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Tuesday, April 3, 2018

Grandfather clause in equity investments to protect you from some tax liabilities on LTCG

The famous budget speech by Arun Jaitley left the investors dissapointed with the re-introduction of Long-term capital gains tax. LTCG which was abolished sometime in 2004, by introducing STT was re-introduced for the equity investors with a 10% tax on capital gains over and above rupees 1 lakh for the financial year for the investments made above one year.

The shocker was too much for the investors, leading to a short-term fall in the market. The finance minister tried to tame the anger by keeping a grand-father clause applicable till 31st Jan 2018. Now the point is what is this grand-fathering clause and how is it going to make any difference to the investors?
As the LTCG was introduced, it simply meant April 1, 2018 onwards one has to pay tax on income on equity sales over 1 lakh. However, this is not exactly the case. Grand-father clause give you some respite. According to.this clause, investor need not pay tax on the notional profit accumulated till 31st of January. The returns generated over and above on the closing price of the equity as on 31st January will attract LTCG of the return is over 1 lakh. However, the return will be grand-fathered upto 31st July, 2018, post which investors will have to pay 10% tax on LTCG.

Let me give you an example with a real equity test case example. Lets take ESCORTS as a test case. Assume I purchased ESCORTS share on August 9, 2016 at a price of Rs. 260 per share. It reached a peak of Rs. 811 per share on Jan 31, 2018. So, according to grand-father clause, If I sale the shares at or below 811, I dont have to pay any tax on the same (before 31st July, 2018). Assume I sale it on 3rd April, 2018 at the price of 884 per share, my tax liability will be based on 884 - 811, 73 Rs. i.e. my tax liability would be 10% of Rs. 73 (Upto 1 Lakh tax free inclome still applies here)
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The Grandfather clause is applicable to domestic investors for equity and mutual funds investments on LTCG.

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