Tax on capital gains arising from shares, land and buildings

Introduction:

Capital gain plays a key role in income tax because, where slab rates are not applied, a fixed rate is applicable on the entire gain from capital assets. Capital gain generally comes from either the sale of land and buildings or the sale of shares or mutual funds. In the case of capital gains, the tax rates vary based on the nature of the asset. For Example, if you sell listed shares (where STT is applicable) and get a gain of Rs. 1,50,000/-, if the holding period of those shares is less than or equal to 12 months, then the 15% tax rate is applicable directly; if the holding period is more than 12 months, then the 10% tax rate is applicable only on the extra amount of Rs. 50,000 (1,50,000-1,00,000). Let’s take another example: if we sell land and buildings after 2 years of purchase, the applicable rate is 20% with an indexation benefit. If we sell a property within 2 years of purchase, then normal tax slabs are applicable to it. 

LTCG on the Sale of Equity Shares Bought Before February 1, 2018:

Section 112A is applicable to listed shares, with STT applicable at 10% on excessive 100000/- as a gain, and Section 55(2)(ac) provides the method for deriving the cost of acquisition of such shares. The cost of acquisition of shares acquired before 1.2.2018 is higher than the market value as of January 31^st, 2018 and the actual purchased value, but the market value as of January 31^st, 2018 does not exceed the fair value of the consideration received through sale. For example:

• Case 1: X purchased 10 shares at a cost of 100/- per share on April 1, 2017, and the market rate as of January 31^st, 2018 is 200/- per share. On March 31, 2023, Mr. X will sell those shares at a cost of Rs. 300 per share. Taxable capital gain will be 10*100 (300–200) = 1000/-.
• Case 2: X purchased 10 shares at a cost of 100/- per share on April 1, 2017, and the market rate as of January 31^st, 2018 is 200/- per share. On March 31, 2023, Mr. X will sell those shares at a cost of Rs. 50 per share. Taxable capital loss will be 10*50 (50-100) = 500/-.
• Case 3: X purchased 10 shares at a cost of 100/- per share on April 1, 2017, and the market rate as of January 31^st, 2018 is 200/- per share. On March 31, 2023, Mr. X will sell those shares at a cost of Rs. 150 per share. Taxable capital gain will be 10*50 (150-100) = 500/-. 

Cost of acquisition of assets acquired before 1.4.2001 (Section 55(2)(b)):

If assets were acquired prior to 1.4.2001, then the cost of acquisition of land and buildings will be the value as of 1.4.2001 or the actual purchase cost, whichever is higher. Here, value as on 1.4.2001 means the lower of fair market value as on 1.4.2001 and stamp duty value as on 1.4.2001. The calculation of the cost of acquisition will be:

• Case 1: Mr. Y purchased a Land at a cost of Rs. 1,00,000 before 2001; the fair market value as of 1.4.2001 was Rs. 20,000; the stamp duty value as of 1.4.2001 was Rs. 30000; and he sold that property during 2022. While calculating capital gain, the cost of acquisition will be higher than 10,000 and 20,000, i.e., Rs. 20,000.
• Case 2: Mr. Y purchased a land at a cost of Rs. 40,000 before 2001, and the fair market value as of 1.4.2001 was Rs. 20,000, and the stamp duty value as of 1.4.2001 was Rs. 30,000, and he sold that property during the year 2022. While calculating capital gain, the cost of acquisition will be higher than Rs. 40,000 and Rs. 20,000, i.e., Rs. 40,000.

Tax on the sale of land and buildings or both (section 50C)

If the stamp duty value is more than 110% of the actual consideration received on sale, then, as per Section 50C, that stamp duty value is considered a sale amount instead of actual consideration received. Normally, we take stamp duty value as on the date of registration, which is why we called the date of registration the date of transfer, but we have the option to take stamp duty value as on the date of agreement when part or all of the consideration is paid by electronic means on or before the date of agreement. (Simply, stamp duty value means a rate fixed by the government.)

Case 1: The actual consideration received is Rs. 1,00,000/-, the stamp duty value as of the date of agreement is Rs. 1,09,000/-, and the stamp duty value as of the date of registration is Rs. 1,11,000/-.

• If any part or whole of the consideration is paid by electronic mode on or before the date of agreement, then the actual value of the consideration is Rs. 1,00,000 because the stamp duty value as of the date of agreement is not more than 110% of the actual consideration received.
• If any part or whole of the consideration is not paid by electronic mode or paid after the date of agreement, then the actual value of the consideration is 1,11,000/- because the stamp duty value as of the date of registration is more than 110% of the actual consideration received.

Case 2: The actual consideration received is Rs. 100000/-, the stamp duty value as of the date of agreement is Rs. 1,11,000/-, and the stamp duty value as of the date of registration is Rs. 1,09,000/-.

• If any part or whole of the consideration is paid by electronic mode on or before the date of agreement, then the actual value of the consideration is 1,11,000/- because the stamp duty value as of the date of agreement is more than 110% of the actual consideration received.
• If any part or whole of the consideration is not paid by electronic mode or paid after the date of agreement, then the actual value of the consideration is Rs. 1,00,000 because the stamp duty value as of the date of registration is not more than 110% of the actual consideration received.

Conclusion:

In general, we will get capital gains either from shares or from land and buildings, so while calculating capital gains on shares, the calculation of the cost of acquisition is difficult for people, so it is very important to know about Section 55(2)(ac) and Section 112A. While calculating long-term capital gains on the sale of land and buildings, we must be aware of the fair value of the consideration received and the cost of acquisition. For that, we must be thorough with Section 50(C) and Section 55(2)(b).

Reference: https://resource.cdn.icai.org/71141bos57143-cp4u4.pdf

(Republished with amendments)