Income From Capital Gains

Frequently Asked Questions
1	BIRDS EYE VIEW OF CAPITAL GAINS ON SALE OF SHARES
2	IF A SOLE SHARE HOLDER INCLUDES FOR A CONSIDERATION ANOTHER PERSON AS A SECOND-JOINT SHAREHOLDER, IS THE CHANGE A TRANSFER?
3	IF ONE OF THE TWO JOINT-HOLDERS, FOR A CONSIDERATION, WITHDRAWS HIS NAME, IS IT A TRANSFER?
4	IS RENUNCIATION, OF THE ENTITLEMENT OF 'RIGHTS-SHARES 1 A TRANSFER' ?
5	IF AN INVESTOR IN SHARES STARTS A BUSINESS OF DEALING IN SHARES AND TREATS HIS EXISTING INVESTMENTS AS THE STOCK-IN-TRADE OF THE NEWLY STARTED 'BUSINESS 1 , IS THE TREATMENT OF INVESTMENTS' as 'STOCK-IN-TRADE' A TRANSFER'?
6	TRANSACTIONS NOT REGARDED AS 'TRANSFER'
7	YEAR OF CHARGEABILITY
8	WHAT IS THE HOLDING PERIOD IN THE CASE OF 'BONUS-SHARES'?
9	HOW ARE CAPITAL GAINS COMPUTED?
10	NOTIFIED COST-INFLATION INDEX
11	WHAT IS THE DEFINITION OF COST INFLATION INDEX?
12	WHAT IS COST OF ACQUISITION IN THE CASE OF LONG TERM CAPITAL ASSETS?
13	WHAT IS INDEXED-COST OF SPECIAL ASSETS?
14	IS INDEXATION TO BE ALLOWED ON TRANSFER OF BONDS?
15	IS THE VALUE OF SHARES BOUGHT BY NON-RESIDENTS OUT OF FOREIGN CURRENCY REMITTANCES ALSO TO BE SUBJECTED TO INDEXATION FOR COST?
16	WHAT IS THE COST OF BONUS SHARES FROM ASSESSMENT YEAR 1996-97 ONWARDS?
17	IS THE PERIOD OF HOLDING OF THE BONUS ASSETS?
18	HAS EXEMPTION BE OBTAINED ON LONG TERM CAPITAL GAINS BY INVESTING IN BONDS OR DEBENTURES?
19	CAN EXEMPTION BE ALSO OBTAINED ON LONG TERM CAPITAL GAINS BY INVESTING IN ASSETS OTHER THAN BONDS OR DEBENTURES?
20	WHAT ARE THE PROVISIONS FOR ALLOWING EXEMPTION FROM TAX ON LONG TERM CAPITAL GAINS?
21	HAS EXEMPTION FROM THE TRANSFER OF A LONG-TERM CAPITAL ASSET UNDER SECTION 54EC BEEN EXTENDED TO INVESTMENT IN BONDS ISSUED BY THE WJRAL ELECTRIFICATION CORPORATION LTD.?
22	WHAT HAPPENS IN CASE THESE BONDS ARE TRANSFERRED DURING THE LOCK-IN PERIOD?
23	IS LONG TERM CAPITAL GAINS ON SECURITIES AND UNITS EXEMPT IF REINVESTED IN PRIMARY ISSUES?
24	IS THERE A LOCK IN PERIOD FOR THIS INVESTMENT? WHAT HAPPENS IF THESE NEW SHARES ARE TRANSFERRED DURING THE LOCK IN PERIOD?
25	IS THERE A NEW PROVISION FOR CONCESSIONAL TAX FOR NON-RESIDENTS ON INCOME FROM SHARES OR BONDS OF AN INDIAN COMPANY?
26	IS THERE A CHANGE IN PROVISIONS OF PAYMENT OF ADVANCE TAX RELATABLE TO CAPITAL GAINS OR OTHER SUCH INCOMES?
27	EARLIER, SHARES USED TO HAVE A STANDARD FACE VALUE OF Rs.10 OR IN SOME CASES, Rs.100. NOW THERE IS NO SUCH RESTRICTION, COMPANIES LIKE COMPANY(S) HAVE LOWERED THE FACE VALUE TO Rs. 5, Rs. 2 or Rs. 1. HOW WILL CAPITAL GAINS TAX BE CHARGED ON THESE SPLIT SHARES?
28	WHAT WOULD BE THE COST OF NEW SHARES AFTER SPLITTING?
