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TAX ON SHORT TERM CAPITAL GAINS

TAX ON SHORT TERM CAPITAL GAINS

INTRODUCTION

Gain arising on transfer of capital asset is charged to tax under the head “Capital Gains”. Income from capital gains is classified as “Short Term Capital Gains” and “Long Term Capital Gains”. In this part you can gain knowledge about the provisions relating to tax on Short Term Capital Gains.

TAX ON SHORT TERM CAPITAL GAINS

short-term-capital-gains

TAX ON SHORT TERM CAPITAL GAINS

Short Term Capital Gains are Taxed normally as per Income Tax Slab Rates except in case of Shares and Mutual Funds.

MEANING OF CAPITAL GAINS:

PROFIT OR GAINS ARISING FROM TRANSFER OF A CAPITAL ASSET ARE KNOWN AS “CAPITAL GAINS” AND THESE ARE CHARGED TO TAX UNDER THE HEAD “CAPITAL GAINS”.

TO UNDERSTAND THE MEANING OF “CAPITAL GAINS” WE HAVE KNOW WHAT IS “CAPITAL ASSET”

CAPITAL ASSET :

DEFINATION

Capital Asset is defined to include:

a) Any kind of property held by an assesee, whether or not connected with Business or Profession of the Assessee.
b) Any Securities held by a FII (Foreign Institutional Investor)  which has Invested i such Securities in accordance with the Regulations made under the SEBI Act, 1992.
However, the following items are excluded from the definition of “capital asset”:

i) Any stock-in-trade (other than securities referred to in (b) above), consumable stores or raw materials held for the purposes of his business or profession,

ii) Personal effects, that is, movable property (including wearing apparel and furniture) held for personal use by the taxpayer or any member of his family dependent on him, but excludes____

  • Jewellery,
  • archaeological collections,
  • drawings,
  • sculptures,
  • any work of art.

iii) Agricultural Land in India, not being a land situated

  1.  Within jurisdiction of municipality, notified area committee, town area committee, cantonment board and which has a population of not less than 10,000;
  2. Within range of following distance measured aerially from the local limits of any municipality or cantonment board:

 

  • not being more than 2 KMs, if population of such area is more than 10,000 but not exceeding 1 lakh;
  • not being more than 6 KMs , if population of such area is more than 1 lakh but not exceeding 10 lakhs; or
  • not being more than 8 KMs , if population of such area is more than 10 lakhs.

TAX ON SHORT TERM CAPITAL GAINS

TAX ON SHORT TERM CAPITAL GAINS

Following points should be kept in mind:

• The property being capital asset may or may not be connected with the business or profession of the taxpayer. E.g. Bus used to carry passenger by a person engaged in the business of passenger transport will be his capital asset.
• Any securities held by a Foreign www.cakart.in Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 will always be treated as capital asset, hence, such securities cannot be treated as stock-in-trade.

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Short Term Capital Asset:

  • Any capital asset held by the taxpayer for a period of not more than 36 months immediately preceding the date of its transfer will be treated as short-term capital asset.
  • shares (equity or preference) which are listed in a recognised stock exchange in India (listing of shares is not mandatory if transfer of such shares took place on or before July 10, 2014), units of equity oriented mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months

TAX ON SHORT TERM CAPITAL GAINS

For Example:
  1. Mr. Kumar is a salaried employee. In the month of April, 2012 he purchased gold and sold the same in December, 2013. In this case gold is capital asset for Mr. Kumar. He purchased gold in April, 2012 and sold it in December, 2013, i.e., after holding it for a period of less than 36 months. Hence, gold will be treated as Short Term Capital Asset.
  2. Mr. Raj is a salaried employee. In the month of April, 2010 he purchased gold and sold the same in December, 2013. In this case gold is capital asset for Mr. Raj. He purchased gold in April, 2010 and sold it in December, 2013, i.e., after holding it for a period of more than 36 months. Hence, gold will be treated as Long Term Capital Asset.
  3. Mr. Kumar is a salaried employee. In the month of April, 2013 he purchased shares of SBI Ltd. (listed in BSE) and sold the same in January, 2014. In this case shares are capital assets for Mr. Kumar. He purchased shares in April, 2013 and sold them in January, 2014, i.e., after holding them for a period of less than 12 months. Hence, shares will be treated as Short Term Capital Assets.
  4. Mr. Kumar is a salaried employee. In the month of April, 2013 he purchased un-listed shares of XYZ Ltd. and sold the same in August, 2014. In this case shares are capital assets for Mr. Raj and to determine nature of capital gain, period of holding would be considered as 36 month instead of 12 months as shares are not listed and transfer took place after 10th July 2014. He purchased shares in April, 2013 and sold them in August, 2014, i.e., after holding them for a period of less than 36 months. Hence, shares will be treated as Short Term Capital Assets.

TAX ON SHORT TERM CAPITAL GAINS

Meaning of short-term capital gain

Capital gain arising on sale of short-term capital asset is termed as short-term capital gain. However, there are a few exceptions to this rule, like gain on Depreciable asset is always taxed as short-term capital gain.

