Last updated on February 6th, 2018 at 04:24 pm
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After Mr.Arun Jaitley’s announcement of Long Term Capital Gains (LTCG) on Stocks and Mutual Funds, stock markets crashed by almost 900 points on last Friday. Till now, LTCG is tax free on stocks and equity mutual funds. Now as per budget 2018 announcement, there is tax component on long term capital gains. The budget announcement also created confusion where the computation is different for the stocks or mutual funds purchased till 31st January, 2018 and the ones which are brought fresh from 1st Feburay, 2018. How is long term capital gains taxed on equity stocks and equity mutual funds from 2018? How LTCG computations are different till 31st Jan and from 1st February, 2018? This post is revised on 6th February, 2018 (after post is published) with clarifications received by Govt of India.
Also Read: Best Sector Funds for 2018 that can give high returns
What is existing Capital Gains Tax on Stocks and Mutual Funds?
Here are the existing guidelines on Capital Gains Taxation till last year.
1) Returns from sale of Equity stocks or Equity Mutual Funds held for < 1 year are short term capital gains – 15% is taxed.
2) Returns from sale of Equity stocks or Equity Mutual Funds held for > 1 year are long term capital gains – Zero Tax on LTCG.
3) Returns from sale of Assets other than stocks or Equity Mutual Funds held for < 3 years are short term capital gains – Taxed based on individual tax in the year which one gets STCG.
4) Returns from sale of Assets other than stocks or Equity Mutual Funds held for > 3 years are long term capital gains – 20% of LTCG is taxed.
What Changed now in 2018?
Just see point no.2 above. Returns from sale of Equity Stocks or Equity Mutual funds after 1 year were tax FREE. Now post budget announcement, there is change in taxation rules for LTCG for stocks and equity mutual funds.
How long term capital gains of 10% taxed on Stocks and Mutual Funds from 2018?
Here are the change in guidelines for taxation of long term capital gains tax on stocks and equity mutual funds from 2018.
1) There is no change in short term capital gains (STCG).
2) There would be 10% tax on long term capital gains from Stocks and Equity Mutual Funds (held for more than 1 year) from April 2018 onwards. Any equity funds or stocks sold by 31st March, 2018, there wold not be any long term capital gain tax.
3) An investor would get ₹ 1 Lakh as exemption from total long term capital gains and balance (if any), one need to pay 10% tax on LTCG.
4) Stocks or Mutual Funds purchased prior to 31st January, 2018, one need to assess the value as on that date (Highest of (a) purchase value (b) value as on 31st January, 2018) to compute capital gains tax.
5) Stocks or Mutual Funds purchased on or after 1st February, 2018, one would already know what is the purchase value and LTCG can be computed accordingly.
Also Read: Top 10 Multibagger Stocks that benefits from Rural Spending announced in budget
How long term capital gains of 10% taxed on Stocks and Mutual Funds from 2018 – Explained with examples
Example 1 – LTCG Taxation on Stocks and Mutual Funds from 2018 which was brought on or prior to 31st January, 2018
Mr.Rajesh purchased Equity Stocks of ₹ 1 Lakh on or before 31st July, 2017 (6 months prior to budget announcement date). The value of such stocks are ₹ 1.2 Lakhs on 31st January, 2018. The acquisition value (as per finance bill 2018 it is highest of purchase value or deemed value as on acquisition of asset) is ₹ 1.2 Lakhs.
a) If Mr.Rajesh sells all his stocks before 31st July, 2018 (< 1 year), short term capital gain of 15% to be paid. Assuming that he sold them at ₹ 1.3 Lakhs, STCG is ₹ 10,000 (₹ 1.3 Lakhs minus ₹ 1.2 Lakhs) and 15% of ₹ 10,000 = ₹ 1,500 is the STCG Tax.