29	WHAT WOULD BE THE DATE OF ACQUISITION OF SPLIT SHARES FOR PURPOSES OF INDEXATION?
30	TRADITIONALLY NATURE OF CAPITAL GAINS TAX AS LONG-TERM CAPITAL GAINS TAX CAN BE COMPUTED @10% WITHOUT INDEXATION OR AT 20% WITH INDEXATION. WHAT WOULD BE THE POSITION IN THE CASE OF DEMATTED SHARES?
31	WHAT IS THE LAW ON SET OFF OF LOSS ON SALE OF SHARES?
32	WHAT ARE THE NEW MEASURES TO CURB CREATION OF SHORT-TERM LOSSES BY CERTAIN TRANSACTIONS IN SECURITIES AND UNITS?
33	WHAT IS THE LAW ON CARRY FORWARD OF LOSS ON SALE OF SHARES?
34	HOW TO ENSURE CARRYING FORWARD OF LOSS ON SALE OF SHARES?
35	BIRDS EYE VIEW OF CAPITAL GAINS ON TRANSACTIONS RELATING TO HOUSE PROPERTY TRANSFER
36	MODE OF COMPUTATION OF CAPITAL GAINS
37	COST WITH REFERENCE TO CERTAIN MODES OF ACQUISITION
38	PROPERTY OF AN INDIVIDUAL CONVERTED INTO PROPERTY OF AN HUF
39	WHAT IS THE COST OF PROPERTY ON PARTITION OF AN HUF?
40	WHAT IS THE EXEMPTION OF PROFIT ON SALE OF A RESIDENTIAL HOUSE?
41	WHAT IF THE HOUSE IS SQLD SOON AFTER ITS PURCHASE/CONSTRUCTION?
42	WHAT ARE THE NEW PROVISIONS FOR EXEMPTION FOR INVESTMENT OF LONG TERM CAPITAL GAIN ARISING FROM ANY PROPERTY, OTHER THAN A RESIDENTIAL HOUSE, FOR ACQUIRING A RESIDENTIAL HOUSE?
43	Cost of residential house x Long Term Capital gains Net consideration
44	WOULD THIS EXEMPTION BE AVAILABLE IN CASE THE FIRST HOUSE IS LET OUT ON RENT?
45	WHAT ACTION IS TO BE TAKEN IF THE NET CONSIDERATION IS NOT UTILISED TILL THE DATE OF FILING OF RETURN OF INCOME?
46	IS EXEMPTION AVAILABLE FOR INVESTMENT OF NET CONSIDERATION ARISING ON TRANSFER OF HOUSE PROPERTY ON ACQUIRING SPECIFIED BONDS OR DEBENTURES OR UNITS OF A MUTUAL FUND?
47	EXEMPTION FOR INVESTMENT OF LONG TERM CAPITAL GAINS ARISING ON TRANSFER OF ANY CAPITAL ASSET ON ACQUIRING SPECIFIED ASSETS?
48	WHAT WOULD HAPPEN IF THE AMOUNT DEPOSITED IN A BANK UNDER THE CAPITAL GAINS SCHEME IS NOT UTILISED, WHOLLY OR PARTLY FOR THE PURCHASE OR CONSTRUCTION OF THE NEW ASSET WITHIN THE SPECIFIED PERIOD?
49	IF ANY ADVANCE MONEY WAS RECEIVED IN THE PAST, WOULD IT HAVE ANY EFFECT ON THE COMPUTATION OF CAPITAL GAINS?
50	WHAT IS THE TIME FOR INVESTING AMOUNT OF CAPITAL GAINS IN CASE OF COMPULSORY ACQUISITION?
51	HAS THE REQUIREMENT OF CLEARANCE CERTIFICATE UNDER SECTION 230A FOR REGISTRATION OF TRANSFER OF IMMOVABLE PROPERTY IN CERTAIN CASES ABOLISHED?
52	DOES IT MEAN THAT ANY PROPERTY CAN BE SOLD WITHOUT OBTAINING ANY CLEARANCE/PERMISSION FROM INCOME TAX DEPARTMENT?
53	A NUMBER OF TAX PROVISIONS/EXEMPTIONS HAVE BEEN GIVEN IN THE CHAPTER DEALING WITH CAPITAL GAINS ON SALE OF SHARES. DO THOSE APPLY TO TAXATION OF CAPITAL GAINS ON SALE OF HOUSE PROPERTY?

