Long Term Capital Gains

In The News

March 1, 2018: Business Standard: New LTCG tax: ESOPs may not get 'grandfathering'

LTCG from FY 2018-19

In the Union Budget, a 10% tax on Long Term Capital Gains was introduced.

Earlier to this, Equities long term capital gains are tax-free.

Now, as per the new taxation, even long term equity gains are taxable.

There is a grandfathering clause attached with 31 January 2018 as the referance date.

Grandfathering

Let us see what this Grandfathering is all about..

The technical definition for Grandfathering is as follows: A grandfathering clause in any new tax law allows people who made their decisions under the old law to continue to enjoy a concession, until the original timeframe for it runs out.

The Grandfathering clause is under the new section 112A on long-term capital gains.

It seeks to shield investors who have bought listed shares or equity mutual funds before February 1 2018, from the impact of the 10 per cent tax.

If a taxpayer has acquired listed shares or equity funds before February 1, all the long-term capital gains he has made on them will remain tax-free for all future years.

In short, these past gains have been ‘grandfathered’ for the taxpayer. ‘Long-term’ here implies a holding period of one year.

The extent of gains (or losses) will be calculated based on two things:

1. Your cost of acquisition and

2. The highest traded price for the stock (or closing Net Asset Value of the fund) as of January 31, 2018.

Example

Assume you have bought an Equity fund at a NAV of Rs 150 two years ago.

Assume it rose to Rs 200 by January 31 and you finally sell it at Rs 250 on April 30 this year.

Your taxable gains without the grandfathering would have been Rs 100 per unit.

But with the grandfathering, you pay tax only on Rs. 50.

If the same fund sees its NAV tank to Rs 90 on April 30, the clause ensures that you can book a capital loss of Rs. 60 per unit (Rs150 minus Rs. 90) and set it off against future profits.

What to do now?

Many panic investors are now worried that they will get less returns and contemplating to switch from one product to another so as to move away from the tax.

For example, some investors are thinking if they can move away from Mutual funds to ULIPs.

This is a very bad idea.

The two products are different and it is foolish to sacrifice the growth prospects of one product and going in for the other solely for the sake of saving tax.

10% LTCG after grandfathering above Rs 1 Lakh is peanuts that we pay as tax.

So, investors should not worry about taxation and focus on getting the most out of your investment.

Also, investors need to understand that they really do not have any alternative to long term wealth creation.