What is capital
gain ?
Profits or
gains arising from transfer of a capital asset are called “Capital Gains” and
are charged
to tax under the head “Capital Gains”. Capital gain is taxable on
due basis.
A
capital gain tax is only paid on after sales of asset.
Capital
gains only apply to “capital assets” such as stocks, bonds, jewelry, coin
collections, and real estate property.
There
are two approaches to computed capita gain tax
1.
Long term gain and
2.
Short term capital gain
Long Term Capital Gain:-
Any
capital asset held by the taxpayer for a period of more than 36 months
immediately preceding the date of its transfer will be treated as
long-term capital asset.
However, in respect of certain
assets like shares (equity or preference) which are listed in a recognised
stock exchange in India (listing of shares is not mandatory if transfer of such
shares took place on or before July 10, 2014), units of equity oriented mutual
funds, listed securities like debentures and Government securities, Units of
UTI and Zero Coupon Bonds, the period of holding to be considered is 12 months
instead of 36 months
Note:
1) With effect from Assessment Year
2017- 18, period of holding to be considered as 24 months instead of 36 months
in case of unlisted shares of a company,
2) With effect from A.Y. 2018-19,
period of holding to be considered as 24 months in instead of 36 months in case
of immovable property being land or building or both.
Illustration
Mr. Raj is a salaried employee. In
the month of April, 2018 he purchased equity shares of SBI Ltd. (listed in BSE)
and sold the same in December, 2019. In this case shares are capital assets for
Mr. Raj. He purchased shares in April, 2018 and sold them in December, 2019,
i.e., after holding them for a period of more than 12 months. Hence, shares
will be treated as long-term capital assets.
Short Term Capital Gain:-Any capital asset held by the taxpayer for a period of not
more than 36 months immediately preceding the date of its transfer will be
treated as short-term capital asset.
However, in respect of certain
assets like shares (equity or preference) which are listed in a recognised
stock exchange in India (listing of shares is not mandatory if transfer of such
shares took place on or before July 10, 2014), units of equity oriented mutual
funds, listed securities like debentures and Government securities, Units of UTI
and Zero Coupon Bonds, the period of holding to be considered is 12 months
instead of 36 months
Note:
1) With effect from Assessment Year
2017- 18, period of holding to be considered as 24 months instead of 36 months
in case of unlisted shares of a company,
2) With effect from A.Y. 2018-19,
period of holding to be considered as 24 months in instead of 36 months in case
of immovable property being land or building or both.
Illustration
Mr. Kumar is a salaried employee. In
the month of April, 2018 he purchased un-listed shares of XYZ
Ltd. and sold the same in January, 2020. In this case shares are capital assets
for Mr. Raj and to determine nature of capital gain, period of holding would be
considered as 24 month as shares are unlisted. He purchased shares in April,
2018 and sold them in January, 2020, i.e., after holding them for a period of
less than 24 months. Hence, shares will be treated as Short Term
Capital Assets.
Computation of long-term capital gains
Long-term
capital gain arising on account of transfer of long-term capital asset will be
computed as follows :
Particulars
|
Rs
|
Full value
of consideration (i.e., Sales consideration of asset)
|
XXXX
|
Less:
Expenditure incurred wholly and exclusively in connection with transfer of
capital asset (E.g., brokerage, commission, advertisement expenses, etc.).
|
(XXXX)
|
[As amended by Finance (No.2) Act, 2019] Net sale consideration
|
XXXX
|
Less:
Indexed cost of acquisition (*)
|
(XXXXX)
|
Less:
Indexed cost of improvement if any (*)
|
(XXXXX)
|
Long-Term
Capital Gains
|
XXXX
|
(*) Indexation is a process by which the cost
of acquisition is adjusted against inflationary rise in the value of asset. For
this purpose, Central Government has notified cost inflation index. The benefit
of indexation is available only to long-term capital assets. For computation of
indexed cost of acquisition following factors are to be considered:
Year
of acquisition/improvement
· Year of transfer
· Cost inflation index of
the year of acquisition/improvement
· Cost inflation index of
the year of transfer
Indexed
cost of acquisition is computed with the help of following formula :
Cost of acquisition × Cost inflation index of the year of transfer
of capital asset
-------------------------------------------------------------------------------------------------
Cost
inflation index of the year of acquisition
=
not in short term
Indexed cost of improvement is computed with
the help of following formula:
Cost of improvement × Cost inflation index of the year of transfer
of capital asset = not in
short
term
Cost inflation index of the year
of improvement
The
Central Government has notified the following Cost Inflation Indexes:-
Sl. No.
|
Financial
Year
|
Cost
Inflation Index
|
(1)
|
(2)
|
(3)
|
1
|
2001-02
|
100
|
2
|
2002-03
|
105
|
3
|
2003-04
|
109
|
4
|
2004-05
|
113
|
5
|
2005-06
|
117
|
6
|
2006-07
|
122
|
7
|
2007-08
|
129
|
8
|
2008-09
|
137
|
9
|
2009-10
|
148
|
10
|
2010-11
|
167
|
11
|
2011-12
|
184
|
12
|
2012-13
|
200
|
13
|
2013-14
|
220
|
14
|
2014-15
|
240
|
15
|
2015-16
|
254
|
16
|
2016-17
|
264
|
17
|
2017-18
|
272
|
18
|
2018-19
|
280
|
The government is yet to notify CII
number for FY 2019-20.