BIRDS EYE VIEW OF CAPITAL GAINS ON SALE OF SHARES

There has been a spectacular growth of the Indian Stock Market, more particularly during the last decade. The changes which are now taking place in the Indian Economy due to massive structural, trade and industrial policy reforms have created an interest amongst the large population of investors, both domestic and foreign in the capital markets. A good proportion of these investors are those whose main source of income is from salaries. Many of them do not know the tax implications. There is, therefore, an urgent need to educate all those who are interested in the equity-cult, so as to protect them and also to encourage them to continue to participate in the economic growth of our country.

'Capital gains from Shares' is the gain or profit arising from the sale or transfer of shares effected during the accounting year under consideration.

The expression 'transfer' has been given an inclusive meaning and it basically means the act by which a person conveys property to another.

With special reference to shares, transfer includes:-

a) Sale, exchange or relinquishment of rights in shares

b) Extinguishment of any rights in shares.

c) Conversion of shares into stock-in-trade.

d) Receipt of money or other assets by a share holder on liquidation of a     company.

Some clarifications in this connection are as follows:

IF A SOLE SHARE HOLDER INCLUDES FOR A CONSIDERATION ANOTHER PERSON AS A SECOND-JOINT SHAREHOLDER, IS THE CHANGE A TRANSFER?

Yes, as the second joint-holder acquires ownership in these shares.

IF ONE OF THE TWO JOINT-HOLDERS, FOR A CONSIDERATION, WITHDRAWS HIS NAME, IS IT A TRANSFER?

Yes, as he is relinquishing his rights in these shares.

IS RENUNCIATION, OF THE ENTITLEMENT OF 'RIGHTS-SHARES 1 A TRANSFER' ?

Yes. Renunciation is transfer of the right to subscribe to the shares of a company in a 'Rights Issue 1 .

IF AN INVESTOR IN SHARES STARTS A BUSINESS OF DEALING IN SHARES AND TREATS HIS EXISTING INVESTMENTS AS THE STOCK-IN-TRADE OF THE NEWLY STARTED 'BUSINESS 1 , IS THE TREATMENT OF INVESTMENTS' as 'STOCK-IN-TRADE' A TRANSFER' ?

Yes. The definition of 'transfer' under the Income Tax Act covers such a situation and it is 'deemed' to be a transfer. Though the capital gains is chargeable only as his income of the year in which such stock-in-trade is subsequently sold. 'For example, if one share in ABC Ltd. bought on 1.4.81 for Rs.10 is treated as stock-in-trade on 27.12.94 when its market Price was Rs. 360 Per share, but actually sold on 2.2.95 when its price was Rs. 375 then capital gain is Rs. 334 (Rs. 360(-) Rs. 26 (indexed Cost: Rs. 10x259/100)] and business-profits are RS. 15 (Rs. 375(-) Rs. 360 ).

