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  • Saving Tax on Long Term Capital Gains and Its Attributes

    If you are investing in equities, equity mutual funds or even business trust units, you will be bound to conform to the norms surrounding long-term capital gains, or LTGCs.

    The Union Budget 2018 has proposed new additions and developments in the way equity shares and mutual funds are taxed. However, take into consideration the following escape units and factors of mitigation:

    1. The first escape window here is that if an equity (that has remained under possession for more than a year) is sold off on or before 31 March, 2018, an exemption can still be claimed on LTCGs on the same. The recently established tax norm is applicable April onwards.
    2. The second escape window herein is that long-term capital gains levied on similar financial instruments that are registered post 31 March, 2018 by a taxpayer will be allowed an exemption upto Rs.1 lakh on a yearly basis.

    However, if you have made the said investment post 31 March, 2018, taxation of LTCG will materialise in the following manner:

    The acquisition cost of the mutual fund unit or the share that is bought before 1 February, 2018 will be more than the exact acquisition cost of the asset, although, it will be lower than the FMV (Fair Market Value) of the said asset.

    Computation of Long-Term Capital Gains in accordance with the Union Budget of 2018

    1st Scenario Pre-Budget Scenario Post-Budget Scenario
    Purchase date 1 February 2016 1 February 2016
    Date when it is sold 25 March 2018 25 March 2018
    Price of Purchase 100 100
    Price of Sale 130 130
    Fair Market Value as of 31 January 2018 120 120
    Tax Calculation on Long-Term Capital Gains
    Consideration of Sale 130 130
    Acquisition Cost 100 120
    Capital Losses and Gains 30 10
    Tax Exemption -30 -10
    Capital Gains N/A N/A
    10% Tax N/A N/A
    2nd Scenario Pre-Budget Scenario Post-Budget Scenario
    Purchase Date 1 February 2018 1 February 2018
    Date when it is sold 1 April 2019 1 April 2019
    Price of Purchase 100 100
    Price of Sale 130 130
    Fair Market Value as of 31 January 2018 120 N/A
    Units 1 1
    Tax Calculation on Long-Term Capital Gains
    Consideration of Sale 130 130
    Acquisition Cost 100 100
    Capital Losses and Gains 30 30
    Tax Exemption -30 N/A
    Capital Gains (Net Value) N/A 30
    10% Tax N/A 3

    Now, let us understand how Long-Term Capital Gains will actually be computed according to officials of the Income Tax Department.

    Scenario 1: On 1 January 2017, an equity share is bought at the cost of Rs.100 and its FMV stands at Rs.200 as of 31 January 2018 and its sale happens on 1 April 2018 at the price of Rs.250.

    Since the acquisition cost incurred is fairly less than the FMV (on 31 January 2018), Rs.200 will act as the actual acquisition cost and the profit (LTGC) will be Rs.50.

    Scenario 2: On 1 January 2017, an equity share is bought at the cost of Rs.100 and its FMV stands at Rs.50 as of 31 January 2018, and its sale happens on 1 April 2018 at the cost of Rs.150. In this particular situation the FMV that stands on 31 January 2018 is comparatively lower than the acquisition cost and therefore, Rs.100 (which is the actual cost) will be the cost of acquisition and long-term capital gain in this scenario will be Rs.50.

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