What is LTCG?
LTCG stands for Long-term Capital Gains. In other words, it is the gain for investing in the equity market (stocks as well as equity mutual funds) over the long-term.
Investment for one year or more is a long-term investment in the Indian market. Anything under one year is short term.
Pre 2018, there was no tax on long-term capital gains. It means if you book profit in any stock or equity mutual funds after holding it over one year, all the profit were tax-free.
It was exploited by many to convert black money into white without paying taxes.
So LTCG was introduced in 1st Feb 2018 Budget.
As per the new rules crafted in 2018, any gains made on long-term investments are all taxable making such malpractice operators out of business.
What is Grandfathering of Taxable LTCG up to 31 January 2018?
Grandfather is the right of the person to avail concession because they have made their decisions under the old law.
Because there were no LTCG 31st Jan 2018, taxing old long-term investors who have been holding stocks for the past many years wouldn’t be right.
The investment made pre 31-Jan 2018 which qualifies for tax-free return as per old long-term capital gains rules will be grandfathered at a price as on 31st Jan 2018.
In other words, long-term capital gains made until Jan 31, 2018, aren’t taxed. Any further profits on the holdings will now be taxed.
As an example, I invested in Pidilite Industries in September 2016.
- My purchase price of each share is ~₹716, and I continue to hold.
- On 31 Jan 2018, the share price was ~₹898.
So my gains till 31st Jan 2018 was ~₹184 per share.
Currently, the price of Pidilite Industries is ~₹1200
So if I sell now, my per share gain will be sell price which is ~₹1200 less cost price which is ~₹716 which is ~₹484 per share.
I am eligible for tax grandfathering on this transaction because it is long-term investment done before 31st Jan 2018.
So my taxable gains will be sell price which is ~₹1200 less the grandfathered price as on 31st Jan 2018 which is ~₹898 instead of my cost price of ~₹716. So my taxable capital gains become ~₹302 per share.
Note: The price to be considered for grandfathering is the price on 31st Jan 2018 and not the highest price till 31st Jan 2018.
So, for example, the high of Pidilite Industries pre 31st Jan 2018 was around ₹950, but for grandfathering, we consider ₹898 which was the price as on 31st Jan 2018.
In the above calculation, we assume the sale is above the 31st Jan 2018 price.
- If I sell the under ~₹898 but above ₹716 – I am entitled to complete gains as tax-free because they are grandfathered.
- Similarly, if I sell the stock under ₹716, I make a long-term capital loss.
Hope the above calculation clarifies most questions about tax implications on grandfathering.
Again I am not a tax consultant or any taxation expert. Above calculations is based on my understanding of the matter and is shared to help you as a retail investor understand the concept. For exact calculations on your investment, it is always better to consult the expert in the matter.
One more point to note is, tax saving was allowed to investors who wish to book out of the stocks before 31st April 2018 and after the declaration of LTCG on 1st Feb 2018. It is now of no value, and so I like to skip it.
Does LTCG apply to Mutual Funds?
Yes, it certainly applies to equity mutual funds.
Regarding debt mutual funds, I am not sure if it applies or not. There are many types of debt mutual funds, and so it is advisable to consult an expert for your type of fund and time of investment. I don’t invest in debt mutual funds so won’t be able to comment on it.
For equity mutual funds, grandfathering for the NAV is precisely the same as I explained above.
If you remained invested in the fund for more than a year, and your purchase was before 31st Jan 2018, you are eligible for tax exemption on LTCG as per the above grandfathering calculations.
Instead of price per share, the calculation is on cost per unit or NAV.
Can you Save LTCG Tax if you Re-Invest?
No. You can’t save on the capital gains tax by re-investing. The investor has to pay the tax for the gains irrespective of investing back or not.
What is the Percentage of Tax for LTCG?
10% on the net LTCG profits with tax heaven of 1L per fiscal whereas short term capital gains tax or STCG Tax rate is 15%.
Let us look at the tax calculation with the example below, to make things more transparent.
How to calculate LTCG Tax on Shares and Equity Mutual Fund Units?
Let us use the above grandfathering calculations to understand the taxable amount.
My taxable gains as per the above calculations are as follows. The selling price which is ~₹1200 less the grandfathered price as on 31st Jan 2018 which is ~₹898.
My taxable gains are ₹302 per share.
If I am selling all my 1,000 shares of Pidilite Industries, my total gains will be ₹302 x 1000 or ₹3,02,000
I am eligible for LTCG tax saving of 100k per year.
If I have no other LTCG gains in a year, my taxable LTCG is ~₹2,02,000.
So I have to pay 10% of my gains which is ~₹20,200
LTCG is applicable only when you make a sale and not if you continue to hold.
If I don’t sell all the units but only sell 300 units in a fiscal, My total gains become
= ₹302 x 300 shares which equal to ₹90,600
So this will be tax-free assuming I have no other LTCG.
Again, if I spread my sell for few fiscals, I can save on the tax.
My view of LTCG Tax
There is no denying fact about the misuse of LTCG tax heaven. So it is good to have an LTCG but applying the same for retail investors on the mutual fund wasn’t ideal. I think we have made good progress in curbing the bad guys but at the expense of taxing retail investors.
LTCG is healthy for the market, but it should only be applied on stocks and not on equity mutual funds to let retail investors continue investing in the equity market via the mutual fund route. Equity investment in India is still under-penetrated, and tax-free return is a way to lure investors into considering investing in equity.
LTCG existed in the Indian market very early, but it was removed back then with an introduction of STT for each transaction irrespective of long or short term investment. LTCG is back, and STT also remains.
On top of that, LTCG doesn’t have indexing which means if I am not booking any profits in a fiscal, I lose the 100k benefit which I am entitled in a year. It makes retail investor book out some amount every year than to remain invested. Over time, it will be taken care off.