Illustration to Understand STCG:

In January, 2014 Mr. Rahul sold his residential house property which was purchased in May, 2013. Capital gain on such sale amounted to Rs. 8,40,000. In this case the house property is sold after holding for a period of less than 36 months and, hence, gain of Rs. 8,40,000 will be charged to tax as Short Term Capital Gain.

TAX ON SHORT TERM CAPITAL GAINS

Computation of Short-Term Capital Gains

Short-term capital gain arising on account of transfer of short-term capital asset is computed as follows :

Particulars

Rs.

Full value of consideration (i.e., Sales value of the asset)
XXXXX
Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (E.g., brokerage, commission, etc.).
 (XXXXX)
Net Sale Consideration
XXXXX
Less: Cost of acquisition (i.e., the purchase price of the capital asset)
(XXXXX)
Less: Cost of improvement (i.e., post purchases capital expenses on improvement of capital asset )
(XXXXX)
Short-Term Capital Gains
XXXXX

TAX ON SHORT TERM CAPITAL GAINS

Based on this lets take an Example:

Mr. Kaushal is a salaried employee. In the month of December, 2014 he purchased gold worth Rs. 8,40,000 and sold the same in March, 2015 for Rs. 9,00,000. At the time of sale of gold, he paid brokerage of Rs. 10,000. What is the amount of taxable capital gain? **

Gold was purchased in December, 2014 and sold in March, 2015, i.e., sold after holding it for a period of less than 36 months and, hence, the gain will be short-term capital gain. The gain will be computed as follows :

TAX ON SHORT TERM CAPITAL GAINS

Solution:

Particulars

Rs.

Full value of consideration (i.e., Sales value of the asset)
9,00,000
Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (E.g., brokerage, commission, etc.).
 (10,000)
Net Sale Consideration
8,90,000
Less: Cost of acquisition (i.e., the purchase price of the capital asset)
(8,40,000)
Less: Cost of improvement (i.e., post purchases capital expenses on improvement of capital asset )
(NIL)
Short-Term Capital Gains
50,000

long-term-capital-gain

TAX ON SHORT TERM CAPITAL GAINS

Short Term Capital Gains are Taxed normally as per Income Tax Slab Rates except in case of Shares and Mutual Funds.

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Short-Term Capital Gains (STCG) arising on account of sale of equity shares listed in a recognised stock exchange, i.e., STCG covered under section 111A.

Section 111A is applicable in case of STCG arising on transfer of equity shares or units of equity oriented mutual-funds (*) or units of business trust other than a unit allotted by the trust in exchange of shares of a special purpose vehicle as referred to in section 47(xvii), which are transferred on or after 1-10-2004 through a recognised stock exchange and such transaction is liable to securities transaction tax (STT).

(*) Equity oriented mutual fund means a mutual fund specified under section 10(23D) and 65% of its investible funds, out of total proceeds are invested in equity shares of domestic companies.

If the conditions of section 111A as given above are satisfied, then the STCG is termed as STCG covered under section 111A. Such gain is charged to tax at15% (plus surcharge and cess as applicable).

TAX ON SHORT TERM CAPITAL GAINS

Illustration to Understand:

Mr. Janak is a salaried employee. In the month of December, 2014 he purchased 100 equity shares of X Ltd. @ Rs. 1,400 per share from Bombay Stock Exchange. These shares were sold in BSE in March, 2015 @ Rs. 2,000 per share (securities transaction tax was paid at the time of sale). What will be the nature of capital gain in this case?

Solution:

Shares were purchased in December, 2014 and were sold in March, 2015,i.e., sold after holding them for a period of less than 12 months and, hence, the gain will be short term capital gain. Section 111A is applicable in case of STCG arising on transfer of equity shares or units of equity oriented mutual-funds or units of business trust which are transferred on or after 1-10-2004 through a recognised stock exchange and such transaction is liable to securities transaction tax.

If the conditions of section 111A are satisfied then the STCG is termed as STCG covered under section 111A. Such gain is charged to tax at15% (plus surcharge and cess as applicable).

In the given case shares were sold after holding them for less than 12 months, shares were sold through a recognised stock exchange and the transaction was liable to STT, hence, the STCG can be termed as STCG covered under section 111A. Such STCG will be charged to tax at15% (plus surcharge and cess as applicable).

Examples of STCG covered under section 111A :

  • STCG arising on sale of equity shares listed in a recognised stock exchange, which is chargeable to STT.
  • STCG arising on sale of units of equity oriented mutual fund sold through a recognised stock exchange which is chargeable to STT.
  • STCG arising on sale of units of a business trust other than a unit allotted by the trust in exchange of shares of a special purpose vehicle as referred to in section 47(xvii).

This is all about Short Term Capital Gains.

TAX ON SHORT TERM CAPITAL GAINS

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TAX ON SHORT TERM CAPITAL GAINS

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TAX ON SHORT TERM CAPITAL GAINS

TAX ON SHORT TERM CAPITAL GAINS

TAX ON SHORT TERM CAPITAL GAINS

TAX ON SHORT TERM CAPITAL GAINS

TAX ON SHORT TERM CAPITAL GAINS

TAX ON SHORT TERM CAPITAL GAINS

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