Capital gains on sale of shares

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best consultant (Querist)
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13 December 2011 I offered consulting services to a pvt ltd company. Instead of paying me Rs. 1 lac as fee they have issued me 10,000 shares at face value of Rs. 10/equity share. I have declared this as my income while filing my returns for FY 10-11. However, I got the certificates only in June 2011.

Now I have an offer to sell these shares at Rs.15/equity share to one of the other shareholders.

If I agree to sell these shares what will be my tax liability.

I have held the shares for less than one year.

CA Siddhartha Bhardwaj

CA Siddhartha Bhardwaj (Expert)
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13 December 2011 In case of shares, the date of acquisition is the date on which these shares are alloted. In your case, it is June, 2011.

Since, the holding period is less than 1 year, the gain on sale of shares will be Short Term Capital Gain and chargeable to tax @ 15%.

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best consultant (Querist)
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14 December 2011 Dear Mr. Bharadwaj,

Thank you for your prompt reply.
In case I hold for more that 1 yr (or 3 yrs if required) what will be the long term cap gains tax.

Also, in LTCG, will indexation be applicable for this type of transaction?

Also STT is not paid as these are shares of a pvt ltd company. will this make any change?

regards

CA Siddhartha Bhardwaj

CA Siddhartha Bhardwaj (Expert)
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14 December 2011 If you hold the shares for a period of more than 1 year, the gain/loss will be long term.

Since STT will not be paid on these shares at the time of sale, the gain will be taxable as Long Term Capital Gain.

Long term gains are taxable @ 20%.

Indexation benefit will be available.

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best consultant (Querist)
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14 December 2011 Great. So I am better off liquidating now as there is no benefit of holding the shares to make it Long term capital asset.

CA Siddhartha Bhardwaj

CA Siddhartha Bhardwaj (Expert)
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14 December 2011 Depends.
Calculate you gain now WITHOUT INDEXATION (indexation not available for short-term gain) and calculate tax @ 15%.

Calculate estimate long term gain taking the benefit of INDEXATION and calculate tax @ 20%.

Whichever option involves lower tax outflow is a better option.

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20 December 2011 One last query..

If I have capital gains by sale of these shares, can I offset it against purchase of property?

regards,

CA Siddhartha Bhardwaj

CA Siddhartha Bhardwaj (Expert)
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21 December 2011 I am unable to understand your query.

Do you mean to say that if you incur loss on sale of shares and profit on sale of property, is it possible to set-off loss against gain?

In this specific case (since STT will not be paid) the loss on sale of shares can be set-off against gain on sale of property.

Kindly redraft your query so that I can give a better reply.

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21 December 2011 Thanks for the prompt reply.

- I got the shares for Rs. 1 lac
- I sell the share in 2-3 years time for Rs. 7 lac
- I get an indexed Capital gain of Rs. 5 lacs (approx)
- Tax on this will be 20% LTCG i.e. Rs.1 lac
- If I buy a property worth Rs. 5 lacs or more, can the tax liability of Rs. 1 lac be offset?

Points noted here - STT not paid, LTCG applicable, CG caused by sale of share to be set of by purchase of real estate? Is this possible?

CA Siddhartha Bhardwaj

CA Siddhartha Bhardwaj (Expert)
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21 December 2011 Ok. You are asking about exemption under Section 54F.

Section 54F exempts long term capital gain if the assessee invests the NET SALE CONSIDERATION in a RESIDENTIAL house property.

Such investment is to be made:
Purchase - within a period of one year before or two years after the date on which the transfer took place

Construction - within a period of three years after the date on which the transfer took place.

However, if the amount is not invested till the due date of filing the return for the previous year in which the shares were transferred, the amount must be deposited in a Capital Gain Scheme Account with a nationalised bank.

Amount to be invested = Net sale consideration (Selling Price Less: expenses on transfer)

In your case, the net sale consideration will be Rs. 7 lakhs.

If you invest Rs. 7 lakhs in a residential house property, then Rs. 5 lakh capital gain shall be exempt.

If you invest Rs. 5 lakhs, only Rs. 3,57,143 shall be exempt.(Cost of house*Capital Gain/Net Sale Consideration).

On the balance Rs. 1,42,857 you shall have to pay tax @ 20% which comes to Rs. 28,571/- as increased by EC & SHEC @ 3%.

Total tax liability comes to Rs. 29,429/-

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best consultant (Querist)
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21 December 2011 Thank you very much sir. This info is very helpful.

Warm Regards.

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