Capital assets are classified as short-term or long-term based on their holding period. The taxation rules for both categories differ under the Income Tax Act, 1961.

1️⃣ Short-Term Capital Assets (STCA)

✔️ Assets held for ≤ 36 months (≤ 3 years) before transfer.
✔️ For listed shares, equity mutual funds, and certain securities – holding period ≤ 12 months is considered short-term.
✔️ Gains taxed as per slab rates (for individuals) or flat 15% (for equities under Section 111A).
✔️ No indexation benefit available.

2️⃣ Long-Term Capital Assets (LTCA)

✔️ Assets held for > 36 months (or > 12 months for equities & specified assets).
✔️ Taxed at 20% with indexation (except equities, which are taxed at 10% without indexation if gains exceed ₹1 lakh under Section 112A).
✔️ Eligible for exemptions under Sections 54, 54F, 54EC, etc.

🚨 Key Budget 2024 Updates Considered

📌 Debt Mutual Funds – Always taxed as short-term, no LTCG benefit.
📌 Market-Linked Debentures (MLDs) – Always short-term, regardless of holding period.
📌 REITs & InvITs – Capital repayment now taxable.

When companies undergo a merger or acquisition, the treatment of depreciation on transferred assets is governed by specific provisions of the Income Tax Act. The key objective is to ensure that the tax benefit of depreciation already claimed by the transferor is preserved for the transferee, subject to certain conditions.

Key Points to Consider:

• Carry Forward of Unabsorbed Depreciation:
  Under the provisions applicable to amalgamations and demergers, any unabsorbed depreciation on assets of the transferor can be carried forward by the acquiring company. This means that if a company has already claimed depreciation in previous years, that benefit can continue in the new entity, provided the required conditions are met.

• Continuity Conditions:
  For the depreciation benefit to be transferred, the following conditions must generally be satisfied:

  • Continuity of Business: The acquiring company should continue the same business operations as the transferor.

  • Shareholding Continuity: There is often a requirement that a certain percentage (commonly 50% or more) of the transferor’s share capital or voting power is maintained by the acquiring company.

• Basis of Depreciation for Transferred Assets:
  The cost of the asset in the hands of the acquiring company is typically taken as the cost in the hands of the transferor, adjusted for any unabsorbed depreciation already claimed. This ensures that the depreciation deductions for future years are computed on the written-down value carried forward from the transferor’s books.

Practical Impact:

• If Conditions Are Met:
  The acquiring company continues to claim depreciation on the transferred assets, and the benefit of unabsorbed depreciation is preserved. This helps in maintaining a lower taxable income post-merger or acquisition.

• If Conditions Are Not Met:
  If the continuity conditions fail, the depreciation claimed by the transferor may not be carried forward. In such cases, the acquiring company might have to start fresh without that tax benefit, potentially resulting in higher taxable profits.