B) If Mr.Rajesh sells his stocks after 31st July, 2018 (> 1 year), long term capital gain applies. Assuming that he sold them at ₹ 1.3 Lakhs, LTCG is ₹ 10,000 (₹ 1.3 Lakhs minus ₹ 1.2 Lakhs) and if we remove minimum exemption of ₹ 1 Lakh, the net LTCG is nil and income tax on LTCG is also nil.
c) If Mr.Rajesh sells his stocks after 31st July, 2018 (> 1 year), long term capital gain applies. Assuming that he sold them at ₹ 2.3 Lakhs, gross LTCG is ₹ 1.1 Lakhs (₹ 2.3 Lakhs minus ₹ 1.2 Lakhs) and if we remove minimum exemption of ₹ 1 Lakh, net long term capital gain is ₹ 10,000. LTCG Tax @ 10% would come to ₹ 1,000.
Example 2 – LTCG Taxation on Stocks and Mutual Funds from 2018 which was brought on on prior to 31st January, 2018
Mr.Mahesh purchased Mutual Funds of ₹ 10 Lakh on or before 31st July, 2017 (6 months prior to budget announcement date). The value of such mutual funds are ₹ 12 Lakhs on 31st January, 2018. The acquisition value (as per finance bill 2018 it is highest of purchase value or deemed value as on acquisition of asset) is ₹ 12 Lakhs.
a) If Mr.Mahesh sells all his mutual funds before 31st July, 2018 (< 1 year), short term capital gain of 15% to be paid. Assuming that he sold them at ₹ 13 Lakhs, STCG is ₹ 100,000 (₹ 13 Lakhs minus ₹ 12 Lakhs) and 15% of ₹ 100,000 = ₹ 15,000 is the STCG Tax.
B) If Mr.Mahesh sells them after 31st July, 2018 (> 1 year), long term capital gain applies. Assuming that he sold them at ₹ 13 Lakhs, LTCG is ₹ 100,000 (₹ 13 Lakhs minus ₹ 12 Lakhs) and if we remove minimum exemption of ₹ 1 Lakh, LTCG is nil and tax on LTCG is also nil.
c) If Mr.Mahesh sells this after 31st July, 2018 (> 1 year), long term capital gain applies. Assuming that he sold them at ₹ 23 Lakhs, LTCG is ₹ 11 Lakhs (₹ 23 Lakhs minus ₹ 12 Lakhs) and if we remove minimum exemption of ₹ 1 Lakh, long term capital gain is ₹ 10 Lakhs. LTCG Tax @ 10% would come to ₹ 1 Lakh.
Example 3 – LTCG Taxation on Stocks and Mutual Funds from 2018 which was brought on on after 1st February, 2018
Mr.Kishore purchased Equity Mutual Funds of ₹ 5 Lakh on or after 1st February, 2018 (post budget announcement date). The acquisition value would not change as these are after the cut-off date of 1st February, 2018.
a) If Mr.Kishore sells this before 1st February, 2019 (< 1 year), short term capital gain of 15% to be paid. Assuming that he sold them at ₹ 6 Lakhs, STCG is ₹ 1 Lakh and STCG Tax @ 15% of ₹ 1 Lakh = ₹ 15,000.
B) If Mr.Kishore sells his mutual funds after 1st February, 2019 (> 1 year), long term capital gain applies. Assuming that he sold them at ₹ 8 Lakhs, Gross LTCG is ₹ 3 Lakhs and if we remove minimum exemption of ₹ 1 Lakh, net LTCG would be ₹ 2 Lakhs. LTCG tax is 10% @ ₹ 2 Lakhs = ₹ 20,000.
Example 4 – LTCG Taxation on Stocks and Mutual Funds from 2018 which was brought on on after 1st February, 2018
Mr.Bala purchased Equity Mutual Funds of ₹ 20 Lakh on or after 1st February, 2018 (post budget announcement date). The acquisition value would not change as these are after the cut-off date of 1st February, 2018.
a) If Mr.Bala sells this before 1st February, 2019 (< 1 year), short term capital gain of 15% to be paid. Assuming that he sold them at ₹ 25 Lakhs, STCG is ₹ 5 Lakhs and STCG tax of 15% @ ₹ 5 Lakhs = ₹ 75,000.
