CG on securities

1. How is Capital Gain defined under the Income tax Act, 1961 (hereinafter referred to ‘the Act’) and when shall Capital Gain be chargeable to tax?

Ans.

Capital receipts generally are not taxed under the Act except for profit and loss arising on transfer of Capital Asset which is specifically taxed and referred to as Capital Gains.

 

The term ‘Capital Asset’ is further defined under the Act to include Shares, Units of Mutual Funds, Bonds, Debentures (hereinafter referred to ‘Capital Assets’), etc.

 

As per provision of the Act, any profit and loss arising from transfer (viz, sale, exchange, release, relinquishment, etc.) of a Capital Assets during the financial year, shall be chargeable to Income tax under the head “Income from Capital Gains” during the said year, subject to exemptions.


2. How following Capital Assets are classified as Short Term or Long-Term Capital Assets?

Ans.

Sr. No.

Asset Type

Holding Period to qualify as Long-Term Capital Asset

 

Capital Assets transferred before July 23, 2024

Capital Assets transferred on or after July 23, 2024

 

Listed Capital Assets

 

 

1.             

 

Shares, Units of Equity Oriented Mutual Funds, Bonds, Debentures

12 Months

12 Months

 

 

2.

 

Units of Business Trust sold on recognized Stock Exchange

36 Months

12 Months

 

Unlisted Capital Assets/ Other Assets

 

3.

Shares

24 Months

24 Months

 

4.

Other Assets

(e.g. Exchange Traded Funds, Gold Mutual Funds and Gold ETFs)

36 Months

24 Months

5.

Listed Bonds and Listed Debentures

12 Months

12 Months

 

5.

 

Unlisted Bonds and Unlisted Debentures

36 Months

Refer Note 1

 

Note 1: Unlisted bonds or Unlisted debentures are now covered under the special taxation regime of deemed Short-term Capital Gains irrespective of period of holdings and shall be taxed as per the applicable slab rates


3. What is the rate of tax for a Non-Resident on Capital Gains arising on sale of following Capital Assets in India?

Ans.

The rate of tax on Capital Gains arising on sale of following Capital Assets to a Non- Resident shall be as under: -


Sr. No.

Capital Asset Type

Assets transferred before July 23, 2024*

Assets transferred on or after July 23, 2024*

Short-term Capital Gains- Rates of Taxation

1.

Listed Equity Shares, Units of Equity Oriented Mutual Funds and Business Trust

15%

 

[provided Securities transaction tax (STT) is paid on sale of shares**]

20%

 

[provided Securities transaction tax (STT) is paid on sale of shares**]

2.

ALL other Capital assets

As per slab rates of tax$

As per slab rates of tax$

 

Long-term Capital Gains- Rates of Taxation

(Refer Note 4)

1.

Listed Equity Shares, Units of Equity Oriented Mutual Funds and Listed Business Trust

 

(provided STT paid on sale as well as on acquisition of shares and STT is paid on Sale of Units of Equity Oriented Mutual Funds and Listed Business Trust, subject to exceptions**)

10%#

(Without indexation and

with Grandfathering: Refer Note-1 below)

 

 

12.5%#

(Without indexation and

with Grandfathering: Refer Note-1 below)

 

2

Unlisted Shares

10%

(without indexation and no benefit of foreign exchange fluctuation)

12.5%

(without indexation and no benefit of foreign exchange fluctuation)

3

Listed Shares (STT not paid and not covered under exceptions for STT payment)

20% (Indexation)

 

10% (without Indexation)

12.5%

(Without Indexation)

 

4

Units of Equity Oriented Mutual Funds and Listed Business Trust (STT not paid)

20% (Indexation)

12.5%

(Without Indexation)

5

Specified Mutual Funds acquired on or after April 1, 2023 and Market Linked Debentures

(Refer Note 2 and Note 3)

Not applicable as termed as Deemed STCG

Not applicable as termed as Deemed STCG

6.

Listed Bonds and Debentures

10%

(Without indexation)

12.5%

(Without indexation)

7.

