How you can smartly use the systematic exit route to avoid LTCG tax

Just ensure the overall long-term capital gain in a financial year is below Rs one lakh -- you won't be taxed

The finance minister has in the Finance Bill, 2018 proposed to tax certain long-term capital gains that have so far been exempt from tax.

Currently, capital gains from transfer of equity shares in a company and a units of equity-oriented mutual fund schemes are exempt from tax, provided they have been held for more than one year prior to transfer. Equity shares should also have been subject to Security Transaction Tax (STT) in order to avail this exemption. In other words, long-term capital gains from the transfer of listed shares and units of an equity-oriented scheme are not subject to tax.

As proposed, long-term capital gains arising from the transfer of an equity share in a company on which STT has been paid, or a unit of an equity-oriented fund, shall be taxable at the special rate of 10 per cent without any indexation benefit. However, any such capital gains up to Rs 1 lakh shall not be subject to tax.

Further, to avoid any retrospective impact, gains up to 31 January 2018 will be grandfathered. This is done by introducing a deeming provision for determining the cost of acquisition. Accordingly, the cost of acquisition would be the higher of the actual cost of acquisition and the fair market value.

Fair market value would be determined as summarized below:
A.    Asset listed on a recognised stock exchange and traded on 31 January 2018 - highest price quoted on such exchange on 31 January 2018
B.    Asset listed on a recognised stock exchange and not traded on 31 January 2018 - highest price quoted on such exchange on a date prior to 31 January 2018 on which the asset was traded
C.    Unit not listed on a recognised stock exchange – net asset value as on 31 January 2018

Thus, in summary, effective 1 April 2018, any gain post 31 January 2018, in excess of Rs 1 lakh in a financial year, from sale of listed shares and unit of equity-oriented fund would be subject to tax at the rate of 10 per cent.

The above changes are very thoughtful from the perspective of investors. On the one hand, the grandfathering of gains up to 31 January 2018 has avoided any immediate sell-off. Further, small investors can avail the benefit of exemption from tax on long-term capital gains from transfer of listed shares and units, by opting for systematic transfer/exit, such that the overall gain in a financial year is below the threshold of Rs one lakh.
Saraswathi Kasturirangan is Partner, Deloitte India. Suresh Kumar is Director with Deloitte Haskins and Sells LLP. Views are personal and do not reflect those of Business Standard.