TRANSACTIONS NOT REGARDED AS 'TRANSFER'

Certain transactions are not regarded as 'transfer' and so do not attract capital gains tax. They are:-

a) Distribution of shares (i.e. capital assets) on a total or partial partition
    of an HUF (Hindu Undivided Family).

b) Transfer of shares by way of gift or will or an irrevocable trust.

c) Transfer of notified shares or bonds (purchased in foreign currency)
    made outside India by a non-resident to another non-resident.

d) Transfer by way of conversion of debentures or bonds, debenture-stock
    or deposit-certificates of a company into shares or debentures.

e) Transfer by a shareholder in a scheme of amalgamation of shares in
    an Indian amalgamating company in consideration of the allotment of
    shares in amalgamated company.

YEAR OF CHARGEABILITY

The income under this head is deemed to be the income of the year in which the transfer takes place.

Capital gains are chargeable to tax on accrual basis whether the consideration is received or not, especially in the case of gains-from sale of shares and like securities.

KINDS OF CAPITAL GAINS

Capital gains are of two kinds, namely:-

a) Short term Capital Gains, if the shares are held by the assessee for a period not exceeding 12 months.

b) Long-term Capital gains, if the shares are held by the assessee for a period exceeding 12 months.

Units of UTI and specified mutual funds are also eligible for treatment as long term capital assets if they are held for a period exceeding 12 months.

RELEVANT FACTORS DETERMINING PERIOD OF HOLDING IN SPECIAL CASES

Ordinarily, the period between date of purchase and the date of sale, is the period of holding. However, in the following special circumstances, determination of this period is made as:-

a) Where the shares became the property of the assessee

(1) by succession or inheritance

(2) under a gift or a Will.

(3) on a distribution of assets on a total or partial
     partition of a HUF.

(4) under a transfer to a trust

(5) by the individual's impressing the character of joint property,
     after 31-12-69, on the  self-acquired property.

b)The period of holding 'includes' the period for which the shares were held by
  the previous owner(s).

c)Where the shares are held in a company in liquidation, the period
  &following the date of liquidation, is excluded.

d)Where   the   shares   are   of an  Indian   amalgamated company received
   in consideration of the shares held in the amalgamating company,
   that period will be included when the shares in the amalgamating company
   were held by the assessee.

WHAT IS THE HOLDING PERIOD IN THE CASE OF 'BONUS-SHARES'?

Only the period starting from date of issue of bonus-shares is taken into account. The date(s) on which the original shares were acquired is not relevant.

HOW ARE CAPITAL GAINS COMPUTED?

Capital gains are computed by deducting from the full value of consideration for the transfer of a capital asset the following:-

a) expenditure connected exclusively with the transfer;

b) the cost of acquisition of the asset, and

c) the cost of improvement, if any, of that asset.

In the case of shares, expenditure in connection with the transfer includes the stock broker's brokerage/commission but the salary of an employee is not deducted in computing capital gains though the employee may have helped in the transfer of the shares.

Cost of acquisition* in such cases includes the price-paid, cost of share transfer stamps, cost of postage for sending the shares for transfer to the transfer-agents of the company, legal expenses etc. etc.

NOTIFIED COST-INFLATION INDEX

WHAT IS THE DEFINITION OF COST INFLATION INDEX?

Cost Inflation Index for any previous year will be such Index as is notified by the Central Government having regard to seventy-five per cent of average rise in the Consumer Price Index for Urban non-manual employees.

WHAT IS COST OF ACQUISITION IN THE CASE OF LONG TERM CAPITAL ASSETS?

Where the shares are long-term capital assets, the cost of acquisition is calculated by referring to notified Cost-Inflation Index, at the option of the assessee.

First, the indexed cost of acquisition and the indexed cost of improvement are calculated and then deducted from the full value of consideration.

The Government has notified the Index as below: -

The cut off date for valuing assets, at the option of the assessee, has now been taken as 1st April 1981, in the case of assets purchased before 1-4-81. So, 1981-82 is the base year for the Index.

WHAT IS INDEXED-COST OF SPECIAL ASSETS?

