Period of Holding : How to Compute in 11 Situations Like Gift , Inheritance etc?

Period of holding of a capital asset is very important step in determination of liability of capital gains. If you are holding shares or mutual fund units or other securities  and sold through stock exchange , it shall be tax free if it is held for 12 months or more before sale . Similarly, other assets also become long term capital asset or short term asset based on the period for which it was held by the transfer The tax rates for short term capital gains and long term capital assets are entirely different and even the rules of carry forward and adjustment of loss are different.

Period of Holding in 9 Circumstances.

Section 2(42) of the Income Tax Act provides definition of short term capital gains and Explanation 1 to Section 2(42) provides the rules for computing the period of holding in nine different situations. These are summarized in following table .

Situation How the Capital Asset was acquired ? Types of Capital Asset Period of Holding
  1. Gift or
  2. Inheritence or
  3. on partition of HUF
Any capital asset The date of acquisition of previous owner from which the asset was acquired by the person  is important.
 2 On merger or demerger of companies Shares The period for which the shares were hold in merging ( amalgamating company ) or demerged company.
 3 Equity shares or securities received by employee or directors from employer company Shares  From the date of allotment or transfer of such  shares
 4 Shares of company which is in liquidation Shares  The computation of total period of holding shall Exclude the period after the date of on which company goes into liquidation .
 5 Acquired on Rights issue by a company Share or any other security as defined u/s 2(h) of SCRA  From the date of allotment of shares or securities acquired on Rights
 6 Renouncement of Rights, being a capital asset Rights to acquire shares or securities as defined u/s 2(h) of SCRA Period of holding shall be computed by taking date of the offer of such right by the company or institution
 7 Buying shares from Stock Exchange Shares Date of broker’s contract note of purchase
 8 Buying shares without involvement of stock exchange shares Date of contract of sale between parties.
 9 Bonus shares shares or securities  Date of allotment of such shares or securities
10 Equity shares allotment on denationalization or corporatisation of stock exchange to its members shares or capital asset, being trading or clearing rights of a recognised stock exchange Date will be counted from the day the member got membership of the stock exchange before such mutualization or corporatisation
11 Any other case Any other asset As fixed by CBDT by rules made in this regard.

Meaning of Securities for determination of Period of Holding

It must be noted that Explanation to section 2(42A) has mentioned in few case only shares whereas at some places mentioned shares or securties as defined u/s 2(h) of the SCRA. So , it is important to know what is the meaning of securities u/s 2(h) of Securities Contract Regulation Act , 1956  which is as under :

‘(h) “securities” include—

(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

(ia) derivative;

(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;

(ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

(id) units or any other such instrument issued to the investors under any mutual fund scheme;

(ie) any certificate or instrument (by whatever name called), issued to an investor by any issuer being a special purpose distinct entity which possesses any debt or receivable, including mortgage debt, assigned to such entity, and acknow-ledging beneficial interest of such investor in such debt or receivable, including mortgage debt, as the case may be;

(ii) Government securities;

(iia) such other instruments as may be declared by the Central Government to be securities; and

(iii) rights or interest in securities;’

As can be seen that for determining period of holding in case of aforesaid kinds of securities , which just not shares but may be ,scrips, stocks, bonds, debentures, debenture stock or other marketable securities or other instrumenst as listed above , the Rule given in Sl No 5 , 6, and 9 should be followed.

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