26 July 2012
My client Company has a Turnover of more than 60 Lacs for all the 3 previous years. Now the Company is desiring to get converted into LLP. What will be Capital Gain tax calculation in the hands of LLP and how the tax will be calculated?
18 July 2024
When a company converts into a Limited Liability Partnership (LLP), there are specific provisions under the Income Tax Act that address the tax implications, particularly regarding capital gains. Here’s how the capital gains tax would typically be calculated in the context of such a conversion:
### Capital Gain Tax Calculation on Conversion to LLP
1. **Transfer of Assets and Liabilities:** - Upon conversion of a company into an LLP, all the assets and liabilities of the company are transferred to the LLP.
2. **Cost of Acquisition for Assets:** - The assets transferred to the LLP retain their original cost of acquisition as per the company’s books.
3. **Capital Gains Taxation:** - **Capital Gains on Transfer of Assets:** - Capital gains tax arises on the transfer of capital assets from the company to the LLP. - The capital gains are computed as per the provisions of Section 45 of the Income Tax Act, which states that any profits or gains arising from the transfer of a capital asset shall be chargeable to tax under the head "Capital Gains". - The capital gain is computed as the difference between the full value of consideration received or accruing as a result of the transfer and the indexed cost of acquisition of the asset.
4. **Indexed Cost of Acquisition:** - For assets held for the long term (more than 3 years), the cost of acquisition is adjusted for inflation using the Cost Inflation Index (CII) notified by the government.
5. **Tax Rate:** - Long-term capital gains (for assets held for more than 3 years) are taxed at 20% plus applicable surcharge and cess. - Short-term capital gains (for assets held for 3 years or less) are taxed at the applicable income tax slab rates of the LLP.
### Example Scenario:
Let’s consider an example where a company converts into an LLP and transfers assets valued as follows:
- Land acquired in 2000: Cost Rs. 10L Market value at conversion Rs. 30L - Machinery acquired in 2010: Cost Rs. 20L, Market value at conversion Rs. 25L
**Capital Gain Calculation:**
1. **Land (Long-term asset):** - Indexed Cost of Acquisition = Cost of acquisition × (CII for the year of transfer / CII for the year of acquisition) - Indexed Cost of Acquisition = Rs. 31,40,000 - Capital Gain = Rs. 1,40,000 (assuming a loss for illustration)
2. **Machinery (Short-term asset):** - Capital Gain = Rs. 5,00,000
**Tax Implications:** - Loss on transfer of land: Can be set off against gains on machinery or carried forward. - Gain on machinery: Taxed at the applicable income tax slab rate of the LLP.
### Conclusion:
When a company converts into an LLP, the capital gains tax is computed based on the transfer of assets and liabilities at their fair market value. The LLP would need to prepare a detailed calculation of capital gains for each asset transferred, taking into account the indexed cost of acquisition for long-term assets and applying the appropriate tax rates.
It’s advisable to consult with a tax advisor or chartered accountant to ensure compliance with all relevant tax laws and to optimize tax planning strategies during the conversion process.
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