Arulmozhi had purchased 1000 shares of Hindustan Unilever Ltd (HUL) at Rs.845/share in FY 2015-16. He sold these shares in July 2019 at Rs. 1730/ share. He is in the process of filing his Income Tax returns for FY 2019-20. As per his computation he will have a long term capital gain of Rs. 8,85,000 which will be subject to tax @ 10%. His friend who is a Chartered Accountant computed his taxable capital gain as Rs. 2,30,000 and explained that the lower gain is due to the “Grand fathering” effect.
On February 1, 2018, then Union Finance Minister, Mr. Arun Jaitley announced that the tax exemption on Long term Capital gains arising on sale of listed equity shares and equity oriented mutual funds shall be withdrawn with effect from FY 2018-19. To ensure that the tax impact is not retrospective he introduced the “Grandfather” clause.?
EFFECT OF GRANDFATHERING
Since Long term capital gains were completely exempt u/s 10(38) of the Income Tax Act, it was a favorable wealth creation bucket for investors. Withdrawal of this exemption would have adversely impacted the long term investors. Hence the grand fathering clause was introduced with an intent to “not tax” the long term capital gains accrued till January 31, 2018.
HOW IT WORKS?
The cost of acquisition of a listed equity share acquired by the assessee before February 1, 2018 shall be deemed to the higher of the following:
(a) Actual cost of acquisition of such equity share or
(b) Lower of the following:
(i) Fair Market Value of such as on January 31, 2018 or
(ii) Actual sale consideration accruing on its transfer
HUL SHARE PRICE HISTORY:
| Date | HUL Share Price |
| 09 Dec 2016 | ₹ 845 |
| 31 Jan 2018 | ₹ 1,400 |
| 26 Jul 2019 | ₹ 1,730 |
The deemed cost of acquisition per share would be Rs.1,400 per share. Long term capital gain = (1730-1400)*1000 shares = Rs. 3,30,000. Since Long term capital gain on sale of equity shares is exempt upto Rs. 1L, taxable long term capital gain would be Rs. 2,30,000.
While declaring long term capital gains on sale of equity shares, one should remember that if grandfathering clause is applicable, the details of purchase and sale of shares should be specified scrip wise.
Share trading has become very user friendly due to the online trading facility, one must keep in mind to declare the gain or loss appropriately to avoid notice from the Tax department.
How can we help you?
Various clauses from the Income Tax Act may be simplified in online contents. But most of the time, it requires professional help in identifying suitable route for specific instances. Similar to nurturing and taking care of personal health, it is important to also keep a tab on one’s financial health. We at Chockalingam Unnamalai & Associates, can help you understand the pros and cons of various choices you make in the context of personal taxation. You can bank on us for a stress free tax filing and related compliances.
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With a 15 year experience in the Industry, Chocksi decided to commence his practice after the “Entrepreneurial Bug” bit him ! He is the Founder Partner of Chockalingam Unnamalai & Associates, Chartered Accountants.
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