Personal Finance Tuesday, August 23, 2011 20:36 Hrs IST

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TAXATION

Tax Matters: When does an asset attract long-term capital gain tax?

If an asset is held for more than 12 months immediately prior to its transfer, that is excluding the date of sale, then it is a long-term capital asset

What is the eligible period for holding an asset to attract a long-term capital gain tax? I purchase shares of a company on 15 April 2010 and sold them on 16 April 2011, i.e., after 366 days. Was my holding a long-term capital asset?

Mukesh Jain, e-mail

Shares of a company or any security listed on a recognised stock exchange in India, units of UTI and mutual funds or zero coupon bonds will be treated as short-term capital asset if they are held for not more than 12 months before the date of its transfer, as per Section 2(42A) of the Income Tax Act, 1961. If an asset is held for more than 12 months immediately prior to its transfer, then it is a long-term capital asset.

While calculating the holding period of capital asset, the date of sale should not be included. For stock purchased on 15 April 2010, 12 months expired on 14 April 2011 as the stock was sold on 16 April 2011. Hence, it is a long-term capital asset.

I booked a flat in 2004 on construction-linked payment plan. I sold the flat in 2010-11 before taking possession. What will be my tax liability? Can I argue that what I have sold is the right in the flat and not the flat itself and pay long-term capital gain?

Amar Kapoor, e-mail

When a flat is booked with a builder under a letter of allotment or an agreement for sale, it represents only a right to acquire the flat. You booked a flat in 2004 on construction-linked payment plan. The possession was not taken. But the flat was sold in 2010-11.

Therefore, the gain received on sale of such flat is treated as gain from sale of right to acquire flat. As such right to acquire flat was purchased more than 36 months ago, it becomes long-term capital asset and gain on such sale of asset is treated as long-term capital gain (LTCG). LTCG is taxable at 20%.

I am working as a crew member in a foreign merchant shipping company and receive salary in pounds. I am on ship out of India for more than 182 days. What is the tax treatment for the salary received? Is it correct that if salary is received in non-resident external (NRE) account, the treatment is different?

Mohan Brahmanand Verma, email

For a non-resident Indians, foreign income is not taxable in India. Only Indian income is taxable in India. Salary income is taxable in the hands of the non-resident if it is received or deemed to be received in India or accrued or deemed to be accrued in India, as per Section 5(2) of the Income Tax (IT) Act, 1961.

Sections 9(1)(ii) and 9(1)(iii) of the IT Act say income of a non-resident by way of salaries' is deemed to accrue or arise in India, when it is payable by government of India to a citizen of India for services rendered outside India, when services are rendered in India, and when the rest period or leave period for which salary is received is preceded and succeeded by services rendered in India and forms part of service contract of employment.

For a non-resident, only salary earned in India would be taxable in India, as per Section 9(1)(ii)]. No tax would be deductible on salary earned outside India by a non-resident as such salary would not be taxable in India.

Salary received in the NRE account, will be taxable outside India (Ranjit Kumar Bose v income tax officer, Calcutta). You are giving services outside India and receiving salary in the NRE account in India. The assessment officer will try to tax the salary on the ground that it is received in India and should be included in the total income of the assessee, as per Section 5(2). If salary of a non-resident person accrues outside India, such salary is not taxable under the IT Act and, as such, is not included in total income even if it is received in India later because salary payable is taxable at the place where it accrues. Only exception is salary received in advance, which is taxable at the place where it is received.

I am holding 1,000 equity shares of an unlisted private company for more than three years. A year ago, the company issued bonus share in the ratio of 1:1. Now my total holding is 2,000 equity shares, If I sell all these equity shares to a third party in an off-market deal at premium, what will be the capital gain tax?

Dilip J Chandaria, e-mail

The cost of acquisition of the financial assets, i.e., share or any other security allotted to the assessee on or after 1 April 1981 without any payment and on the basis of holding of any other financial asset is to be taken as nil, as per Section 55(2) of the Income Tax Act, 1961. Therefore, the cost of bonus shares is to be taken as nil and the entire sale consideration received on the transfer of bonus shares is to be treated as capital gain.

The option to substitute fair market value as on 1 April 1981 is available if such bonus shares have been allotted to the assessee before 1 April 1981.

