Long-term capital gains (LTCG) or loss are generated by assets like real estate or equity. What makes a profit or loss from the asset 'long term' or 'short term' varies on the time frame set by the tax regulations.
LTCG is in the news of late due to re-introduce of tax on direct equity in the budget for 2018-19 that was earlier exempt. The government found that the tax exemption regime is "inherently biased against manufacturing and has encouraged diversion of investment to financial assets" and led to "significant erosion in the tax base resulting in revenue loss." The exemption also caused the abusive use of tax arbitrage opportunities created by these exemptions.
On 4th of February, 2018, the Income Tax (IT) Department of India released an FAQ (Frequently Asked Questions) document to help citizens understand the new tax regime that will be applicable on Long-Term Capital Gains from 1st of April, 2018.
24 questions were answered. Here is a summary of all the questions answered:
1. Which assets will be covered under the new LTCG tax regime?
- Equity Shares in a company listed on a recognised stock exchange
- Unit of an equity oriented fund
- Unit of a business trust
These will be considered LCT assets if:
- They are held for over 12 months from the date of acquisition
- the Securities Transaction Tax (STT) is paid at the time of transfer. However, in the case of equity shares acquired after 1.10.2004, STT is required to be paid even at the time of acquisition (subject to notified exemptions).
2. What are the modes of acquisition of equity shares which are proposed to be exempted from the condition of payment of STT?
Certain mode of acquisitions of equity shares that were exempt under the current tax regime (refer here) will be taxed from April 1, 2018, under clause 31 of the Finance Bill, 2018.
3. What is the point of chargeability of the tax?
It will apply only on transfer of LTCG on or after 1st of April 2018.
4. What is the method for calculation of long-term capital gains?
Full considered amount of sale of the asset - cost of acquisition = Capital gain
5. How do we determine the cost of acquisition for assets acquired on or before 31st January 2018?
6. Whether the cost of acquisition will be inflation-indexed?
No, not under the new tax regime that is applicable from 1st April 2018.
7. What is the date of commencement of the proposed new tax regime?
1st April 2018. This means you can avail the tax exemption benefits till then.
8. What will be the tax treatment of accrued gains upto 31st January 2018?
Gains accrued upto 31st January, 2018 will continue to be exempt. The fair market price on 31st January 2018 will be considered cost of acquisition (except some cases as explained in Q5).
9. What will be the tax treatment of transfer made on or after 1 st April 2018?
LTCG exceeding the limit of Rs 1 lakh will be taxed at 10%. However, there will be no tax on gains accrued upto 31st January, 2018.
10. What is the date from which the holding period will be counted?
The holding period will be counted from the date of acquisition.
11. Whether tax will be deducted at source in case of gains by a resident tax payer?
No. There will be no deduction of tax at source from the payment of long-term capital gains to a resident tax payer.
12. Whether tax will be deducted at source in case of payment of long-term capital gains by non-resident tax payer (other than a Foreign Institutional Investor)?
Tax at the rate of 10%. will be deducted from payment of long-term capital gains to a non-resident tax payer (other than a Foreign Institutional Investor).
13. Whether tax will be deducted at source in case of payment of long-term capital gains by Foreign Institutional Investors (FIIs)?
14. How will the gains in the case of FIIs be determined?
Same as residents tax payers.
15. What will be the cost of acquisition in the case of bonus shares & right shares acquired before 1 st February 2018?
The fair market value of the bonus shares as on 31st January 2018 will be taken as the cost of acquisition (except in some typical situations explained before), and hence, the gains accrued up to 31st January 2018 will continue to be exempt.
16. What will be the treatment of long-term capital loss arising from a transfer made between 1st February 2018 and 31st March 2018?
As the current tax-free regime will be applicable, the long-term capital loss arising during this period will not be allowed to be setoff or carried forward.
17. What will be the treatment of long-term capital loss arising from a transfer made on or after 1st April 2018?
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.
You can refer the full official statement released by the IT department here.