Capital Gains On Share Transfer

Capital Gains On Share Transfer

Share transfer of a non-public Ld. will end in capital gains income under the revenue enhancement Regulations. Investors in startup private limited companies often exit by transferring their equity shares to a replacement investor. The resulting income is taxed as capital gains within the hands of the vendor. the speed of tax depends on if the income is classed as long-term capital gains or short-term capital gains.

Short-Term Vs Long-Term Capital Gains

Under Section 2(42A) of the revenue enhancement Act, unlisted shares of companies are treated as short-term capital assets if held for twenty-four months or less. Unlisted shares are treated as long-term assets if held for quite 24 months. The sale of short-term capital assets will create short-term capital gains while the transfer of long-term capital assets will make long-term capital gains.

Taxability ON Capital Gain

Capital Gains On Share Transfer

1) future financial gain on sale of equity shares listed in an exceedingly recognized exchange (applicable up to Assessment year 2018-19)

As per Section 10(38), gain arising on transfer of a long-run capital asset, being an equity share or unit of an equity-oriented fund or unit of a business trust, isn’t chargeable to tax within the hands of the person if the subsequent conditions are satisfied: –

  • *Securities transaction tax (STT) applies to such transactions.
  • On or after October 1, 2004, the transfer should have occurred.

The exemption under 10(38) shall be available from Assessment year 2017-18 whether or not the STT isn’t paid provided that: –

  • the transaction is undertaken on a recognized stock market located in any International Financial Services Center
  • and when the transaction’s consideration is paid or due in a foreign currency

Note: – With effect from Assessment year 2018-19, exemption u/s 10(38) shall not apply to any income arising from the transfer of a long-term capital asset, being an equity share in an exceeding company, if the transaction of acquisition, aside from the acquisition notified by the Central Government during this behalf, of such equity share is entered into on or after the first day of October 2004 and such transaction isn’t chargeable to the securities transaction tax. As per Notification 43/2017 issued by Government on 05th June 2017 which is applicable from Assessment year 2018-19, Central Government has defined the subsequent transaction on which STT isn’t paid on acquisition but still, they’re eligible for 10(38) exemption. This notification specifically covers genuine cases like Initial Public Offer (IPO), Further Public Offer (FPO), Employee option Scheme (ESOP), Bonus Issue, Right Issue, etc.

2) Long-term financial gain on sale of equity shares listed in recognized exchange (applicable from Assessment year 2019-20)

Exemption for long-term financial gain arising from the transfer of equity shares under Section 10(38) has been withdrawn by Finance Act 2018 with effect from Assessment year 2019-20 and a brand new Section 112A is introduced.

As per Section 112A, the long-term financial gain arising from the transfer of long-term capital asset being an equity share during a company or a unit of an equity-oriented fund or a unit of a business trust shall be taxed at the speed of 10% of such financial gain exceeding Rs 1,00,000. If you meet the following criteria, you will be eligible for a 10% discount: –

  • in an exceedingly case of an equity share during a company, securities transaction tax has been paid on both acquisition and transfer of such capital asset; and
  • in an exceedingly case a unit of an equity-oriented fund or a unit of a business trust, STT has been paid on the transfer of such capital asset.

Note: – Government has invited the treat the Draft Notification for Section 112A to incorporate the real transactions on which STT isn’t required to be paid on acquisition or transfer. The draft notification is more or less the same as the Notification 43/2017 associated with Section 10(38).

3) Long-term financial gain on unlisted equity shares Long-term financial gain in unlisted equity shares shall be taxable under Section 112. it’s mostly kind of like the taxability of listed shares (on which STT isn’t paid) except the assessee doesn’t have a choice to pay tax at the speed of 10% without taking indexation benefit.

Note: – the amount of holding should be 24 months to be considered a long-term asset because the shares are unlisted.

4) Short term financial gain on sale of equity shares listed in a very recognized stock market

Gain accruing on the transfer of a short-term capital asset, such as an equity share or unit of an equity-oriented fund or a unit of a business trust, is subject to tax at a rate of 15% if the following requirements are met, according to Section 111(A).

  • Such transactions are chargeable to securities transaction tax (STT)*
  • The transfer should have taken place on or after October 1, 2004

         The benefit under Section 111(A) shall be available from the Assessment year                

2017-18 whether or not the STT isn’t paid provided that: –

  • The transaction is undertaken on a recognized exchange located in any International Financial Services Center and
  • When the transaction’s consideration is paid or due in a foreign currency.

5) Short term financial gain on sale of unlisted equity shares

Short-term financial gain shall be taxable as per Section 48 of the tax Act, at the applicable slab rate of the shareholder. If the individual has a 5% income bracket|bracket} then the gain would be taxed at the speed of fifty or if the tax bracket is 20% or 30% then the applicable charge per unit would be 20% or 30%.