Capital gain stressing – Solution by the best Ca in Udaipur

Capital gains tax stressing you out in Udaipur? Get clarity from this post by the Best chartered accountant in Udaipur on Income Tax planning when transferring securities or converting debentures. Actionable tax planning advice by the Best Tax Advisor

Capital gains on transfer of securities by the depository – Section 45(2A)

Many persons or retired people spend their time in  buying and selling shares but are unaware about its taxation aspect and does not know how its income will be taxed Income/loss from the sale of equity shares is covered under the head ‘Capital Gains’. Capital gain arising on transfer of securities held with the depository will be of the individual security holder and not of the depository. The cost of acquiring that security and the time of holding it will be determined on the basis of first in, first out method.

Under the head ‘Capital Gains’, income is further classified into:

1. Long-term capital gains- I f shares are held for more than a period of 12 Months
2. Short-term capital gains- if shares are held for less than a period of 12 Months

This classification is made according to the holding period of the shares. Holding period means the duration for which the investment is held from the date of acquisition till the date of sale or transfer. 

Holding periods of the listed equity shares and equity mutual funds is different from the holding period of debt mutual funds. Hence their  taxability is also different.

short-term capital gains

If equity shares listed on a stock exchange and  are sold within 12 months of purchase, the seller may make a short-term capital gain (STCG)  or incur a short-term capital loss (STCL).

The seller makes short-term capital gains when shares are sold at a price higher than the purchase price. Short-term capital gains are taxable at 15%. 

Long Term capital gain

If listed equity shares of stock exchange are sold after 12 months of purchase, the seller may make a long-term capital gain (LTCG) or incur a long-term capital loss (LTCL). 

Before the Budget 2018, the long-term capital gain made on the sale of equity shares was exempt from tax, i.e. no tax was payable on gains from the sale of long-term equity investments. 

In Financial  Budget of 2018, With effect from 1.4.2018, the provision has been amended and since then , if a seller makes a long-term capital gain of more than Rs.1 lakh on the sale of equity shares or equity-oriented units of a mutual fund, the gain earned will attract a long-term capital gains tax @ 10% (plus applicable cess). Also, the benefit of indexation will not be available to the seller.

Also, this new provision was introduced prospectively, i.e. gains starting from the 1st of Feb 2018 will only be considered for taxation. Any long-term gains from the equity instruments purchased before the 31st of January 2018 will be calculated according to  new rule

Example: 

Mr x purchased shares for Rs.1000 on 30th August 2017.

He sold them for Rs.1200 on 31st December 2018.

Aa on 31st January 2018, The stock value was Rs.1100.

Thus there is a gain of Rs. 200/- (Rs. 1200-Rs. 1000).  Out of This capital gain, Rs.100 (value of 31.1.2018  Rs. 1100  Less Purchase price of 30.8.2017  Rs.1000) is not taxable. Rest Rs.100 is taxable as capital gains at 10% without indexation.

Tax responsibility on long term capital gain

In a year, LTCG of Rs 1 lakh is tax-free. Thus, after subtracting Rs 1 lakh from the total tax gain, the tax burden will be 10% (plus applicable surcharge and cess

Loss From Equity Shares

Short-Term Capital Loss (STCL)

Any short-term capital loss from the sale of equity shares can be offset against short-term or long-term capital gain from any capital asset.

If the loss is not set off entirely, it can be carried forward for eight years and adjusted against any short term or long-term capital gains made during these eight years, subject to conditons that tax payers files his return with  in the due date even if the tax payers has total income less than mimimum taxable income . 

Long-Term Capital Loss (LTCL)

After the Budget 2018, Long-term capital loss from a transfer made on or after 1 April 2018 will be allowed to be set off and carried forward in accordance with existing provisions of the Act. Therefore, the long-term capital loss can be set off against any other long-term capital gain.  It is important to note here that set off long-term capital loss cannot be set of against short-term capital gains. 

Also, any unabsorbed long-term capital loss can be carried forward to the subsequent eight years for set-off against long-term gains.

If the loss is not set off entirely, it can be carried forward for eight years and adjusted against long-term capital gains made during these eight years, subject to conditions that tax payers files his return with  in the due date even if the tax payers has total income less than minimum taxable income

Securities Transaction Tax (STT)

STT is applicable on all equity shares sold or bought on a stock exchange.  Any sale/purchase on a stock exchange is subject to STT. Therefore, these tax implications discussed above are only for shares on which STT is paid.

Calculation of Income from Business:-

In such a case, the taxpayer is required to file an ITR-3, and income from share trading to be shown under ‘income from business & profession’.

When taxpayer treat the sale of shares as business income, he can reduce expenses incurred in earning such business income. In such cases, the profits would be added to his total income for the financial year and, consequently, charge to tax as per slab rates. 

Calculation of Income from Capital Gains

If taxpayer treat his income as capital gains, expenses incurred on such transfer are allowed for deduction. Also, long-term gains from equity above Rs 1 lakh annually are taxable, while short-term gains are taxed at 15%. 

Clarification from CBDT

Taxpayers have now been offered a choice of how they want to treat such income. Once they choose, they must, however, continue the same method in subsequent years, too, unless there is a major change in the circumstances of the case. Note that the choice has been made applicable only to listed shares or securities. 

To reduce litigation in such matters, CBDT has issued the following instructions (CBDT circular no 6/2016 dated 29th February 2016)– 

1. If the taxpayer opts to treat his listed shares as stock-in-trade, the income shall be treated as business income. Irrespective of the period of holding of listed shares. The AO shall accept the stand chosen by the taxpayer. 
2. If the taxpayer opts to treat his listed shares as Capital gain, then his  income shall be treated as capital gain income income. This is applicable for listed shares held for more than 12 months. The AO shall accept this stand chosen by the taxpayer. 

However, any  stand, once taken by a taxpayer in a particular assessment year, shall also be applicable in subsequent assessment years. And the taxpayer will not be allowed to take a different stand in subsequent years. 

The above option would prevent unnecessary questioning from Assessing Officers regarding income classification.

How to Treat the Sale of Unlisted Shares in This Context 

However, in the case of the sale of unlisted shares for which no formal market exists for trading, the department has given its view. Income arising from the transfer of unlisted shares would be taxed under the head ‘Capital Gain’, irrespective of the holding period, to avoid disputes/litigation and maintain a uniform approach (as per CBDT circular Folio No.225/12/2016/ITA.1I dated the 2nd of May, 2016).

Calculation of capital gain on conversion of debentures into shares- Section 45(2A)

No capital gain arises on conversion of debentures into shares but when the converted shares are sold, their acquisition cost will be considered to be the same as the acquisition cost of the debentures. The period for calculating short-term or long-term capital gains will be determined on the basis of the date of conversion of shares and the index cast will also be taken on the basis of the year of conversion.

Calculation of capital held by the employee under section 45(2AA) of stock options or sweet equity.

From the assessment year 2001-02, the cost of such shares or securities which the employee has received from the employer without consideration will be considered equal to the cost of fringe benefits made under section 17(2).

Looking to reduce capital gains tax ? This post by an expert tax advisor covers Income Tax planning when transferring securities or converting debentures into shares. Discover the best strategies from top chartered accountants in Udaipur.