The cost of assets acquired either through succession, inheritance, devolution of assets on the total or partial partition of HUF and other such modes mentioned earlier, then the cost of acquisition in the hands of the person receiving it, will be that for which the previous owner had acquired the asset.

After finding out this cost, the indexed cost will be calculated by means of the Notified Index rates.

IS INDEXATION TO BE ALLOWED ON TRANSFER OF BONDS?

No. The benefit of indexation has been withdrawn in respect of long term capital gains arising from transfer of long term capital asset being bonds or debentures other than capital indexed bonds issued by the Government.

IS THE VALUE OF SHARES BOUGHT BY NON-RESIDENTS OUT OF FOREIGN CURRENCY REMITTANCES ALSO TO BE SUBJECTED TO INDEXATION FOR COST?

No. In such cases, the cost of acquisition, cost of improvements & the full value of the consideration etc. are converted into the same foreign currency as was used for the purchase of shares or debentures and the resultant capital gains, if any, are reconverted into Indian rupees, to be taxed. No indexation is permitted.

This is a special protection against depreciation of rupee, given to non-residents investing in Indian equity out of foreign currency remittances.

WHAT IS THE COST OF BONUS SHARES FROM ASSESSMENT YEAR 1996-97 ONWARDS?

The cost of the bonus shares will be taken as 'Nil 1 for the purpose of computation of capital gains on sale of bonus shares. This procedure will also be applicable for Other priorities (for eg. bonus debentures where a bonus issue been made.   Further this would not affect the cost of Original Shares, whether retained or sold along with the us shares.

IS THE PERIOD  OF HOLDING OF THE BONUS ASSETS?

period of holding of the bonus asset will be reckoned the date of allotment of such assets.

HAS EXEMPTION BE OBTAINED ON LONG TERM CAPITAL GAINS BY INVESTING IN BONDS OR DEBENTURES?

Yes, but the investment must be in notified Bonds or . Debentures. Under earlier provisions, long term capital gains were exempt from tax where the net consideration received or accruing on transfer of a capital asset was invested or deposited in specified financial assets. This exemption ceased to be available in respect of assets transferred after 31.03.92.

In order to provide an input to investment in priority sectors of the economy, with effect from 1st October, 1996, a new section 54EA has been inserted having the following salient features: -

1)Exemption from capital gains is now available in cases where investment in specified bonds or debentures is made, before 1 st April, 2000, out of the net consideration received or accruing from the transfer of the capital asset.    The bonds and debentures, re-investment in which will qualify for exemption, are notified by the Central Board of Direct Taxes;

2)Where only part of the net consideration is invested in specified    bonds    or    debentures,     only    proportionate exemption is available;

3)A lock-in' period of 3 years is provided during which the specified  bonds  and  debentures  must  be  held  by  the assessee in order to be eligible for the exemption;

4)If the specified bonds or debentures are sold before the expiry of the ' lock-in 1 period, the exemption is withdrawn;

5)Where  the  bonds  or  debentures  are  transferred  or otherwise converted into money (e.g. by pledging them and taking a loan or advance against their security) at any time within the, "lock-in" period, the long term capital gain which was exempted earlier would be taxed in the year of such transfer;

6)Where exemption from capital gains is availed of in respect of reinvestment in specified bonds or debentures, rebate under section 88 would not to be available.

CAN EXEMPTION BE ALSO OBTAINED ON LONG TERM CAPITAL GAINS BY INVESTING IN ASSETS OTHER THAN BONDS OR DEBENTURES?

Yes. With effect from 1st October, 1996, another section 54EB has been inserted in the Income Tax Act, to provide that the capital gain arising from the transfer of a long term capital asset will be exempt from tax if the capital gain so arising is re-invested, before 1 st April, 2000 , within six months of transfer in specified assets notified by the Central Board of Direct Taxes.

If part of the capital gain is so invested in the specified assets, proportionate exemption would be available. A lock in period of seven years is prescribed. If the asset is transferred before the expiry of the lock-in period of seven years, the exemption will be liable to be withdrawn.

