Capital gains is considered as one of the most crucial head of income. Since it is that crucial, everybody needs to be doubly sure at the time of computation of tax liability from capital gains. Many times, we observed that there is always a confusion regarding bifurcation of short term and long term capital asset and because of lack of in depth understanding people commit mistakes at the time of calculations. Hence today we are writing this article to enlighten you all regarding short term and long term capital assets and how its tax?
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Types of Capital Assets
Types of capital assets is depending on the period of holding. As per period of holding tax payer need to determine its type of asset and accordingly decide how it will tax.
There are two types of capital assets:
1. Short Term Capital Assets
2. Long Term Capital Assets
1. Short Term Capital Assets for Capital Gain Tax
Capital asset held for not more than 36 months immediately prior to the date of transfer shall be deemed as short-term capital asset.
However, following assets held for not more than 12 months shall be treated as short-term capital assets:
a) Equity or preference shares in a company which are listed in any recognized stock exchange in India;
b) Other listed securities;
c) Units of UTI;
d) Units of equity oriented funds; or
e) Zero Coupon Bonds.
Note: Unlisted shares and immovable property (being land or building or both) held for not more than 24 months immediately prior to the date of transfer shall be treated as short-term capital asset.
2. Long Term Capital Assets for Capital Gain Tax
Capital Asset that held for more than 36 months or 24 months or 12 months, as the case may be, immediately preceding the date of transfer is treated as long-term capital asset.
Period of Holding for classification of Assets as Short Term or Long Term
We all are aware that recently there are some amendments in period of holding of capital assets. Hence following is the summary of period of holding as per capital assets and how its classification is carried out.
Period of Holding for Capital Assets Classification (Long Term / Short Term)
| Description of Asset | Before AY 2017-18 | AY 2017-18 onwards |
| Securities listed on recognised stock exchange (Other than units), unit of equity-oriented funds, Unit of UTI and Zero Coupon Bonds | Short term capital asset if held for less than 12 months | Short term capital asset if held for less than 12 months |
| Long term capital asset if held for more than 12 months | Long term capital asset if held for more than 12 months | |
| Unlisted shares, Land and Building or Both | Short term capital asset if held for less than 36 months | Short term capital asset if held for less than 24 months |
| Long term capital asset if held for more than 36 months | Long term capital asset if held for more than 24 months | |
| Units of Debt oriented fund, Unlisted securities other than shares and | Short term capital asset if held for less than 36 months | Short term capital asset if held for less than 36 months |
| Long term capital asset if held for more than 36 months | Long term capital asset if held for more than 36 months | |
| Immovable properties such as land, building and house property | Short term capital asset if held for less than 36 months | Short term capital asset if held for less than 24 months |
| Long term capital asset if held for more than 36 months | Long term capital asset if held for more than 24 months | |
| Other remaining capital assets | Short term capital asset if held for less than 36 months | Short term capital asset if held for less than 36 months |
| Long term capital asset if held for more than 36 months | Long term capital asset if held for more than 36 months |
Tax implication of Capital Assets
1. Short Term Capital Gains (STT is part of transaction) –
Tax @ 15% as per Section 111A
2. Short Term Capital Gains (STT not applicable) –
Amount of capital gains added to the other income tax return items and tax as per the tax slab of that tax payer.
3. Long Term Capital Gains –
Generally, tax at 20% but if the gain arises from sale of Equity shares or unit of equity oriented bonds and amount of gain is more than Rs 1,00,000 then tax at 10%.
Important Amendment of Finance Act, 2020 regarding Segregated Portfolio of Mutual Fund
As we all aware that SEBI has, vide circular SEBI/HO/IMD/DF2/CIR/P/2018/160 dated December 28, 2018, permitted creation of segregated portfolio of debt and money market instruments by Mutual Fund schemes. As per the SEBI circular, all the existing unit holders in the affected scheme as on the day of the credit event shall be allotted equal number of units in the segregated portfolio as held in the main portfolio. On segregation, the unit holders come to hold same number of units in two schemes –the main scheme and segregated scheme.
After this circular, there is a question arises in market regarding calculation of Capital Gains, which are as follows:
- What will be the period of holding for segregated units?
- How to calculate cost of acquisition for segregated and original units?
Hence Finance Act, 2020 come up with solution for these 2 major questions for calculation of capital gains of Segregated Portfolio of Mutual Fund.
1. Period of Holding for segregated units
Section 2(42A) specify the methods of calculation of period of holding. But this section does not have any clause regarding period of holding of segregated units. Hence Finance Act, 2020 amended Section 2(42A) and inserted clause that ‘the period of holding of a capital asset being unit or units in a segregated portfolio shall include the period for which the original unit or units in the main portfolio were held by the assessee.’
