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A handy guide to calculate capital gain tax

Getting ready for filing Income-tax return for the A.Y. 2005-06 would mean special care and

attention to be paid with reference to computation of short term and long-term capital gains,

says Subhash Lakhotia.

Getting ready for filing Income-tax return for the A.Y. 2005-06 would mean special care and

attention to be paid with reference to computation of short term and long-term capital gains that mayarise to the tax payers during the financial year ending on 31-03-2005. The special care would

particularly be required in case the capital gain is arising in respect of shares and securities quotedin the stock market particularly when such transactions have suffered Securities Transaction Tax

(STT). Similarly, the capital gains as a result of selling the Mutual Funds would require special taxtreatment. In the subsequent paragraphs these aspects are discussed in greater details which willhelp the readers in correct computation and filing of their Income tax return for the A.Y. 2005-06.

Taxation of long-term Capital gains on equity shares and units of equity-oriented mutualfunds

As a result of insertion of a new Section 10(38) by the Finance (No.2) Act, 2004 incomearising from the transfer of a long-term capital asset being equity shares as also units of equity-oriented mutual funds would be exempted from the purview of long-term capital gains.

This exemption is however, not applicable on capital gains arising on sale of any type of

equity share. It is very clearly mentioned that the exemption from tax in respect of such long-termcapital gains would be available only when the transaction relating to sale of equity share or units of

equity-oriented is entered into on or after 01-10-2004. Another condition to avail this exemption isthat such transaction is chargeable to Securities Transaction Tax (STT). If a person sells shares of alisted company directly to a friend without routing it through a stock broker, then the benefits of

exemption of long-term capital gains on such sale of equity shares would not be available.

Similarly, if the shares of a private limited company are sold after holding them for more than

12 months, the above mentioned benefits would not be available because such shares are not soldthrough the stock broker and thus the transaction is not subjected to STT. Therefore, in view of thefact that the shares of Private Limited Company are not chargeable to STT, the same would not

enjoy any tax benefits.

If the sale of units of an equity-oriented fund results into a long-term capital gains, it wouldalso be tax free if the said transaction is chargeable to STT.

It has been clarified that equity oriented fund would mean a fund where the investible fundsare invested in equity shares of domestic companies to the extent of more than 50% of total corpus

of the fund. Moreover, such a fund should have been set up as a scheme of a mutual fund in termsof section 23D of the Income-tax Act, 1961. It has also clarified that the percentage of equity share

holding of the fund shall be computed as the annual average of its average monthly holding ofequity based on opening and closing figures. Thus, where a mutual fund has exposure to equity

investment of, say, only 15% to 25%, then the above mentioned benefit would not be available.

Taxation of short-term capital gains on equity shares of a company or units of equity-oriented funds

As per section 111A inserted by the Finance (No.2) Act, 2004 the tax on income arising to all

categories of tax payers on transfer of a short-term capital asset being an equity share in a companyor unit of an equity oriented mutual fund would be only 10%.

However, this provision would not be applicable to all transactions of shares and units of equitymutual fund resulting in short-term capital gains but is limited only to :

transactions entered on or after 01-10-2004.

that such transaction is chargeable to STT.

Only when both these conditions are fulfilled is the special 10% tax on such short-term

capital gains applicable. It is, therefore, clear that when a short-term capital gain arises on selling

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equity shears or units of equity fund which does not attract STT, then the concessional rate ofincome tax of just10% on short-term capital gains would not be applicable and tax would be payable

on the short-term capital gains like any other income as per applicable slab rates.

It is further provided that in the case of an individual or a Hindu undivided family, being aresident, where the total income as reduced by such short-term capital gains is below the exemption

limit, the, such short-term capital gains shall be reduced by the amount by which the total income,as so reduced, falls short of the maximum amount which is not chargeable to income-tax and the tax

on the balance of such short-term capital gains shall be computed at the rate of 10%. A personhaving short-term capital gains and other incomes, the deduction under Chapter VIA as well as thetax rebate would be allowed after reducing the said short-term capital gains.

The author is tax and investment consultant at New Delhi for the last over 35 years. Email :slakhotia@satyam.net.in.

- www.moneycontrol.com

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