Capital Gains on Sale of Equity Shares, Mutual Funds, Bonds and Debentures

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.

 

For the purpose of this Chapter, we are limiting the discussion relating to taxability arising on Capital Gains on the said Capital Assets.

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

Ans.

Capital Assets

Securities Listed in a recognized stock exchange in India (hereinafter referred to ‘Listed’) (other than a unit), Unit of Equity Oriented Fund, Zero Coupon Bonds.

Unlisted shares of a Company

Others*

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

Short Term

 

Held Capital Asset for not more than 12 months immediately preceding the date of its transfer

 

Held Capital Asset for not more than 24 months immediately preceding the date of its transfer

 

Held Capital Asset for not more than 36 months immediately preceding the date of its transfer

 

Considered as short term Capital Asset irrespective of period of holding.

Long Term

 

Held Capital Asset for more than 12 months immediately preceding the date of its transfer

 

Held Capital Asset for more than 24 months immediately preceding the date of its transfer

 

Held Capital Asset for more than 36 months immediately preceding the date of its transfer

 

Not applicable

 

* Others include Units of Mutual Funds - Hybrid mutual funds and specified mutual fund acquired before April 1, 2023 {Explained below in FAQ-3}, Unlisted Bonds, Unlisted Debentures, etc.


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: -

 

Capital Asset

STCG*

LTCG*

(Refer Note 3)

Equity shares

Listed Shares

15%

 

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

10%#

(with Grandfathering: Refer FAQ-4 below)

 

(provided STT paid on sale as well as on acquisition of shares, subject to exceptions**)

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

As per slab rates of tax$

20% (Indexation)    

 

10% (Without indexation)

Unlisted Shares

As per slab rates of tax$

 

10%

(Without indexation and no benefit of foreign exchange fluctuation)

Units of Mutual Funds

Equity oriented Mutual Fund( STT is paid on sale) (Note 1)

15%

 

 

10%#

(with Grandfathering: Ref FAQ-4 below)

 

Hybrid Mutual Funds, Specified Mutual Funds acquired before April 1, 2023), Equity Oriented Mutual Funds (STT not paid on sale) [Listed]

- (Note-1)

As per slab rates$

 

20% (Indexation)                 

Unlisted Mutual fund (Not covered above)

As per slab rates$

10%

(Without indexation and no benefit of foreign exchange fluctuation)

Specified Mutual Funds acquired on or after April 1, 2023 (Deemed STCG) (Note 1)

From FY 2023-24,

Slab rate of tax$

 

Not applicable

Bonds

Listed Capital Indexed Bonds and Listed Sovereign Gold Bonds

As per slab rates$

          20% (Indexation)

 

10% (Without indexation)

Listed Bonds (Other than above)

As per slab rates$

20%

(Without indexation)

Zero Coupon Bonds

As per slab rates$

10%

(Without indexation)

Unlisted Capital Indexed Bonds, Unlisted Sovereign Gold Bonds and Other Unlisted Bonds

As per slab rates$

10%

(Without indexation and no benefit of foreign exchange fluctuation)

Debentures

Listed Debentures (other than Market Linked Debentures)

As per slab rates$

 

10%

(Without indexation)

 

Unlisted Debentures

 

As per slab rates$

 

                 10%

(Without indexation and no benefit of foreign exchange fluctuation)

Market Linked Debentures (Note-2)

From FY 2023-24,

Slab rate$

Not Applicable























































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 Lakh.

 

$ Refer Chapter 14: TDS and Tax liability of this Booklet.

 

Note-1:

·       Mutual funds are classified as under:

Nature of Mutual Fund

Percentage of investment

Specified

Investment of Less than or equal to 35% of Total proceeds in equity shares of domestic company

Others(Hybrid)

Investment of less than 65% but more than 35% of its proceeds in equity shares of listed domestic company

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

 

·   As per recent amendment , Benefit of Indexation for the calculation of Long-term capital gains on “Specified Mutual Funds” will not be available for Investment made on or after April 1, 2023, and Gain arising from such type of Mutual fund will attract tax as per Normal tax rate as per slab applicable to Individual.

 

Note-2:

·  "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 3:

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 Chapter 23: "Special Provisions for NRI" in this booklet.

4. A NRI has sold its shares in April, 2023 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 Lakh being exempt from tax. However, for securities purchased before 1 February 2018 and sold after 31 March 2018, all gains up to 31 January 2018 will be grandfathered. Further, no benefit of indexation shall be available on such sale.

    

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 30 April 2023: 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%. However, 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 @10% (without indexation) or @20% (with indexation), whichever is more beneficial, on the long-term capital gains, subject to certain exceptions. No benefit of Grandfathering shall be available. In this case, the computation shall be as under:

 

Particulars

Amount

Calculation of @10% (without indexation)

 

Actual Sale Value

Rs. 110

Cost of Acquisition

Rs. 50

LTCG chargeable to tax at 10% (I)

Rs.60*

 

 

Calculation of @20% (with indexation)

 

Actual Sale Value

Rs. 110

Cost of Acquisition (i.e. Purchase Cost *Inflation Index of year of Sale/Inflation Index of year of Purchase)

=Rs. 50 * 348/272

Rs. 64

LTCG chargeable to tax at 20% (II)

                Rs. 46*

LTCG chargeable to tax (whichever is more beneficial from I and II above)**

 

               

**The above computation of LTCG is prepared as per the normal provisions of Income Tax. For special provisions, one shall refer to Chapter 23: Special provisions for NRI, of this booklet.

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 available only in the case of long-term capital assets and is not available in case of short-term assets. Refer answer to FAQ-2 for meaning of indexation in Chapter 16: Taxation of Capital Gains on Sale of Immovable Property.

7. In respect of capital asset (eg: 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 Chapter 16: 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 Chapter 16: Taxation of Capital Gains on Sale of Immovable property, of this booklet.

 

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 to Relative and/or Inheritance are not subject to income tax at the time of such transfer in the hands of Transferor and Transferee.

 

However, on subsequent transfer of such gifted and/or inherited Capital Assets by Transferee, tax is payable in the year in which transfer takes place. Further, the benefit of cost and period of holding shall be accounted from date of original purchase by the previous owner and accordingly, it’s essential to keep accurate records of investment originally made by the previous owner.

 

*& Refer Definition of Relative in FAQ-9 of Chapter 26: Gifts of this Booklet.

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 Chapter 26: Gifts of this booklet, for detailed understanding of the same.

 

Updated 10/2023