Amendment in Taxation – Long term Capital Gains

Many of you would have finished filing your Income Tax Returns and would have already begun planning for the next Financial Year. Yes, as always, there were few amendments which would be applicable from the Assessment Year 2019-20. One of the most important and tricky amendments was made in the computation and taxability of Long Term Capital Gains u/s 112A. So, in this article, we would go through the amendment in detail and also take some examples to understand its applicability and impact.

 

Earlier,

Section 10(38) provides for exemption from tax on the income arising from the transfer of a long-term capital asset (being an equity share in a company or a unit of an equity oriented fund or a unit of business trust) subject to certain conditions.

Now,

The exemption under Section 10(38) will not be available if equity shares/units are transferred on or after April 1, 2018. Tax on such Long-term Capital Gain (LTCG) will be calculated as per the special provisions proposed in Section 112A.

 

When is Sec 112A applicable?

Section 112A is applicable only if the following conditions are satisfied:

 

  1. Total income includes income chargeable under the head “Capital Gains”.

 

  1. Capital gains arise from the transfer of a long term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust.

 

  1. Securities and Transaction Tax (STT) has been paid on acquisition (on or after October 1, 2004) or transfer of equity shares of a company; and on transfer of units of equity oriented fund/business trust

 

If Section 112A is not applicable, then tax will be calculated under the existing provisions of Section 112.

 

Tax Computation under section 112A

Long-term Capital Gains

Long-term Capital Gains

  • If long-term capital gain does not exceed 1 Lakh, it is not chargeable to tax.
  •   If such gain exceeds exceeds Rs. 1 lakh, the amount in excess of Rs.1 lakh will be taxable @10 percent (+ surcharge +4 percent HEC)
  • Proviso to section 112A(2) gives exemption limit benefit to resident individual and resident HUF if the total income (excluding LTCG) is less than the exemption limit. LTCG will be reduced by the exemption limit left unutilised and then 1 lakh exemption to be given. Tax will be 10% of such balance amount of LTCG.

 

Mode of Computation of Cost of Acquisition

 

If tax is payable under section 112A, cost of acquisition of equity shares/units shall be calculated according to the provisions given under section 55(2)(ac). This provision is applicable only in respect of equity shares/units acquired by the assesse before February 1, 2018.

Cost of acquisition shall be calculated as higher of the two amounts calculated under following two steps:

 

  1. Find out actual cost of acquisition of equity shares/units.
  2. Find out whichever is less among the following two:

 

  1. Fair Market Value (FMV) of such asset on January 31, 2018. (as discussed below)

 

  1. Full value of consideration received/occurring as a result of transfer of equity shares/units.

 

Example for better understanding of the provisions

 

Consider the following situations (1,000 shares are transacted at BSE but value of one equity share is given below)

 

Situation 1 Situation 2 Situation 3 Situation 4 Situation 5
Rs. Rs. Rs. Rs. Rs.
STEP 1

– Cost of Acquisition on Sep 20, 2017

(a) 410 710 900 800 30
STEP 2

– FMV as per highest quotation on Jan 31, 2018

(b) 730 780 300 1,000 100
– Selling Price on Oct 15, 2018 (c ) 760 650 910 825 400
– Lower of (b) or (c ) (d) 730 650 300 825 100
Cost of acquisition for the purpose of section 112A [(a) or (d) whichever is higher] (e ) 730 710 900 825 100
LTCG u/s 112A [(c ) – (e )] 30 60 10 300

 

Fair Market Value (FMV)

 

FMV on January 31, 2018 shall be calculated in three different ways as per the situation:

 

  • Quoted shares/units: FMV is the highest traded price of share/unit on such stock exchange on January 31, 2018. If there is no trading in such share, on such exchange, on that day, the highest traded price on such exchange on a date immediately preceding January 31, 2018 shall be the FMV.

 

  • Units not listed: Net asset value (NAV) of such unit as on January 31, 2018 is taken as FMV.

 

 

  • Shares (not listed on January 31, 2018 but listed on the date of transfer: FMV will be calculated after giving indexation benefit up to Previous year 2017-18 as

 

follows:

 

Cost of acquisition   x                Cost Inflation Index of 2017-18 i.e. 272

 

CII for the year in which shares were first held or 2001-02 w.e.i. later

 

Points to be noted

 

While computing tax u/s 112A, following points are to be noted:

 

  • Indexation benefit is not available

 

  • Deductions under sections 80C to 80U are not available from LTCG

 

  • Rebate under section 87A is not available from income-tax on LTCG. However, the rebate under section 87A shall be allowed from the income tax on the total income as reduced by tax payable on capital gains

 

Cost of Acquisition – Bonus and Rights Issue

 

  • Bonus Shares:

 

The cost of acquisition of bonus shares acquired before 31st January, 2018 will be determined as per sub-clause (6) of clause 31 of the Finance Bill, 2018. Therefore, the fair market value of the bonus shares as on 31st January, 2018 will be taken as cost of acquisition (except in cases where the Selling price of such shares is less than the FMV).

 

  • Rights Issue:

 

The cost of acquisition of right share acquired before 31st January, 2018 will be determined as per sub-clause (6) of clause 31 of the Finance Bill, 2018. Therefore, the fair market value of right share as on 31st January, 2018 will be taken as cost of acquisition (except in cases where the Selling price of such shares is less than the FMV).

 

Treatment of Long-term Capital Loss

 

Long-term capital loss arising from transfer made on or after 1st April, 2018 will be allowed to be set-off and carried forward in accordance with existing provisions of the Act. Therefore, it can be set-off against any other long-term capital gains and unabsorbed loss can be carried forward to subsequent eight years for set-off against long-term capital gains.

 

Long-term Capital Gains by  Nidhi Jain, Delhi      chartered accountant

 

Career Gide: Job Scope in Chartered Accountancy Course

Spread the love

Leave a Reply

Your email address will not be published. Required fields are marked *