BUDGETARY CHANGES ON CAPITAL GAINS UNDER INCOME TAX ACT, 1961

[Mr. M. GOVINDARAJAN]

Part E of the Income Tax Act, 1961 (‘Act’ for short) of Chapter provides the procedure for computation of tax for income arised out of capital gains.  This budget brought a broad changes to the provisions relating to capital gains.

Amendment of section 46A

Section 46A of the Act provides that if a shareholder receives a consideration in resect of buy back shares by the company, then the difference between the cost of acquisition and the value of consideration received by the shareholder shall be deemed to be the capital gains in the year of buy back.  The Finance Bill inserts a proviso before the explanation to the said section.  The proviso provides that the shareholder receives any consideration of the nature referred to in sub-clause (f) of clause (22) of section 2 from any company, in respect of any buy-back of shares, that takes place on or after the 1st day of October, 2024, then for the purposes of this section, the value of consideration received by the shareholder shall be deemed to be nil.

This provision shall come into effect from 01.10.2024.

Amendment of Section 47

Clause 19 of the Finance Bill substituted the new section 47(iii) for the existing one.  According to the new section provides that any transfer of a capital asset by an individual or a Hindu undivided family, under a gift or will or an irrevocable trust.  This amendment shall come into effect from 01.04.2025.

Amendment of Section 48

Section 48 of the Act provides method of income tax on capital gains.  The second proviso to section 48((iii) provides that where long-term capital gain arises where long-term capital gain arises from the transfer of a long-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first provi­so, the provisions of clause (ii) shall have effect as if for the words "cost of acquisition" and "cost of any improvement", the words "indexed cost of acquisition" and "indexed cost of any improvement" had respectively been substituted.

Clause 20 of the Finance Bill inserted the words ‘(which takes place before the 23rd day of July, 2024)’ after the words where long-term capital gain arises.  This amendment shall be deemed to have been inserted with effect from the 23rd day of July, 2024.

Amendment of Section 50AA

Section 50AA is a special provision for computation capital gains in case of market linked debentures.  Clause 21(a) of the Finance Bill proposed to substitute a new para for the first para of section 50AA.

The newly substituted para provides that   notwithstanding anything contained in clause (42A) of section 2 or section 48, where the capital asset―

1. is a unit of a Specified Mutual Fund acquired on or after the 01.04.2023 or a Market Linked Debenture; or
2. is an unlisted bond or an unlisted debenture which is transferred or redeemed or matures on or after the 23.07.2024,

the full value of consideration received or accruing as a result of the transfer or redemption or maturity of such debenture or unit or bond as reduced by—

1. the cost of acquisition of the debenture or unit or bond; and
2. the expenditure incurred wholly and exclusively in connection with such transfer or redemption or maturity,

shall be deemed to be the capital gains arising from the transfer of a short-term capital asset.

The term ‘special mutual fund’ was defined in the explanation to this section as a Mutual Fund by whatever name called, where not more than 35% of its total proceeds is invested in the equity shares of domestic companies.  Clause 21(b) of the Finance Bill substituted a new definition for the expression ‘special mutual fund’.  The new definition defines the expression ‘special mutual fund’ as-

(a) a Mutual Fund by whatever name called, which invests more than 6% of its total proceeds in debt and money market instruments; or

 (b) a fund which invests 65% or more of its total proceeds in units of a fund referred to in sub-clause (a):

Provided that the percentage of investment in debt and money market instruments or in units of a fund, as the case may be, in respect of the Specified Mutual Fund, shall be computed with reference to the annual average of the daily closing figures:

Provided further that for the purposes of this clause, “debt and money market instruments” shall include any securities, by whatever name called, classified or regulated as debt and money market instruments by the Securities and Exchange Board of India.

This amendment came into effect from 23.07.2024.

