Budget 2018: Reintroduction Of Capital Gains Tax On Listed Securities

Sujit Parakh, Partner And Namrata Arora, Sr Mgr, Tax & Regulatory

The Hon’ble Finance Minister (FM) pronounced the Budget on 01 February 2018 and has introduced new tax regime for taxation of long-term capital gains (LTCG) on sale of listed equity shares and units of equity oriented funds and business trusts.

The provisions of section 10(38) of the Income-tax Act, 1961 (Act) were introduced in India in Finance Act, 2004 to attract foreign investors to invest funds in India. Under the current tax regime, LTCG arising from transfer of equity share in a company or unit of equity oriented fund and unit of a business trust are exempt under section 10(38) of the Act, if STT has been paid on the transfer of such units and on both acquisition and transfer of such equity shares.

The FM in his Budget speech, mentioned that the existing tax regime is inherently biased against manufacturing sector and has encouraged diversion of investment in financial assets. It has also led to significant erosion in the tax base resulting in revenue loss.

In order to minimize economic distortions and curb erosion of tax base, the FM has proposed to withdraw the exemption section 10(38) of the Act on LTCG exceeding INR 1 lakh. Further, it has been proposed to introduce a new section 112A in the Act to provide that LTCG arising from transfer of a long term capital asset being an equity share in a company or a unit of an equity- oriented fund or a unit of a business trust shall be taxed at 10% of such capital gains exceeding INR 1 lakh. LTCG shall be computed without giving effect of inflation indexation and benefit of computation of capital gains in foreign currency to non-resident.

The concessional rate of 10% will be applicable to such LTCG where STT has been paid on

        both acquisition and transfer of a capital asset being equity share in a company; and

        transfer of a capital asset being unit of an equity-oriented fund or a unit of a business trust

The central government will notify the nature of acquisitions of equity shares in a company in respect of which the requirement of payment of STT will not apply.

Further, LTCG up to 31 January 2018 has been grandfathered i.e. broadly speaking no tax would be paid on gains up to this date. In order to ensure grandfathering of such capital gains, cost of acquisitions for such long capital assets acquired before the 01 February 2018, shall be deemed to be the higher of:

        Actual cost of acquisitions

        Lower of:

        Fair market value

        Sale consideration received on transfer

Under the new provisions proposed to be inserted, ‘fair market value’ in respect of such capital assets has been defined as follows

        Equity Share –

        Highest trade price on 31 January 2018 on a recognized stock exchange

        In case of no trade on 31 January 2018, highest trade price on a recognized stock exchange on a date immediately preceding 31 January 2018

        Unit of equity-oriented fund or a business trusts –

        Net asset value as on 31 January 2018.

(Please refer Illustration no. 1 for better understanding)

Proposed amendment will be effective in relation to AY 2019-20. Accordingly, tax on LTCG will be applicable only on transaction on or after 1 April 2018.

Illustration No. 1:


XYZ Ltd. acquired the equity shares of ABC Ltd. on 30 June 2016 details of which are as follows:


Purchase price

INR 100 per share

Highest price of the share on a recognised stock exchange on 31 January 2018

INR 120 per share

Date of transfer

31 August 2018

Sale price

(A) INR 150 per share

(B) INR 110 per share

(C) INR 90 per share








Sale price (1)




Cost of acquisition (2):


Higher of:


·         Purchase price


·         Lower of:



   Sale price





































LTCG (3) = (1) – (2)





The capital loss arising on transfer of such capital asset shall be allowed to be carried forward for 8 years and set-off against subsequent LTCG.

Introduction of tax on LTCG on the listed securities may act as a dampener for investors. Further, since STT has not been abolished by the government, levy of the same on purchase/ sale transaction will lead to double taxation.

Sujit Parakh, Partner – Tax & Regulatory

Sujit is partner of the business tax team. He is responsible for tax advisory, compliance and litigation of various clients. He has a rich experience in domestic and international corporate taxation matters and has advised numerous clients on international tax issues, including cross border restructuring keeping in view the domestic taxation regime, tax treaties and exchange control regulations. Sujit is a member of the Institute of Chartered Accountants of India, the Institute of Company Secretaries of India and, the Institute of Cost and Works Accountants of India.

Namrata Arora, Senior Manager – Tax & Regulatory

Namrata is a Senior Manager in the Tax group, and is based in Delhi. She has experience in corporate income tax matters that include advising multinational companies in formulating an entry strategy into India, inbound investment advisory, outbound structuring, repatriation and exit options in a tax efficient manner, transaction structuring, matters related to double taxation avoidance treaties and domestic income tax issues relating to companies in India.



Disclaimer: Above expressed are the personal views of the author, and the publisher or the author disclaim all, and any liability and responsibility, to any person on any action taken on reliance of it.