In one of our earlier blog-posts, we had discussed Capital Gain and Underlying Tax Benefits at length. Now that DTC (Direct Tax Code) is going to be implemented, probably from Financial Year 2011-2012 onwards, some rules regarding Capital Gain are set to be revised.
In the present Income Tax Regime, Capital Assets are classified as Short-Term Capital Gains (STCG) and Long-Term Capital Gains(LTCG) on the basis of time period, it is held. The Assert-Holding Time-Period is taken as a simple difference between Selling Date and Buying Date. But in DTC (Direct Tax Code), this Assert-Holding Time-Period is going to be calculated differently. DTC(Direct Tax Code) proposes this Holding Period to be calculated from the End of Financial Year in which asset was acquired. For example, if the Purchase Date is 20th July 09 and Selling Date is 21st July 10, under the Current Taxation Regime, Holding Period is 1 year 1 day, but once DTC (Direct Tax Code) is in place, Holding Period will become only 3 months 20 days. You could see the difference. What qualified as a Long Term Capital Gain (LTCG) before will now be counted as a Short Term Capital Gain (STCG) !!
This modification to this act may also throw absurd results for two assets with merely one day difference. Say for example, Ram acquired an asset on 28th March 2009 and sold it on 1st April 2010, while Shyam acquired an asset on 1st April 2009 and is also selling it on same date i.e, 1st April 2010. In present Income Tax Act, both Ram as well as Shyam will get an indexed benefit and their gains will be counted as a Long Term Capital Gain(LTCG) for listed shares asset, simply because it is held for more than 1 year. Let’s see what happens, once DTC (Direct Tax Code) is in place. Ram will continue getting indexed benefit and his capital gain will be counted as a Long Term Capital Gain(LTCG) where date of acquiring is counted from 31st March 2009 to 1st April 2010 and clearly it has completed one financial year. But Shyam won’t get indexed benefit and for him gain will be a Short Term Capital Gain (STCG) because the Asset Holding-Period is only one day (01 Apr 2010 – 31st Mar 2010). So he has to wait till 1st April 2011 to complete 1 financial year, so that his gain will be counted as a Long Term Capital Gain (LTCG). As you can see, only couple of days could be the difference between Short Term and Long Term Capital Gains, resulting into you not getting the benefits of Long Term Capital Gains (LTCG).
In present Income Tax Regime, for the unlisted shares, which are acquired before 1981, the cost of acquisition is calculated from 1 April 1981 whereas in DTC (Direct Tax Code) it is shifted to 1 April 2000 and indexation will also be allowed from the same.
Presently, all assets other than listed equity shares and units of equity oriented funds are eligible for the benefits of indexation. Presently, long term capital gains for such assets is calculated after deducting the indexed cost from the net sale price and you have to pay tax at the rate of 20% of indexed capital gain. But in DTC (Direct Tax Code) the capital gains after indexation are proposed to be included in your total income and taxed according to Income Tax Slab, your Current Income falls into.
There are some very interesting resources on Web discussing the impact of DTC (Direct Tax Code) on Capital Gain and Tax Structure, lying underneath. So if you could not get what you were looking for, you can always go for more details at following places
Having said all that, we would still recommend you not to take any step/actions right now (Be smart, but not over smart :-)). DTC(Direct Tax Code) is yet to be finalized and some of its provisions are still being reviewed by parliamentary committees. So its very much possible that it may undergo some changes, before DTC (Direct Tax Code) finally gets enacted as law. Let’s keep our fingers crossed 🙂