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Capital gains can be described as profits arising out of sale or transfer of properties, whether movable or immovable. These properties are called capital assets. Capital assets can be divided into two parts based on the holding period of the assets by a seller before any transaction takes place. These are – long-term capital assets and short-term capital assets.
The tenure to qualify as a long-term or short-term capital asset varies across different properties. Most securities in the market qualify as a long-term capital asset once it has been held for more than 12 months. Assets held below that period are considered as short-term assets.
Long term capital gain tax on shares had a few changes to it in the previous year, i.e. 2018. However, no change has been made to the taxation of short-term capital gains.
Tax on short-term capital gains is valued at 15% if the respective asset has been subject to Securities Transaction Tax (STT) during its purchase and sell. However, any short-term asset listed on stock market which does not incur STT is subject to tax rate depending on the respective slab rate of that individual’s income including cess of 3% and surcharge (if applicable).
Tax Provision Amendments on Long-term Capital Gains
In Budget 2018, Section 10 (38) of the Income Tax Act, 1961 was revoked. It removed exemption on long term capital gains tax on equity shares arising out of the sale of equity shares and equity-oriented mutual funds. The section was introduced in the Finance Act, 2004 by the Kelkar Committee. It was done to encourage investments from the Foreign Institutional Investors (FII).
However, after Budget 2018, Section 10 (38) was replaced by another section, Section 112A. This section postulates taxation on capital gains arising out of the following assets –
- Equity Shares
- Equity oriented funds or units of equity-oriented funds
- Business Trusts or units of business trusts
In case of long-term capital gains arising out of the sale of assets mentioned above, the tax rate is 10% excluding any cess or surcharge, if the gain amount is above Rs. 1 Lakh. No indexation facility will be available to sellers post-implementation of that section.
Securities other than the ones mentioned in Section 112A are also subject to taxation. The following table demonstrates the nature of a long term capital gain tax on shares and other securities.
|Particulars||Applicable Tax Clause|
|Sale of listed shares on recognised stock exchanges and Mutual Funds for which STT has been paid.||10% tax for gain amounts exceeding Rs. 1 Lakh.|
|Sale of bonds, debentures, shares, and other listed securities on which STT has not been paid.||10%|
|Sale of debt-oriented Mutual Funds||With indexation -20%|
Without indexation – 10%
Individuals can avail long term capital gain tax exemption on shares under Section 54F. They need to meet the following parameters to benefit from Section 54F –
- An individual needs to reinvest the net consideration amount received from the sale of shares in a maximum of two real estate properties. Before Budget 2019, this limit was one housing property per person.
- Reinvestment should occur 1 year before the sale or 2 years after it.
- An individual can also decide to invest his/her consideration amount in a construction project. However, such construction should be completed within 3 years from the date of sale or transfer of shares.
If an individual wants to avail exemption on the entire capital gain amount, they must reinvest the entire net consideration value. In case that is not possible, exemption on capital gain will be based on the portion of consideration amount invested. The calculation for that would be –
Exemption on capital gain = (Capital gains x cost of a new house)/net consideration value
However, exemption on long-term capital gain would be revoked if the individual decides to sell the new property within 3 years of its purchase.
Introduction of income tax on long-term capital gain on shares, however, was supposed to be inconvenient for certain individuals. It was because of the implementation of “grandfathering” for which the inconvenience was kept to a minimum.
Under the new Section 112A, certain individuals are exempted from complying with it. This group of people can be considered “grandfathered” individuals.
Grandfathering can be seen as a concept where individuals who made decisions based on the previous tax regime are provided with the benefit to trade according to the previous stipulations. It is done to protect individuals from reforms which may affect their income significantly.
When computing the taxable capital gain amount, two factors need to be accounted for – grandfathering provision and tax exemptions up to Rs. 1 Lakh – apart from other necessary conditions which have been mentioned above.
The taxation system for these individuals is demonstrated below
|Purchase and sale of securities before 31.1.2018||Total exemption u/s 10 (38)|
|Purchase of securities before 31.1.2018 and sale before 1.4.2018||Total exemption u/s 10 (38)|
|Purchase of securities before 31.1.2018 and sale after 1.4.2018||LTCG tax on shares u/s 112A|
|Purchase and sale of securities after 31.1.18 and 1.4.18 respectively||Long-term capital gain tax on shares u/s 112A|
Calculation of Long term Capital Gain for Grandfathering
For the calculation of long term capital gain, in this case, the pivotal factor is the Cost of Acquisition. It can be determined by considering higher of the following –
- The actual cost of acquisition
- And the lower of the following –
- Fair Market Value (FMV) on 31.1.18
- The sale price or full value consideration of the security
The highest quoted price on 31.1.18 is considered as the FMV. If the security was not listed on that date, then the quoted price on the date preceding 31.1.18 is considered.
Formula for calculation of LTCG on shares in that case = Full value consideration – Cost of Acquisition
Suppose Mr X purchases shares at Rs. 15000 on 1.5.17 and sells the same on 1.2.18 for Rs. 20,000. The highest quoted price for that security on 31.1.18 was Rs. 18000.
The cost of acquisition should be determined first before calculating his LTCG on shares. The higher of –
- The actual cost of acquisition which is Rs. 15000
- And the lower of –
- FMV which is Rs. 18000
- Sale price which is Rs. 20000
From this, the cost of acquisition should be Fair Market Value which is Rs. 18000 as it is the lower of the FMV and sale price and higher than the actual cost of acquisition. Therefore, LTCG = Sale price – Cost of Acquisition
Or, LTCG = Rs. (20000 – 18000)
Or, LTCG = Rs. 2000
Long-term Capital Loss
Long-term capital loss arises out of the sale or transfer of any long-term capital assets where the cost of acquisition is more than the sale price. Such loss is set off against the Long-term Capital gain in that particular Assessment Year. In case, LTCG on shares fall below Rs. 1 Lakh due to the set-off, taxability of long-term capital gains on shares is exempted.
In cases where the entire long-term capital loss cannot be set off against the gain, it is carried forward to the next year. A long-term capital loss can be carried forward for eight subsequent Assessment Years.
Tax Filing Process Changes after Finance Bill 2018
On 14th June 2019, the Central Board of Direct Taxes (CBDT) announced relaxation of the earlier constringent set of rules for posting capital gains while filing tax. After the implementation of Financial Bill 2018, which contained the revised taxation system for long-term capital gains, individuals required to segregate their gains from equity shares and equity-oriented mutual funds. It made the tax filing process more complicated.
After the recent announcement by CBDT, individuals need to file income tax with only the net consolidated amount from capital gains. However, during the computation of income tax, the profits and losses from different equity shares and units of equity-oriented funds need to be calculated separately.
Provisions Regarding Disclosure of LTCG in ITR filing
The ITR-2 and ITR-3 forms have been updated and changed according to the changes made by the Central Board of Direct Tax. The following are the provisions –
- Individuals and Hindu Undivided Families (HUFs) who have long-term capital gains from sale or transfer of shares need to disclose their LTCG in Section B7 of the ITR-2 form provided they do not consider those gains under the head “Income from Business or Profession”.
- Non-residents who have LTCGs from sale or transfer of shares need to disclose the same in Section B7 and B8 of ITR-2 and ITR-3 respectively.
If an individual treats his equity shares and equity-oriented shares as stock-in-trade, then profits from sale or transfer of shares shall be posted under the head “Income from business and profession”. In that case, such gains will not be considered for a 10% long-term capital gain tax on shares even if the amount exceeds Rs. 1 Lakh.