Long Term Capital Gains Tax on Mutual Funds explained

Published on 23 Feb 2018 by Tushar

What is the new long-term capital gains tax on equity oriented mutual funds and stocks? This new 10 per cent tax on long-term capital gains (LTCG) on equity mutual fund investment and stocks/shares was proposed by the finance minister in Budget 2018. In this context, long-term capital gains mean gain or profit arising from selling of stock or redemption of equity mutual funds held more than one year. Remember that a mutual fund has at least 65 per cent allocation to equities is termed an equity mutual fund for taxation purposes.

If the investor has incurred a loss, there is no LTCG tax to be paid.

When will the new LTCG tax become effective?

The new tax will be levied on redemption of equity mutual fund units or sale of shares after April 1, 2018, provided they have been held for more than one year. So if you sell before on or before March 31, 2018, there will be no long-term capital gains tax. If the mutual fund units/stocks are sold before one year of holding, short term capital gains tax apply. The short-term capital gains tax has been kept unchanged at 15 per cent.

What is the new LTCG tax rate on equity mutual funds/stock market investments?

The long-term capital gains exceeding Rs. 1 lakh arising from redemption of mutual fund units or equities on or after April 1, 2018 will be taxed at 10 per cent (plus cess). This includes long-term capital gains earned from your equity or mutual fund investments put together in a financial year. Suppose you earn Rs. 2 lakh in combined long-term capital gains from stocks or mutual fund investments in a financial year. The taxable long-term capital gains will be Rs. 1 lakh (Rs. 2 lakh - Rs. 1 lakh) and tax liability will be Rs. 10,000 (10 per cent of Rs. 1 lakh).

Set-off or carry forward benefits

Long-term capital loss arising from sale or redemption on or after April 1, 2018, will be allowed to be set-off and carried forward. 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.

However, remember that since tax exemption is available on long-term capital gains on units sold till March 31, 2018, the long-term capital loss arising during this period will not be allowed to be setoff or carried forward.

How to calculate long-term capital gains?

The long-term capital gain is calculated by reducing the cost of acquisition from the redemption value of mutual funds or stocks.

How do calculate the cost of acquisition for assets acquired on or before January 31, 2018?

First, you need to know about fair market value (FMV) of the particular equity investment as on January 31, 2018. In case of a listed equity share or unit, the fair market value means the highest price of such share or unit quoted on a recognized stock exchange on January 31, 2018. However, if there is no trading on 31st January, 2018, the fair market value will be the highest price quoted on a date immediately preceding 31st of January, 2018, on which it has been traded.

According to the income tax department, the cost of acquisition for the long-term capital asset acquired on or before 31st of January, 2018 will be the actual cost. However, if the actual cost is less than the fair market value of such asset as on 31st of January, 2018, the fair market value will be considered to be the cost of acquisition.

Further, if the full value of consideration on sale is less than the fair market value, then such full value of consideration or the actual cost, whichever is higher, will be considered to be the cost of acquisition.

Source- NDTV.com

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