Amendment of Section 55

Section 55 (2) (ac) of the Act prescribes the procedure to calculate the cost of acquisition of shares.  Clause 22 of the Finance Bill inserted a new sub clause (AA) after the sub clause (B) in Section 55 (2)(ac).  The newly inserted (AA) provides that the shares not listed on a recognized stock exchange as on the 31.01.2018, or which became the property of the assessee in consideration of share which is not listed on such exchange as on the 31.01.2018 by way of transaction not regarded as transfer under section 47, as the case may be, but listed on such exchange subsequent to the date of transfer (where such transfer is in respect of sale of unlisted equity shares under an offer for sale to the public included in an initial public offer).

This amendment shall be deemed to have been inserted with effect from the 01.04.2018.

Amendment of Section 111A

Section 111A (i) of the Act provides for the tax rate for short term capital gains.  The Finance Bill revised the tax rate for short term gains.  Clause 29(a) of the Finance Bill substituted section 111A(i) and (ii).  According to the amendment,

(i)  the amount of income-tax calculated on such short-term capital gains–

(a) at the rate of 15% for any transfer which takes place before the 23.07.2024; and

(b) at the rate of 20% for any transfer which takes place on or after the 23.07.2024;

(ii) the amount of income-tax payable on the balance amount of the total income as if such balance amount were the total income of the assessee.

The first proviso to the said section provides that in the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such short-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such short-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such short-term capital gains shall be computed at the rate of 15%.        

Clause 29(b) of the Finance Bill substituted the words rate as applicable in clause (i) for 15%. 

This amendment came into effect from 23.07.2024.

Amendment of section 112

Section 112 provides the procedure for determination of tax for long term capital gains.  Clause 30 of the Finance Bill substituted new provisions for the existing Section 112(a)(b)(c)(d) and the first proviso.

The newly substituted Section 112 (a) provides the procedure for determination of tax for long term capital gains in case of an individual or a Hindu undivided family, being a resident as detailed below-

(i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been his total income; and

(ii) the amount of income-tax calculated on such long-term capital gains, –

(A) at the rate of 20% for any transfer which takes place before the 23.07.2024’ and

(B) at the rate of 12.5% for any transfer which takes place on or after the 23.07.2024.

Where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such long-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such long-term capital gains shall be computed at the rate as applicable in sub-clause (ii).

The newly substituted Section 112(b) provides the procedure for determination of tax for long term capital gains in case of a domestic company as detailed below-

(i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been his total income; and

(ii) the amount of income-tax calculated on such long-term capital gains, –

(C) at the rate of 20% for any transfer which takes place before the 23.07.2024 and

(D) at the rate of 12.5% for any transfer which takes place on or after the 23.07.2024.

Section 112© provides the procedure for determination of tax for long term capital gains in case of a non-resident (not being a company) or a foreign company, as detailed below-

(i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been his total income; and

(ii) the amount of income-tax calculated on such long-term capital gains, –

(A) at the rate of 20% for any transfer [other than a transfer referred to in sub-clause (iii)] which takes place before the 23.07.2024’ and

(B) at the rate of 12.5% for any transfer which takes place on or after the 23.07.2024.

(iii) the amount of income-tax on long-term capital gains arising from the transfer of a capital asset which takes place before the 23.07.2024, being unlisted securities or shares of a company not being a company in which the public are substantially interested, calculated at the rate of 10% on the capital gains in respect of such asset as computed without giving effect to the first and second proviso to section 48.

The newly substituted Section 112 (d) provides the procedure for determination of tax for long term capital gains in case of a resident as detailed below-

(i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been his total income; and

(ii) the amount of income-tax calculated on such long-term capital gains, –

(A) at the rate of 20% for any transfer which takes place before the 23.07.2024 and

(B) at the rate of 12.5% for any transfer which takes place on or after the 23.07.2024.

Where the tax payable in respect of any income arising from the transfer of a long-term capital asset which takes place before the 23.07.2024, being listed securities (other than a unit) or zero-coupon bond, exceeds 10% of the amount of capital gains before giving effect to the provisions of the second proviso to section 48, then, such excess shall be ignored for the purpose of computing the tax payable by the assessee.

This amendment came into effect from 23.07.2024.

