Long Term Capital Gain proposed in Finance Bill, 2018

Frequently Asked Questions (FAQs) regarding taxation of long-term capital gainsproposed in Finance Bill, 2018 released by Government of India.

F. No. 370149/20/2018-TPL
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes

New Delhi, Dated 4th February, 2018

Subject: Frequently Asked Questions (FAQs) regarding taxation of long-term capital gainsproposed in Finance Bill, 2018-reg.

Under the existing regime, long term capital gains arising from transfer of long termcapital assets, being equity shares of a company or a unit of equity oriented fund or a unit ofbusiness trust, is exempt from income-tax under clause (38) of section 10 of the Act.However, transactions in such long-term capital assets are liable to securities transaction tax
(STT). Consequently, this regime is inherently biased against manufacturing and hasencouraged diversion of investment to financial assets. It has also led to significant erosion inthe tax base resulting in revenue loss. The problem has been further compounded by abusiveuse of tax arbitrage opportunities created by these exemptions.
In order to minimise economic distortions and curb erosion of tax base, it is proposedto withdraw the exemption under clause (38) of section 10 and to introduce a new section112A in the Income-tax Act, 1961 (the Act) vide clause 31 of the Finance Bill, 2018 so as toprovide that long-term capital gains arising from transfer of such long-term capital asset
exceeding one lakh rupees will be taxed at a concessional rate of 10 percent.
Since the introduction of the Finance Bill, 2018 on 1st February, 2018, several querieshave been raised in different fora on various issues relating to the proposed new tax regimefor taxation of long-term capital gains. The responses to these queries are provided below.
Q 1. What is the meaning of long term capital gains under the new tax regime forlong term capital gains
Ans 1. Long term capital gains mean gains arising from the transfer of long-term capitalasset. The Finance Bill, 2018 proposes to provide for a new long-term capital gainstax regime for the following assets

i. Equity Shares in a company listed on a recognised stock exchange;
ii. Unit of an equity oriented fund; and
iii. Unit of a business trust.
The proposed regime applies to the above assets, if

a. the assets are held for a minimum period of twelve months from the dateof acquisition; and
b. the Securities Transaction Tax (STT) is paid at the time of transfer. However,in the case of equity shares acquired after 1.10.2004, STT is required to bepaid even at the time of acquisition (subject to notified exemptions).

Q 2. What are the modes of acquisition of equity shares which are proposed to beexempted from the condition of payment of STT
Ans 2. The Central Government had exempted certain modes of acquisition of equityshares for the purposes of clause (38) of section 10 of the Act vide notification no.43/2017 dated 5th of June, 2017. This notification is proposed to be reiterated forthe purposes of clause 31 of the Finance Bill, 2018 after its enactment.

Q 3. What is the point of chargeability of the tax
Ans 3. The tax will be levied only upon transfer of the long-term capital asset on or after1st April, 2018, as defined in clause (47) of section 2 of the Act.

Q 4. What is the method for calculation of long-term capital gains
Ans 4. The long-term capital gains will be computed by deducting the cost of acquisitionfrom the full value of consideration on transfer of the long-term capital asset.

Q 5. How do we determine the cost of acquisition for assets acquired on or before31st January, 2018
Ans 5. The cost of acquisition for the long-term capital asset acquired on or before 31stof January, 2018 will be the actual cost.However, if the actual cost is less than the fair market value of such asset as on31st of January, 2018, the fair market value will be deemed to be the cost ofacquisition.
Further, if the full value of consideration on transfer is less than the fair marketvalue, then such full value of consideration or the actual cost, whichever is higher,will be deemed to be the cost of acquisition.

Q 6. How will the fair market value be determined
Ans 6. In case of a listed equity share or unit, the fair market value means the highestprice of such share or unit quoted on a recognized stock exchange on 31st ofJanuary, 2018.
However, if there is no trading on 31st January, 2018, the fair market value will bethe highest price quoted on a date immediately preceding 31st of January, 2018,on which it has been traded.In the case of unlisted unit, the net asset value of such unit on 31st of January,
2018 will be the fair market value.

