Period of holding of a capital asset

Introduction

The 'period of holding' is the period for which a capital asset has been held by the owner before its transfer. The period of holding of every capital asset is determined so that it can be classified into short-term capital asset or long-term capital asset.

1. About

For the purpose of computation of capital gain, a capital asset is bifurcated into short-term capital asset and long-term capital asset. This distinction is important as incidence of tax is higher on short-term capital gains as compared to the long-term capital gains. The distinction between a long-term and short-term capital asset is based on the period for which it is held by the owner before transfer. Usually, the period of holding of a capital asset is reckoned from the date of its purchase. However, in certain special cases, the period of holding is determined in accordance with the specific provisions.

2. How to calculate period of holding?

2.1. In general

The period of holding of a capital asset is calculated from the date of its purchase or acquisition till the date of its transfer. However, in certain cases, the period of holding of a capital asset is determined in accordance with special provisions which are enumerated below.

2.2. Period of holding in case of shares

2.2-1. Listed shares

If listed shares or securities are sold through brokers, the date of broker's note is treated as date of transfer, provided the contract is followed up by delivery. Thus, the period of holding should be counted from the date of purchase to the date of broker's note.

In case the transaction takes place directly between the parties and not through stock exchange, the date of contract of sale as declared by the parties is treated as the date of transfer, provided it is followed by actual delivery of shares and the transfer deeds

2.2-2. Securities held in Demat form

The Dept. has clarified

2.2-3. Bonus shares

Where shares or any other security is allotted without any payment on the basis of holding of any other shares or security, the period of holding is reckoned from the date of allotment of such bonus shares or security.

2.2-4. Sweat equity shares

Where securities or shares are allotted or transferred, directly or indirectly, by the employer free of cost or at concessional rate to his employees (including former employee or employees) the period of holding is reckoned from the date of allotment or transfer of such specified security (ESOPs) or sweat equity shares.

2.2-5. Conversion of shares

Where equity shares become the property of the assessee on its conversion from the preference shares, the period for which the preference shares were held by the assesse is also included in the period of holding of equity shares. In other words, the period of holding shall be considered from the date of acquisition of preference shares.

2.2-6. Conversion of debentures or bonds

In case of conversion of bonds or debentures, debenture-stock or deposit certificates into shares or debentures of that company, the period of holding of converted shares or debentures, as the case may be, shall be considered from the date of acquisition of bond, debenture, debenture-stock or deposit certificate. In other words, the holding period of the original asset shall be taken into consideration while determining the period of holding of converted assets.

2.2-7. Rights shares

Where a person has acquired any share or security on the basis of his rights entitlement or on the basis of rights renounced in his favour ('right shares'), the period of holding is reckoned from the date of allotment of such right share or security.

2.2-8. Renouncement of right

Any right available to a shareholder to subscribe to shares or any other security of a company is treated as 'capital asset' under Income-tax Act. When such capital asset is renounced in favour of any other person, the period of holding of such capital asset shall be reckoned from the date of offer made by the company to the date of renouncement.

2.2-9. Shares of co. in liquidation

Where shares are held in a company which is under liquidation, the period subsequent to the date on which the company goes into liquidation is excluded while computing the period of holding.

Example, if High Court appoints July 1, Year 00 as the date of liquidation, the period from the date of appointment till the date of distribution of assets shall be excluded while calculating the period of holding of equity shares.

2.2-10. Shares of amalgamated co.

Where in a scheme of amalgamation of two Indian Companies, shareholder of an amalgamating co. transfers his shares to the amalgamated co. in consideration of allotment of shares from the amalgamated company, the period of holding of the original shares held in the amalgamating company, is also included in computing the period of holding of the shares in the amalgamated company.

In other words, the period of holding of shares allotted in the amalgamated co. shall be counted from the date of acquisition of shares in the amalgamating company.

2.2-11. Shares of resulting co.

Where an assessee holds shares of an Indian company that were allotted to him in a scheme of demerger in lieu of his shareholding in the demerged company, period of holding is counted from the date of holding of the shares in the demerged company and not from the date of allotment of the shares in the resulting company.

2.3. Period of holding in case of acquisition by operation of law

Where an assessee does not purchase a capital asset but acquire it by way of operation of law in the circumstance specified in Section 73(1) [Table S. No. 1], the period of holding, in such cases, shall be reckoned from the date of holding of the asset by its last previous owner who acquired the asset by way of purchase. In other words, the period of holding of the last previous owner is also included for the purpose of determining the period of holding by the assessee.

2.4. Period of holding in case of conversion of stock into capital asset

Where stock-in-trade is converted into, or treated as, a capital asset, the period of holding of the converted capital asset shall be reckoned from the date of its conversion or treatment.

