If you think income tax just relates to the salary then you might need to reconsider as there are other high sources of income other than salary. One of the main sources of income is selling of capital assets. Those transactions where capital asset is associated with in turn results in capital gains. The capital gains, in turn, bifurcate into the long term and short term capital gain. Eventually, the tax is there on the long-term and short-term gain.After reading this blog, you will come to know the basics of long-term capital gains and recent changes in Budget 2018.
Let us discuss the basics of long-term capital gains
What is a capital asset?
The capital asset includes any kind of property held by an assessee. It need not be concerned with his business or profession. It also includes the securities held by FII which is Foreign Institutional Investor. And yet again the list excludes stock trade and movable property from this list.
It includes Jewellery, archaeological collections, sculpture, any work of art.However, personal assets are outside the ambit of capital assets.
What is short-term and long-term capital asset?
What are short-term capital gains and long-term capital gains?
The gain which arises from the transfer of the short-term capital asset is a short-term capital gain. However, gain arising from the transfer of the long-term capital asset is a long-term capital gain. There is an exception to this rule, like gain on a depreciable asset, is always taxable as short-term capital gain.Check out various investment instruments and their tax rates for STCG & LTCG as below-
Why is there a need for separation of capital gains?
Since the taxability of capital gains depends on the nature of gain, it leads to their bifurcation as long term or short term capital gains. So it implies that the tax gain for the long term and short term tax gain are not similar due to different tax rates provided under income tax Act.
Cost of improvement (COI)
Cost of improvement means additions to a capital asset in the form of capital expenditure. In other words, it includes those expenditures which will increase the value of the capital asset. You can claim the deduction for the COI also. For example, Construction of a floor in your house will be eligible for improvement of that asset and you will get the deduction. However, it shall not includes the painting of walls.
Indexation under long-term capital assets
When there is a need for calculation of the long-term capital gains there is the requirement of indexation for the procedure. In the valuation of an asset, indexation is the process where we have to adjust the cost of acquisition against the rise of inflation in the value of the asset. Then you need to calculate the cost inflation index of the year of acquisition or improvement and the cost inflation index of the year of transfer.
Till now, the base year for calculation of capital gain was the year 1981.But after FY 2017-2018, the calculation of purchase price will have the base year as 2001.Thus capital assets acquired before April 2001 shall also be computed using fair market value as on 2001. This will benefit the property owners by lowering their capital gains and tax burden as the inflation rate is more in sync with market rates now.Keep in mind that property owners have the option of considering either the cost of acquisition or fair market value for calculating capital gains.
LTCG reintroduced in Budget 2018
There is a disappointment for equity investors in budget 2018 due to the reintroduction of LTCG. W.e.f 1st April 2018, capital gains on the sale of listed shares shall be taxable at 10% exceeding Rs 1lakh. However, a small relief is the grandfathering of gains till 31st January 2018. So the investors would not pay taxes on capital gains up to 31st Jan. Let us discuss the taxability of long-term capital gains on equity shares with the help of three scenarios.
Suppose you bought one share of Rs 100 on 01/04/16 and you sell it for Rs 200 on 31/03/2018. In this case, there shall be no LTCG since you sold it before 01/04/18. Let’s say you sell it on 5th April 2018, now you will have to pay LTCG at 10%. However, Budget 2018 has excluded the gains up-to 31/01/18. So if the FMV as on 31/01/18 is 170, COA is higher of Rs 100 or Rs 170. So LTCG shall be 200-170= Rs 30.
Suppose You bought a share on 01/01/2017 at Rs 100, FMV as on 31st Jan 2018 is 200. Now if you sold it on 01/04/2018 at Rs 150. In this case, both COA and sale value are less than FMV. Accordingly, the sale value of Rs 150 will be taken as COA and LTCG shall be NIL (150-150)
Another disappointment for long-term investors is that there is no indexation benefit on LTCG on the sale of shares. Grandfathering of gains up to 31st Jan 2018 is just a small relief.
In the third scenario, What if he sells it at Rs 50, with COA Rs 100 and Rs FMV 150. Since his sale value is even lower than COA, the difference RS 50 ( 100-50) shall be the long-term capital loss.
Set off Long-term capital Loss
Investors can now set off their long-term capital loss from selling off their shares held beyond one year. They can also carry forward the loss for eight years. Investors have to make sure that set off is allowed only against long-term capital gains. Moreover, the transaction must take place on or after 1st April 2018.Losses cannot be carried forward if the transaction takes place between Feb1 and 31st March.This is a logical step after removing the exemption from LTCG tax.
Investing in long-term capital assets can save your taxes more as against investing in short-term capital assets.However, as far as investing in listed stocks and equity oriented mutual funds are concerned, it will be challenging for new investors.And with this recent amendments, both investors need to save more to meet their financial goals.