Q 7. Please provide illustrations for computing long-term capital gains in differentscenarios, in the light of answers to questions 5 and 6.
Ans 7. The computation of long-term capital gains in different scenarios is illustrated asunder –

Scenario 1 An equity share is acquired on 1st of January, 2017 at Rs. 100, its fairmarket value is Rs. 200 on 31st of January, 2018 and it is sold on 1st of April, 2018at Rs. 250.As the actual cost of acquisition is less than the fair market value as on 31st ofJanuary, 2018, the fair market value of Rs. 200 will be taken as the cost ofacquisition and the long-term capital gain will be Rs. 50 (Rs. 250 Rs. 200).

Scenario 2 An equity share is acquired on 1st of January, 2017 at Rs. 100, its fairmarket value is Rs. 200 on 31st of January, 2018 and it is sold on 1st of April, 2018at Rs. 150.In this case, the actual cost of acquisition is less than the fair market value as on31st of January, 2018. However, the sale value is also less than the fair marketvalue as on 31st of January, 2018. Accordingly, the sale value of Rs. 150 will betaken as the cost of acquisition and the long-term capital gain will be NIL (Rs. 150 Rs. 150).

Scenario 3 An equity share is acquired on 1st of January, 2017 at Rs. 100, its fairmarket value is Rs. 50 on 31st of January, 2018 and it is sold on 1st of April, 2018at Rs. 150.In this case, the fair market value as on 31st of January, 2018 is less than the actualcost of acquisition, and therefore, the actual cost of Rs. 100 will be taken as actual
cost of acquisition and the long-term capital gain will be Rs. 50 (Rs. 150 Rs. 100).

Scenario 4 An equity share is acquired on 1st of January, 2017 at Rs. 100, its fairmarket value is Rs. 200 on 31st of January, 2018 and it is sold on 1st of April, 2018at Rs. 50.In this case, the actual cost of acquisition is less than the fair market value as on31st January, 2018. The sale value is less than the fair market value as on 31st ofJanuary, 2018 and also the actual cost of acquisition. Therefore, the actual cost ofRs. 100 will be taken as the cost of acquisition in this case. Hence, the long-termcapital loss will be Rs. 50 (Rs. 50 Rs. 100) in this case.

Q 8. Whether the cost of acquisition will be inflation indexed
Ans 8. Sub-clause (5) of clause 31 of the Finance Bill, 2018, inter alia, provides that thelong-term capital gain will be computed without giving effect to the provisions ofthe second provisos of section 48. Accordingly, it is clarified that the benefit ofinflation indexation of the cost of acquisition would not be available forcomputing long-term capital gains under the new tax regime.

Q 9. What is the date of commencement of the proposed new tax regime
Ans 9. The proposed new tax regime will apply to transfer made on or after 1st April,2018. The existing regime providing exemption under clause (38) of section 10 ofthe Act will continue to be available for transfer made on or before 31st March,2018.

Q 10. What will be the tax treatment of accrued gains upto 31st January 2018
Ans 10. As the fair market value on 31st January, 2018 will be taken as cost of acquisition(except in some typical situations explained in Ans 7.), the gains accrued upto 31stJanuary, 2018 will continue to be exempt.

Q 11. What will be the tax treatment of transfer of share or unit between 1st February2018 to 31st March 2018
Ans 11. As replied in answer 9, the new tax regime will be applicable to transfer made onor after 1st April, 2018, the transfer made between 1st February, 2018 and 31stMarch, 2018 will be eligible for exemption under clause (38) of section 10 of theAct.

Q 12. What will be the tax treatment of transfer made on or after 1st April 2018
Ans 12. The long-term capital gains exceeding Rs. 1 Lakh arising from transfer of theseasset made on after 1st April, 2018 will be taxed at 10 per cent. However, therewill be no tax on gains accrued upto 31st January, 2018 as explained in Ans 10.

Q13. What is the date from which the holding period will be counted
Ans 13. The holding period will be counted from the date of acquisition.