Long-term
capital gains arising from sale of listed securities
[Section
112A –with effect from Assessment Year 2019-20]
The Finance Act, 2018 inserts a new Section
112A with effect from Assessment Year 2019-20. As per the new section capital
gains arising from transfer of a long term capital asset being an equity share
in a company or a unit of an equity oriented fund or a unit of a business trust
shall be taxed at the rate of 10 per cent of such capital gains exceeding Rs.
1,00,000.
This
concessional rate of 10 per cent will be applicable if:
a) in a case of an equity share in a company,
securities transaction tax has been paid on both acquisition and transfer of
such capital asset; and
b)
in a case a unit of an equity oriented fund or a unit of a business trust, STT
has been paid on transfer of such capital asset.
The
cost of acquisitions of a listed equity share acquired by the taxpayer before
February 1, 2018, shall be deemed to be the higher of following:
a)
The actual cost of acquisition of such asset; or
b)
Lower of following:
(i) Fair market value of such shares
as on January 31, 2018; or
(ii) Actual sales consideration accruing on
its transfer.
The
Fair market value of listed equity share shall mean its highest price quoted on
the stock exchange as on January 31, 2018. However, if there is no trading in
such shares on January 31, 2018, the highest price of such share on a date
immediately preceding January 31, 2018 on which trading happens in that share
shall be deemed as its fair market value.
In case of units which are not listed on
recognized stock exchange, the net asset value of such units as on January 31,
2018 shall be deemed to be its FMV.
In a case where the capital asset is an equity
share in a company which is not listed on a recognised stock exchange as on
31-1-2018 but listed on the date of transfer, the cost of unlisted shares as
increased by cost inflation index for the financial year 2017-18shall be deemed
to be its FMV.Illustration
Mr.
Saurabh is a salaried employee. In the month of July, 2017 he purchased 100
shares of XYZ Ltd. @ Rs. 2,000 per share from Bombay Stock Exchange. These
shares were sold through NSE in June, 2019 @ Rs. 4,900 per share. The highest
price of XYX Ltd. share quoted on the stock exchange on January 31, 2018 was
Rs. 3,800 per share. What will be the nature of capital gain in this case?
Shares
were purchased in July, 2017 and were sold in June, 2019, i.e., sold after
holding them for a period of more than 12 months and, hence, the gain will be
long-term capital gain (LTCG).
In
the given case, shares are sold after holding them for a period of more than 12
months, shares are sold through recognised stock exchange and the transaction
is liable to STT. Therefore, section 112A is applicable in this case.
The
cost of acquisition of X Ltd. shares shall be higher of:
a) Cost of acquisition i.e., 2,00,000 (2,000 ×
100);
b)
Lower of:
(i) Highest quoted price as on 31-1-218 i.e.,
3,80,000 (3,800 × 100);
(ii)
Sales consideration i.e., 4,90,000 (4,900 × 100)
Thus from above, the cost of acquisition of
shares shall be Rs. 3,80,000. Accordingly, Long-term capital gains taxable in
hands of Mr. Saurabh would be Rs. 1,10,000 (i.e., 4,90,000 – 3,80,000). Since
the long-term capital gains exceeds Rs. 1,00,000, hence it will be covered
under section 112A. Mr, Saurabh would be liable to pay at the rate of 10% on
Rs. 10,000 i.e., gains exceeding Rs. 1,00,000.
Adjustment
of LTCG against the basic exemption limit
Basic
exemption limit means the level of income up to which a person is not required
to pay any tax. The basic exemption limit applicable in case of an individual
for the financial year 2019-20 is as follows :
For
resident individual of the age of 80 years or above, the exemption limit is Rs.
5,00,000.
For resident individual of the age of 60 years
or above but below 80 years, the exemption limit is Rs. 3,00,000.
For
resident individual of the age of below 60 years, the exemption limit is Rs2,50,000.
For
non-resident individual, irrespective of the age of the individual, the
exemption limit is Rs. 2,50,000.
For HUF, the exemption limit is Rs. 2,50,000.
In the Next
post we are discussed about Short –Term Capital Gain and all about Other Section’s
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