Long term capital gain on Equity shares

Long term capital gain on Equity shares

Hi Reader, in this article we will discuss the tax treatment of Long Term Capital gain on Equity Shares. Before Budget 2018, Long Term capital gain arising from transfer of Long-term capital assets (Being a unit of equity oriented fund  or equity share of a company) was exempt from income tax under section 10(38).

After Budget 2018, government introduced a new rule 112A, according to which one has to pay tax at the rate of 10% on transfer of long-term capital assets (Being a unit of Equity oriented fund or equity share of a company) if gain is in excess of Rs 1 Lakh.

Now, we will discuss the various provisions in Details.

Definition of Long Term Capital Assets: –

An asset other than Short Term Capital Assets is long Term Capital assets.

Short Term Capital assets” – capital assets held by a person for less than 36 months before the date of transfer. In other words we say that if assets held by the person for more than 36 months, it become Long Term Capital Assets.

In respect of following capital assets, if transfer takes place on or after 1st April 2017 then period of holding will be taken as per following table: –

S.NoType of AssetsPeriod
1.Shares in a listed Company12 Months
2.Shares in a unlisted Company24 Months
3.Debentures, Bonds, Government Securities, derivatives etc12 Months
4.UTI Units (Listed or Unlisted)12 Months
5.Units of Equity Oriented Mutual Fund (Listed or unlisted)12 Months
6.Units of Debt Oriented Mutual Fund (Listed or unlisted)36 Months
7.Zero Coupon Bonds (Listed or unlisted)12 Months

 

Taxation of Long term Capital Gain (Before Budget 2018)

Long term capital gain arising on transfer of equity share of a company or units of an equity oriented mutual fund or unit of a business trust is exempts from tax under section 10(38) subject to below mention conditions : –

Transfer of share or units has been done on or after 1st October 2014 and at the time of transfer; transaction should be liable to Securities transaction tax (STT).

The Exemption under Section 10(38) will not be available in case of Equity Share / units are transferred on or after 1st April 2018.

Taxation of Long Term Capital Gain (After Budget 2018)

After Budget 2018, a new proviso Section 112A has been inserted. According to new section 112A,  long-term capital gain on transfer of Equity Share of a company or Unit of Equity Oriented fund or Unit of a Business Trust will attract tax at the rate of 10% if gain exceeding Rs 1 Lakh. If Section 112A is not applicable than tax on such LTCG will be calculated under section 112.

Conditions for applicability of Section 112A

Section 112 will be applicable on fulfillment of following conditions.

  • Condition A: Capital assets should be a long-term capital assets such as an Equity share in a Company or a unit of an equity oriented fund or a unit of a business trust.
  • Condition B: In case of equity shares, this section applies only if Securities Transaction Tax (STT) has been paid at the time acquisition as well as transfer of such shares. In case of units of Equity Oriented Mutual Fund or units of business trusts, this section applies if the STT has been paid on transfer of such assets.

However, Board has clarified that the requirement of STT paid on acquisition of equity share applicable only shares acquired on or after 1st October 2014.

STT paid conditions is also not applicable in case of transfer undertaken on a recognized stock exchange located in International Financial Services Centre (IFSC), if the consideration for transfer is received or receivable in foreign currency.

How to Compute Tax on Long Term Capital Gain under Section 112A

In case Long Term Capital gain under Section 112A does not exceed Rs One Lakh then gain is not chargeable to Tax. On the other side, if such gain Exceeds Rs One Lakh then the amount in excess of Rs One Lakh will be taxable at the rate of 10%. Surcharge and 4% HEC will be applicable extra. This rate is applicable for both corporate and non corporate assessee.

Benefit of utilized basis exemption unit in case of resident individual and HUF is allowed against LTCG under section 112A.

Example: – Mr. A (35 year) is resident Individual. For the F.Y. 2018-19, he has following income.

ParticularAmount
Long Term Capital Gain Under Section 112A2,50,000
Other Income1,50,000
Total Income4,00,000

 

In the above case, Basis exemption limit is Rs 2,50,000. After set off of Basis Exemption limit with other income of Rs 1,50,000, utilised basis exemption limit is Rs 1,00,000 (2,50,000-1,50,000). This utilized basis exemption limit will be set off against LTCG. In out words, out of LTCG of Rs 2,50,000, amount chargeable to tax under section 112A is Rs 1,50,000 (2,50,000-1,00,000).

