Short term and Long term Capital Gains

Capital gains earned by an individual in lieu of transfer of a short term capital asset is termed as short term capital gain. Capital gain earned by an individual in lieu of transfer of a long term Capital asset is termed as long term capital gain.Time Period: Short term capital gains – This refers to gains arising out of sale/transfer of assets within three years of ownership (in case of gold, property, etc) and 1 year of ownership in case of shares. Long term capital gains – This refers to gains arising out of sale/transfer of assets after owning them for three years (in case of gold, property, etc) and more than 1 year in case of shares or mutual funds.

Short term and Long term Capital Gains

 

Short term and Long term Capital Gains

Any capital gains arising as a result of transfer of a short-term capital asset is known as short-term capital gains. According to Section 2(42A) of the Income-tax Act:

Short term and Long term Capital Gains

Short term capital asset

Short term capital asset means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer. In the case of capital assets (being equity or preference share in a company) held by an assessee for not more than 12 months immediately prior to its transfer.

However, an unlisted security and a unit of a mutual fund (other than an equity oriented mutual fund) shall be a short-term capital asset if it is held for not more than thirty six months.

The expression “equity oriented fund” shall have the meaning assigned to it in the Explanation to clause (38) of section 10

The Finance Act, 2014 as passed by the Lok Sabha has inserted a new proviso in section 2(42A) to provide that the unlisted shares and units of a Mutual Fund(other than equity oriented fund) shall continue to be deemed to be long-term capital assets if they have been transferred during the period from April 1, 2014 to July 10, 2014 after holding them for a period of more than 12 months (instead of more than 36 months). This proviso shall be inserted w.e.f. April 1, 2015.

In determining the period for which a capital asset is held by an assessee, the following must be noted:

  1. In the case of shares held in a company in liquidation, the period subsequent to the date on which the company goes into liquidation shall be excluded.
  2. In case the asset becomes the property of the assessee under the circumstances mentioned in Section 49(1) – discussed later in this lesson – the period for which the asset was held by the previous owner shall be included.
  3. In the case of the shares in an Indian Company which become the property of the assessee in a scheme of amalgamation, the period for which the shares in the amalgamating company were held by the assessee shall be included.
  4. In the case of a capital asset, being a share or any other security subscribed to by the assessee on the basis of his right to subscribe to such financial asset or subscribed to by the person in whose favour the assessee has renounced his right to subscribe to such financial asset, the period shall be reckoned from the date of allotment of such financial asset;
  5. In the case of a capital assets, being the right to subscribe to any financial asset, which is renounced in favour of any other person, the period shall be reckoned from the date of the offer of such right by the company or institution, as the case may be, making such offer.
  6. In the case of a capital asset, being a financial asset, allotted without any payment and on the basis of holding of any other financial asset, the period shall be reckoned from the date of the allotment of such financial asset
  7. In the case of a capital asset, being a share or shares in an Indian company, which becomes the property of the assessee in consideration of a demerger, there shall be included the period for which the share or shares held in the demerged company were held by the assessee.
  8. In the case of a capital asset, being trading or clearing rights of a recognized stock exchange in India acquired by a person pursuant to demutualisation or corporatisation of the recognized stock exchange in India as referred to in Clause (xiii) of Section 47, there shall be included the period for which the person was a member of the recognized stock exchange in India immediately prior to such demutualisation or corporatisation;
  9.  In the case of a capital asset, being equity share or shares in a company allotted pursuant to demutualisation or corporatisation of a recognised stock exchange in India as referred to in Clause (xiii) of Section 47, there shall be included the period for which the person was a member of the recognized stock exchange in India immediately prior to such demutualisation or corporatisation;

Third proviso inserted in section 2(42A) of the Act

As per section 2(42A) of the Act, “Short-term capital asset” means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer. However, the period of holding of shares in a company for determination of the nature of capital gains vis-à-vis long-term or short-term was 12 months. However this period was extended to 36 months in the case of unlisted companies by Finance Act (no. 2) of 2014.

The third proviso to section 2(42A) has been inserted vide Finance Act, 2016 as per which in case of unlisted shares, period of holding for transfer to be considered as a short-term capital asset reduced from 36 months to 24 months.

Short term and Long term Capital Gains

Long Term Capital Asset

Assets other than short-term capital assets are known as ‘long-term capital assets’ and the gains arising therefrom are known as ‘long-term capital gains’. In the case of other long- term capital assets, the period of holding is determinable subject to any rules made by CBDT.

Examples:

                   Asset

Long term /Short term Capital Asset

                                       Explanation

A Ltd. sold a motor car, not being asset held in stock within two years of its purchase

Short term Capital Asset

Held for less than 36 months

A plot of land purchased for construction of farm house in 1992 sold on 21.07.2016

Long term Capital Asset

Held for less than 36 months

A land not being agricultural land purchased on 1.06.2016 and sold on 1.09.2016

Short term Capital Asset

Held for less than 36 months

Bought shares of ABC ltd on 15th June 2015 and transferred them on 17th August, 2016. (Shares being listed on recognized stock exchange)

 Long term Capital Asset

Listed security held for more than 12 months

Bought shares of X ltd. on 10th June 2013 and transferred them on 7th July 2014. (Shares are not listed on stock exchange)

Long term Capital Asset

Unlisted securities held for more than 12 months and transferred during the transitional period of April 1, 2014 to July 10, 2014. (Proviso to section 2(42A) as amended by Finance Act 2014)

Bought shares of Y ltd. on 15th June 2013 and transferred them on 17th August, 2014. (Shares are not listed on stock exchange)

Short term Capital Asset

Unlisted security held for more than 12 months but less than 36 months and transferred after the expiry of transitional period. (Proviso to section 2(42A) as amended by Finance Act 2014)

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