2.5. Period of holding in case of unit of business trust

Where units of business trust are allotted on account of transfer of shares of special purpose vehicle, the period for which the shares were held by the assessee is also included while counting the time-limit for which the said units were held.

2.6. Period of holding in case of conversion of Indian branch of foreign co. into its subsidiary

Where a capital asset became the property of the Indian subsidiary company in consequence of conversion of an Indian branch of a foreign company as per Section 219, the period of holding of such asset in hands of the subsidiary company shall be counted from the date on which such asset was acquired by branch of the foreign company. Further, where the capital asset is obtained by the branch under any mode as specified under Section 73(1) [Table S. No. 1] , the period of holding of the last previous owner shall also be included for the purpose of determining the period of holding of capital asset held by the Indian Subsidiary.

2.7. Period of holding in case of transfer of capital asset by firm to its partner in connection with reconstitution

Main article: Computation of income on reconstitution of Firm, AOP or BOI

Where a partner (or member) of a firm (or AOP or BOI) receives any capital asset or money or both in connection with the reconstitution of such firm, then any profit and gains arising from such receipt by partner or member shall be deemed to be the income of the firm under the head capital gain and chargeable to tax as per Section 67(10).

Such capital gains shall be deemed to be from the transfer of short-term capital asset if it is attributed to:

(a) A capital asset which is a short-term capital asset at the time of taxation of amount under Section 67(10);

(b) Capital asset forming part of a block of asset; or

(c) Self-generated asset and self-generated goodwill.

However, such capital gains or part of it shall be deemed to be long-term if it is attributed to a capital asset that is not covered above and is a long-term capital asset at the time of taxation of amount under Section 67(10).

2.8. Period of holding in case of redemption of GDRs

Where a non-resident acquires shares of a company on redemption of Global Depository Receipts, the period of holding of such shares shall be counted from the date on which a request for such redemption was made.

2.9. Period of holding in case of consolidation scheme

Where units become the property of the assessee in the consolidation scheme of a mutual fund, the period for which the units were held under consolidating scheme is also included in the period of holding of units acquired.

Where units of consolidated plan become the property of the assessee in consolidation of the plans within the scheme of a mutual fund, the period for which the unit or units were held under consolidating plan is also included in the period of holding of units acquired.

2.10. Period of holding in case of segregated portfolio

In the case of a capital asset, being units in a segregated portfolio, the period for which the original units were held in the main portfolio is also included in the period of holding of the units acquired in the segregated portfolio.

Example: Mr. X acquired the units in the main portfolio on 01-04-2026 and he was allotted units in the segregated portfolio on 01-05-2026, then, the period of holding of the units in the segregated portfolio shall be reckoned from 01-04-2026.

2.11. Period of holding in case of trading or clearing rights

While calculating the period of holding of trading or clearing rights or equity shares acquired on Demutualisation or Corporatisation of Recognised Stock Exchange in India, the period for which the person was a member of the recognised stock exchange, immediately prior to such demutualisation or corporatisation, is also to be included to determine the period of holding.

2.12. Period of holding in case of capital asset declared under Income Declaration Scheme, 2016

In case an assessee has declared its capital assets under Income Declaration scheme, 2016, the period of holding of such assets shall be computed as follows:

2.12-1. Immovable property

If a capital asset declared by the assessee is an immovable property, its period of holding shall be reckoned from the date on which such property is acquired. However, such date of acquisition should be evidenced by a registered deed. In absence of registered deed, the period of holding of such immovable asset shall be reckoned from June 1, 2016.

2.12-2. Any other capital asset

If any other capital asset has been declared under such scheme, the period of holding shall be reckoned from June 1, 2016.

2.13. Period of holding of EGRs converted from gold or vice versa

When the gold is converted into an Electronic Gold Receipt (EGR), the period for which it was held before converting into EGR will be included for computing the period of holding of the EGR and vice-versa.

For example, determine the period of holding in the following case:

Since the combined holding period of the gold and the EGR exceeds 12 months, the gain realised from the sale of EGR on the stock exchange will be treated as long-term capital gain.

For example, determine the period of holding in the following case:

The period of holding of the gold sold shall be an aggregate of the following:

(a) Period of holding of gold before conversion into EGR (from 24-02-2025 to 04-08-2025);

(b) Period of holding of EGR before re-conversion to gold (from 05-08-2025 to 25-12-2025); and

(c) Period of holding of re-converted gold before sale (from 26-12-2025 to 26-07-2026).

As the gold, and not EGR, has been sold. The period of holding to treat it as a long-term capital asset shall be 24 months. Since the combined holding period of the converted gold does not exceed 24 months, the gain from the sale of gold shall be taxable as a short-term capital gain.

References

Circular No. 704, dated 28-04-1995

Circular No. 768, Dated June 24, 1998

This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.