Understanding Long-Term Capital Gains (LTCG) on Stocks and Mutual Funds
Introduction to Long-Term Capital Gains (LTCG)
The 2018 Budget introduced significant changes to how Long-Term Capital Gains (LTCG) are taxed, particularly for stocks and equity mutual funds. As of April 1, 2018, the tax on LTCG without indexation is now 10% for capital gains exceeding one lakh. However, gains accrued before January 31, 2018, are grandfathered. This article will guide you through the intricacies of calculating LTCG, especially focusing on stock prices on January 31, 2018, and the new tax regime.
Calculating LTCG on Stocks and Mutual Funds
Calculating LTCG involves understanding the purchase and sale prices, as well as the tax implications under the new regime. For stock transactions, the effective tax date is shifted, and for mutual funds, the conditions are based on NAV details at the relevant times.
Stock Prices on Important Dates
To calculate LTCG, one needs to determine the stock prices on crucial dates such as the date of acquisition and the date of sale. Bhavcopy, published by India's major stock exchanges BSE and NSE, provides essential details for these calculations.
E.g., BSE and NSE Bhavcopy:
On January 31, 2018, Bhavcopy details contain the opening price, high price, low price, closing price, and volume for every scrip traded on the exchange on that day. Additionally, Bhavcopy can provide details like turnover and trades.
Specific Calculation Example for Long-Term Capital Gains
Let's consider an Indian equity mutual fund acquired on January 1, 2017, at Rs. 100. Its NAV was Rs. 200 on January 31, 2018, and it was sold on April 1, 2019, at Rs. 250. In such cases, the fair market value (FMV) as of January 31, 2018 (Rs. 200), is considered the acquisition cost for calculating LTCG.
The long-term capital gain (LTCG) is calculated as:
LTCG Selling Price - Fair Market Value (FMV) on acquisition date
In this example:
LTCG Rs. 250 - Rs. 200 Rs. 50
Tax on LTCG 10% of Rs. 50 Rs. 5
If 1,000 units were acquired, the total Capital Gain would be: 50 × 1,000 50,000. Since the gain is less than one lakh, there is no LTCG tax.
If 25,000 units were acquired, the total Capital Gain would be: 50 × 25,000 1,250,000. The exemption is 1 lakh, so the LTCG to be taxed is: 1,250,000 - 1,000,000 250,000. The LTCG tax would be 10% of 250,000 Rs. 25,000.
A Practical Example Calculating LTCG
Let’s consider a practical example for better clarity:
Acquisition Date: January 1, 2017, at Rs. 100 per unit
NAV on January 31, 2018: Rs. 200 per unit
Sale Date: April 1, 2019, at Rs. 250 per unit
Step-by-Step Calculation
Calculate the Acquisition Cost:
Acquisition Cost Rs. 200 per unit (FMV as on January 31, 2018)
Calculate the Total Sale Amount:
Total Sale Amount Rs. 250 per unit (Selling Price on April 1, 2019)
For 25,000 units: 250 × 25,000 6,250,000
Calculate Capital Gain:
Capital Gain Total Sale Amount - Acquisition Cost
6,250,000 - (25,000 × 200) 6,250,000 - 5,000,000 1,250,000
Calculate LTCG (since gain > 1 lac, 10% tax applies):
LTCG 1,000,000 (Exempt amount)
Taxable LTCG 1,250,000 - 1,000,000 250,000
Tax on LTCG 10% × 250,000 25,000
How to Fetch Share Prices:
To fetch the share price on January 31, 2018:
Log into the BSE or NSE website.
Input the company symbol and the date for which you want the price.
It will display the closing price of the share on that date. Capture the image for record-keeping purposes.
Conclusion
Understanding the intricacies of calculating Long-Term Capital Gains (LTCG) is crucial for investors, particularly in light of the recent changes in the tax regime. By following the steps outlined above, one can easily determine the share prices necessary for accurate LTCG calculations, ensuring compliance with tax laws and optimizing tax planning.