The year 2018 saw the introduction of long term capital gains tax on equity investments (mutual funds or direct stocks) at the rate of 10%+surcharge. As you file your tax returns, here are some key points to wade through the calculations.
If you have sold your equity investment (held for more than 1 year) in the financial year 2018-19, you are required to calculate your long term capital gains and pay taxes on them.
Before you start cursing the government for introducing one more tax, do know there’s a breather in the law. If you invested in mutual funds on or before Jan 31, 2018, any gains made till that day are exempt from this tax.
For the purpose of calculation of your capital gains, you can take the higher of your ‘actual buy price‘ or ‘price as Jan 31, 2018 as your actual cost‘ and calculate your gains accordingly.
The set off against long term capital loss!
The other benefit that has come out of from this tax is that you can now also set off your realised long term capital losses against your realised long term capital gains.
Means, that if you invested in Mutual Fund A and sold it after one year at a loss of Rs. 10,000, then you can deduct this loss from another Mutual Fund B, that you sold for a profit of Rs. 20,000. The net capital gains in this case is (Rs. 20,000 – Rs.10,000) = Rs. 10,000.
What is the capital gains tax that you pay?
Here’s how it works.
- In any financial year, long term capital gains on equity mutual funds are exempt till Rs. 1 lakh.
- Over this Rs. 1 lakh, you pay 10%+surcharge as long term capital gains tax.
So, in the above example, assuming that the total capital gains is only Rs. 10,000, there is no tax payable as the net capital gains is less than Rs. 1 lakh.
What if the total gain was over Rs. 1 lakh?
Suppose, the total gain is Rs. 1.5 lakh. In this case, the first Rs. 1 lakh is free of tax. For the balance Rs. 50,000, the tax amounts to 10.4% of Rs. 50,000, that is, Rs. 5,200.
What if there is an overall realised loss?
Good question. Suppose, you sold some of your long term investments in the past year and overall you made a loss of Rs. 50,000.
First thing, you don’t need to pay any tax on the loss.
Second, you can note down the loss and set it off against any future gains, till the next 8 years.
How? Suppose, the next year, you end up realising a gain of Rs. 175,000 on sale of your equity mutual funds. You can now set off the earlier Rs. 25,000 loss against this gain. This reduces the overall gain to Rs. 1.5 lakhs. Isn’t that great?
Can I set off my short term capital loss against long term capital gains?
Yes, of course. If you have made a short term capital loss (STCL), that is, on sale of equity mutual fund held for less than 1 year, you can set off this loss against long term capital gains.
The rule to note is that you can set off STCL against Short Term Capital Gains first and if there is still a balance in STCL, then against Long Term Capital Gains.
I know this sounds like a lot of work but most investment tracking platforms can help you get these numbers. If you are using the services if a CA, s/he will help you with the same.
Your primary job is to ensure that you have the calculations done correctly basis the transactions you have carried out in the financial year ending March 2019.
Read more: Long Term Capital Losses
Further reading: Capital Gains Tax – All that you need to know in a single place