Tax on LTCG under Section 112A (1,50,000-1,00,000)*10%5,000
Add : Health and Education cess @ 4%   200
Tax Liability5,200

 

How to calculated Cost of acquisition for LTCG under Section 112A

Cost of acquisition of Equity Share / units shall be calculated as per section 55(20(ac). This provision is applicable only in that case where equity share or units acquired before 1st February 2018. Cost of acquisition shall be calculated as follows:-

Step 1: Find out actual cost of acquisition.

Step 2: Find out less of the following

  • Fair market value as on 31st January 2018 or
  • Full value of consideration as a result of transfer

Step 3: Cost of acquisition shall be higher of the amount calculated in Step 1 or Step 2.

Step 1 (Cost)Step 2Step 3 – Higher of A or DProfit/ (Loss)
FMV 31-01-2018Selling PriceLesser of B or C
ABCDEF = C – E
200600800600600200
200600500500500
200160140140200(60)
200160180160200(20)
How to determine Fair Market Value (FMV) as on 31st January 2018
  • FMV in case of Quoted Share / Units: – In case where Equity Share / unit is listed on any recognised Stock Exchange then FMV shall be taken highest price of that share / units as on 31st January 2018. In case trading not done of such share / unit as on 31st January 2018 then highest price of preceding day when such share / unit is traded is taken as FMV.
  • Units not Listed: – NAV (Net Asset Value) of unlisted unit as on 31st January 2018 shall be taken as FMV (Fair Market Value).
  • Equity share Not Listed:- If Equity share not listed as on 31st January 2018 but later on listed on the date of transfer then FMV (Fair Market Value) on 31st January 2018 will be calculated after giving indexation benefit up to FY 2017-18.

FMV = Cost of Acquisition x CII of 2017-18 (i.e. 272) / CII of year where share is first held by the assessee or 2001-02 whichever is less.

Example: – Calculation of Cost of Acquisition and Capital Gain:-

ParticularSituation ASituation B
Date of Acquisition of ShareJun-13Jul-95
Cost of Acquisition (Share not listed)70,00038,000
Fair Market Value on 1st April 200150,000
Date of Sale of ShareJul-18Jul-18
Sale Consideration300,000300,000
(Share Listed after 31st January 2018

 

In the above example, since Share is not listed at the time of acquisition so cost of acquisition and Gain will be calculated as follows: –

  Step 1 (Actual Cost)Step 2Step 3 – Higher A or DProfit / (Loss)

FMV 31-01-2018

Selling PriceLesser of B or C
ABCDEF = C– E
A        70,000     174,679     300,000     174,679     174,679     125,321
B        50,000     136,000     300,000     136,000     136,000     164,000

 

Note: In Situation B, cost of share is taken Rs 50,000 (FMV value as on 1st April 2001).

Note: Since Share is not listed in any stock exchange so FMV as on 31st January 2018 will be calculated as below:

FMVCost of Acquisition x CII of the FY 2017-18 (272)
CII of year where share is first held by the assessee or 2001-02 whichever is less

 

FMV in  Situation A70000 x 272 (CII of 2017-18)            174,679
109 (CII of 2003-04)

 

FMV in  Situation B50000 x 272 (CII of 2017-18)            136,000
100 (CII of 2001-02)

 

Other Important Points: –

Section 112A States that Long Term capital gain shall be calculated without giving the indexation benefits. (First Proviso of Section 48).

Section 112A States that Long Term capital gain shall be calculated without giving the benefits of calculating Capital Gain in foreign Currency to Non Residents. (Second Provision of Section 48)

No deduction under chapter VIA (Deduction under Sections 80C to 80U) shall be allowed from the LTCG.

Rebate under Section 87A shall not be allowed in respect of tax payable on LTCG under section 112A.

After the withdrawal of exemption under section 10(38), Long Term capital gain on transfer of Equity share / unit will be become taxable in the hand of FIIs also.

 

For any query you can write at taxhouseindia@gmail.com, before making any decisions do consult with your professional or tax advisor.

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