Taxation of Capital Gains

Profit or loss on sale of various immovable properties such as land, building and house property or movable assets such as shares, securities, gold, jewellery become taxable based on the period for which the asset was held, type of asset, the purpose for which the sale proceeds are utilised etc.

Long Term Capital Asset

An asset held for a period of more than 36 months is a long-term capital asset. However, in the case of immovable properties such as land, building and house property the period of holding if is more than 24 months they are considered as long-term capital assets. Hence, movable property such as jewellery, debt-oriented mutual funds etc., shall be considered as long-term capital asset when the period of holding is more than 36 months. However, in the case of unlisted equity shares, with the period of holding being more than 24 months the same shall be considered as long-term capital asset.

Further following assets are considered long-term capital assets when they are held for more than 12 months:

a. Equity or preference shares in a company listed on a recognized stock exchange in India

b. Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India

c. Units of UTI, whether quoted or not

d. Units of equity oriented mutual fund, whether quoted or not

Further in the case of an asset acquired by gift, will, succession or inheritance, the period for which the asset was held by the previous owner is also included when determining whether it’s a short-term or a long-term capital asset. In the case of bonus shares or rights shares, the period of holding is counted from the date of allotment of bonus shares or rights shares respectively.

When the asset is held for period shorter than the thresholds referred above, the said asset shall be considered as a short-term capital asset.

Special Tax Rates for Short-Term and Long-Term Capital Gains

Type of TaxApplicabilitySpecial Tax Rate Applicable
Long-term capital gains taxExcept on sale of equity shares / units of equity oriented fund20%
Long-term capital gains taxOn sale of Equity shares / units of equity oriented fund10% of the capital gain over and above Rs 1 lakh
Short-term capital gains taxWhen securities transaction tax is not applicableThe short-term capital gain is added to the other taxable income and the taxpayer is taxed at applicable tax slabs.
Short-term capital gains taxWhen securities transaction tax is applicable15%.

Section 111A of the Income Tax Act

Under Section 111A, an assesses is liable to tax at the rate of 15% on the capital gains generated by him on short term capital assets which are equity shares in a company or a unit of an equity-oriented fund or a unit of a business trust. Transfer of such assets should be subjected to Securities Transaction Tax such as listed equity shares, listed mutual funds and listed units of business trusts.

The deductions under Section VI-A against the taxable capital gains are not provided while calculating tax under Section 111A.

Balance total income excluding the income subjected to tax under Section 111A shall be taxed in the hands of the assessee calculated as if such balance amount were the total income of the assessee.

Such benefit is available when assessee proves that the securities held by him are Capital assets and not Stock in Trade.

Section 112 of the Income Tax Act

Under Section 112 of Income Tax Act, an assessee is required to pay a tax at the rate of 20% after indexation or 10% before indexation respectively on the capital gain generated by him on any long term capital assets.

The deductions under Section VI-A against the taxable capital gains are not provided while calculating tax under Section 112.

Balance total income excluding the income subjected to tax under Section 112 shall be taxed in the hands of the assessee calculated as if such balance amount were the total income of the assessee.

Section 112A of Income Tax Act

Under Section 112A the assesses are liable to pay a tax at the rate of 10% on the capital gains made by him on long term capital assets being an equity share in a company or a unit of an equity oriented fund and if the value of gains amounts to more than Rs. 100,000. The transfer and acquisition of such securities should be subjected to STT and further benefit of indexation is not available for calculation of Capital Gain under Section 112A.

The deductions under Section VI-A against the taxable capital gains are not provided under Section 112A.

Such benefit is available when assessee proves that the securities held by him are Capital assets and not Stock in Trade.

Acquisition Cost for securities acquired on or before on or before 31 Jan 2018 for calculation of Capital Gains

For the calculation of the cost of acquisition, the value taken should be higher of:

  1. the actual cost of acquisition and
  2. lower of
  3. highest traded price of the security on 31st January 2018 and
  4. sale consideration

Special Provisions with respect to Shares or Debentures

Capital gains arising to a non-resident from the transfer of shares in or debentures of Indian companies is, at his option, computed by first converting the cost and the transfer consideration into the same foreign currency which was initially utilized in the purchase of such shares / debentures and then the difference being the capital gains expressed in that foreign currency is reconverted into Indian currency for the purpose of taxation. This is done to ensure that the amount of capital gain chargeable to tax is not influenced by the exchange rate fluctuation and represents only the accretion in value. The aforesaid manner of computation of capital gains is also applicable in respect of capital gains accruing or arising from every reinvestment thereafter in share or debentures of an Indian Company. Where this option is availed of, the non-resident is not entitled to the benefit of indexation adjustment.

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