Salient features of Direct Tax code-Part II(contd)


Capital Gains:

Capital assets are classified as short term capital gains(STCG) and long term capital gains (LTCG) on the basis of  holding period. Under proposed DTC, for STCG, it is less than one year and for LTCG, it is more than one year. At present, the holding period for assets other than securities is three years for LTCG. Now it will be reduced to one year which will benefit real estate business people .This asset holding time is determined as time difference between selling date and buying date. In order to avoid complex calculation, the DTC proposes that this holding period will be calculated from the end of financial year in which the said asset acquired.

Income under the head “Capital Gains” will be considered as income from ordinary sources in caseof all taxpayers including non-residents. It will be taxed at the slab rate applicable to that taxpayer.

The DTC provides for a rollover deduction in respect of capital gains – for assets held more than a year – if the proceeds of any long-term investment asset are invested in a residential house.

This provision is similar to the relief available under the Act, but the scope has been narrowed to give benefit only if the taxpayer does not own more than one residential house on the date of transfer of the original asset, other than the residential house being purchased.

Alternatively, for claiming the aforesaid deduction, the proceeds on the transfer of the investment asset can be parked under capital gains deposit scheme with a bank till the time a fresh residential property is purchased.

A)    Asset held for a period of more than one year from the end of financial year in which asset is acquired.

Presently, there is no capital gain tax on profit on sale of equity shares of any company if it was held more than a year. This is removed and these transactions will be taxed at lesser rate based on holding period.

Capital gains arising from transfer of an investment asset, being equity shares of a company listed on a recognized stock exchange or units of an equity oriented fund, which are held for more than one year, shall be computed after allowing a deduction at a specified percentage of capital gains without any indexation. This adjusted capital gain will be included in the total income of the taxpayer and will be taxed at the applicable rate. The loss arising on transfer of such asset held for more than one year will be scaled down in a similar manner.

For e.g. if shares are held more than one year but less than two years, then there may be deduction allowed around 50% ( to be specified by DTC). If the shares are held more than one year but less than three years, then there may be deduction allowed around 60% etc. etc..The percentage of deduction with period of holdings are to be finalized by DTC.

For e.g. if the “capital gains” before the deduction at the specified rate comes to Rs.100, it would stand reduced to Rs.50 (if the specified deduction rate is 50 percent for holding between one year and two year). This capital gain would then be included in the tax payer’s total income and taxed at the applicable rate. In this example, for a taxpayer in the tax bracket of 10%, such gain will bear an effective tax at the rate of 5% and for taxpayers in tax bracket of 20% or 30%, the effective tax rate would be 10% or 15% respectively.

If the shares are held more than 2 years, the % of deduction can be of 60% etc. etc.

%Deduction   allowed Income   tax Slab (10%) Income   tax Slab (20%) Income   tax Slab (30%)
50% 5% 10% 15%
60%(40%   taxable) 4%  8% 12%
70   %(30% taxable) 3%  6%   9%

The proposed scheme is therefore especially beneficial to low and middle income category of taxpayers as they are to be taxed at their applicable marginal rate of 10 percent or 20 percent after the specified deduction for computing adjusted capital gains. The specific rate of deduction for computing adjusted capital gain will be finalized in the context of overall tax rates.

As per present income tax rules, the long term capital loss can be adjusted against long term capital gain. Short term capital loss can be adjusted against short term capital gain or long term capital gain. But capital loss cannot be adjusted against any head of income. The capital loss can be carried over for eight years. Even then the investor who lose money continuously for 2/3 years will have to wait for the gain to come.

Now it is to be noted that the loss in sale of shares can also be adjusted against current income just like loss from house property due to interest payment as it is. It may be beneficial to investors who lose money in stock market. Only unadjusted loss can be carried over. Thus to some extent, investor will get benefit of reduced taxation if he has other taxable income.

(B) Capital gains on other assets(other than listed equity shares or units of equity oriented funds) held for more than one year

For taxation of capital gains arising from transfer of investment assets held for more than one year (other than listed equity shares or units of equity oriented funds), the base date for determining the cost of acquisition will now be shifted from 1.4.1981 to 1.4.2000. As a result, all unrealized capital gains on such assets between 1.4.1981 and 31.3.2000 will not be liable to tax. The Direct Tax Code 2012 provides that the assessee can choose to substitute cost of acquisition (purchase price) with the  Fair Market Value as on 01/04/2000 .The services of Registered valuer can be taken for the purpose of determining fair market value of the old property including improvement if done in between before 1.4.2000. So all old properties prior to 2000 may have chance to avoid capital gain tax as their fair market will be more than purchase price or even indexed cost for the said period.  Hence a property bought before 01/0/04/2000 will have the benefit of substituting the cost of acquisition to fair market price as on 01/04/2000 .  That Fair Market Price will become the base price on which indexation formula shall be applied w.e.f.1.4.2000.The capital gains will be computed after allowing indexation on this fair market price. The capital gains on such assets will be included in the total income of the taxpayer and will be taxed at the applicable rate.

C)Capital gains on assets held for less than one year from the end of Financial Year in which asset is acquired. The capital gain arising from transfer of any investment asset held for less than one year from the end of the financial year in which it is acquired will be computed without any specified deduction or indexation. It will be included in the total income and will be charged to tax at the rate applicable to taxpayer as short term capital gains.

Reverse mortgage under notified scheme will continue to be exempt from capital gains tax

The DTC proposes to reduce Securities Transaction Tax. Recently SEBI Chairman also has spoken about this in order to prop up the stock market in India.

Buying or selling securities by FIIs is to be taxed under capital gains instead of business income.  Foreign Institutional investors will not be subjected to tax deducted at source but will have to pay advance tax.

Author:

CR Venkata Ramani AICWA

Email: kpmramani@gmail.com

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