Generally, Long term gains arising from sale of equity shares listed in recognized stock exchange were exempt u/s 10(38) but exemption of the same has been withdrawn by the Finance Act,2018 w.e.f Assessment Year 2019-20 and the new section 112A was introduced in the Income-tax Act. Therefore any long term gains arising out of sale of shares are taxable from the financial year 2017-18.
Classification of shares as long term/short term Asset
Certain assets like
1. equity/preference shares listed in recognized stock exchange in India (listing of shares is not mandatory where transfer of such shares have been made on or before July 10,2014)
2. Units of equity oriented funds
3. Listed securities like debentures and government securities
4. Units of UTI and Zero coupon bonds
held by the taxpayer for a period of more than 12 months immediately preceding the day of its transfer will be treated as long term Capital asset otherwise it will be treated as short term capital asset.
Note : In case of unlisted shares of the company the period of holding to be considered as 24 months w.e.f A.Y 2017-18.
Taxability of long term capital gains.
Generally, long term capital gains are taxable at the rate of 20% but As per new section -112A, w.e.f A.Y 2019-20 long – term capital gains arising from transfer of an equity share, or a unit of an equity oriented fund or a unit of a business trust shall be taxable at the rate of 10% of such capital gains without indexation. The tax on capital gains shall be levied only in excess of Rs 1,00,000.
This concessional rate of 10 percent will be applicable if;
1. In case of an equity share of a company, securities transaction tax (STT) has been paid on both acquisition and transfer of such capital asset and
2. In case of equity oriented fund or a unit of business trust, STT has been paid on transfer of such capital asset.
However in case of any taxpayer earning long term capital again arising from transfer of any listed security or any unit of UTI/mutual fund (whether listed or not), not being covered u/s – 112A and Zero coupon bonds shall have the following two options*, where capital gains will be
1. Taxed at the rate of 20% (plus applicable surcharge and cess) in case of availing the benefit of indexation
2. Taxed at the rate of 10% (plus applicable surcharge and cess) in case not availing the benefit of taxation
*The option with lower tax liability is to be selected by the taxpayer.
Computation of Cost of Acquisition
The cost of acquisitions of listed equity share acquired before 1st February 2018, shall be deemed to the higher of the above
1. The actual cost of acquisition or
2. Lower of the following
a. FMV (fair market value) of such shares as on 31st January 2018 or
b. Actual sales consideration accruing on its transfer.
The FMV of listed equity share shall mean its highest price quoted on the stock exchange as on 31st January 2018. In case of no trading in such shares on 31st January 2018 , the highest price of such share on the date immediately preceding January 31st 2018, on which trading happens in that shall be deemed as its FMV.
In case of units which are not listed on recognized stock exchange, the NAV (net asset value) as on 31st January 2018 shall be deemed to be FMV.
In a case where the capital asset is an equity share in a company which is not listed on a recognized 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 2017-18 shall be deemed to be its FMV.
Mr venky has purchased 100 shares of Tata motors Ltd at the rate of Rs 250 per share on 2nd January 2017 from NSE. The above shares were sold in May 2018 @ 308 per share. The highest price quoted on the stock exchange on 31st January 2018 was 284 per share.
In the above case shares were sold after holding for the period of more than 12 months through recognised stock exchange and the transaction is liable to STT. Therefore, Sec 112A is applicable
The cost of acquisition shall be higher of
1. Cost of acquisition i.e; 25,000 (100*250);
2. Lower of :
a. Highest price quoted as on 31st January 2018 i.e; 28,400 (100*284)
b. Sales consideration i.e; 30,800 (308*100)
Thus, the cost of acquisition of shares shall be Rs 28,400, Accordingly long term capital gain earned is Rs 2,400 (30,800-28,400). Since long term capital gains doesn’t exceed Rs 1,00,000, nothing is taxable in the hands of venky.