TAX TALK: Understanding taxation rules for long-term capital gains

The concept of grandfathering of the equity shares on the basis of the fair market value (FMV) as on January 31,2018 was introduced for listed shares and units purchased before such date.

By Shailesh Kumar

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Capital appreciation is the lucrative part in any investment, be it an immovable or movable property. While income in the form of rentals, dividends, etc., are taxed on yearly basis, appreciation is subjected to tax at the time of sale of such capital assets.

The Income-Tax Act excludes movable personal effects such as car, furniture from tax under this head but specifically includes gain from sale of jewellery, archaeological collections, paintings, etc. Land, building, shares, mutual funds are some examples of capital assets. Sale of depreciable assets forming part of the block of assets of business are also subjected to capital gain tax.

Depending upon the period for which such asset is held, gain may be long term or short term and accordingly rate of taxes shall apply. While the former enjoys a benefit of indexation of the cost price, the difference between the sale and cost price is offered to tax in the latter.

LTCG on equity
Long-term capital gain (LTCG) from sale of listed equity shares, equity oriented mutual funds were earlier entirely exempt from tax. With the introduction of Section 112A vide Finance Act, 2018 LTCG from such assets were brought under the ambit of taxation. An exemption up to Rs 1 lakh of long-term gains was provided.Any amount above this threshold was made taxable at 10% rate. The concept of grandfathering of the equity shares on the basis of the fair market value (FMV) as on January 31,2018 was introduced for listed shares and units purchased before such date.

The calculation methodology had been drafted in such a manner that the impact is prospective and not retrospective. Thus, in most cases FMV as on January 31,2018 would replace the cost of acquisition; being higher of the two; in essence, eliminating any tax effect on the resultant gains before January 31,2018.

At the same time, provisions of Section 54EC were also rationalised to restrict the scope of deduction available under this section only to LTCG arising from sale of land or building or both. Before such amendment the benefit of this section was available against gain from sale of any long-term capital asset. Further, the lock-in period of investment made in the bonds specified in this section was also increased from three years to five years.

Relief on LTCG
Relief from tax on LTCG is given under Section 54 where such gains from sale of a residential house is invested in one residential house. From assessment year (AY) 2020-21, in a special case wherein the LTCG does not exceed `2 crore; such benefit was extended to investment in two residential houses. However, this is once in a lifetime opportunity available to a taxpayer.

Further, to claim exemption on capital gains certain time limits for making investment are to be adhered to. Under the ambit of compliance reliefs provided on account of Covid-19, where the last date of compliance for claiming exemption under Sections 54 to 54GB falls between April 1,2021 to September 29,2021 the compliance can be completed up to September 30,2021.

Taxability under the head ‘capital gains’ is vast and depends upon factors such as type of asset held, time period of holding and also residential status. Various exemptions are also available. Hence, while selling a capital asset it becomes necessary to plan the consequential tax effect on the transaction. For example, one may actually hold on to a share for a few extra days before selling it in order to change its taxability from being short term to long term if loss on paying taxes is more than estimated loss of market price.

The writer is partner, Nangia & Co LLP