The period of holding of bonus shares is to is to be determined from the date of allotment of bonus shares and not from the date of acquisition of original shares.

If bonus shares are not held for one year then entire gain is short-term capital gain and liable to tax as per the regular slab rate as shares of a private company are is not listed and, hence, not eligible for special rate.

But you have specifically mentioned that the bonus issue has been made a year ago. Hence, the entire gain from sale of such bonus shares is to treated as long-term capital gain at 20%.

Capital gain on sale of original 1,000 equity shares that are not listed will be computed as consideration received on sale less expenses in connection with sale less indexed cost of acquisition. If there is gain, then it is long-term capital gain. The cost of acquisition would be the cost of purchase of such original shares and it may be indexed. Indexed long-term gain would be taxable at 20%.

I had bought 22 shares of Asian Hotels at Rs 525.4954 per share for total consideration of Rs 11560.90. After the demerger of the company (on record date 25 February 2010), I got 11 shares of Asian Hotels (North), 11 shares of Asian Hotels (East), and 11 shares of Asian Hotels (West). How do I calculate the purchase price and date for these new shares? Do I lose the long-term holding period advantage for the newly acquired shares?

K Udupi, email

Transfer of capital asset in a scheme of demerger is not treated as transfer for the purpose of capital gain, as per Section 47 (vib) of the Income Tax (IT) Act, 1961, provided that capital asset is transferred by the demerged company, it is transferred to the resulting company, and such resulting company is an Indian company.

The cost of acquisition of the shares in the resulting company is the cost of acquisition of shares held by the assessee in the demerged company immediately before such demerger subject to the proportion of net book value of the assets transferred in a demerger bears to the net worth of the demerged company. For this purpose, net worth means the aggregate of the paid-up share capital and general reserves as appearing in the books of account of the demerged company immediately before the demerger. Normally, the proportion is worked out by the company and intimated to the shareholders. To find out if the shares in the resulting company are long-term capital asset, the period of holding is to be determined from the date of acquisition of shares in the demerged company. However, indexation will start from the date of allotment of shares in the resulting company.

In your case, the holding period of shares is to be calculated from the date of allotment of shares in Asian Hotels and, accordingly, such capital asset (shares in resulting company) are classified as long-term capital asset or short-term capital asset. Therefore, if the shares of Asian Hotels are held for more than one year, then shares of Asian Hotels North, East and West are to be treated as long-term capital assets. However, indexation will start from 25 February 2010 and not from the date of acquisition of shares of Asian Hotels. Refer explanation iii to Section 48 and also refer Sections 49(2C) and 49(2D) of the IT Act. The indexation will start from the date of allotment of shares in the resulting company.

I had equity shares of a well-known company, which I gifted to my wife on our first marriage anniversary. But she has now sold those shares. Please guide me on the clubbing provisions.

A Gajera, email

In case of an inherited or gifted property, the cost of acquisition is the cost to the original holder or fair market value as on 1 April 1981. The date of acquisition should be taken as the date of the inheritance or the gift. However, the character of long- or short-term depends on the date of acquisition of the original holder. If the original holder has also acquired the property by way of gift or inheritance, then it will be the date of the very first holder who purchased or constructed the property.

Capital gain with indexation will be taxable in your hands. But as the assets is long-term in nature, it will be tax-free. The profit without indexation will be your wife's own asset and any subsequent income received on it will be taxed in her own hands.

Suppose you have invested Rs 1000 in shares in 1985. You gifted these to your wife in 2010 when the market value of those share was Rs 5000. She disposed of these at Rs 6500 in 2011. Her own profit would be Rs 1500 (Rs 6500-Rs 5000). The subsequent income on this, Rs 1500, will not be liable to be clubbed. Clubbing provisions would be applicable on income on the remaining Rs 5000. Clubbing provisions will be applicable with reference to the market value of the share on the date of gift (in this example Rs 5000) and not with your original cost of investment, i.e., Rs 1000.

The replies are only in the nature of guidelines. The tax counsellorsand the publication are not responsible for any decision taken by readers on the basis of the same. Readers may address their queries on direct taxation to:
T K Doctor, C/o Capital Market, 101, Swastik Chambers, Sion-Trombay Road, Chembur, Mumbai-400 071.
E-mail: tax-matters@capitalmarket.com

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