10% LTCG Tax on sale of Equity Mutual Funds or Stocks | Budget 2018-19

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Government brought back tax on long-term capital gains on listed equities. In this budget 2018-19, government authorities said that long-term capital gains of over Rs 1 Lakh will be taxed at 10 per cent without benefit of indexation. No changes have been made to existing short-term capital gains tax regime. They will continue to be taxed at 15 percent. Let us take a look how long-term capital gain tax will affect your investments during long-run.

What are long term capital gains (LTCG) in equities?

Profit (if any) that you make on your mutual fund or equity investments, when you redeem or sell MF units is referred to as Capital Gains. It can be Short Term Capital Gain (STCG) or Long Term Capital Gain (LTCG) depending upon ‘Period of Holding’. This tax that is applicable on these profits is known as ‘Capital Gains Tax’.

Any gain made after holding shares for more than one year is known as long term capital gain. For example, if you invest in XYZ stock at Rs 100 on 1 Jan 2017 and sold same at Rs 150 after 1 Jan 2018, gain of Rs 50 is termed as long term capital gains. Check Three simple ways to save Income Tax without investing fresh funds 

Who will be taxed?

If you have invested in share market and earns profit from rise in share value. Earlier, if you have sold his share after 1 year did not have any taxes on profit. However, that is changed, from 1st April 2018, all share market need to pay taxes on profit they earn both short-term and long term.

How you will be taxed?

If you hold shares for more than one year, you will be taxed at 10 per cent, if gains exceed Rs 1 lakh. Short term investors will continue to pay 15 per cent short-term capital gains tax if you sells share within year from date of purchase. Read 10 main things you need to know about tax saving fixed deposits 

How will exist people who are already invested be taxed?

Let us understand with an example, if you bought shares before 5 years of Rs 1 Lakh, whose market value has increased to Rs. 2 Lakh, then you, will come under LTCG tax regime after April 1, 2018, if you sell your shares and book profits. However, there is no tax as per new regime if gains are below Rs 1 Lakh.

Suppose, if you sell them on April 30, 2018 and market value of shares on that particular date is Rs. 2.5 Lakh. In such case, cost of acquisition will be Rs 2 Lakh as on January 31, 2018. Therefore, LTCG tax will apply on Rs 50000. Cost price for LTCG calculation starting April 1, 2018 is higher of actual cost price or price on 31 Jan 2018.

Do you have to pay long-term capital gains tax in mutual fund?

You have to pay long-term capital gains tax in equity-oriented mutual funds. And long term capital gains (LTCG) over Rs 100,000 per year on equity mutual funds will be taxed at 10 per cent now. Also Dividends will be taxed at 10 per cent.

How will LTCG tax calculation happens?

If you hold any investment in equity or equity –related scheme over period exceeding of one year or more and make gains for long-term capital gains. However, you will not be taxed if you sell all your units/shares before 31 March of current financial year if your gains are below Rs 1 Lakh. But capital gains above Rs 1 Lakh will get taxed. This LTCG tax exemption under new regime will get effective from April 1, 2018.

10 per cent LTCG Tax on sale of Stocks / Equity Mutual funds

As per existing tax rule, you need not pay any tax on long term capital gains if you are equity customer. If investments in equity mutual funds or stocks are sold within a year, then gains will be treated as short term capital gains are taxed at 15 percent.

According to the budget proposal

  • Any person who sells shares after April 1, 2018 will pay a long-term capital gains tax at the rate of 10 percent on gains of more than Rs 1 lakh. For such shares, the notional cost of acquisition will be price on Jan. 31, 2018.
  • If a person who has held shares for more than one year sells them before March 31, 2018, there will be no long-term capital gains tax.
  • A person who sells shares after April 1, 2018, at a loss, the cost of acquisition for such shares would be the price on the actual date of acquisition and not the notional cost on Jan. 31, 2018.

For Example:

If an equity share is purchased six months before 31st January, 2018 at Rs 1,000 and the highest price quoted on 31st January, 2018 in respect of this share is Rs 1,200, there will be no tax on the gain of Rs 200, if this share is sold after one year from the date of purchase.

However, any gains in excess of Rs 200 earned after 31st Jan 2018 will be taxed at 10%, if this share is sold after 31st July 2018. Kindly note that you pay tax only the extra gain made after 31st Jan, 2018 and only if all such extra gains are above Rs 1 lakh.

So, If your LTCG is say Rs 1.25 Lakh and tax of 10% is applicable then you need to pay tax on Rs 25,000 only i.e., Rs 2,500 (up to Rs 1 Lakh, it is tax-free and on the remaining Rs 25,000 gains, 10% tax is applicable). Also see 2018 Budget will give additional tax relief for pension plans and term insurance? 

LTCG exemptions for small retail investors

If you gains below Rs 1 lakh should not worry about new regime because they will not be taxed under LTCG. Small investors who do not have LTCG in excess of Rs 1 lakh in year can invest in equity shares or mutual fund (growth funds) without any impact of this new tax. By exempting gains below Rs 1 lakh from LTCG, ensures that smaller investors will end up paying minimal tax.

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