2. Cost of acquisition for segregated and original units
Finance Act, 2020 inserted Section 49(2AG) and 49(2AH) for determination of cost of acquisition in case of segregated and original units.
Section 49(2AG) state that, The cost of acquisition of a unit in the segregated portfolio shall be the amount which bears to the cost of acquisition of a unit held by the assessee in the total portfolio, the same proportion as the net asset value of the asset transferred to the segregated portfolio bears to the net asset value of the total portfolio immediately before the segregation of portfolios.’
Further Section 49(2AH) state that, the cost of the acquisition of the original units held by the unit holder in the main portfolio shall be deemed to have been reduced by the amount so arrived as per Section 49(2AG).
Since this concept is little bit difficult to understand, let’s take one example for better and easy understanding:
Example:
Suppose there is one Mutual Fund scheme having 10,000 units. They have invested in 3 instruments in market say company X, company Y and company Z. The details are as under:
| Company Name | Market Value of Investment |
| X | Rs 10,000 |
| Y | Rs 15,000 |
| Z | Rs 20,000 |
| Cash in Hand | Rs 5,000 |
| Total | Rs 50,000 |
| No of Units | 10,000 |
| NAV | Rs 5 |
Now out of this portfolio, Company Z starts downgrading and hence Mutual Fund company decided to segregate Company Z portfolio. When they have decided to segregate the portfolio then the NAV of Rs 5 will also split into two parts. The calculations are as under:
| Company Name | Main Portfolio | Segregated Portfolio |
| X | Rs 10,000 | – |
| Y | Rs 15,000 | – |
| Z | – | Rs 20,000 |
| Cash in Hand | Rs 5,000 | – |
| Total | Rs 30,000 | Rs 20,000 |
| No of Units | 10,000 | 10,000 |
| NAV | Rs 3 | Rs 2 |
Now, we assume one unit holder sold 100 units in the market, the main portfolio at Rs 7 and segregated portfolio is at Rs 1. He has purchased these originally at Rs 6. So in this case how we can calculate capital gains in the hands of this unit holder?
The calculation is as under:
Relevant data from the example:
Sale Price
Main portfolio – Rs 7 per unit
Segregated portfolio – Rs 1 per unit
Purchase price of original units – Rs 6 per unit
NAV after segregation
Main portfolio – Rs 3 per unit
Segregated portfolio – Rs 2 per unit
Workings
1. Calculation of Cost of acquisition of Segregated Portfolio
Formula –
No of Units * Purchase price of Original Unit * NAV segregated portfolio
NAV of Main Portfolio + Segregated Portfolio
= 100*6*2/5
=Rs 240
2. Calculation of Cost of Main Portfolio
Formula –
Cost of acquisition of original unit of main portfolio Less cost of acquisition of segregated units
= (100*6 – Rs 240)
= Rs 360
3. Calculation of Capital Gains
Formula – Sale Consideration – Cost of Acquisition
Main Portfolio = (100*7) – Rs 360 = Capital Gain of Rs 340
Segregated Portfolio = (100*1) – Rs 240 = Capital Loss of Rs 140
We hope the above in depth discussion will clear all your doubts and help you to classify capital asset correctly.
Author Bio
sections 49 2AG and 2 AH made applicable 1.4.2020, specify mechanism on how original cost of acquisition (CoA) is to be split between the main portfolio and the segregated portfolio. Therefore reasonable to assume that the total deemed CoA as determined under 2AG and 2AH can not exceed total CoA.
Now consider a case where segregation occurs in FY 2019-20 and main units are sold in FY 2019-20 i.e before 2 AG and 2 AH came into existence Returns were filed and taxes paid taking CoA of Main units as Total CoA since MF statement showed CoA of Segregated Units as Nil.
In 2020-21 the MF statement suddenly started showing CoA of Segregated Units. Thereafter these units were also sold / off extinguished by the MF during FY 2020-21.
In case we use such CoA of the segregated Units we have in effect inflated CoA of total units and have paid less tax. However another school of thought is that (1) since this is a deeming provision and also (2) in case of any ambiguity the interpretation should be in favour of the assessee.
Your views please
income tax mater under sec 54 LTCG.
LTCG is tax paid as per INDEXATION and Capital gain deposit account to be closed for which applied for Noc in form – G somewhere in Aug 2019 and upto feb the ITO assessing officer of ACIT cader pushing the matter wisely and in mar they have issued notice under 147 for reopening and disputing the declared already taxpaid long term capital gain of AY 2015-2016.
ACIT adding up construction cost which has been entered with builders and developers to income chargeable to tax, since construction agreement not registered as saledeed registration of land value portions for registration under karnataka stamp duty act. since there is no stipulation to include construction value to register for sale deed under karnataka stamo act