Gains on sale of capital assets held for more than three years (one year for listed securities or mutual fund units) are treated as long-term capital gains and are taxed at concessional rates compared short-term capital gains.
While calculating taxable long-term capital gains, the cost of acquisition and the cost of improvement are linked to a cost inflation index. As a result, the indexed cost of acquisition is deducted from the sale consideration received, to arrive at the capital gain.
Long-term capital gains are taxed at a flat rate of 20 per cent for individuals and foreign companies, and 30 per cent for domestic companies. Long-term capital gains on the transfer of shares/bonds issued in a foreign currency under a scheme notified by the Indian Government are taxed at 10 per cent. For non-residents, the capital gains arising from the transfer of shares and debentures are calculated in the original currency of acquisition. Therefore, no tax is payable merely because of the devaluation of the Indian Rupee vis-a-vis other currencies. However, no tax is payable on the transfer of shares in an Indian company by one non-resident to another if the transfer is in pursuance of a scheme of amalgamation and certain conditions are satisfied.
The concessional treatment allowed to long-term capital gains is not applicable to short-term capital gains. Short term capital gains are computed as the sale price or consideration less cost of acquisition and related expenses. The taxable short term gain is aggregated with taxable income from other income classes, and is taxed at the overall tax rate applicable to the assessee.
Income of Offshore Funds and non-residents from units purchased in foreign currency and capital gains on their transfer are taxed at 10 per cent. In the case of Foreign Institutional Investors, income from investment in securities (viz dividends, interest) is taxed at 20 per cent, while capital gains on transfer of these securities are taxed at 10 per cent (long-term) and 30 per cent (short-term).
Any capital losses made in a particular year can be set off only against capital gains made in the same year. If set-off is not possible, these capital losses can be carried forward for a period of eight years, and set off against the capital gains of subsequent years.
Centre for Monitoring Indian Economy, Bombay
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Last updated: May 1995.