WHAT ARE THE PROVISIONS FOR ALLOWING EXEMPTION FROM TAX ON LONG TERM CAPITAL GAINS?

Yes. Now w.e.f. 1.4.2000, a new section 54EC has been introduced. Investment in specified Bonds of National Bank for Agriculture and Rural Development (NABARD) and the National Highways Authority of India (NHAI). These Bonds are redeemable after 3 years and the exemptions are be to the extent of investment in these bonds. If part of the capital gain is so invested, proportionate exemption would be available. Further, any amount invested in these bonds will not be eligible for deduction u/s 88 of the IT Act, 1961.

HAS EXEMPTION FROM THE TRANSFER OF A LONG-TERM CAPITAL ASSET UNDER SECTION 54EC BEEN EXTENDED TO INVESTMENT IN BONDS ISSUED BY THE WJRAL ELECTRIFICATION CORPORATION LTD.?

Yes. With effect from 1st April, 2002, ie. A.Y. 2002-2003 and subsequent years,  the  Explanation in  section  54EC  is amended  so   that  a  long-term   specified  asset  for  the purposes   of   this   section   shall   also   include   bonds redeemable after 3 years issued from 1 st April, 2001 by the Rural Electrification Corporation Ltd.

WHAT HAPPENS IN CASE THESE BONDS ARE TRANSFERRED DURING THE LOCK-IN PERIOD?

Any transfer or conversion of bonds into money during the lock-in period will make the amount so converted as deemed Capital Gains taxable in the year of transfer or conversion. Such deemed Capital Gains also arise, if any loan or advance is taken on security of these bonds.

IS LONG TERM CAPITAL GAINS ON SECURITIES AND UNITS EXEMPT IF REINVESTED IN PRIMARY ISSUES?

Yes. To promote development of the primary market, w.e.f. 1* April, 2002, i.e. in relation to the A.Y. 2002-2003 and subsequent years, a new section 54ED provides that the capital gains arising from transfer of a long-term capital asset, being listed securities or unit of a mutual fund or of the Unit Trust of India shall be exempt from tax to the extent such capital gain is invested in equity shares forming part of an eligible issue of capital, offered by a public company.

IS THERE A LOCK IN PERIOD FOR THIS INVESTMENT? WHAT HAPPENS IF THESE NEW SHARES ARE TRANSFERRED DURING THE LOCK IN PERIOD?

Yes. A one-year lock-in period is provided for. If the newly acquired shares are sold or transferred during this period, the capital gains from the original asset will be charged to tax in the year of sale or transfer.

But, it also provides that where the cost of the new equity shares has been taken into account for the purposes of this section, the deduction shall not be allowed U/s 88.

IS THERE A  NEW PROVISION FOR CONCESSIONAL TAX FOR NON-RESIDENTS ON INCOME FROM SHARES OR BONDS OF AN INDIAN COMPANY?

Yes. The existing section 11 SAC stands substituted with a new section. Presently, the concessional rate of taxation is available with reference to the bonds or shares of an Indian company issued in accordance with Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 that refers to shares issued by way of Global Depository Receipts (GDRs). Under the new substituted section, therefore, the term 'Global Depository Receipts' is used in place of 'share'.

With effect from 1 st April, 2002, ie. in relation to the A. Y. 2002-2003 and subsequent years, the concessional tax rate also extends to GDRs issued under other notified schemes of the Central Government. These include: -

a) GDRs issued in accordance with a scheme notified by the Central Government against the initial issue of underlying shares of an Indian company and purchased by the non­resident in foreign currency;

(b) GDRs issued against the shares of a public sector company sold by the Government and purchased by the non-resident in foreign currency ;

(c)  GDRs re-issued against the existing underlying shares of an Indian company in accordance with such scheme as the Central Government may notify, and purchased by the non-resident in foreign currency ;

(d) GDRs issued against the shares of a listed Indian company on the disinvestment of such company of its shareholdings   in   its   listed   subsidiary   company,   in accordance with such scheme as the Central Government may notify, and purchased by the non-resident in foreign currency.