B) If Mr.Bala sells his mutual funds after 1st February, 2019 (> 1 year), long term capital gain applies. Assuming that he sold them at ₹ 30 Lakhs, Gross LTCG is ₹ 10 Lakhs and if we remove minimum exemption of ₹ 1 Lakh, net LTCG would be ₹ 9 Lakhs. LTCG tax is 10% @ ₹ 9 Lakhs = ₹ 90,000.
Example 5 – LTCG Taxation on Stocks and Mutual Funds from 2018 which was brought before and sold after 1st February, 2018
Mr.Vijay purchased Equity Mutual Funds of ₹ 10 Lakh on 1st February, 2015. The value of such funds are ₹ 12 Lakhs as on 31st January, 2018.
a) If Mr.Bala sells them between 1st February, 2018 and 31st March, 2018, these would fall under long term capital gains (> 1 year) and since it is before 31st March, 2018, these are tax free.
B) Mr.Bala sells his mutual funds after 1st April, 2018 and the value is ₹ 14 Lakhs. Since he sold after 1st April, 2018, gross long term capital gain is ₹ 2 Lakhs (₹ 14 Lakhs minus ₹ 12 Lakhs of base price). Net long term capital gain is ₹ 1 Lakh (₹ 2 Lakhs minus ₹ 1 lakh standard deduction on LTCG). LTCG tax is 10% @ ₹ 1 Lakh = ₹ 10,000.
Does 10% long term capital gains are taxed for all Stocks and Mutual Funds from 2018?
Long Term Capital Gains Tax @ 10% is applicable for the following:
1) Applies to all Equity Stocks which an investor has purchased / holding as on 1st April, 2018 and sold after this date. Any stocks sold before 1st April, 2018, these are any ways exempted.
2) Applies to all Equity Mutual Funds which an investor has purchased / holding as on 1st April, 2018. If you have sold your equity mutual funds before this date, these are any ways tax free.
What does this LTCG Tax on equity mean to investors?
Simple message. Lower your expectation on returns. Earlier I used to keep indicating that one can expect 12% to 15% annualized returns on mutual funds. Now my message should be that one can expect 10% to 13% annualized returns.
How can we avoid or reduce LTCG Tax of 10% on Equity Stocks or Equity Mutual Funds?
While you can go ahead and book the profits before 31st March, 2018 to avoid tax, there are couple of ways where you can avoid or reduce LTCG of 10% in future.
1) Book profit every year (> 1 year holding) upto ₹ 1 Lakh exemption provided
As per budget they have announced ₹ 1 Lakhs exemption on LTCG on Equity Stocks and Mutual Funds per year. Hence you can go ahead and book upto ₹ 1 Lakh profit every year (> 1 year holdings) and get tax benefit. E.g. Mr.Akhil has invested in Stocks for ₹ 10 Lakhs on 1st February, 2018. Between 1st February, 2019 to 31st March, 2019 (before financial year closure) if the value of his stocks are ₹ 11 Lakh, he can go ahead and book the profit and again purchase the same stocks. Since he booked the profit, it would come under ₹ 1 Lakh exemption and no LTCG tax to be paid. He is still holding his stock, hence from personal front, there is no issue about investments.
2) Invest for long term of 10 to 15 years
One can invest for long term of 10 to 15 years. Since you are investing for long term, the tax amount would be very small. E.g. if you are getting 13% annualised returns, your net returns coule be 11.7% after taxation.
3) Invest in diversified portfolio within Stocks or Mutual Funds
Like I indicated earlier, don’t put all your investments in one class of funds or stocks. Invest in variety of stocks or mutual funds. Invest in large cap, midcap or balanced funds. Invest in stocks that benefit from rural Sector or IT Sector or Auto Sector. These tend to perform well across various market cycles. When you want to book profits, you can book profits which are running good during that time. This way if you are paying 10% LTCG you may not see big difference.
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Suresh
How long term capital gains of 10% taxed on Stocks and Mutual Funds from 2018
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