TAX MADE EASY SERIES - 1

My IT Return is starting a series of articles highlighting the amendments made in the recent budget with the help of simple illustrations for easy understanding of the income-tax payers. These articles will be indexed and saved on our site for easy reference. Please note, that practical insights too will also be shared, enabling error-free return filing by the assesses.

Capital Gains on Shares sold/transferred

1. The most important aspect in determining the capital gains on assets sold/transferred is the holding period of the assets. There are only two holding periods for determination of capital gains: the 12-month holding period and the 24-month holding period. An earlier holding period of 36 months for the determination of long-term gains has been removed in the recent budget.
2. The rate of tax for long-term capital gains is increased to 12.5% from 10% and the short-term capital gains tax rate is increased to 20% from 15%.
3. No indexation benefit is available on the sale of listed shares, equity-oriented mutual funds/ units of equity-oriented funds, business trusts/units of business trusts
4. Listed securities or the sale of equity-oriented mutual funds if held for more than 12 months are long-term and all other assets have to be held for more than 24-month period to be characterized as long-term investments.

 We give below the change in rates and period of holding as announced in the recent budget for the sale of different types of securities:

*Slab Rate means tax to be deposited as per the slabs applicable to the Total Income of the assessee.

** One of the conditions to avail lower tax rate is that the Securities Transaction Tax(STT) is to be paid on the purchase and sale of listed shares and STT is to be paid on the sale of equity-oriented mutual funds and units of business trusts

1. The limit on the exemption of Long Term Capital Gains on the transfer of equity shares or equity-oriented units or units of Business Trust is increased from Rs.1 lac to Rs.1.25 lacs per year as per section 112A.
2. The sale of unlisted bonds and debentures will attract tax on capital gains at the applicable slab rates irrespective of its period of holding. This means it will be treated as short-term capital gains.

NOTE: To protect investor interests, the CBDT also introduced grandfathering provisions, which protect the gains accrued until January 31, 2018. As per the provisions, if a shareholder has purchased shares prior to 31/1/2018 then the fair market value as of 31/1/18 can be taken as the cost of acquisition for the calculation of capital gains. The market price of all listed shares as per BSE and NSE will be stored on the myITreturn site.

Illustration:

Shareholder A purchased 1000 listed shares on 1/4/16 @ Rs.500/- each for Rs.5,00,000/- The fair market value of the purchased share as of 31/1/18 is Rs.600/-. The entire 1000 shares are sold in September’24 i.e., the current financial year for Rs.1000/- a share for an amount of Rs.10 lacs. The calculation of capital gains is as follows:

Sale Consideration:10,00,000/-

Less: Cost of acquisition:                  6,00,000/-    ( FMV > than original cost)

Long Term Capital Gain:                   4,00,000/-

Less: Exemption u/s 112A                1,25,000/-

Chargeable Capital Gains                2,75,000/-

Capital Gains Tax (12.5%) *                34,375/-

• Surcharge plus Cess too is to be deposited. Surcharge capped at 15% for long-term capital gains