Consequential amendments are also made in sections 47 and 196C of the Income-tax Act.

IS THERE A CHANGE IN PROVISIONS OF PAYMENT OF ADVANCE TAX RELATABLE TO CAPITAL GAINS OR OTHER SUCH INCOMES?

Yes. Previously, penal interest was not charged on account I of underestimate or failure to estimate either the amount of capital gain or of income from winnings from lottery, horse races, etc., if the assessee pays the whole of the tax payable in respect of such incomes, as part of the instalment of advance tax which is immediately due.

This requirement of paying the whole of the tax, caused some hardship, as the entire tax had to be paid on a short notice. In many cases, even the sale proceeds of the capital asset may not have been received before the advance tax payment become due.

With effect from A.Y. 97-98 and subsequent years, the tax payers have been allowed to pay tax relatable to the capital gain or to income from winnings from lottery, horse races, etc as part of the remaining instalments of advance tax which are due in the financial year.

EARLIER, SHARES USED TO HAVE A STANDARD FACE VALUE OF Rs.10 OR IN SOME CASES, Rs.100. NOW THERE IS NO SUCH RESTRICTION, COMPANIES LIKE COMPANY(S) HAVE LOWERED THE FACE VALUE TO Rs. 5, Rs. 2 or Rs. 1. HOW WILL CAPITAL GAINS TAX BE CHARGED ON THESE SPLIT SHARES?

The mere act of splitting the shares, unlike a bonus issue, does not have a bearing either upon the amount or the nature of capital gains. A share split is not akin to a bonus issue, though the investor gets more shares (depending upon the split ratio), the company does not issue additional capital. Only her existing shares are reclassified and the number of shares outstanding changes. There is no transfer, so no capital gains.

WHAT WOULD BE THE COST OF NEW SHARES AFTER SPLITTING?

The cost, would reduce in proportion to the split. That is, if Infosys was bought at Rs. 8,000 a share and there is a 1:1 split, the cost of acquisition would reduce proportionately to Rs 4,000 a share.

WHAT WOULD BE THE DATE OF ACQUISITION OF SPLIT SHARES FOR PURPOSES OF INDEXATION?

From the company's standpoint, no new shares are issued. The investor too does not receive new shares, only the number of shares increases. As no new capital asset comes into being, there is no question of a new date of acquisition. Computation of capital gains or loss on split shares will be done by taking into account the original date of purchase of un-splited shars.

TRADITIONALLY, INVESTORS HAVE BEEN U&NG THE TOOL OF CHOOSING THE SHARES IN ORDER TO FASHION THE AMOUNT AND NATURE OF CAPITAL GAINS TAX AS LONG-TERM CAPITAL GAINS TAX CAN BE COMPUTED @10% WITHOUT INDEXATION OR AT 20% WITH INDEXATION. WHAT WOULD BE THE POSITION IN THE CASE OF DEMATTED SHARES?

First-in-first-out (FIFO) is the method that has to be followed mandatorily. In other words, for a particular scrip, the shares first dematted will be construed as being sold first. Demat has done away with the practice of choosing shares. The act of dematting and, more importantly, the date thereof has absolutely no bearing on taxes. The dates and the relevant costs of shares remain the same. For example, you may have bought a scrip 5 years back, dematted it yesterday and sold it today. It would still be a long term capital gain.

WHAT IS THE LAW ON SET OFF OF LOSS ON SALE OF SHARES?

Capital loss - short-term or long-term, can be set off only against capital gains - again, short-term or long-term. Obviously would first offset capital loss against short-term gains as these are taxed at higher rates. Remember, capital loss cannot be set off against other income.

WHAT ARE THE NEW MEASURES TO CURB CREATION OF SHORT-TERM LOSSES BY CERTAIN TRANSACTIONS IN SECURITIES AND UNITS?