Unlisted Bonds and Debentures

10%

(without indexation and no benefit of foreign exchange fluctuation)

Not applicable as termed as Deemed STCG

8.

Gold and Other Capital Assets

20%

(with indexation)

12.5%

(without indexation)


* Plus applicable Surcharge and Health and education cess on above rate of Income-tax.

 

** Condition of STT as referred above is not applicable where transaction is undertaken on a recognized stock exchange located in any International Financial Services Centre and where the consideration for such transaction is paid or payable in foreign currency.

 

# Long term capital gain will be chargeable to tax only if such long-term capital gain in aggregate exceeds Rs. 1.25 lakhs.

 

$ Refer FAQ-8 of FAQ on TDS and Tax liability in India.


Note-1:

 

Tax @10% on LTCG from sale of listed equity share of a company or a unit of equity-oriented fund or a unit of business trust was introduced from 1 April 2018. However, if capital asset is purchased before 1 February 2018 and sold after 31 March 2018, all appreciation/gains upto 31 January 2018 will be grandfathered and accordingly appreciation/gain amount upto 31 January 2018 is exempted from tax. Effectively, holders of such capital assets are liable to pay tax on LTCG only on CG over and above Fair Market Value (FMV) as on 31 January 2018 of such capital asset.

 

Note-2:

·         Mutual funds are classified as under:

 

Nature of Mutual Fund

Percentage of investment

Specified

Finance Act, 2024 amended definition of “Specified Mutual Fund” under Section 50AA to provide that a specified mutual fund shall mean a mutual fund:

(a) a Mutual Fund by whatever name called, which invests more than 65% of its total proceeds in debt and money market instruments; or

(b) a fund which invests 65% or more of its total proceeds in units of a fund referred to in sub-clause (a).

Equity oriented

I. In case where the fund invests in units of another fund which is traded on recognized stock exchange:

- 90% or more of its total proceeds is invested in other fund, and

- Other fund also invest 90% or more of its total proceeds in the equity share of domestic companies listed on a recognized stock exchange

and

II. In any other case, 65% or more of its proceeds is invested in equity share of domestic companies listed on a recognized stock exchange

Others

Other than categorized as above

 

 

Note-3:

·         "Market Linked Debenture" means a security by whatever name called, which has an underlying principle component in the form of a debt security and where the returns are linked to market returns on other underlying securities or indices and include any security classified or regulated as a market linked debenture by the Securities and Exchange Board of India;

·         As per recent amendment, Capital gain arising on Sale of Market Linked Debentures sold on/after April 1, 2023, shall be deemed as short-term capital gain. Therefore, no Benefit of Indexation shall be available.

 

Note 4:

When analyzing the tax implications of long-term capital gains, it's crucial to consider the computational mechanism stipulated under the Income Tax Act. The rates presented in the table above adhere to the Normal Income tax provisions. Nevertheless, Non-Resident Indians have the flexibility to choose a special taxation regime for their long-term capital gains from specified assets, as detailed in the tax rates specified within that particular regime. One may refer to "Special provisions relating to Taxation of Income of NRI" under our services.


4. NRI has sold its shares in September, 2024 and had purchased the said shares in February 2010, such shares are sold and purchased on recognized stock exchange and STT is paid both the time. What will be the taxation on gains?

Ans.

Since period of holding of the shares is more than 12 months (i.e., from February 2010 to April 2023), capital gain shall be treated as long term capital gain. As per provisions of the Act, LTCG on sale of shares, listed on recognized stock exchange and on which STT is paid is taxable @10% on LTCG, subject to said LTCG upto Rs. 1.25 Lakhs being exempt from tax. Additionally, as explained above in Note 1 of FAQ 3, for securities purchased before 1 February 2018 and sold after 31 March 2018, all gains up to 31 January 2018 will be grandfathered.

