Taxation of Capital Gains on Sale of Equity Shares

[SECTION 112A] TAX ON LONG TERM CAPITAL GAINS ON CERTAIN ASSETS 

Q.1 What type of assets are covered?

Ans: 

  • an equity share in a company or
  • a unit of an equity oriented fund or

Q.2 What is the rate of tax under this section?

Ans: A concessional rate of tax @10% will be leviable on the long-term capital gains 

Q.3 Tax is liable to be paid in excess of how much amount of capital gains?

Ans: Capital gains in excess of Rs. 1,00,000 are liable to tax. This means that no tax is required to be paid on capital gains upto Rs.1,00,000.

Q.4 What are the conditions for availing the benefit of this concessional rate?

Ans:

(a) In case of equity share in a company, STT has been paid on acquisition and transfer 

(b) In case of unit of an equity oriented fund, STT has been paid on transfer of such capital asset.

Q.5 Is the benefit of basic exemption limit available under this section?

Ans: Yes. In the case of resident individuals or HUF, if the basic exemption is not fully exhausted by any other income, then such long-term capital gain exceeding Rs. 1 lakh will be reduced by the unexhausted basic exemption limit and only the balance would be taxed at 10%.

Q.6 Whether Chapter VIA deductions are allowed to be claimed against this income?

Ans: No. Deductions under Chapter VI-A cannot be availed in respect of such long-term capital gains

Q.7 Is the benefit under this section available even if the securities transaction tax(STT)  is not paid ?

Ans: No. The Securities Transaction Tax (STT) should be paid at the time of transfer.

However, in the case of equity shares acquired after 1.10.2004, STT is required to be paid even at the time of acquisition.

Taxation of Capital Gain

Q.8 What is the treatment of STT paid in computation of capital gains?

Ans: 

  • STT paid at the time of purchase is not added to the cost of acquisition.
  • STT paid at the time of sale is not treated as a transfer expense.

Q.9 What is the minimum period of holding of equity shares to claim the benefit under this section?

Ans: The equity shares must be held for a minimum period of twelve months from the date of acquisition

Q.10 When is the tax liable to be paid under this section?

Ans: The tax will be levied only upon transfer of the long-term capital asset on or after 1st April, 2018.

Q.11 What is the method for calculation of long-term capital gains?

Ans: The long-term capital gains will be computed by deducting the cost of acquisition from the full value of consideration on transfer of the long-term capital asset.

Q.12 How do we determine the cost of acquisition for assets acquired on or before 31st January, 2018?

Ans: Cost of acquisition for assets acquired on or before 31st January, 2018 shall be higher of—

(i) the actual cost of acquisition of such asset; and

(ii) the lower of—

(a) the fair market value of such asset and

(b) the full value of consideration received as a result of the transfer of the capital asset.

Q.13 Example 1:

An equity share is acquired on 1st of January, 2017 at Rs. 150, its fair market value is Rs. 250 on 31st of January, 2018 and it is sold on 1st of April, 2019 at Rs. 350. As the actual cost of acquisition is less than the fair market value as on 31st of January, 2018, the fair market value of Rs. 250 will be taken as the cost of acquisition and the long-term capital gain will be Rs. 100 (Rs. 350 – Rs. 250).

Q.14 Example 2:

An equity share is acquired on 1st of January, 2017 at Rs. 200, its fair market value is Rs. 300 on 31st of January, 2018 and it is sold on 1st of April, 2019 at Rs. 250. In this case, the actual cost of acquisition is less than the fair market value as on 31st of January, 2018. However, the sale value is also less than the fair market value as on 31st of January, 2018. Accordingly, the sale value of Rs. 250 will be taken as the cost of acquisition and the long-term capital gain will be NIL (Rs. 250 – Rs. 250).

Q.15 Example 3:

An equity share is acquired on 1st of January, 2017 at Rs. 200, its fair market value is Rs. 150 on 31st of January, 2018 and it is sold on 1st of April, 2019 at Rs.  250. In this case, the fair market value as on 31st of January, 2018 is less than the actual cost of acquisition, and therefore, the actual cost of Rs. 200 will be taken as actual cost of acquisition and the long-term capital gain will be Rs. 50 (Rs. 250 – Rs. 200).

Q.16 Example 4:

Ans: An equity share is acquired on 1st of January, 2017 at Rs. 200, its fair market value is Rs. 300 on 31st of January, 2018 and it is sold on 1st of April, 2019 at Rs. 150. In this case, the actual cost of acquisition is less than the fair market value as on 31st January, 2018. The sale value is less than the fair market value as on 31st of January, 2018 and also the actual cost of acquisition. Therefore, the actual cost of Rs. 200 will be taken as the cost of acquisition in this case. Hence, the long-term capital loss will be Rs. 50 (Rs. 150 – Rs. 200) in this case.

Step Particulars Ex:1 Ex:2 Ex:3 Ex:4
1 Fair Market Value 250 300 150 300
2 Full value of consideration 350 250 250 150
3 Lower of Step 1 and Step 2 250 250 150 150
4 Actual Cost 150 200 200 200
5 Higher of Step 3 and 4 250 250 200 200
Capital gains/loss  [Step 2 – Step 5] 100 0 50 -50

Q.17 Whether the cost of acquisition will be inflation indexed?

Ans: The benefit of inflation indexation of the cost of acquisition would not be available for computing long-term  capital gains under this section.

Q.18 What will be the tax treatment of transfer made on or after 1st April 2018?

Ans: The long-term capital gains exceeding Rs. 1 Lakh arising from transfer of the specified assets made on after 1st April, 2018 will be taxed at 10 per cent. However, there will be no tax on gains accrued upto 31st January, 2018.

Q.19 What is the date from which the holding period will be counted?

Ans: The holding period will be counted from the date of acquisition.

Q.20 What will be the treatment of long-term capital loss arising from transfer made on or after 1st April, 2018?

Ans: Long-term capital loss arising from transfer made on or after 1st April, 2018 will be allowed to be set-off against any other long-term capital gains and unabsorbed loss can be carried forward to subsequent eight years for set-off against long-term capital gains.

[Section 112] Tax on long-term capital gains

Q.21 What is the tax rate applicable under this section?

Ans: Capital gains on transfer of listed securities shall be chargeable to tax at the rate of:

1. 10% computed without the benefit of indexation or

2. 20% availing the benefit of indexation whichever is more beneficial to the assessee.

[Section 111A]

Tax on short-term capital gains on sale of equity shares and units of equity oriented fund on which STT is chargeable

Q.22 What is the tax rate applicable under this Section?

Ans. Any short-term capital gains on transfer of equity shares or units  of an equity oriented fund shall be liable to tax @15%, if securities transaction tax has been paid on such sale.

Q.23 What is the treatment of short term capital loss?

Ans: Any short term capital loss from sale of equity shares can be set off against short term or long term capital gain from any capital asset. If the loss is not set off entirely, it can be carried forward for a period of 8 years and adjusted against any short term or long term capital gains made during these 8 years.

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