If unlisted shares are held for over 24 months, gains qualify as LTCG

I was allotted 200 shares at ₹100 each in October 1991 at face value by my employer and another 200 shares on rights basis at ₹150 per share in October 1993. I sold these shares at ₹850 per share in December 2018. How much long-term capital gains (LTCG) tax will I be liable to pay on the sale of these shares? Please help me with the calculation as well.

—Narayana

For unlisted shares: In case the shares are unlisted, please note the following:

Vide the Finance Act 2017, (Union Budget 2017), the Cost of Inflation Index (CII) used for adjusting the cost of acquisition of long-term capital assets for inflation was pegged to 1 April 2001 (instead of 1 April 1981) and revised CII tables were published.

Presently, where a capital asset is acquired prior to 1 April 2001, the cost of the capital asset for the purpose of calculating LTCG on the sale of such capital asset can be substituted with the fair market value (FMV) of the asset as on 1 April 2001, at the option of the assessee. You should, therefore, obtain a valuation of the shares as on 1 April 2001 and use either such FMV or the actual purchase cost, as per your discretion.

As you have held the shares for more than 24 months prior to the sale, the gains would qualify as LTCG. The indexed cost of acquisition of the shares in your case would be calculated as the cost of acquisition (i.e. ₹100 and ₹150, respectively, for the initially allotted shares and shares acquired under the rights issue) or FMV for the respective category of shares as on 1 April 2001/CII of FY 2001-02 (i.e. 100) x CII of FY 2018-19 (i.e. 280).

Assuming that FMV as on 1 April 2001 is ₹250, LTCG would be ₹60,000 [{ ₹850 – ( ₹250/100x280)} x 400]. Further, assuming that the surcharge is not applicable to you, the said LTCG shall be taxable at 20% plus 4% health and education cess. Accordingly, tax of ₹12,480 would be levied.

Tax exemptions as available under the Income-tax Act, 1961 against such LTCG, may be separately evaluated.

For listed shares: In case the shares are listed, please note the following:

With effect from 1 April 2018, LTCG arising on the sale of listed shares in India that are held for more than 12 months before sale, are taxable, to the extent such LTCG exceeds ₹1 lakh in the given FY, provided securities transaction tax (STT) has been paid both at the time of purchase and sale of the shares. Tax at 10% (plus applicable surcharge and cess) is payable on such LTCG exceeding ₹1 lakh.

You can consider the highest listed price of the shares as on 31 January 2018 in place of the actual cost of purchase, provided the listed price is lesser than the actual sales value. The resultant LTCG, if any, to the extent it exceeds ₹1 lakh would need to be taxed at 10% plus applicable surcharge and cess.

Assuming that the highest listed price of the shares as on 31 January 2018 is ₹500, LTCG would be ₹1.40 lakh [( ₹850 – ₹500) x 400]. Assuming this is the only sale of listed shares during FY2018-19 and that surcharge is not applicable to you, the said LTCG in excess of ₹1 lakh i.e. ₹40,000 shall be taxable at 10% plus 4% health and education cess. Accordingly, income tax on the same would come to ₹4,160.

Exemptions available under the Act against such LTCG may be separately evaluated.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India. Queries and views at mintmoney@livemint.com