Long Term Capital Gain Tax – The Union Budget 2018-19 had one major announcement that affects the long-term investors in the stock market. The budget has re-introduced long-term capital gains at the rate of 10%. Earlier, there was no tax on long-term capital gains made in the stock market. Since its introduction, the investors in the stock market have many questions in their heads. In this article, we shall try to clarify their doubts and make them understand the calculation of long-term capital gain tax.
What is Long Term Capital Gain Tax?
Long-Term Capital Gain is a tax that is applicable to the Indian stock market on selling stocks after holding it for over 1 year. However, there are certain points that an investor must be aware of in relation on long-term capital gain tax. They are as follows:
- The long-term capital gain tax is exempted up to Rs. 1 lakh.
- Any stock sold before 1stApril 2018 shall not be liable to tax. To put it another way, the long-term capital tax is applicable only if an investor sells the stock on or after 1stApril
- Long-term capital gains on stocks until 31stJanuary 2018 will be grandfathered.
Let us understand the term “Grandfather” in terms of taxation.
Meaning of Grandfather
In taxation terms, Grandfather means “exempt from tax” i.e. no tax shall be applicable.
Even though long-term capital gains on stocks until 31st January 2018 will be grandfathered. Nevertheless, a recent notification by income tax department clarifies that gains on stock sold between the period of 1st February to 1st April 2018 shall not be taxable.
Let us take an example to understand the concept of long-term capital gain tax.
Example of Long Term Capital Gain Tax
Let us see the example of long-term capital gain tax in different scenarios.
- Suppose an investor bought shares of Reliance Industries 10 years ago for Rs. 500. Moreover, the investor sells the shares for Rs. 1000 before 31st January 2018. In such a case, the investor is not liable for long term capital gain tax as he sold his shares before 31st January 2018.
- Suppose the above investor sells the share on or after 1st April 2018 for Rs. 1,100. The highest price of shares on 31st January 2018 was Rs. 1,000. In this case, the investor shall be liable to tax only on the gains made after 31st January 2018. Therefore, the gain made are Rs. 1,100 – Rs. 1,000 = Rs. 100. Hence, the capital gain shall be payable at the rate of 10% on profit of Rs. 100 per share and the rest gain shall be grandfathered. However, any gain made up to Rs. 1 lakh is exempt from tax.
The investor must keep in mind that any purchase of shares after 31st January 2018 shall be liable to tax. If the holding period is less than 365 days, short-term capital gain shall be applicable at the rate of 15%. On the other hand, if the holding of shares is for a period of more than 365 days, the long-term capital gain tax shall be applicable at the rate of 10%.
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