Introduction:
The taxation of long-term capital gains on the sale of listed shares is a critical aspect of financial planning and investment strategies. Under the Income Tax Act 1961, these gains are categorized under the third head of income, known as Capital Gains. In this article, we will delve into the definition of “capital asset,” the differentiation between short-term and long-term gains, and the changes brought about by the introduction of section 112A in the assessment year 2019-20.
Under third head of income of the Income Tax Act 1961, is of Capital Gains. Capital gains means any profits or gains arising from the transfer of a capital asset effected to the previous year.
Definition of “capital asset” given under Section 2(14) of the Act, is as under:
The term ‘capital asset” means:
(a) property of any kind held by an assesse, whether or not connected with his business or profession;
(b) any securities held by a Foreign Institutional Investor, which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992; and
(c) any unit linked insurance policy to which exemption u/s 10(10D) does not apply on account of the applicability of the 4th and 5th proviso thereof, in relation to assessment year 2021-22 and on words.
The term “capital asset” does not include inter alia:
(1) any stock in trade ( other than securities)
(2) personal effects such wearing apparel, furniture, motor car, air conditioner, refrigerator, etc., held for personal use by the assesse or by any member of his family dependent on him.
However, definition of the term capital asset shall include jewelry, archaeological collections, drawings, paintings, sculptures and any work of art, even though these assets are personal effects and transfer of such personal effects will attract tax on capital gains.
(3) 6.5% Gold Bonds,1977, 7% Gold Bonds,1980, National Defense Gold Bonds 1980, Special Berar Bonds 1991, Gold deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government, Deposit certificates issued under the Gold Monetization Scheme, 2015, and
(4) Agricultural land in India with certain conditions.
As per Section 2(42A), of the Income Tax Act, 1961, capital asset is divided as short-term or long term with reference to the period of holding of the asset by the assesse or by or by the previous owner and the assesse under certain circumstances. The period of holding of the asset is computed from the date of acquisition to the date immediately preceding its transfer. The periods specified are:
| Nature of Asset | Short term | Long term |
|
Security listed in a Recognized Stock exchange in India, unit UTI, or unit of an equity Oriented fund or a zero coupon Bond. |
Capital asset held for not more than 12 months | Capital Asset held for more than 12 months |
| For assets other than Assets specified above | Capital asset held for not more than 36 months |
Capital Asset held for more than 36 months |
Till assessment year 2018-19, long term capital gain on shares and securities was exempt under section 10(38) of the Income Tax Act, 1961. But from assessment year 2019-20, section 112A was added, according to that on long term capital gain flat rate of 10% is liable along with surcharge and cess. It is to be calculated as under:
For Individual and HUF: If the total income is less than limit of taxable income, without considering Long Term Capital Gain, to that extend long term capital gain is exempt. Say for example, total income of Mr. A is as under:
| Income Category | Amount |
| Dividend | 20,000 |
| Other Income | 1,20,000 |
| Long Term Capital Gain | 3,00,000 |
| Total Income | 4,40,000 |
| Total Income without capital gain | 1,40,000 |
| Mr. A has paid Life insurance Premium of Rs. 1,50,000, his taxable income will be as under:
Less Deduction u/s 80C |
1,40,000 |
Because on capital gain income deduction u/s 80C not allowed. Now total income of Mr. A Will be Rs. 3,00,000 basic exemption available u/s 112A of Rs. 1,00,000 so taxable income will be Rs.2,00,000 which is blow exemption limit, hence Mr. A is not liable to pay any tax.
For Company, Partnership Firm, LLP, AOP or BOI.
Total Long Term Capital Gain will taxable and rate of tax will be 10% plus cess of 4%, total will be 10.40%
As per Section 111A the rate of tax is as under:
If the total taxable income of Individual, HUF, AOP, BOI is between rupees 50lakhs to rupees 1 cr. 10% surcharge and more than rupees 1 cr. 15% surcharge plus 4% cess. That means 11.44% and 11.96%.
In case of partnership firm, LLP total taxable income is more than rupees 1cr. 12% surcharge and 4% cess, that means 11.648%.
In case of Company, taxable income is between rupees 1cr. And rupees 10 cr. Than surcharge 7% and cess 4% and more than rupees 10 cr. surcharge 12% and cess 4%
Hence total will be 11.128% and 11.648%.
- Remember that u/s 112A exemption is of Rs. 1,00,000 and on rest of income it will be 10% plus surcharge and cess.
- No rebate is allowable from LTCG income.
Conclusion:
The taxation of long-term capital gains on listed shares is now subject to the provisions of section 112A, which imposes a 10% tax rate on these gains. However, individuals and HUFs with total incomes below the taxable income limit, considering capital gains, may still be eligible for an exemption. The rate of taxation varies based on the total taxable income and includes surcharge and cess.
It is essential to plan your investments and assess your tax liability carefully. Keep in mind that the exemption limit under section 112A is Rs. 1,00,000, and no section 80C deduction is applicable to LTCG income. Understanding these tax implications can help you make informed investment decisions and manage your tax liabilities effectively.
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