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How does the new long term capital gain tax work?

If shares or mutual fund units are sold after being held for one year or longer, any gains exceeding ₹1,00,000 per annum are subject to a 10% long-term capital gain (LTCG) tax, along with a 4% health and education cess.

This is grandfathered until January 31, 2018, implying that any gains made before this date are exempt from taxes. Only subsequent gains will be subject to a 10% tax. In this context, grandfathered refers to the fact that for shares held for more than a year and sold after January 31st, the purchase price will be calculated based on the higher of the two prices: the actual purchase price or the price on January 31, 2018.

Example scenario

  1. A share was purchased in January 2015 at a price of ₹500.
  2. In April 2018, the share was sold for ₹1000.
  3. The share's price on January 31, 2018 was ₹700.
  4. The LTCG tax would be applicable on ₹300.
  5. If the share was sold in April for ₹650. The purchase price of ₹700 cannot be considered to claim a loss.Instead, the sale price of ₹650 will be considered as the new purchase price, rendering it tax-exempt.

Download the tax P&L to see LTCG tax liability. To learn more, see Where can I find the holding period of my investments and the tax liability based on the grandfather clause of LTCG?

This rule is applicable from 1st April 2018. So, there will be no LTCG tax on shares sold up to this date. This is applicable under the current taxation rules and could be subject to changes.