Amendment of Section 112A

Clause 31 of the Finance Bill substituted a new section for Section 112A(2)(i) as detailed below-

(i) the amount of income-tax calculated on such long-term capital gains exceeding Rs.1,25,000/–

(a) on long-term capital gains at the rate of ten per cent. for any transfer which takes place before the 23.07.2024; and

(b) on long-term capital gains, at the rate of twelve and one-half per cent. for any transfer which takes place on or after the 23.07.2024.

The limit of Rs.1,25,000/- shall apply on aggregate of the long-term capital gains under sub-clauses (a) and (b).

The said amendment came into effect from 23.07.2024.

Amendment of Section 113

Section 113 of the Act provides that the total undisclosed income of the block period, determined under section 158BC, shall be chargeable to tax at the rate of 60%:

Provided that the tax chargeable under this section shall be increased by a surcharge, if any, levied by any Central Act and applicable in the assessment year relevant to the previous year in which the search is initiated under section 132 or the requisition is made under section 132A.

Clause 32 of the Finance Bill omitted the words ‘undisclosed income’ and the words ‘applicable in the assessment year relevant to the previous year in which the search is initiated under section 132 or the requisition is made under section 132A’.

This amendment shall come into effect from 01.09.2024.

Amendment of section 115AB

Section 115AB deals with the tax on income from units purchased in foreign currency or capital gains arising from their transfer. 

Clause 33 of the Finance Bill substituted a new sub clause for the existing Section 115AB(1)(ii) as detailed below-

 (ii) the amount of income-tax calculated on the income by way of long-term capital gains referred to in clause (b), if any, included in the total income,

(A) at the rate of 10% for any transfer which takes place before the 23.07.2024; and

(B) at the rate of 12.5% for any transfer which takes place on or after the 23.07.2024.

This amendment came into effect from 23.07.2024.

Amendment of Section 115AC

Section 115AC deals with the tax on income from bonds or global depository receipts purchased in foreign currency or capital gains arising from transfer.

Clause 34 of the Finance Bill substituted a new sub clause for the existing Section 115AB(1)(ii) as detailed below-

(ii) the amount of income-tax calculated on the income by way of long-term capital gains referred to in clause (b), if any, included in the total income,

(A) at the rate of 10% for any transfer which takes place before the 23.07.2024;

and

(B) at the rate of 12.5% for any transfer which takes place on or after the 23.07.2024.

This amendment came into effect from 23.07.2024.

Amendment of Section 115ACA

Section 115ACA deals with the tax on income from global depository receipts purchased in foreign currency or capital gains arising from transfer.

Clause 35 of the Finance Bill substituted a new sub clause for the existing Section 115ACA(1)(ii) as detailed below-

(ii) the amount of income-tax calculated on the income by way of long-term capital gains referred to in clause (b), if any, included in the total income,

(A) at the rate of 10% for any transfer which takes place before the 23.07.2024; and

(B) at the rate of 12.5% for any transfer which takes place on or after the 23rd day of July, 2024. 

This amendment came into effect from 23.07.2024.

Amendment of Section 115AD

Section 115AD deals with the tax on income of foreign institutional investors from securities or capital gains arising from such transfer. 

Clause 36 of the Finance Bill substituted new provisos sub clauses (ii) and (iii) as detailed below-

The amount of income-tax calculated on the income by way of short-term capital gains referred to in section 111A shall be at the rate of–

(A) 15% for any transfer which takes place before the 23.07. 2024; and

(B) 25% for any transfer which takes place on or after the 23rd day of July, 2024.

In case of income arising from the transfer of a long-term capital asset referred to in section 112A which exceeds RS.1,25,000/- income-tax shall be calculated at the rate of–

(A) 10% where transfer of such asset takes place before the 23.07.2024; and

(B) 12.5% where transfer of such asset takes place on or after the 23.07.2024.

The limit of one lakh twenty-five thousand rupees mentioned in the first proviso shall apply on aggregate of the long-term capital gains referred to in clauses (A) and (B).

This amendment came into effect from 23.07.2024.