Exemption for long-term capital gains arising from transfer of listed securities as referred to in Section 10(38) has been withdrawn by the Finance Act, 2018 w.e.f. Assessment Year 2019-20 and a new section 112A is introduced in the Income-tax Act.

As per Section 112A, long-term capital gains arising from transfer of an equity share, or a unit of an equity oriented fund or a unit of a business trust shall be taxed at 10% (without indexation) of such capital gains. The tax on capital gains shall be levied in excess of Rs. 1 lakh.

Long-term capital gains arising from sale of listed securities [Section 112A –with effect from Assessment Year 2019-20]

The Finance Act, 2018 inserts a new Section 112A with effect from Assessment Year 2019-20.

As per the new section capital gains arising from 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 shall be taxed at the rate of 10 per cent of such capital gains exceeding Rs. 1,00,000.

This concessional rate of 10 per cent will be applicable if:

  1. a) in a case of an equity share in a company, securities transaction tax has been paid on both acquisition and transfer of such capital asset; and
  2. b) in a case a unit of an equity oriented fund or a unit of a business trust, STT has been paid on transfer of such capital asset.

The cost of acquisitions of a listed equity share acquired by the taxpayer before February 1, 2018, shall be deemed to be the higher of following:

  1. A) The actual cost of acquisition of such asset; or
  2. B) Lower of following:

(i) Fair market value of such shares as on January 31, 2018; or

(ii) Actual sales consideration accruing on its transfer.

The Fair market value of listed equity share shall mean its highest price quoted on the stock exchange as on January 31, 2018. However, if there is no trading in such shares on January 31, 2018, the highest price of such share on a date immediately preceding January 31, 2018 on which trading happens in that share shall be deemed as its fair market value. In case of units which are not listed on recognized stock exchange, the net asset value of such units as on January 31, 2018 shall be deemed to be its FMV.

In a case where the capital asset is an equity share in a company which is not listed on a recognized stock exchange as on 31-1-2018 but listed on the date of transfer, the cost of unlisted shares as increased by cost inflation index for the financial year 2017-18shall be deemed to be its FMV.

Long-term capital gains arising from transfer of specified asset A taxpayer who has earned long-term capital gains from transfer of any listed security or any unit of UTI or mutual fund (whether listed or not),not being covered under Section 112A,and Zero coupon bonds shall have the following two options: a. Avail of the benefit of indexation; the capital gains so computed will be charged to tax at normal rate of 20% (plus surcharge and cess as applicable).

  1. Do not avail of the benefit of indexation; the capital gain so computed is charged to tax @ 10% (plus surcharge and cess as applicable). The selection of the option is to be done by computing the tax liability under both the options, and the option with lower tax liability is to be selected.

 

ILLUSTRATIONS

Illustration1

Mr. Janak is a salaried employee. In the month of January, 2014 he purchased 100 shares of X Ltd. @ Rs. 1,400 per share from Bombay Stock Exchange. These shares were sold through BSE in April, 2018 @ Rs. 2,600 per share. The highest price of X Ltd. share quoted on the stock exchange on January 31, 2018 was Rs. 1,800 per share. What will be the nature of capital gain in this case? **

Shares were purchased in January, 2014 and were sold in April, 2018, i.e., sold after holding them for a period of more than 12 months and, hence, the gain will be long-term capital gain (LTCG). In the given case, shares are sold after holding them for a period of more than 12 months, shares are sold through recognised stock exchange and the transaction is liable to STT. Therefore, section 112A is applicable in this case.

The cost of acquisition of X Ltd. shares shall be higher of:

  1. A) Cost of acquisition i.e., 1,40,000 (1,400 × 100);
  2. B) Lower of:
  3. Highest price quoted as on 31-1-2018 i.e., 1,80,000 (1,800 × 100);
  4. Sales consideration i.e., 2,60,000 (2,600 × 100)

Thus, the cost of acquisition of shares shall be Rs. 1,80,000. Accordingly, Long-term capital gains in hands of Mr. Janak would be Rs. 80,000 (i.e., 2,60,000 – 1,80,000). Since long-term capital gains doesn’t exceed Rs. 1,00,000, nothing is taxable in hands of Mr. Janak.

Illustration2

Mr. Saurabh is a salaried employee. In the month of July, 2016 he purchased 100 shares of XYZ Ltd. @ Rs. 2,000 per share from Bombay Stock Exchange. These shares were sold through NSE in June, 2018 @ Rs. 4,900 per share. The highest price of XYX Ltd. share quoted on the stock exchange on January 31, 2018 was Rs. 3,800 per share. What will be the nature of capital gain in this case?

 

Shares were purchased in July, 2016 and were sold in June, 2018, i.e., sold after holding them for a period of more than 12 months and, hence, the gain will be long-term capital gain (LTCG). In the given case, shares are sold after holding them for a period of more than 12 months, shares are sold through recognised stock exchange and the transaction is liable to STT. Therefore, section 112A is applicable in this case.

The cost of acquisition of X Ltd. shares shall be higher of:

  1. Cost of acquisition i.e., 2,00,000 (2,000 × 100);
  2. B) Lower of:

(i) Highest quoted price as on 31-1-218 i.e., 3,80,000 (3,800 × 100);

(ii) Sales consideration i.e., 4,90,000 (4,900 × 100)

 

Thus from above, the cost of acquisition of shares shall be Rs. 3,80,000. Accordingly, Long-term capital gains taxable in hands of Mr. Saurabh would be Rs. 1,10,000 (i.e., 4,90,000 – 3,80,000). Since the long-term capital gains exceeds Rs. 1,00,000, hence it will be covered under section 112A. Mr, Saurabh would be liable to pay at the rate of 10% on Rs. 10,000 i.e., gains exceeding Rs. 1,00,000.

Illustration3

Mr. Kumar (a non resident) purchased equity shares (listed) of Shyamal Ltd. in December 1995 for Rs. 28,100. These shares are sold (outside recognised stock exchange) in April, 2017 for Rs. 5,00,000. He does not have any other taxable income in India. What will be his tax liability.

 

In this situation, Mr. Kumar has following two options:

 

Particulars Option 1 (Avail indexation) Option 2 (Do not avail indexation)
Full value of consideration 5,00,000 5,00,000
Less: Indexed cost of acquisition (Rs. 28,100 × 272/100) 76,432
Less: Cost of acquisition 28,100
Taxable Gain 4,23,568 4,71,900
Tax @ 20% on Rs. 4,23,568 84,714
Tax @ 10% on Rs. 4,71,900 47,190

 

From the above computation, it is clear that Mr. Kumar should exercise option 2, since in this situation the tax liability (excluding cess as applicable) comes to Rs. 47,190 which is less than tax liability (excluding cess as applicable) under option 1 i.e. Rs. 84,714.