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Long Term Capital Gains of shares of unlisted private ltd co

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Long Term Capital Gains of shares of unlisted private ltd co

Postby rvsekar2000 » Sat Feb 27, 2010 1:25 pm

Dear All,

Please clarify the following:

Some shareholders of a private ltd co wants to purchase the entire shareholding from a foreign investor who has held the shares for the last 3 years.

In such scenario , what will be the long-term capital gain tax to be deducted at source before making payment to them.( Please note that foreign holder has no PAN No or place of office in India).

Is surcharge is applicable to these transaction at it exceeds Rs 1 Crore ( the consideration for shares to be paid).

If the shares are held by the foreign company for more than three years , then whether it is exempted from Long Term Capital Gains Tax or lower rate of tax is applicable .

Thanks in advance,

Regards,

R.V.Seckar

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Re: Long Term Capital Gains of shares of unlisted private ltd co

Postby rvsekar2000 » Sat Mar 06, 2010 11:01 am

Dear All ,

I have done further research on the subject. This is regards to application of long-term or short-term capital gain tax applicable to an unlisted or a private limited Indian company shares to be transferred or purchased from a Non –resident or a foreign company

Long –Term Capital Gain Tax on shares of private limited company

It is to be observed that shares of unlisted companies if it is held by more than 3 years , then it will be considered as long term one and if it is disposed before three years, then it will be considered as short-term gains.

Nature of Asset


Short Term Capital Asset


Long Term Capital Asset

(i) Shares in a company or any other security listed in a recognised stock exchange in India or a unit of a Unit Trust of India or a unit of a mutual fund specified under section 10(23D).


Held for not more than 12 months.


Held for more than 12 months.

(ii) Assets other than assets mentioned in (i) above.


Held for not more than 36 months.


Held for more than 36 months.

Source : Karnataka IT Department Web Site

In case of listed company, if the shares are sold through recognised stock exchange, then no long –term capital gain is attracted as it will be subject Security Transaction Tax (STT). However, if the shares of the listed company are sold outside the stock exchange, then long-term capital gain tax will be applicable. In such cases , only indexation can be applied.

For unlisted companies, no indexation is applicable. The flat rate income tax on long –term capital gain tax will be 20% plus surcharge.

The following provisions will throw more light on the subject:

Non Resident Unitholders
Under section 115 E of the Act, in case of income of non resident Indians by way of long term capital gains, in respect of units is chargeable at the rate of 20% plus surcharge, if applicable. Chapter XIIA exclusively deals with taxation related to Non-resident Indians. Under section 115 D of the Income Tax Act, a non-resident Indian cannot avail the benefit of indexation.

In the alternative the capital gains tax may be computed by the non residents under section 112, if it is more beneficial to them. Under Section 112 of the Act, long term capital gains are taxed at the rate of tax @ 20% plus surcharge. The benefit of indexation is also available to the non residents under section 48 of the Income Tax Act, 1961. Gains on short term capital asset are taxed as regular income.

Income –Tax on capital gains

Long Term Capital Gains


As per Part II of the First Schedule to the Finance Act 2008 {Clause 1 (b) (i) (D)}, the Mutual Fund is liable to deduct tax @ 20% on long term capital gain.

(iii) Other than a Domestic Company:

Long Term Capital Gains
As per Part II of the First Schedule to the Finance Act 2008 {Clause 2 (b) (viii)}, the Mutual Fund is liable to deduct tax @ 20% on long term capital gains.

http://www.utimf.com/customer_services/ ... entre.aspx



Applying the above provisions , the following conclusion can be arrived at as there are lot of ambiguity in the Income Tax Act about the sale of unlisted company’s shares attracting either long-term or short-term capital gain tax:

1.No indexation is applicable for unlisted shares or shares of a private limited company. Please note that indexation is only a viable option for the listed company shares and an assessee may select to avail indexation or he can pay taxes even with out indexation.

2. For long term capital gains of a unlisted or a private limited , the tax rate is applicable will be 20% + 10% surcharge.

Other professional views on the subject are always appreciated.


R.V.Seckar
rvsekar2000
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Re: Long Term Capital Gains of shares of unlisted private ltd co

Postby Sanjeev Grover » Wed Jul 07, 2010 10:36 pm

Well, the shares of a private company, if held for more than 12 months should qualify as long term capital asset . However the benefit of zero taxation which is available to listed shares on which STT is payable, would not be available to shares of a private company.
Sanjeev Grover
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