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What are the tax implications of selling inherited shares and equity mutual funds?

Posted on 25 Aug 2024
Author: Sayan Sircar

Tags: Tax ; Calculator

8 mins read
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This article shows how to calculate the tax on selling inherited shares and equity mutual funds using the grandfathering concept.

What are the tax implications of selling inherited shares and equity mutual funds?

This article is a part of our detailed article series on the concept of mutual fund taxation in India. Ensure you have read the other parts here:

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How is tax calculated on selling shares/MFs and how do to do tax harvesting?

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📚 Topics covered:

How are inherited shares taxed when sold?
Why do we need the purchase price of the share relative to the 31st January 2018 price?
What if the price of the share in the past has always been below the price on 31st January 2018?
What if the price of the share in the past has NOT always been below the price on 31st January 2018?
How to use a calculator to determine the capital gains tax for shares that adjust for LTCG grandfathering?

How are inherited shares taxed when sold?

It is common in many families to have shares purchased decades ago, in the 1980s, 1990s, or later, which have been passed on to other family members due to the death of the original investor. In some cases, these shares were initially in paper form and later converted to Demat form. The same is true for mutual funds, which have been in India since the 1990s.

The issue arises when selling these shares (or equity mutual funds) if the purchase price is unknown. For capital gains tax calculation, it is necessary to determine the original purchase price, which might date back several decades. In this article, we will use the terms “share” and “equity mutual fund” interchangeably.

We are discussing only long-term capital gains (LTCG) tax here since the short-term period for equity is just one year. For shorter-term purchases, the data will be available in digital or physical form, either in an email account or through physical mail.

You can determine the purchase price using the digital version of the physical share or MF certificate as well if you have that.

We are only discussing shares sold after 1st April 2024, as this article is written after the 31st July 2024 tax-filing deadline for all share sales before 1st April 2024. We are using the latest taxation rules from the Union Budget 2024, announced on 23rd July 2024.

The taxation rules that apply here are as follows:

The purchase date is the original date of purchase (and not the transfer date to the nominee’s Demat account).
Any capital gains accumulated before 31st January 2018 are considered zero.
For sales between 1st April 2024 and 22nd July 2024, any capital gains from 1st February 2018 to the sale date will be taxed at 10%, with a ₹1 lakh exemption.
For sales on or after 23rd July 2024, the tax rate is 12.5%, with the exemption limit increased to ₹1.25 lakhs.

So, we first need to know if the purchase price of the share is higher or lower than the price on 31st January 2018.

As per Budget 2018, presented in February 2018, LTCG was reintroduced at 10% if the LTCG amount exceeded ₹1 lakh in the financial year. Budget 2024 has increased the tax rate to 12.5% and the exemption to ₹1.25 lakhs. However, we have been given the facility to “grandfather” all capital gains on or before 31st January 2018 to zero.

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In such a case, capital gains tax will only be calculated based on the 31st January 2018 price. It is easy to obtain the adjusted share price via a platform like Google Finance and check if the price in the past has mostly been lower than the 31st January 2018 price.

For example, a typical company like Reliance has been around for decades, and its price has overall increased up to 31st January 2018.

Also read
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If you don’t have the exact purchase price or statement, determining whether the share price exceeds the 31st January 2018 price can be challenging.

Here is an example where the stock price in 2011-2014 was higher than the 31st January 2018 price but lower than the current market price in August 2024. In this case, you need the exact purchase price to know the tax due.

How to use a calculator to determine the capital gains tax for shares that adjust for LTCG grandfathering?

Our goal-based investing calculator contains a dedicated sheet to calculate equity grandfathering, including the NAVs from AMFI and the stock prices from NSE/BSE for 31st January 2018.

Equity LTCG Grandfathering Calculation

Click the image below to get the calculator

Please refer to the “eq-ltcg” tab in the sheet.

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