SHORT INTRO OF CAPITAL GAINS
Gain arising on transfer of capital asset is charged to tax under the head “Capital Gains”. Income from capital gains is classified as “Short Term Capital Gains” and “ Long Term Capital Gain ”. The taxability of capital gains depends on the nature of gain, i.e., whether short-term or long-term. Hence, to determine the taxability capital gains are classified into short-term capital gain and long-term capital gain.
In this post we will try to know some provisions related to taxability of Long Term Capital Gains.
LONG TERM CAPITAL ASSET
“long-term capital asset” means a capital asset which is not a short-term capital asset ; (29B) “long-term capital gain” means capital gain arising from the transfer of a long-term capital asset ;
LONG TERM CAPITAL ASSET (reference to Section 2(29A)):
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 recognized 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 Assessment Year 2018-19, period of holding to be considered as 24 months instead of 36 months in case of immovable property being land or building or both,
Some Example
- Ishant Sharma is a small business man. In the month of March, 2012 he bought Residential Property and sold the same in January, 2016. In this case Residential Property is capital asset and holding period is more than 24 months. Hence, Residential Property will be treated as Long Term Capital Asset.
- Suresh Saina is a salaried employee. In the month of Jan, 2015 he bought equity shares of ICICI ltd (listed in a recognized stock exchange in India) and sold the same in March, 2016. In this example shares are capital asset and holding period is more than 12 months. Hence, shares will be treated as Long Term Capital Assets.
- NS Dhoni is a salaried employee. He bought unlisted shares of DABC ltd in the month May, 2014 and sold in August, 2016. In this case, shares are sold in assessment year 2017-18. Hence, period of holding for unlisted shares to be considered as 24 months instead of 36 months. In this case, Holding period is more than 24 months. Hence, shares will be treated as Long Term Capital Assets.
LONG TERM CAPITAL GAIN
As per section 2(29B) Gain arising on transfer of Long-term capital asset is termed as Long-term capital gain.
Example : In January, 2016 , Yuvraj Singh sold a piece of land which was purchased in May, 2012. Capital gain on such sale amounted to Rs. 5.90,000. In this case, land being immovable property, is sold after holding for a period of more than 24 months and, hence, gain of Rs. 5,90,000 will be charged to tax as Long Term Capital Gain.
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COMPUTATION OF LONG TERM CAPITAL GAINS (reference Section 48) : The income chargeable under the head “Capital gains” shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :—
(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the asset and the cost of any improvement thereto.
Computation of Long term capital gain is bit different from computation of Short term capital gain. Benefit of Indexation is available while calculating long term capital gain.
Full Value of Consideration: Generally, Full value of consideration means the price or consideration seller (transferor) receives, or entitles to receive.
Expenditure incurred : Expenses directly related to transfer e.g. Brokerage,stamp duty, legal expenses,advertisement expenses,etc.
Indexed Cost of acquisition: when cost of acquisition is adjusted against inflationary rise in the value of asset.
Indexed cost of Improvement: when cost of improvement is adjusted against inflationary rise in the value of asset.
COMPUTATION OF LONG TERM CAPITAL GAIN
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 | (XXXX)
|
| Net sale consideration | XXXX |
| Less: Indexed Cost of acquisition | (XXXX) |
| Less: Indexed Cost of improvement if any (capital expenses on improvement of capital asset) | (XXXX) |
| Long-Term Capital Gains | XXXX |
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Example : Virat purchased a piece of land in December, 2006 for Rs. 4,20,000 and sold the same in June, 2016 for Rs. 12,10,000 (brokerage Rs. 10,000). What will be the taxable capital gain in the hands of Mr. Raja? Computation of capital gain will be as follows :
| Particulars | Rs |
| Full value of consideration
(i.e., Sales consideration of asset) |
12,10,000 |
| Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset | (10,000)
|
| Net sale consideration | 12,00,000 |
| Less: Indexed Cost of acquisition
( 4,20,000 X 1125/519) |
(9,10,405) |
| Long-Term Capital Gains | 2,89,595 |
To know about Cost Inflation Index and Indexed cost of acquisition /improvement. Click Here
After Computation of Long term capital gain, Deduction (u/s 54/ 54B/ 54D/ 54EC/ 54F/ 54G/ 54GA) is allowed if conditions satisfy.
| Particulars | Rs. |
| Long Term Capital Gain | XXXX |
| Less:(If any) Exemption available
u/s 54/54B/54D/54EC/54F/54G/54GA |
(XXXX) |
| Taxable Long Term Capital Gain | XXXX |
Points to be noted
1) Long term capital gain covered under section 10(38) is exempted from tax.
