Section 45(2A):Capital Gain from Transfer of Securities

As per S. 45(2A) of the Act, if any person has in the previous year transferred his interest in securities to another person and if there is any gain or profit arising from transfer made by the depository of such beneficial interest in securities shall be chargeable to tax as the income of the beneficial owner who is receiving the securities and not the income of the depository who is deemed to be the registered owner of the securities.

In the case of short-term capital gains arising from transfer of equity shares in a company or units of an equity oriented fund, the tax payable by the assessee shall be @10% on such short term capital gains provided that such a transaction is chargeable to securities transactions tax. As per the Finance Act 2008, this rate would be 15% w.e.f 1-4-2009. Notably, no deduction is available u/s 80C to 80U from above short-term capital gains. In case of LTCG on transfer of equity shares or units of equity-oriented mutual funds, provided the transaction has been subject to securities transaction tax, the LTCG is not chargeable to tax at all.

If the transaction has not been subjected to securities transaction tax, the LTCG will be taxed @ 10% if no indexing is claimed and @ 20% if cost of acquisition is indexed. The taxpayer has an option to choose from either of the above. In case the shares / securities are transferred in ‘demat’ form, for computing capital gain chargeable to tax, the cost of acquisition and period of holding of any security shall be determined on First in – First – out or FIFO basis.

When the securities are transacted through stock exchange, it is the established procedure that the brokers first enter into contracts for purchase/sale of securities and thereafter, follow it up with delivery of shares, accompanied by transfer deeds duly signed by the registered holders. The seller is entitled to receive the consideration agreed to as on the date of contract. Thus, it is the date of broker’s note that should be treated as the date of transfer in case of sale transactions of securities provided such transactions are followed up by delivery of shares and also the transfer deeds. Similarly, in respect of the purchasers of the securities, the holding period shall be reckoned to take place directly between the parties and not through stock exchanges. The date of contract of sale as declared by the parties shall be treated as the date of transfer provided it is followed up by actual delivery of shares and the transfer deeds.

Where securities are acquired in several lots at different points of time, the FIFO method shall be adopted to reckon the period of the holding s of the security, in cases where the dates of purchase and sale could not be correlated through specific numbers of the scrips. In other words, the assets acquired  last will be taken to be remaining with the assessee while assets acquired first will be treated as sold. Indexation, where applicable, for long-term assets will be regulated on the basis of the holding period determined in this manner – CBDT circular no. 704, dated 28.04.1995. In effect, this circular explains that the FIFO method should be adopted account-wise and the relevant date to be taken for determining which shares are transferred in cases where the shares were purchased in physical form and later dematerialized would be the date of dematerialization and not the date of its acquisition in physical form. The period of holding will, however, be taken with reference to when the share was acquired in physical form and not from the date of dematerialization. In other words it is only for determining which shares are sold on the basis of FIFO method that the date of dematerialization is relevant. The benefit of indexation will also be available from the date on which the shares were actually acquired.

• “Beneficial owner” means a person whose name is recorded as such with a depository.
• “Depository” means a company formed and registered under the Companies Act, 1956 and which has been granted a certificate of registration u/s 12(1A) of the SEBI Act, 1992.
• “Security” means such security as may be specified by SEBI.

Computation of Capital Gain—

To compute capital gain, the expenditure incurred wholly and exclusively in connection with the transfer (B) is deducted from the the full value of consideration (A). The result would be net consideration {(C) = (A) – (B)}. Reducing cost of acquisition and cost of improvement (D) from net consideration would result in arriving at short-term capital gains {(E) = (C) – (D)}.

If the capital gain is long term, the gain is to be computed in the same manner as explained above, subject to the modification that indexed cost of acquisition/indexed cost of improvement would be substituted in place of cost of acquisition/cost of improvement.

• “Indexed cost of acquisition” is to be computed by multiplying the cost of acquisition by the cost inflation index of the financial year of transfer and dividing it by the cost inflation index of the financial year in which the asset was first held by the assessee or the cost inflation index of financial year 1981-82, whichever is later.
• “Cost of improvement” is the expenditure of a capital nature incurred by the assessee or where the asset is acquired by way of gift, will, inheritance, and so on also incurred by the previous owner on or after April 4, 1981. Indexed cost of improvement is computed by multiplying the cost of improvement by the cost inflation index of the financial year of transfer and dividing it by the cost inflation index of the financial year in which the improvement took place.

In brief—

Reference:

As Per Section 45(2A), of the Income Tax Act, 1961-

Capital gains.

45(2A). Where any person has had at any time during previous year any beneficial interest in any securities, then, any profits or gains arising from transfer made by the depository or participant of such beneficial interest in respect of securities shall be chargeable to income-tax as the income of the beneficial owner of the previous year in which such transfer took place and shall not be regarded as income of the depository who is deemed to be the registered owner of securities by virtue of sub-section (1) of section 10 of the Depositories Act, 1996, and for the purposes of—

(i) Section 48; and

(ii) Proviso to clause (42A) of section 2,

the cost of acquisition and the period of holding of any securities shall be determined on the basis of the first-in-first-out method.

Explanation.—For the purposes of this sub-section, the expressions “beneficial owner”, “depository” and “security” shall have the meanings respectively assigned to them in clauses (a), (e) and (l) of sub-section (1) of section 2 of the Depositories Act, 1996.