3.2.1 Calculating Capital Gain Tax

This topic provides information on calculating Capital Gain Tax.

Capital Gain Tax (CGT) calculations are applicable only for Funds. Since the fund prices are declared gross of CGT, the system will deduct CGT by the Life Company when a CGT event occurs, that is, when sale of units happens which can be due to surrender/ disinvestments or switches.

The system will calculate CGT as follows:

Capital Gain Tax = (Gains or Profit – Proportionate Loss from other Funds) * Tax Rate

Where,

Gain or Profit = Units Sold * (Price as of Disinvestment Date - WAC)

WAC = Weighted Average Cost

Post Unitiation, CGT fee will be computed and deducted for all outflows based on the CGT load mapping. If there is any loss, CGT will be zero and losses will be carry forwarded to offset against any future profit/gain. Transaction level losses will be added to the Carry Forwarded losses at policy level if any, and proportionately deducted from the profit/Gain of the other funds.

The system will run a batch at EOD to compute the total gain on a policy outflow (post unitization) and generate a follow on CGT redemption transaction to the extent of capital gains Tax due to a Policy holder. Losses will get logged in Policy Gain/Loss table. Follow on transaction will deduct units to recover any gains tax calculated at the Policy Level.

The system will use the preferred fund of the Unitholder for withdrawal of units to deduct the CGT. If there is no sufficient balance in that fund for that unitholder, then the system will use the latest portfolio percentage and generate a policy withdrawal on pro-rata basis.

Note:

Follow on transaction to deduct CGT is applicable only for LEP transactions. For UT the system will limit only to calculate the capital gains.

The system will record the CGT amount that is due for outflow transactions. Even if CGT transaction generation fails, the system will calculate and log the CGT amount due on the outflow transaction which can then be used for further processing manually.

In case of 100% surrenders, the capital gains amount due by the policy holder will be netted off from the settlement amount of underlying UT transactions. If surrender amount is less than the capital gains tax amount, then system will block EFT and carry forward the capital gains.

The system will map standard post allocation load with 0% return value to the product to compute gain/loss. If the policy transaction under consideration is a 100% surrender then the system will recover the tax from settlement amount.

The system should reduce the system derived settlement amount to the extent of tax recovered.

The above process will consider the gain/loss computed/carried forward up to and including the current 100% surrender in consideration. The system will recover the tax amount from the settlement amount of funds which resulted in gain only.

If the settlement of such funds is insufficient then the system will recover proportionately from all funds involved in 100% surrender.

If all the UT transactions are in loss then the system will recover proportionately from the portfolio funds.

If the CGT redemption transaction is reversed then the gain will not be reversed.