    

For Example:

 

Purchase Cost of share on 1 January 2017: Rs. 50

Fair Market Value (‘FMV’) as on 31 January 2018: Rs. 100

Sale Value on 1 September 2024: Rs. 110

 

Computation of LTCG shall be as follows:

 

Particulars

Amount

 

Amount

Actual Sale Value

 

Rs. 110

Cost of Acquisition:

(higher of 1 and 2)

 

Rs. 100

1.            Purchase Cost

Rs. 50

 

2.            Lower of (a) and (b)

(a)          Actual Sale Value                Rs.110

(b)          FMV as on 31 January 2018  Rs.100

i.e. Rs.100

 

LTCG

 

Rs.10*

 

Note:

The benefit of FMV as on 31 January 2018 is available for only those shares which are purchased before 1 February 2018.

 

The FMV of the share shall be the highest trading price on the recognized stock exchange as on 31 January 2018.    

 

*As per the relevant provisions of the Act, all capital gains upto 31 January 2018 are exempt from tax. Accordingly, in the above example, one may find that out of total capital gains of Rs.60 i.e. (110-50), gains to the extent of Rs. 50 i.e. (100-50) upto 31 January 2018 is exempt from tax and balance gains of Rs. 10 i.e. (110-100) is chargeable to tax at 10% and no benefit of indexation shall be available on such sale.


5. Will the answer differ if STT is not paid on such purchase of shares?

Ans.

Yes, the LTCG on sale of shares on which STT is not paid at the time of acquisition of shares is taxable @12.5% without Indexation (since transferred on or after 23.07.2024) on the long-term capital gains. No benefit of Grandfathering shall be available. In this case, the computation shall be as under:

 

Particulars

Amount

Actual Sale Value

Rs. 110

Less: Cost of Acquisition

Rs. 50

LTCG chargeable to tax at 12.50% *

                        Rs. 60

               

*The above computation of LTCG is prepared as per the normal provisions of Income Tax. One may refer to "Special provisions relating to Taxation of Income of NRI" under our services .

6. Is the benefit of indexation available while computing capital gain arising on transfer of short-term capital asset?

Ans.

The benefit of indexation is not available while computing capital gain arising on transfer of short-term capital asset. Further, benefit of indexation is available while computing capital gain arising on transfer before July 23, 2024, of certain Long-term capital asset. Refer FAQ 3 for details. 

7. In respect of capital asset (e.g.: shares) acquired before 1 April, 2001 is there any special method to compute cost of acquisition?

Ans.

Generally, cost of acquisition of a capital asset is the cost incurred in acquiring the capital asset. It includes the purchase consideration plus any expenditure incurred exclusively for acquiring the capital asset. However, in respect of capital asset acquired before 1 April, 2001, the cost of acquisition will be higher of the actual cost of acquisition of the asset or fair market value of the asset as on 1 April, 2001.

 

Please note fair market value means the price that the capital asset would ordinarily fetch on sale in the open market as on 1st April, 2001 and where the fair market value is not ascertainable, such price may be determined as per the provisions prescribed.


8. What is the exemption benefits available on Capital Gain arising from sale of shares, mutual funds, bonds and debentures?

Ans.

One can avail tax exemption from Capital gains benefit by reinvesting proceeds from sale of said capital assets, in Residential House property in India, however one may need to fulfill certain conditions.

 

We have already covered below conditions to claim the said tax exemption benefit from capital gains in Note on Taxation of Capital Gains on Sale of Immovable Property, however for ready reference we have reiterate below:

 

i.             If person sell a Long Term Capital Asset viz, above securities, other than residential house, he/she can claim a tax exemption from Capital Gains if he/she buy a new residential house one year before or within two years from the sale date of said Capital assets, or if he/she construct a new residential house within three years from the sale date of said Capital assets.

 

ii.            If person has not purchased/constructed the new residential house before July 31, (i.e. due-date for filing tax return for the year in which the said Capital Assets is sold), and he/she would like to claim tax exemption then he/she has option to open a banking a/c under the ‘Capital Gains Account Scheme’ (CGAS) with a Nationalized Bank and deposit the amount of net sale consideration and utilize the said deposits for purchasing/construction of the new residential house within the time lines prescribed above. However, if the amount deposited in CGAS is not utilized wholly or partly in purchasing/construction of the new residential house property within the timelines prescribed in paragraph-i above, then such unutilized amount would be subject to LTCG tax in the 3rd year from the date of transfer of Capital Asset.

