LTCG tax : Capital Gains, Changes by CBDT

Long term capital gains (LTCG tax) refer to profit generated by the sale of long term capital assets. These products are held for a particular period before the sale. LTCG is a taxable component. Recently, the norms related to disclosing LTCG for ITR returns have been relaxed.

The Union Budget of 2018 re-introduced the Long Term Capital Gains Tax or LTCG tax on capital gains (profits earned from the sale of Equity and Equity Mutual Funds held for over a year). Investors now have to pay LTCG tax if the sale of Equity and Equity Mutual Funds exceeds Rs 1 Lakh, annually.

Capital Gains

Capital gains are profits or gains arising from the transfer of a capital asset. The capital asset could be any kind of property held by the assessee including equity investments and mutual funds. Capital gains can be short term or long term and whether it is earned from debt- or equity-oriented scheme. Gains made on investment in debt mutual funds held for more than 36 months are considered LTCG and indexation benefit is available on it.  The status is determined by the holding period of the assessee. Share, mutual funds, debenture and other securities which are held for 12 months or more than 12 months are long term capital assets.

For example, Karan purchased equity shares of a listed company in January 2017 and sold them in November 2018. The holding period was more than 12 months. Hence, gains from the sale will be LTCG.

Previously, LTCG on each equity investment required disclosure in the ITR returns. Central Board of Direct Taxes has recently simplified the process. The disclosure of the net consolidated amount of LTCG from different equity-oriented investments is sufficient. This applies when LTCG earned from equity investments is more than Rs 1 lakh FY 2018-19. In this case, LTCG should be from the sale of instruments held for more than 12 months. The applicable tax rate is  10 percent (excluding surcharge and cess). The securities transaction tax must be paid at the time of purchase and sale of the equity products.

Changes by CBDT

Central Board of Direct Tax (CBDT) has amended ITR-2 and ITR-3 forms to reflect the changes. You must disclose the aggregate LTCG the specified columns provided in these ITR forms. The various forms and sections of the form for disclosing LTCG is below:

• If you are a resident individual who has LTCG from equity, use Form ITR-2. HUFs(Hindu Undivided Family (‘HUF‘) is treated as a ‘person’ under section 2(31)​ of the income-tax Act, 1961 that do not have income from profits and gains through a profession can also use this form. LTCG should be disclosed in Section B4 of the form.

• If you are an individual/HUF with income from profits through a profession, use Form ITR-3. LTCG should be disclosed in Section B5 of the form.
• If you are an NRI, LTCG should be disclosed in Section B7 and B8 of Forms ITR-2 and ITR-3.
• If you are Company then you have to file your returns through Form ITR-7, use Form 5 to disclose LTCG.

Also Read: NRI Mutual Fund Taxation investment procedure

ITR 3 Form

Tips to reduce the effect of LTCG Tax

Here are some simple tips to soften the blow of LTCG on your portfolio:

1. Improve your equity investment plan:

   Equities remain the most efficient tool to achieve high growth with the lowest mutual fund taxation impact over the long term. If you have a sizeable equity portfolio where the potential long-term returns could reduce by 10%, you may want to increase your SIP investments by 10%, each, to nullify this impact. You can invest in a wide range of mutual fund schemes with complete control over your investment plan.

2. Invest in your adult child:

   Under Indian tax laws, the earnings of individuals who have turned 18 are not clubbed along with their parents’ earnings. Thus, if you invest in your child’s name (provided they are already 18) you can avoid LTCG altogether. Besides, your children will also be eligible for the basic exemption of Rs 2.5 Lakh each, until they have an income of their own exceeding this amount. Additionally, if they have invested in an Equity Linked Savings Scheme (ELSS) in their name, they can get additional tax exemption benefits under Section 80C of the Income Tax Act.

3. Harvest gains each year:

   If your equity portfolio is sizeable (say Rs 20 Lakh or higher), you are likely to garner profits of Rs 1 Lakh annually. However, if you get into the habit of churning your portfolio to increase the acquisition cost, you can still avoid the LTCG tax. Let us understand this with an example.

   • You purchased 1,000 shares of company A at Rs 150 per share in February 2018
   • By March 2019, the share price increases to Rs 200, at which point you sell the shares
   • You make long-term gains of Rs 50,000 in the process
   • If you repurchase the same stocks, the acquisition price is now set at Rs 200, and the acquisition date becomes March 2019
   • If the share price rises to Rs 250, and a year later, i.e. on April 2020, your long-term capital gain will remain Rs 50,000.
   • However, had you not sold and repurchased the shares by March 2019, your long-term capital gains would have amounted to Rs 1,00,000 by April 2020, thus subject to LTCG tax.

FAQs related to LTCG Tax

Q1-If someone made LTCG tax of less than Rs 1 lakh do they have to report the gains in return?

Long-term gains below Rs 1 lakh threshold have to be reported. It is only when the taxpayer reports such income that the department will know that Rs 1 lakh exemption has been claimed on LTCG from equity investments.

Q2-If long-term or short-term losses bring down the net LTCG tax to below Rs 1 lakh, do the person has to report the gains and losses in the return?

Gains have to be reported irrespective of the amount of gains. After you fill the cost of acquisition, Future Money Value and sale value of each stock sold, the form will auto calculate the net gains and set off the losses against capital gains. Unadjusted losses can be carried forward to the next year.

Q3- Can short-term losses from stocks be adjusted against long term gains?

Short-term losses can be set-off against long-term gains as well as short-term gains from any capital asset. However, long-term losses can only be adjusted against long-term gains from any asset.

Q4-If a person made long-term losses from stocks, can these be carried forward to adjust against other gains in future years? 

Yes, long-term losses can be carried forward up to eight years to be set-off against long-term gains from stocks and other assets.

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