Income Tax Rates On Long-Term And Short-Term Capital Gains

The rates of long-term capital gains are contained in Section 112. Broadly speaking, the rate of income tax payable on long-term capital gains after taking into account both the indexed cost of improvement and indexed cost of acquisition under Section 48 would be 20% in the case of individuals, HUFs, companies, firms and AOPs.

As a result of the application of the indexed cost of acquisition as also the indexed cost of improvement by taking into account the Cost Inflation Index, the effective rate of tax on long-term capital gains can work out to a very low figure of about 9% only and, in some cases where the asset was acquired prior to 1 April 1981, to an even lower percentage.


Transfer of Long-term Capital Asset.


As a result of the insertion of Section 10(38) by the Finance (No. 2) Act, 2004, income arising 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-term capital 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 the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force.


Another condition to avail this exemption is that such transaction is chargeable to Securities Transaction Tax (STT). If a person sells shares of a listed 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, then the above mentioned benefits would not be available because such shares are not sold through the stock broker and thus the transaction is not subjected to STT. Therefore, in view of the fact that the shares of a Private Limited Company are not chargeable to STY, 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 would also be tax free if the said transaction is chargeable to STT. It has been clarified that an “equity-oriented fund” would mean a fund where the investible funds are invested in equity shares of domestic companies to the extent of more than 65% of total corpus of the fund.


Moreover, such a fund should have been set up as a scheme of a mutual fund in terms of 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 of equity 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.

Transfer of Short-term Capital Asset.


As a result of Section 111A 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 company or unit of an equity-oriented mutual fund would be only 15% for and from the AY 2009-10.


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

•        transactions entered on or after the date on which the Chapter VII of the Finance (No.2) Act, 2004 comes into force, and

•        that such transction 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 equity shares or units of equity fund which does not attract STY, then the concessional rate of income tax of just 15% 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 a resident, where the total income as reduced by such short-term capital gains is below the exemption limit, then, 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 15%. A person having short-term capital gains and other incomes, the deduction under Chapter VIA as well as the tax rebate would be allowed after reducing the said short-term capital gains.

In case the sale transactions relating to shares/units of equity- oriented mutual funds are not subjected to Securities Transaction Tax then income tax on long-term capital gains will, at the option of the assessee, be limited at 10% of the long-term capital gains on shares and securities and defined in Section 2(h) of the Securities Contract (Regulation) Act, 1956 and listed in recognised stock exchanges in India before allowing adjustment of Cost Inflation Index for all assessees. If the assessee desires, he can take the benefit of Cost Inflation Index and pay tax on such long-terms capital gains @ 20%.


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