The tax treatment for gains on the sale of unlisted shares depends primarily on the holding period:

• Short-Term Capital Gains (STCG):
  If the unlisted shares are held for less than 12 months, the gains are classified as short-term.

• Long-Term Capital Gains (LTCG):
  If the shares are held for 12 months or more, they qualify as long-term capital assets.

Chargin sections

Section 47 and Section 48 (Income Tax Act, 1961)

• Section 47: Defines how gains arising from a transfer of a capital asset are computed.

• Section 48: States that the capital gain is the difference between the full value of consideration and the (indexed) cost of acquisition, cost of improvement, and expenses incurred on transfer.

Section 55(2)

• This section prescribes the method for computing the Cost Inflation Index (CII), which is used to adjust the cost of acquisition of long-term assets, thereby reducing the taxable gain.

Computation of Capital Gains

A. Short-Term Capital Gains (STCG) on Unlisted Shares

• Method:
  Since no indexation benefit is available, the capital gain is computed as:

  STCG=Sale Consideration−(Cost of Acquisition+Expense on Transfer+Cost of Improvement)

• Tax Rate:
  The resulting gain is added to your total income and taxed at the applicable slab rates (if the taxpayer is an individual) or at the normal corporate tax rates (if a company).

B. Long-Term Capital Gains (LTCG) on Unlisted Shares

• Method:
  For unlisted shares held for 12 months or more, the cost of acquisition (plus cost of improvement and transfer expenses) must be indexed using the Cost Inflation Index from Section 55(2). The computation is:

  Indexed Cost of Acquisition=Cost of Acquisition×CII in the year of saleCII in the year of acquisition/CII in the year of acquisition. The LTCG is then calculated as:

• LTCG=Sale Consideration−(Indexed Cost of Acquisition+Cost of Improvement+Expense on Transfer)

• Tax Rate:
  The taxable LTCG is taxed at a flat rate of 20% (plus applicable surcharge and cess) as per the current provisions for long-term capital gains on unlisted shares.

tep-by-Step Computation of STCG

Step 1: Determine the Full Value of Consideration (FVC)

• This is the total sale price (or aggregate consideration) received from the transfer of the asset.

Step 2: Determine the Cost of Acquisition & Directly Attributable Expenses

• Cost of Acquisition: The original purchase price (plus any incidental costs incurred at the time of purchase).

• Direct Expenses: Expenses incurred exclusively for facilitating the sale (e.g., brokerage, commission, transfer fees).

Step 3: Calculate the Short-Term Capital Gain (STCG)

• Use the formula:

STCG=Full Value of Consideration(Cost of Acquisition+Directly Attributable Expenses)

• Note: No indexation is allowed for short-term assets.

Step 4: Determine the Tax Treatment Based on Asset Type

1. For Equity Shares or Equity-Oriented Mutual Funds (with STT Paid):

   • Tax Rate: Under Section 111A, the resulting STCG is taxed at a flat rate of 15%.

   • • Example:
       If you sell shares with a gain of ₹50,000 and STT has been paid, the tax payable is 15% of ₹50,000 (i.e., ₹7,500), plus applicable surcharge and cess.

   • For Other Assets or in Cases Where STT is Not Applicable:

     • The computed STCG is added to the total income and taxed at the applicable individual or corporate slab rate (as per Section 48).

     • Example:
       If you sell a non-equity asset with an STCG of ₹50,000, that amount is added to your income, and the tax rate applied will depend on your applicable income tax slab.

How to Deposit Money in the CGAS

Step A: Open a CGAS Account

• Designated Banks:
  The government has notified certain banks to operate as authorized CGAS account holders. To deposit funds, you must open a CGAS account with one of these designated banks.

• Documentation:
  You will typically need to provide:

  • Proof of sale of the capital asset (sale deed, transaction details)

  • PAN and identity proofs

  • A declaration regarding the purpose of deposit as per the reinvestment conditions stipulated under the applicable exemption (for example, under Section 54 or 54EC)

Step B: Deposit the Amount

• Timing:
  You must deposit the requisite amount in the CGAS account within the time limit specified for reinvestment (for example, within two years from the date of transfer for residential property purchase under Section 54, or within six months for Section 54EC bonds).

• Mechanism:
  The deposit is made as you would for any regular bank account transaction. The bank records the deposit, but note that funds in a CGAS account do not earn interest and are earmarked strictly for the purpose of reinvestment.

• Notification:
  Once the deposit is made, you receive an account statement or certificate confirming the deposit. This document is crucial when claiming the exemption later.

3. Procedure for Withdrawing Funds from the CGAS

Step A: Utilize Funds for Reinvestment

• Reinvestment:
  When you identify a new asset that qualifies for the exemption (e.g., a new residential property or eligible bonds), you must complete the purchase or construction within the prescribed time limit.

Step B: Request Withdrawal

• Documentation Required:
  To withdraw funds from the CGAS, you need to submit:

  • Proof of purchase or construction (such as a sale or construction agreement, payment receipts, and completion certificate)

  • The CGAS deposit certificate as evidence of the funds available.

• Bank Process:
  The designated bank will verify the documents. Once validated, the bank will release the required amount from the CGAS to facilitate the payment for the reinvestment.

• Excess Funds:
  Any funds in excess of what is used for reinvestment typically revert to your account; however, failure to utilize the funds within the prescribed period means that the exemption ceases, and the capital gains become taxable.