Income Tax Query

Long Term Capital Gains Tax on Shares  

As per Section 10(38) of the Income Tax Act, income from transfer of long-term capital asset being equity share in a company or unit of an equity-oriented fund or a unit of business trust is exempt from tax. 


This exemption is available to all the assessees. 


Shares, equity-oriented fund or unit of business trust from a period of one year from the date of purchase are considered long term capital assets. 


The conditions for exemption are as follows: 

1.     The transaction is chargeable to Securities Transaction Tax. However, it is provided that as on the date of acquisition, if the Securities Transaction Tax is not applicable, then this condition is not applicable. It is to be noted that Securities Transaction Tax is made applicable from 2004-05 onwards. 

2.     Transaction of sale should be subject to Securities Transaction Tax. 


However, with effect from 1.4.2018, section 10(38) is not applicable. In its place, a charging section 112A was introduced. 


Important points of Section 112A: 

1.     Long-Term Capital Gain on transfer of equity shares, unit of equity-oriented mutual fund or a unit of business trust is exempt only up to Rs.1,00,000.  

2.     Capital Gain is the difference between cost of acquisition and amount realised on sale. 

3.     After the minimum threshold of Rs.1,00,000, the extra amount is taxable as long-term capital gain. For example, if the long-term capital gain is Rs.1,50,000, then Rs.50,000 will be subject to capital gains tax.  

4.     The tax rate on long-term capital gain after the basic minimum exemption is 10%. 

5.     In case of equity share in a company, Securities Transaction Tax is paid on both acquisition and transfer. 

6.     In case of unit in equity-oriented mutual fund or unit of business trust, Securities Transaction Tax should be paid on transfer of such unit. 

7.     The conditions relating to Securities Transaction Tax shall not apply where the transfer is undertaken in a recognised stock exchange located in any International Financial Services Centre and where the consideration for the transfer is received or receivable in foreign currency. 

8.     In case of resident individual and HUF for whom basic exemption is provided as per normal tax slabs, it is to be seen whether their other income has exceeded the basic minimum exemption limit. If not, the long-term capital gain also goes to reduce the basic minimum exemption limit and the capital gain over and above that is taxable. 


Unrealised Capital Gain before 1.2.2018 not taxed 

As per Section 55(2)(ac), there is a special provision for determining cost of acquisition of equity shares in a company, units of equity-oriented mutual fund or unit in a business trust. The fair market value of capital asset as per section 55(2)(ac) is to be taken as the cost of acquisition of such long-term capital asset acquired before 1.2.2018 and is to be adopted as under: 


The cost of acquisition is the higher of: 


a.     The cost of acquisition of such asset. 

b.     The fair market value or full value of consideration received or receivable on transfer, whichever is lower. 


So, for the cost of acquisition, the fair market value is being substituted. Alternately, if fair market value is lower than cost of acquisition, the cost of acquisition is compared with the sale value.  


If sale value is lower than fair market value, and is higher than cost of acquisition, then there will not be any capital gain. The idea behind this is that the capital gain relates to the unrealised gain before 1.2.2018 and hence, cannot be taxed. 


This can be better explained with the help of an example: 

Cost of Acquisition Rs. 

Fair Market Value Rs. 

Sale Value Rs. 





Cost of acquisition being the higher, there will be no capital gain. 




Fair Market Value is lower of than sale value and higher than cost of acquisition. Hence, it is adopted as cost of acquisition and compared with sale value which is Rs.120 hence capital gain is Rs.20 




Sale value is lower than fair market value and higher than cost of acquisition. Hence, it is adopted as the cost of acquisition and capital gain is nil. Reason behind this is already unrealised capital gains in the form of fair market value. 


Fair Market Value-how to determine 

Ø  For capital asset which is listed on recognised stock exchange, the intra-day high quoted as on 31.1.2018. If there is no trading as on 31.1.2018, intra-day high quoted on the immediately preceding day on which such shares were traded. 

Ø  In case of unlisted units, net asset value as on 31.1.2018. 

Ø  In case of non-listed shares, i.e., not listed as on date of acquisition and listed on the date of sale or vice versa, the cost of acquisition has to be made indexed cost of acquisition through cost inflation index.