Company Taxation

Capital Gains Tax (CGT)

According to the ITA, an assessee is chargeable to pay CGT on the transfer of ‘capital assets.’ See the section on Capital Assets for the definition of the term. The rate of CGT depends on whether the capital asset is a short-term or a long- term capital asset.

Any capital asset held for less than 36 months is regarded as a short-term capital asset; otherwise, it is considered to be a long-term capital asset. However, securities listed on a recognized stock exchange in India, units of an equity-oriented mutual fund, and zero-coupon bonds held for more than 12 months are considered long-term assets. With effect from 1 April 2016, a share of an unlisted company will be treated as a long-term capital asset, if held for a period exceeding 24 months (reduced from 36 months).

Furthermore, with effect from 1 April 2017, immovable property being land or building, or both, would be treated as long-term capital assets, if held for a period exceeding 24 months.

Section 49 of the Act provides for the cost of acquisition for the capital asset, which became the property of the assessee under certain situations. Further, clause (42A) of Section 2 of the Act provides the definition of the term ‘short-term capital asset.’ It also provides for the determination of the period of holding of the capital asset held by the assessee.

The Finance Act, 2020 amended Sub-section (42A) of Section 2 of the Act to provide that in the case of a capital asset, being a unit or units in a segregated portfolio, the period for which the original unit or units in the main portfolio were held by the assessee should also be included.

Furthermore, Section 49 (2AG) provides that the cost of acquisition of a unit or units in the segregated portfolio shall be in the same proportion as the net asset value of the asset transferred to the segregated portfolio bears to the net asset value of the total portfolio immediately before the segregation of portfolios.

The sale of capital assets is taxable based on the following rate structure:

Particulars Applicable Tax Rate*
1. Sale of short-term capital assets: listed equity shares and units of equity-oriented mutual funds, which have been charged to Securities Transaction Tax (STT) in India 15%
2. Sale of short-term capital assets: other than the above Based on corporate tax rate/ individual tax rate
3. Sale of long-term capital assets: listed equity shares and units of equity-oriented mutual funds, which have been charged to STT in India and purchase of such assets which have been charged to STT (except certain exceptional situations provided in law such as Initial Public Offering (IPO), bonus, etc.) 10%(If the amount of gains exceeds INR 100,000)
4. Sale of long-term capital assets: listed securities or zero-coupon bonds, which have not been charged to STT, and listed equity shares, where the purchase of such assets have not been subject to STT If costs are not adjusted for inflation – 10% If costs are adjusted for inflation – 20%
5. Sale of long-term capital assets: other than those mentioned in points 3 and 4 above 20% with adjustment for inflation

*Applicable surcharge and Health and education cess at the rate of 4% shall also be levied

However, certain exceptions in the case of taxability of capital gains in the hands of a non-resident are:

  • Capital gains arising from the transfer of a capital asset, being shares and debentures of an Indian company that have been initially purchased and sold in foreign currency, are required to be computed in the foreign currency. The net gain in foreign currency would be converted to Indian Rupees considering the prevailing exchange rate on the last day of the month immediately preceding the month in which the capital asset is transferred. Furthermore, the cost of such capital assets cannot be adjusted for inflation despite the same being a long-term gain;

Long-term capital gains arising from the transfer of unlisted securities would be chargeable to tax at the rate of 10%

However, the cost of the said asset cannot be adjusted for inflation.

  • Transfer of capital assets as a consequence of amalgamation, demerger or business reorganization, in compliance with conditions of the Indian income tax law, is not taxable in India;
  • Capital gains arising on account of long-term capital assets are also exempt up to INR 5 million if the profit is invested in specified bonds within six months of the transfer of the long-term capital asset. However, the Finance Act 2018 has restricted this benefit only to the long-term capital assets being land and buildings. Furthermore, the Finance Act, 2018, has increased the lock-in period from three years to five years and also clarified that the exemption would be withdrawn if these investments are sold within five years
  • Also, there are a few other avenues available to save tax on capital gains in the case of an individual.
Get in Touch
Maulik Doshi
Deputy Managing Director
Transfer Pricing and International Tax

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