Under the existing provision contained in section 94, p transactions of sale and purchase of securities which result in the interest or dividend in respect of such securities being received by a person not being the owner of the securities, are to be ignored and the interest or dividend from such securities is required to be included in the total income of the owner. The purchase and resale of securities, including units of equity oriented mutual funds, was being carried on for the purposes of creating short-term losses. These losses were then set off against other incomes for unintended benefits to the taxpayer. This practice popularly known as dividend stripping was being widely used to reduce the tax, which would have been otherwise payable, by the taxpayers.

With effect from 1 st April, 2002, i.e. in relation to the assessment year 2002-2003 and subsequent years, a new sub-section (7) has been inserted in the said section to provide that where any person buys or acquires securities or units within a period of three months prior to the record date fixed for declaration of dividend or distribution of income in respect of the securities or units, and sells or transfers the same within a period of three months after such record date, and the dividend or income received or receivable is exempt, then, the loss, if any, arising from such purchase or sale shall be ignored to the. extent such loss does not exceed the amount of such dividend or income, in the computation of the income, chargeable to tax, of such person.

WHAT IS THE LAW ON CARRY FORWARD OF LOSS ON SALE OF SHARES?

The loss left over after set-off, can be carried forward for eight years in the case of short term assets and for four years in the case of long term assets, for similar set-off.

HOW TO ENSURE CARRYING FORWARD OF LOSS ON SALE OF SHARES?

By filing your tax return in time.

BIRDS EYE VIEW OF CAPITAL GAINS ON TRANSACTIONS RELATING TO HOUSE PROPERTY TRANSFER

'Transfer' means the act by which a living person conveys property to one or more living persons. Title in movable property is generally passed when delivery is made. But, in the case of immovable property worth Rs.100 or more, title in the property passes, only when a conveyance deed is executed and registered.

The term transfer' as defined in the Income-tax Act includes: -

(i) Sale, exchange or relinquishment of a capital asset.

• A sale takes place when title in the property is transferred for a price.
• An involuntary sale like that by a court of a property of a judgement debtor at the instance of a decree holder is also transfer of a capital asset.
• An exchange of capital asset takes place when the title in one property is passed in consideration of the title in another property.
• Relinquishment of a capital asset arises when the owner surrenders his rights in property in favour of another person. For example, the transfer of rights to subscribe shares in a company in a 'Right Issue' to a third person.

(ii) Compulsory acquisition of the capital asset.

Acquisition of immovable properties under the Land Acquisition Act, Acquisition of Industrial Undertaking or Pre-emptive purchase of immovable properties by the Income Tax Department, are some examples of compulsory acquisition of a capital asset.

(iii) Conversion of capital asset into stock-in-trade.

Though normally there can be no transfer if the ownership in an asset remains with the same person, however, the Income Tax Act provides an exception. When a person converts any capital asset, e.g. a house property, owned by him into stock-in-trade of a business carried on by him, it is regarded as a transfer.

(iv) Handing over possession in part performance of contract of sale.

Normally transfer of an immovable property worth Rs.100 or more is not complete without execution and registration of a conveyance deed. However, section 53A of the Transfer of Property Act also visualises situations where under a contract for transfer of an immovable property, the purchaser has paid the price and has taken possession of the properly, but the conveyance-deed is either not executed or if executed is not registered. In such cases the transferor is debarred from agitating his title to the property against the purchaser.

The act of giving possession of an immovable property in part performance of a contract is treated as transfer' for the purposes of capital gains tax. This extended meaning of transfer applies also to cases where possession is already with the purchaser and he is allowed to retain it in part performance of the contract.

(v) Extinguishment of any rights in a capital asset.

This covers every possible transaction which results in destruction, extinction, cessation or cancellation of all or any rights in a capital asset. For example, termination of a lease or/and of a mortgagee's interest in a property.

(vi) Transfer of rights in immovable properties through co-operative societies, companies etc.

Usually flats in multi-storeyed buildings and other housing units in group housing schemes are registered in the name of a co-operative society formed by the individual allottees