As per Section 112(1) of the Income Tax Act, 1961 (the Act), in case of long term capital gain (LTCG) (other than LTCG on equity shares and units of equity oriented fund) arising from the transfer of a Long term capital asset, being listed securities or unit or zero coupon bond, assessee has an option to compute tax on such capital gain @ 10% without indexation or 20% with indexation with effect from assessment year 2000-2001.

If the following conditions are satisfied the tax on long term capital gain will be computed under Option 1 or Option 2 given below:

• The taxpayer is an individual, Hindu Undivided Family (HUF), company or any other person (may be resident or non-resident)
• The asset is a long term capital asset
• The long term capital asset is:

1. a security listed in any recognised stock exchange in India; or
2. a unit of UTI or mutual fund (whether listed in a recognised stock exchange or not); or
3. zero coupon bonds (with effect from assessment year 2006-2007)

Tax Computation:

Option 1:

Step 1: Find Out Sale Consideration

Step 2: Deduct indexed cost of acquisition / improvement and expenses on transfer

Step 3: The balancing amount (Step 1 – Step 2) is long term capital gain

Step4: 20 per cent (+Surcharge + Education Cess + Secondary Higher Education Cess) of Step 3 is the amount of tax liability.

Option 2:

Step 1: Find Out Sale Consideration

Step 2: Deduct cost of acquisition / improvement and expenses on transfer

Step 3: The balancing amount (Step 1 – Step 2) is long term capital gain

Step4: 10 per cent (+Surcharge + Education Cess + Secondary Higher Education Cess) of Step 3 is the amount of tax liability.

Thus assessee has an option to pay tax under Option 1 or Option 2 whichever is lower. It is difficult to state when Option 2 is better. However, in the case of transfer of listed bonus shares, listed debentures, listed bonds and zero coupon bonds, Option 2 is better as compared to Option 1.

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