (LTCG) on equity mutual
fund investment and stocks/shares was proposed by the finance minister in Budget
2018. In this context, long-term capital gains mean gain or profit arising from selling
of stock or redemption of equity mutual funds held more than one year.
Remember that a mutual fund has at least 65 per cent allocation to equities is
termed an equity mutual fund for taxation purposes. (Also read: Waiver On LTCG Tax
To End On 31 March)

If the investor has incurred a loss, there is no LTCG tax to be paid.

When will the new LTCG tax become effective?

The new tax will be levied on redemption of equity mutual fund units or sale of
shares after April 1, 2018, provided they have been held for more than one year. So
if you sell before on or before March 31, 2018, there will be no long-term capital
gains tax. If the mutual fund units/stocks are sold before one year of holding, short
term capital gains tax apply. The short-term capital gains tax has been kept
unchanged at 15 per cent.

What is the new LTCG tax rate on equity mutual funds/stock market investments?

The long-term capital gains exceeding Rs. 1 lakh arising from redemption of mutual
fund units or equities on or after April 1, 2018 will be taxed at 10 per cent (plus cess).
This includes long-term capital gains earned from your equity or mutual fund
investments put together in a financial year. Suppose you earn Rs. 2 lakh in
combined long-term capital gains from stocks or mutual fund investments in a
financial year. The taxable long-term capital gains will be Rs. 1 lakh (Rs. 2 lakh - Rs. 1
lakh) and tax liability will be Rs. 10,000 (10 per cent of Rs. 1 lakh)

Set-off or carry forward benefits

Long-term capital loss arising from sale or redemption on or after April 1, 2018, will
be allowed to be set-off and carried forward. It can be set-off against any other long-
term capital gains and unabsorbed loss can be carried forward to subsequent eight
years for set-off against long-term capital gains.

However, remember that since tax exemption is available on long-term capital gains
on units sold till March 31, 2018, the long-term capital loss arising during this period
will not be allowed to be setoff or carried forward.

How to calculate long-term capital gains?

The long-term capital gain is calculated by reducing the cost of acquisition from the
redemption value of mutual funds or stocks.

How do calculate the cost of acquisition for assets acquired on or before January 31,
2018?

First, you need to know about fair market value (FMV) of the particular equity
investment as on January 31, 2018. In case of a listed equity share or unit, the fair
market value means the highest price of such share or unit quoted on a recognized
stock exchange on January 31, 2018. However, if there is no trading on 31st
January, 2018, the fair market value will be the highest price quoted on a date
immediately preceding 31st of January, 2018, on which it has been traded.

According to the income tax department, the cost of acquisition for the long-term
capital asset acquired on or before 31st of January, 2018 will be the actual cost.
However, if the actual cost is less than the fair market value of such asset as on 31st
of January, 2018, the fair market value will be considered to be the cost of
acquisition.

Further, if the full value of consideration on sale is less than the fair market value,
then such full value of consideration or the actual cost, whichever is higher, will be
considered to be the cost of acquisition.

Scenario 1

Purchase price on January 1, 2017 is Rs. 100

Price on January 31, 2018, is Rs. 200

Sold on March 31, 2018, at Rs. 250

Since it is sold on or before March 31, 2018, there is no tax liability

Scenario - 2

Purchase price on January 1, 2017 is Rs. 100

Price on January 31, 2018, is Rs. 200

Sold on April 1, 2018, at Rs. 250

As the investment is sold after March 31, it will attract long-term capital gains. Since
the actual cost of acquisition is less than the fair market value as on 31st of January,
2018, the fair market value of Rs. 200 will be taken as the cost of acquisition and the
long-term capital gain will be Rs. 50 (Rs. 250 - Rs. 200)

Scenario 3

Purchase price as on January 1, 2017 is Rs. 100

Fair market value is Rs. 200 on 1st of January, 2018

Sold on 1st of April, 2018 at Rs. 150

The actual cost of acquisition is less than the fair market value as on 31st of
January, 2018. The sale value is also less than the fair market value as on 31st of
January, 2018. So, the sale value of Rs. 150 will be taken as the cost of acquisition
and the long-term capital gain will be NIL (Rs. 150 - Rs. 150).

Scenario 4

Purchase price on 1st of January, 2017 is Rs. 100

Fair market value is Rs. 50 on 31st of January, 2018

Sold on 1st of April, 2018 at Rs. 150

In this case, the fair market value as on 31st of January, 2018 is less than the actual
cost of acquisition. So the actual cost of Rs. 100 will be taken as actual cost of
acquisition and the long-term capital gain will be Rs. 50 (Rs. 150 - Rs. 100).

Scenario 5

Purchase price on 1st of January, 2017 at Rs. 100

Fair market value on 31st of January, 2018 is Rs. 200

Sold on 1st of April, 2018 at Rs. 50

The actual cost of acquisition is less than the fair market value as on 31st January,
2018. The sale value is less than the fair market value as on 31st of January, 2018
and also the actual cost of acquisition. Therefore, the actual cost of Rs. 100 will be
taken as the cost of acquisition in this case. Hence, the long-term capital loss will be
Rs. 50 (Rs. 50 - Rs. 100) in this case.