Mumbai: There are signs that the government may streamline the structure of long-term capital gains (LTCG) in the upcoming budget. If done, it could result in parity between the same asset classes — both in terms of tax rates and holding periods.
Currently, the holding period to qualify as long-term assets for shares in an equity-linked mutual fund is 12 months, while it is 36 months for a debt-linked mutual fund. There’s also a difference in the rates – the former incurs a 10% LTCG tax, while the rate is 20% (with indexing) for shares in debt-linked mutual funds.
According to tax experts, the open questions on the grandfathering of listed shares for the calculation of the LTCG should also be clarified. Grandfathering refers to a situation where a new rule is announced for all cases after a certain date, even though the previous rule still applies to old cases. The Finance Act 2018 had introduced a 10% (unindexed) tax on LTCG arising from the sale of listed shares on and after 1 April 2018 Value of shares from date of purchase to 31 January 2018 was grandfathered . In such cases, taxpayers had the option to use the market price (fair market value) as of January 31, 2018 as the acquisition price if their actual acquisition cost was below this “fair market value”.
However, there is ambiguity surrounding this step-up provision, causing hardship for taxpayers. Mahendra Sanghvi, Chartered Accountant and former President of the Chamber of Tax Consultants (CTC), pointed out: “Section 55(2)(ac) of the Income Tax (IT) Act requires the Shares to be acquired before 1 February 2018 It it is not clear whether this condition will have to be met in subsequent takeovers. If a son inherits shares that belonged to his father before February 1, 2018 due to his father’s recent death, will the son receive the grandfather’s pension? The tax rules do not explicitly cover this.”
CTC pointed out in its pre-budget memorandum that this problem also arises in mergers. For example, if a shareholder owned shares in HDFC prior to February 1, 2018, they will receive shares in HDFC Bank after the merger. Will he have the benefit of grandfathering in relation to the shares in HDFC Bank he will now hold? “The forthcoming budget must address these issues with appropriate amendments – the date of ownership by the previous owner or original shares (in the case of mergers) must be taken into account,” Sanghvi said.
CTC also stated that the acquisition cost for bonus shares should be the pro rata acquisition cost of the original shares, rather than zero. This puts it on an equal footing with the tax treatment in the case of stock splits and simplifies the capital gains tax regime.
Currently, the holding period to qualify as long-term assets for shares in an equity-linked mutual fund is 12 months, while it is 36 months for a debt-linked mutual fund. There’s also a difference in the rates – the former incurs a 10% LTCG tax, while the rate is 20% (with indexing) for shares in debt-linked mutual funds.
According to tax experts, the open questions on the grandfathering of listed shares for the calculation of the LTCG should also be clarified. Grandfathering refers to a situation where a new rule is announced for all cases after a certain date, even though the previous rule still applies to old cases. The Finance Act 2018 had introduced a 10% (unindexed) tax on LTCG arising from the sale of listed shares on and after 1 April 2018 Value of shares from date of purchase to 31 January 2018 was grandfathered . In such cases, taxpayers had the option to use the market price (fair market value) as of January 31, 2018 as the acquisition price if their actual acquisition cost was below this “fair market value”.
However, there is ambiguity surrounding this step-up provision, causing hardship for taxpayers. Mahendra Sanghvi, Chartered Accountant and former President of the Chamber of Tax Consultants (CTC), pointed out: “Section 55(2)(ac) of the Income Tax (IT) Act requires the Shares to be acquired before 1 February 2018 It it is not clear whether this condition will have to be met in subsequent takeovers. If a son inherits shares that belonged to his father before February 1, 2018 due to his father’s recent death, will the son receive the grandfather’s pension? The tax rules do not explicitly cover this.”
CTC pointed out in its pre-budget memorandum that this problem also arises in mergers. For example, if a shareholder owned shares in HDFC prior to February 1, 2018, they will receive shares in HDFC Bank after the merger. Will he have the benefit of grandfathering in relation to the shares in HDFC Bank he will now hold? “The forthcoming budget must address these issues with appropriate amendments – the date of ownership by the previous owner or original shares (in the case of mergers) must be taken into account,” Sanghvi said.
CTC also stated that the acquisition cost for bonus shares should be the pro rata acquisition cost of the original shares, rather than zero. This puts it on an equal footing with the tax treatment in the case of stock splits and simplifies the capital gains tax regime.
