Any profit or gain arising from the transfer of capital assets is chargeable to tax under the head “Capital Gains” in the year in which such transfer took place. Capital assets are categorised under two head (a) Short term capital assets (b) Long term capital assets.

Short term capital assets means assets held by an assessee for not more than 36 months prior to its date of transfer. However, in the following case, assets held for not more than 12 months shall be treated as Short term capital assets:

(a)          Equity or preference shares in a company

(b)         Any other securities listed in a recognised stock exchange in India.

(c)          Units of UTI or units of Mutual Fund

(d)         Zero Coupon Bond

Capital gain arising from transfer of short term assets being any listed securities shall be charged to tax at a flat rate of 15% u/s 111A of the Act, provided securities transaction tax is paid at the time of transfer of the share. Capital gain arising from transfer of assets other than listed securities shall be chargeable to tax at normal rates as applicable.

Capital gain arising from transfer of long term assets being any listed securities shall be exempt from tax u/s 10(38), provided securities transaction tax is paid at the time of transfer of the share. Capital gain arising from transfer of any other long term assets shall be chargeable to tax at a flat rate of 20%. Income Tax Laws have the provision of reducing the effective tax burden on long term capital gain so earned. This provision allows increasing the purchase price of the asset by indexing the same results in lowering of the amount of long term capital gain. Indexed cost is computed so that we can get the real value from sale of assets. However, debentures & bonds are not indexed except capital indexation bond.  Short term capital assets are not required to be indexed.

Long term capital gain is computed as under:

Where Indexed Cost of Acquisition / Improvement =

Cost of Acquisition or Improvement X Cost Inflation Index of year of transfer

Cost Inflation Index of year of acquisition / improvement

If the total income of the individual excluding such capital gain is below the maximum exemption limit, then such capital gain is reduced by the amount by which the total income falls short of the maximum exemption limit.

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