From the next financial year, the government will impose a long term capital tax at the rate of 10% on the gains to the tune of Rs. one lakh and above. This has spooked the Indian markets, Sensex and Nifty. Both market indices are trading in red a little before the closing hours despite the fact that they were considerably higher in run up to the Budget Speech.

Long Term Capital Gains Tax (LTCG) on Equity: 4 Things To Know 

1. The tax liability will accrue only when the income from sale of equity/ equity mutual funds is over Rs. one lakh. For instance, if you buy Rs. 5 lakh worth shares on April 1 and sell the shares on April 2 the year after for Rs. 5.8 lakh then no tax liability will occur on account of capital gains because the profit is Rs. 80,000 only and not Rs. one lakh or higher. However, if you sell the shares for Rs. 6,01,000 then you will have to pay tax at the rate of 10% on the profit of Rs. 1.01 lakh.

2. In case the shares are sold for a price which is over Rs. one lakh higher than the cost price but in less than one year of the purchase, then also no tax liability will accrue on account of the capital gains since the long term capital gain (LTCG) tax accrues only when shares are sold after one year.

3. When shares are sold in less than one year, the tax liability will be as per the short term capital gains rules. The existing rate of short term capital gains is 15%.

4. No indexation is allowed in case of sale of equity shares. In case of capital gains on jewellery and real estate, the tax department allows indexation on account of inflation. But this will not be allowed in case of share sale. This means the rate at which inflation rises, the cost is also increased so as to calculate the profit. By giving the indexation benefit, the tax assessee get the benefit of lower tax liability. Depriving the assessee of this benefit means that their tax liability will rise further.