Some time back, under ‘Buy Back Scheme’, Ranbaxy Lab has purchased my share at Rs. 737 (all shares I held are bonus shares). I had been holding these shares for more than last 10 years. Will I have to pay long-term capital gain (LTCG) on it since it is off market transaction?If so, then at what rate? In which scheme shall I invest to avoid LTCG?

My son has purchased the same shares in Oct,05. While purchasing, he has already paid STT. Will I have to pay LTCG on these as well?

?Kirit Mehta

A per FA04, equities sold on a recognised stock exchange and equity-based MF units redeemed from the MFs are governed by special rates.

1. The long-term capital gain (LTCG) is exempt. Consequently long-term capital loss (LTCL) is also exempt and is not available for any setoff

2. The short-term capital gain (STCG) enjoys a concessional flat rate of tax (@15.45% for FY 08-09).

Note that you may have purchased or acquired the shares any which way. What is important for claiming the benefit is that the shares should be sold on a recognised stock exchange in India at which time you also pay STT thereon. Any ?buy back? is not a sale on a recognised stock exchange in India and therefore the related tax concessions are not available. Therefore, the normal rate of 20.6% on long-term capital gains (computed after indexation) is applicable.

In the case of debt-based MFs and equities, which have not been sold on a recognised stock exchange in India, an additional option of paying the tax @10.3% of the profit (without indexation) is also available, if more beneficial. An important aspect which is mostly misunderstood is that the capital gains are always computed with indexation. It is only the tax that can be paid @10.3% or @20.6%, whichever is less. Short-term capital gains would be taxed at the normal rate applicable to the assessee.

Since the buyback was in the current FY, both you and your son earned LTCG.

The cost of acquisition of bonus shares is to be taken as nil and therefore, the exercise of application of indexation becomes inoperative. The rate would be 10.3% of the buy back proceeds. The shares purchased by your son in October 2005 will be have the option of paying the long term capital gains tax @ 20.6% on indexed LTCG or @ 10.3% on profit whichever is beneficial to him.

I have received a query relating to capital cain.

Which of the following holdings will be considered as long term ;

1.12th January 2007 to 11th January 2008

2.12th January 2008 to 11th January 2009 (leap year to be considered)

3.12th January 2007 to 12th January 2008

4.12th January 2008 to 12th January 2009 (leap year to be considered)

Kindly advise as to for determining short term or long term capital asset, whether 12 months is considered or 365 days. All the above investments are in mutual funds and NAV’s for subscription and redemption are of the dates specified as above

?Sandya

The long-term or short-term nature of the assets are disclosed item wise below.

1. 12th January 2007 to 11th January 2008 : SHORT-TERM

2. 12th January 2008 to 11th January 2009: SHORT-TERM

3. 12th January 2007 to 12th January 2008 : LONG-TERM

4. 12th January 2008 to 12th January 2009 (leap year to be considered) : LONG-TERM

It is always twelve months that is considered and not the number of days within those months or the year.

Let me know if it will be advisable to invest in gilt category at this time? I can hold my investments for next two to three years.

? Avni

Yes, it would be advisable to invest in gilt funds with a two year perspective. Some money should be invested in income funds as well. The reason for this is that with inflation no longer a threat, the government is concentrating on giving an impetus to growth in a bid to counter recessionary trends. One of the key ways of doing so is by employing the monetary tool of cutting interest rates. Already the RBI (repo rate) is the lowest ever at 5.5%. Simultaneously, the rate which RBI pays banks to park their idle funds (reverse repo rate) has also been slashed to 4%. This trend of cutting rates is expected to continue. And since bond prices bear an inverse relationship to interest rates, these rate cuts will result in a bond price rally. Consequently gilt and income funds investing in corporate paper are expected to perform well.

The authors may be contacted at wonderlandconsultants@yahoo.com