1. This is in relation to FY 2014-15. One may be aware that, there is a change in the law relating to taxation of Capital arising out of sale of soft assets like shares. Securities, mutual funds etc.
2. Especially for those who handle their investment portfolio and tax matters themselves and visit their income tax return filing person, if any, very occasionally.
3. There are 2 holding periods i.e. more than 12 months and more than 36 months for a gain on sale of capital asset to qualify as Long term Capital Gain [LTCG].
4. When a gain is becoming LTCG by lapse of 12 months, it is described as benefit of 12 months.
5. Rules regarding categorisation of Short term capital gain [STCG] / LTCG
Upto FY 2013-14, following assets had 12 months period to qualify as long term asset
§ listed securities,
§ units of mutual funds and zero coupon bonds [ i.e. equity and debt]
For FY 2014-15 [with effect from 10 July 2014 to be precise] There is a change in the definition and the benefit of 12 months is available only for following assets
§ Security listed on a recognised stock exchange
§ Units of UTI
§ Units of EQUITY oriented fund
Thus for FY 2014-15 [with effect from 10 July 2014 to be precise] following assets WILL NOT get benefit of 12 months for being long term.
§ Shares other than listed on recognised stock exchange
§ Units of DEBT oriented fund
Hardship to assessees
6. As a result, gains arising out of any investment in the units of FMPs made earlier and sold/redeemed after 10.07.2014 would be taxed as short-term capital gains if the unit was held for a period of thirty-six months or less.
7. Thus these changes were causing the hardship for assessees who had invested keeping in mind the old law. The issue was perused by SEBI and Income Tax Department.
Benevolent steps taken by SEBI and Income Tax Department.
8. In respect of mutual funds, a scheme of roll over is available. In simple terms, it means that, the period is extended to 36 months.
9. In this case, SEBI has clarified that in case of roll over in accordance with the aforesaid regulation the scheme remains the same and it does not constitute a different scheme.
10. In this case, Income Tax Department has issued a benevolent circular dated 9-4-2015 [re-produced below] to clarify that if an assessee opts for a rollover as mentioned above, it will not be treated as transfer and hence will not be liable to tax.
11.Needless to say, if an assessee opts for redemption / encashment of the funds, it will definitely amount to transfer and would be chargeable to tax
12. Section 10(38), 111A and 112 of the Income Tax Act, 1961 deal with the tax rates in this regard.
13. If an assessee opts for a rollover, the question of taxation does not arise.
Assumptions for simplicity
14. It has been assumed that, in case of individual / Hindu Undivided Family, the total income is above 2 lacs.
15. Also, I have not specified the tax rates for gain arising on sale from period 1-Apr-2014 to 10-Jul-2014.
Short Term Capital Gain – Rate
16. In respect of equity shares or units of equity oriented mutual funds, 15% provided Securities Transaction Tax [STT] is paid on such transactions.
17. In case of Debt funds, normal rate of tax will apply i.e. the respective progressive slab rate
Long term Capital Gain – Rate
18.In respect of equity shares where Securities transaction tax is paid or units of equity oriented mutual funds, it is exempt u/s 10(38).
19. Other shares, it is 20%
20. In respect of other shares, it is 10% without indexation. Typically beneficial for bonus shares.
21. In case of Debt funds, 20%
22. The benevolent circular has come a bit (?) late. By the time, the circular was issued; the FY 2014-15 had ended.
Text of the Benevolent circular
Author-: CA. Yogesh S. Limaye and can be reached at firstname.lastname@example.org