Lower holding period for capital gains

By Arnav Pandya

Lower holding period for capital gains

One of the important things that have to be seen during the process of calculation of capital gains or losses is the classification of the asset into the right bracket. The gains or losses that are incurred on the asset can either be long term of short term in nature. The way in which this works is that if the asset is held for more than a specified period of time then it would be classified as a long term capital asset. The main benefit for having a long term asset is that there is usually a lower rate of tax on this investment. The period for this is generally taken as 36 months but there are several exceptions when this is a lower period and the time considered for this purpose will be taken as 12 months. Here is a look at the entire issue and the various assets for which the lower period of 12 months is applicable.

Equity or preference shares in a company

When  the asset that is held by the individual consists of shares in a company then the holding period for the qualification as a long  term capital asset will be brought  down to 12 months. An interesting part is that the shares here can either be equity shares or they can be preference shares. This does not make a difference to the situation so both the types of shares are covered. Another thing is that there is a question mark over whether only those shares that are listed on the stock exchanges would be eligible for this benefit. The answer here is again no and even unlisted or unquoted shares when held for more than 12 months would be considered as a long term capital asset.

Debentures and other securities

The other type of holdings that are significant in terms of the composition of the portfolio of investors is that of securities. These are actually debt instruments and will include the likes of debentures as well as government securities. When this is the case then these too would get the benefit of the lower holding period for the purpose of classification of a long term asset but these have to be listed on a recognised stock exchange in India. This will make only those securities that are listed and traded that would qualify for this benefit and this is a major distinction that needs to be watched out for.

Units of UTI and mutual funds

There are a lot of mutual funds now available for investment and this includes the UTI Mutual fund which was the first mutual fund to operate in the country. All the units that are issued by the mutual funds under various schemes would also be considered for the lower holding period for this type of classification.  The interesting thing is that the mutual fund units of all types would be brought under this working and there are no restrictions. There could be units that are present of close ended funds or it could be that the units are not listed on the stock exchanges but this would not impact the manner of calculation for this purpose.

Zero coupon bonds

One instrument that has been slowing making its presence felt in the Indian market has been the zero coupon bonds where these bonds do not pay out any interest but these are actually issued at a discount to the face value and then redeemed at face value or premium.  Once again these bonds might not be quoted but these will have the lower period qualification for the purpose of being classified as a long term capital asset.

The author can be reached at arnavpandya@hotmail.com