PERIOD OF HOLDING FOR CAPITAL GAINS AS PER THE INCOME-TAX ACT, 1961
PERIOD OF HOLDING FOR CAPITAL GAINS AS PER THE INCOME-TAX ACT, 1961
A capital asset may either be a short-term or long-term capital asset, depending on the period of holding. Gains from alienation thereof would be short-term capital gains or long-term capital gains.
Under section 2(42A) of the Income-tax Act, 1961 (Act), a short-term capital asset means a capital asset held for not more than 36 months immediately preceding the date of its transfer. However, in the following cases, an asset held for a period of 12 months or less was regarded as a short-term asset:-
Equity or preference share in an Indian company (whether listed or not)
- Units of a mutual fund (whether listed or not).
- Any other listed security (debentures, government securities, etc).
- Unit of the Unit Trust of India.
- Zero coupon bonds.
Change in period of holding of share and securities section 2(42A)
Per the existing provisions, short-term capital asset means a capital asset held by tax payer for not more than 36 months immediately preceding the date of its transfer. However, in the case of a share held in a company or any other security listed in a recognised stock exchange in India or a unit of the Unit Trust of India or a unit of a Mutual Fund or a zero coupon bond, the period of holding for qualifying it as short-term capital asset is not more than 12 months. Budget proposes that securities (other than a listed security) and units of mutual funds (other than equity oriented funds) [hereinafter referred to as ‘Securities’] shall be regarded as short term capital asset where the same are held for a period of less than 36 months.
Consequently, capital gains earned by resident & non-resident tax payers on transfer of Securities held for a period of more than 12 months but less than 36 months would be chargeable to tax @30% & 40% respectively (instead of 20% if the shares are not freely marketable or 10%1 if the shares are freely marketable, as applicable under the existing income tax provisions).
The Memorandum to the Finance (No. 2) Bill, 2014 explained that shorter period of holding of not more than 12 months for consideration as short-term capital asset was introduced for encouraging investment on stock market where prices of the securities are market determined. Question therefore arises whether withdrawal of the benefit suggest that investment in stock markets is the only avenue of foreign investment being considered favorably.
The Finance Minister in his speech mentioned that Government will endeavor not to introduce retrospective taxes. As the Budget got presented in July 2014 and the amendment to section 2(42A) was proposed to take effect from assessment year 2015-16 (i.e. April 1, 2014 onwards), the amendment could have a colour of retrospectively. However, to provide relief for taxpayers, the LokSabha (while passing the Finance (No. 2) Bill, 2014) introduced a deeming provision that such Securities shall continue to be long-term capital assets if they have been transferred during the period from 1 April, 2014 to 10 July, 2014 after holding them for a period of more than 12 months (instead of more than 36 months).
Taxability of long term capital gain: Long term capital gain shall be taxable at 20% under section 112 of income tax act. Benefit of indexation shall be available to the assessee under section 48 of income tax act 1961.There is no change in finance act 2014 and 2015 regard to indexation.
Taxability of Short term capital gain: Short term capital gain shall be taxable at normal rate i.e. 30% for resident and 40% for non resident.
Capital Gains Exemption In Case Of Investment in A Residential House Property
The provisions contained in sub-section (1) of section 54 and sub-section (1) of section 54Finter alia, provide that subject to certain conditions, capital gains to the extent invested inresidential house is not chargeable to tax under section 45 of the Act. Since this benefit wasintended for investment in one residential house within India. Accordingly, provisions ofsection 54 (1) and 54F(1) has been amended vide Finance (No. 2) Act, 2014 so as to providethat the relief under the said sections are available if the investment is made in oneresidential house situated in India.
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