 

iii.           Having obtained the tax exemption as above he/she must hold the new residential house for at least 3 years from the date of its purchase/construction as otherwise he may lose the Tax exemption. If the same is sold before 3 years, then while computing Capital Gain from sale of the said new residential house, the cost of acquisition of the new residential house shall be reduced by the amount of exemption claimed earlier and thereby resulting into higher taxable capital gain.

 

iv.           If person invests the entire net consideration* from sale of such capital assets, he/she shall get total exemption of Capital Gains tax. However, if he/she invests partial net consideration, then the exemption shall be available in the same proportion as the proportion of amount reinvested in the residential house bears to the sales proceeds received on sale of the Capital Assets: The same is reiterated for ready reference as below:

 

Amount of exemption = Amount of Capital    X    Amount reinvested in house        

      of Capital Gains             Gains on old asset        Net sale consideration of old asset

 

* For meaning of Net Sale Consideration, one shall refer to FAQ-1 of  FAQ on Taxation of Capital Gains on Sale of Immovable property.

 

v.  The tax exemption from Capital gain on capital assets shall be restricted to Rs. 10 Crores. Hence any investment over Rs. 10 Crores will be ignored.

 

vi. A person should not own more than one residential house (other than the new residential house) on the date of sale of capital assets.

 

vii. A person should not purchase another residential house within a period of 1 year from the date of sale of old capital asset or construct a residential house within a period of 3 years from the date of sale of old capital asset. Failure to meet this condition will make tax exemption claimed above taxable in year in which such other residential house is purchased/constructed.

9. What are the Income tax implication in the hands of Transferor and Transferee in case of capital assets transferred by way of Gift to Relative*& and/or Inheritance?

Ans.

Capital Assets transferred by way of Gift between Individuals to Relative or transfer under WILL (i.e. Inheritance) (‘Transferee’) are not subject to income tax at the time of Gift/Inheritance in the hands of Transferor and Transferee.

 

However, on subsequent transfer of such gifted/inherited Capital Assets by Transferee, tax is payable in the year in which transfer takes place. Further, cost of acquisition for transferee in this case shall be original cost to last previous owner who acquired it and period for which capital asset was held by previous owner shall be included in calculation of period of holding. Accordingly, it’s essential to keep accurate records of investment originally made by the previous owner.

 

*& Refer Definition of Relative in FAQ-9 of FAQ on Gift.

10. NRI has sold unquoted shares to a person in April, 2023 for Rs.1,20,000 whereas Fair Market value of the said shares as per the Method of Valuation prescribed under the Income-tax Rules on the sale date was Rs. 1,80,000. The NRI had purchased the said shares in February 2015 for Rs. 70,000 out of his earnings in India. What are the Income tax implications on above transactions in hands of NRI and how capital gain should be calculated?

Ans.

Tax Implication in the hands of the Transferor: In this case Transferor is liable to pay tax on Capital gain amount and the computation shall be as under:

 

Particulars

Amount

 

Amount

Sale Value for Computation of Capital Gain:

Higher of A or B of below(I)

 

Rs.1,80,000

A.    Actual Sale Price

Rs.1,20,000

 

B.    FMV as per prescribed rule

Rs.1,80,000

 

 

 

 

Cost of acquisition (II)

 

Rs.70,000

 

 

 

LTCG chargeable to tax at 10%      (III)=(I)-(II)  

 

       Rs. 1,10,000

 

Tax Implication in the hands of the Transferee: In this case, the Transferee acquired the Asset at a price lower than its Fair Market Value (FMV), and the difference between the sale price and the FMV exceeds Rs. 50,000. Consequently, the difference amount of Rs. 60,000 shall be subject to taxation in the hands of the transferee. Refer FAQs on Gifts, for detailed understanding of the same.


- Updated 10/2024