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Share allotment date taken as Esop holding period

  • Exemption from long-term capital gains on sale of shares can be sought under Section 54F of the Income-tax Act
  •  LTCG will be exempt in the same proportion that the cost of the new residential house bears to the net sale consideration

I am an Indian tax resident and was allotted Esops (employee stock options) by my employer in the last three years as bonus. Can I sell them to pay off my home loan without paying long-term capital gains (LTCG) tax?

—Manish

It is presumed that the reference to allotment of Esops actually implies that Esops granted to you by your employer were vested and hence exercised by you and consequently actual shares were allotted to you over the last three years. 

The holding period of the shares received by you under Esops for the purpose of determining capital gains is computed from the date of allotment of shares. In case the shares are listed on a recognised stock exchange in India on the date of sale, the gains will qualify as LTCG, if the holding period is more than 12 months. In case the shares are unlisted on the date of sale, the gains would qualify as LTCG, if the holding period exceeds 24 months. 

Exemption from LTCG on sale of shares can be sought under Section 54F of the Income-tax Act, by re-investing the net sale consideration in a new residential house in India, within one year prior or two years after the date of transfer of the shares (if the new house is purchased) or within three years (if the new house is constructed), subject to other conditions specified. If the cost of the new house is more than the net sale consideration, then the whole of LTCG shall be exempt. Otherwise, LTCG will be exempt in the same proportion that the cost of the new residential house bears to the net sale consideration. 

Assuming that the property was bought/constructed by you within the above timelines (i.e. one year prior to the date of sale as the home loan is already existing), you had only one other residential house on the date of sale of the shares, and it should qualify for exemption under Section 54F of the Act, subject to satisfaction of other conditions. 

With respect to utilisation of sale consideration from sale of shares towards paying off the home loan, there are favourable judicial precedents allowing the exemption, as long as the new house is purchased/constructed within the specified period and all other conditions are satisfied.

I took possession of my flat in June 1991 for 1.86 lakh. What will be the indexed cost of acquisition in 2019?

—K.K. Goel

We have assumed that 1.86 lakh represents the entire cost of the flat and you have not incurred any cost of improvement towards it.

Where a property is purchased prior to 1 April 2001, its cost for calculating LTCG on sale can be substituted with the fair market value (FMV) as on 1 April 2001, at the option of the assessee. You should, therefore, obtain a valuation of the property as on 1 April 2001 and use either such FMV or the actual purchase cost at your discretion. While there is no express requirement to obtain a FMV certificate, from the documentation perspective, one should consider obtaining such a certificate from a registered valuer.

In your case, as the flat was purchased in 1991, i.e. prior to 2001, you may choose to replace its cost with FMV as on 1 April 2001. As you have held the flat for more than 24 months prior to sale, the gains would qualify as LTCG. The indexed cost of acquisition of the flat in your case would be calculated as cost of acquisition (i.e. 1,86,000) or FMV as on 1 April 2001/Cost Inflation Index (CII) of FY 2001-02 (i.e. 100) x CII of year of sale. (CII prescribed for FY 2018-19 is 280. CII for FY 2019-20 is yet to be prescribed). Computation of LTCG and exemptions as 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

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