Before 1st April 2018, long-term capital gain (LTCG) on the sale of shares and equity-oriented mutual funds on which Securities transaction Tax has been paid was exempted by the Indian Government.
New Law & Applicability
But in the year 2018 government passed a law making LTCG taxable at a rate of 10% on gains over Rs 1 Lakh a year without indexation benefit. However, all gains up to 31 January 2018 will be grandfathered. The provision was applicable from 1st April 2018.
What is Grandfathering?
A Grandfathering clause (according to Wikipedia) is a provision in which an old rule continues to apply to some existing situations while a new rule will apply to all future cases. Those exempt from the new rule are said to have grandfather rights or acquired rights or to have been grandfathered in.
The tax laws in most counties keep on changing with every budget speech, every year. A grandfathering clause enables all investors who took a decision according to the old provision to continue receiving the benefits of that old provision, until a defined period of time.
Impact of the Grandfathering Clause
This will shield the old investors who already have equity shares or equity-oriented units of mutual funds from the 10% long-term capital gains purchased before 1st February 2018. The exemption on capital gains on all purchases before 1st February 2018 means that all those investments made according to the old clause would remain as it is. Meaning all such gains shall remain tax-free. The new LTCG tax would be applicable only prospectively, i.e only for new investments.
Suppose you invested Rs 5 lakh in the year April 2016 and at the time of making the investments there was no tax on capital gains.
On 31 Jan 2018, the value of the investment was Rs 8 lakh.
You sell the investment for Rs 10.5 lakhs after 31 March 2018.
LTCG will be calculated using the 31 Jan 2018 price. So the gains will be only Rs 2.5 lakh (10.5 Lakhs – 8 lakhs). Of this, Rs 1 lakh will be tax-free in a year and only the remaining Rs 1.5 lakhs will be taxed at 10%.
Due to the grandfathering clause, the Cost of Acquisition (COA) would be higher than the actual cost or the fair value on 31 Jan 2018.
Tax Spanner’s Take
The government has protected the old investors and this grandfathering clause can help them in saving taxes but it involves a great deal of calculation and computation along with the knowledge of tax laws. Therefore it is recommended to consult Tax experts before paying taxes on your gains and there might be a way through which you can protect your hard-earned money.
Taxspanner specializes in capital gain matters and helps customers save tax and file ITR at the lowest price in the Industry. For any kind of tax consultancy or return filing needs connect with us at [email protected].