Section 10(38) : Long-term capital gain arising on transfer of equity share or units of equity oriented mutual fund or units of business trust is not chargeable to tax in the hands of any person, If following conditions are satisfied : i) The transaction should be liable to securities transaction tax. ii) Such shares/units should be long-term capital asset. iii)Transfer should have taken place on or after October 1, 2004.
Note : w.e.f. April 1, 2017 Long term capital gain covered under section 10(38) is exempted from tax even where STT is not paid, if following conditions are satisfied : a) transaction is undertaken on a recognized stock exchange located in any International Financial Service Center, and b) consideration is paid or payable in foreign currency.
2) Short term capital gain on above assets fall under section 111A and get taxed @ 15% (Conditions apply)
Example:
J Rahul is a salaried employee. In the month of March, 2014 he purchased 200 equity shares of TaTa Ltd. @ Rs. 2,100 per share from recognized stock exchange. These shares were sold through recognized stock exchange in May, 2016 @ Rs. 2,700 per share (securities transaction tax was paid at the time of sale). What will be the nature of capital gain in this case?
Shares were sold after holding them for the period of more than 12 months, Hence the gain will be Long term capital gain. Also above Long Term capital gain is covered u/s 10(38) and will not be charged to tax.
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3) Deductions under sections 80C to 80U from Long Term Capital Gain:
No deduction under sections 80C to 80U is allowed from long-term capital gain.
4) Adjustment of Long Term Capital Gain against the basic exemption limit:
Only a resident individual/HUF can adjust the exemption limit against Long Term Capital Gain. Thus, a non-resident individual and non-resident HUF cannot adjust the exemption limit against Long Term Capital Gain. A resident individual/HUF can adjust the Long Term Capital Gain but such adjustment is possible only after making adjustment of other income.
5) How to charge Tax on long-term capital gain ?
the taxpayer has following two options to compute Long Term Capital Gain :
A) if Availing the benefit of indexation, normal rate of 20% (plus surcharge and cess as applicable).
B) if not availing of the benefit of indexation; tax @ 10% (plus surcharge and cess as applicable) only if long-term capital gains arising on transfer of any of the following asset: (a) Any security which is listed in a recognized stock exchange in India; (b) Any unit of UTI or mutual fund (whether listed or not) (sold on or before 10-7-2014. ) and (c) Zero coupon bonds.
Example: Ravi Jadeja (a non resident) purchased equity shares (listed) of Reliance Ind Ltd. in May, 2004 for Rs.58,000. These shares are sold in September, 2017 for Rs.6,30,000. He does not have any other taxable income in India. What will be his tax liability for AY 2018-19. In this situation, Ravi Jadeja has following two options.
| Particulars | Option 1 (Avail indexation) | Option 2 (Do not avail indexation) |
| Full value of consideration | Rs. 6,30,000. |
Rs. 6,30,000. |
| Less: Indexed cost of acquisition (Rs.58,000× 272/113) Or
Less: Cost of acquisition |
Rs.1,39,620. (Approx) |
Rs. 58,000. |
| Taxable Capital Gains | Rs. 4,90,380. |
Rs. 5,72,000. |
| Tax @ 20% on Rs. 4,90,380 (Indexation) |
Rs. 98,076 |
|
| Tax @ 10% on Rs.572000 (Without indexation) |
Rs. 57,200 |
|
| Cess @ 3% ( 4% from AY 2019-20) | Rs. 2,943 |
Rs. 1,716. |
| Tax Liability | Rs. 1,01,020.
(Round off) |
Rs. 58,920. (Round off) |
Calculation of Long Term Capital Gain can be done in above manner. Here, Ravi Jadeja is a non resident hence adjustment of basic exemption limit is not allowed from Long term capital gain.
Comment if You think total tax liability of Sir Jadeja in this example is correct? Is he liable to pay tax on Long Term capital gain?
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