10% tax to Long Term Capital Gains introduced
Legislative change impacting funds
The 2018 Indian Finance Bill, which signalled an intention to introduce a 10% tax to Long Term Capital Gains when announced on 1 February 2018, has recently entered into force with effect from 1 April 2018.
The legislation introduces a 10% tax on Long Term Capital Gains (i.e. holding period of at least 12 months) on the disposition of Indian publicly traded shares and certain other securities after 1 April 2018. Prior to this change, Long Term Capital Gains were exempt from Indian tax, provided securities transaction tax (STT) had been paid.
There are a number of key points to note in relation to this change:
In order to calculate the appreciation that should be subject to tax, transitionary rules provide for an adjustment to the cost of acquisition of the shares. As a result of this, there are a number of circumstances in which formal tax input will likely be required:
The Indian Central Board of Direct Taxes has released a Frequently Asked Question document in relation to the change in legislation, the key practical points of which are summarised below.
|What has changed?||
Prior to 1 April 2018, gains on the sale of the below securities were exempt from Indian tax, provided they were held for at least 12 months from date of acquisition (i.e. were Long Term Capital Gains) and securities transaction tax had been paid:
From 1 April 2018, Long Term Capital Gains exceeding INR1 lakh on these securities will now be subject to 10% Indian tax, even where securities transaction tax has been paid.
|What is the taxing point?||Any transfer occurring on or after 1 April 2018.|
|How is the tax computed?||Tax will be applied to the Long Term Capital Gain, which is computed by deducting the cost of acquisition of the asset from the value of consideration on transfer. In determining these amounts:
|Are there any grandfathering/transitionary provisions?||Yes, there are a number of key transitionary measures to note:
|How is the tax collected?||For any non-resident investor which does not hold their investment as a Foreign Portfolio Investor, tax will be deducted at source. However, if a non-resident investor holds their investment as a Foreign Portfolio Investor, they will be treated in a similar manner to an Indian resident investor and will need to compute and pay the tax on a self-assessed basis – in practice an Indian tax agent will need to be appointed to perform this function.|