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Exemption Of Long-Term Capital Gains On Securities And Lower Tax On Short-Term Capital Gains

[Capital Gain of an NRI could be Completely Exempt from Income Tax]

As a result of insertion of Section 10 (38) by the Finance (No.2) Act, 2004 the 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 1-10-2004, the date on which Chapter VII of the Finance (No. 2) Act, 2004 came 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 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 would also 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 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 45% to 50%, then the above mentioned benefit would not be available.
As a result of new Section IIIA 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 10% for the A.Y. 2008-2009 and 15% from the A.Y. 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 1-10-2004, i.e., the date on which the Chapter VII of the Finance (No. 2) Act, 2004 came into force, and

  • 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 equity shares or units of equity fund which does not attract STT, then the concessional rate of income tax of just 10% or 15% on short-term capital gains would not be applicable and tax would be payable on the short-term capital gains, like an 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 10%. 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.

Capital Gain of an NRI could be Completely Exempt from Income Tax
1. Exemption of Long-Term Capital Gains regarding Residential House Property (Section 54)
2. Exemption of Long-Term Capital Gains from any Capital Asset On Investment In House Property (Section 54F)
3. Exemption of Long-Term Capital Gains On Investment In Bonds of NHAI & REC
4. Exemption to facilitate the Conversion Of Partnership Firm into a Company
5. Exemption from the Levy Of Capital Gains Tax to facilitate Conversion Of Sole Proprietary Concern Into A Company
6. Computation of Capital Gains In Real Estate Transactions
7. Other Important Exemptions Regarding Capital Gains Available to NRI
8. Cost Inflation Index And Computation Of Capital Gains in case of NRI
9. Reduction Of Tax Rate On Long-Term Capital Gains In Regard To Shares And Securities
10. Concessional Rate Of Tax On Income From Certain Global Depository Receipts
11.Tax Treatment Of Capital Gain On Sale Of Shares, Debentures, Etc. Received Under ESOP
12.Provisions Relating To Set-Off Of Long-Term Capital Loss And Carry Forward Thereof ModifiedSections 70 and 74
13. Exemption Of Long-Term Capital Gains On Securities And Lower Tax On Short-Term Capital Gains
14. Issue of Foreign Currency Exchangeable Bonds Scheme, 2008
15. Miscellaneous provisions’ regarding Capital Gains in case of NRI

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