Q 14. Whether tax will be deducted at source in case of gains by resident tax payer
Ans 14. No. There will be no deduction of tax at source from the payment of long-termcapital gains to a resident tax payer.

Q 15. Whether tax will be deducted at source in case of payment of long-term capitalgains by non-resident tax payer (other than a Foreign Institutional Investor)
Ans 15. Ordinarily, under section 195 of the Act, tax is required to be deducted onpayments made to non-residents, at the rates prescribed in Part-II of the FirstSchedule to the Finance Act. The rate of deduction in the case of capital gains is
also provided therein. In terms of the said provisions, tax at the rate of 10 percent. will be deducted from payment of long-term capital gains to a non-residenttax payer (other than a Foreign Institutional Investor). The capital gains will be
required to be computed in accordance with clause 31 of the Finance Bill, 2018.

Q 16. Whether tax will be deducted at source in case of payment of long-term capitalgains by Foreign Institutional Investors (FIIs)
Ans 16. No. There will be no deduction of tax at source from payment of long-term capitalgains to a Foreign Institutional Investor in view of the provisions of sub-section (2)of section 196D of the Act.

Q17. How will the gains in the case of FIIs be determined
Ans 17. The long-term capital gains in case of FIIs will be determined in the same manneras explained in earlier answers in the case of resident tax payers.

Q 18. What will be the treatment of the gains accrued upto 31st January 2018 in thecase of FIIs
Ans 18. In case of FIIs also, there will be no tax on gains accrued upto 31st January, 2018as explained in Ans 10.

Q 19. What will be the tax treatment of transfer of share or unit between 1st February2018 to 31st March 2018 in the case of FIIs
Ans 19. As explained in Ans 11, in case of FIIs also, the transfer made between 1stFebruary, 2018 and 31st March, 2018 will be eligible for exemption under clause(38) of section 10 of the Act.

Q 20. What will be the tax treatment of transfer made on or after 1st April 2018 in caseof FIIs
Ans 20. As explained in Ans 12, in case of FIIs also, the long-term capital gains exceedingRs. 1 Lakh arising from transfer of these asset made on after 1st April, 2018 will betaxed at 10 per cent. However, there will be no tax on gains accrued upto 31stJanuary, 2018 as explained in Ans 10.

Q 21. What will be the cost of acquisition in the case of bonus shares acquired before1st February 2018
Ans 21. The cost of acquisition of bonus shares acquired before 31st January, 2018 will bedetermined as per sub-clause (6) of clause 31 of the Finance Bill, 2018. Therefore,the fair market value of the bonus shares as on 31st January, 2018 will be taken ascost of acquisition (except in some typical situations explained in Ans 7), andhence, the gains accrued upto 31st January, 2018 will continue to be exempt.

Q 22. What will be the cost of acquisition in the case of right share acquired before 1stFebruary 2018
Ans 22. The cost of acquisition of right share acquired before 31st January, 2018 will bedetermined as per sub-clause (6) of clause 31 of the Finance Bill, 2018. Therefore,the fair market value of right share as on 31st January, 2018 will be taken as costof acquisition (except in some typical situations explained in Ans 7), and hence,the gains accrued upto 31st January, 2018 will continue to be exempt.

Q 23. What will be the treatment of long-term capital loss arising from transfer madebetween 1st February, 2018 and 31st March, 2018
Ans 23. As the exemption from long-term capital gains under clause (38) of section 10 willbe available for transfer made between 1st February, 2018 and 31st March, 2018,the long-term capital loss arising during this period will not be allowed to be set offor carried forward.

Q 24. What will be the treatment of long-term capital loss arising from transfer madeon or after 1st April, 2018
Ans 24. Long-term capital loss arising from transfer made on or after 1st April, 2018 will beallowed to be set-off and carried forward in accordance with existing provisionsof the Act. Therefore, it can be set-off against any other long-term capital gainsand unabsorbed loss can be carried forward to subsequent eight years for set-offagainst long-term capital gains.

(Pravin Rawal)
Director (TPL-II)
Tel. 011-23093765

To

The Web Manager, www.incometaxindia.gov.in for uploading on the Departmental website.

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