Capital Gains

 

  • What incomes are charged to tax under the head “Capital Gains”?

 

 

Any profit or gain arising from transfer of a capital asset during the year is charged to tax under the head “Capital Gains”.

  • What is the meaning of capital asset?

Capital asset is defined to include:

  1. a) Any kind of property held by an assesse, whether or not connected with business or profession of the assesse.
  2. b) Any securities held by a FII which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992.

However, the following items are excluded from the definition of “capital asset”:

  • Any stock-in-trade, consumable stores, or raw materials held by a person for the purpose of his business or profession.

g.,Motor car for a motor car dealer or gold for a jewellery merchant, are their stock-in-trade and, hence, they are not capital assets for them.

  • Personal effects of a person, that is to say, movable property including wearing apparels (*) and furniture held for personal use, by a person or for use by any member of his family dependent on him.

(*) However, jewellery, archeological collections, drawings, paintings, sculptures, or any work of art are not treated as personal effects and, hence, are included in the definition of capital assets.

  • Agricultural Land in India, not being a land situated:

* Within jurisdiction of municipality, notified area committee, town area committee, cantonment board and which has a population of not less than 10,000;

* Within range of following distance measured aerially from the local limits of any municipality or cantonment board:

* not being more than 2 KMs, if population of such area is more than 10,000 but not exceeding 1 lakh;

* not being more than 6 KMs , if population of such area is more than 1 lakh but not exceeding 10 lakhs; or

* not being more than 8 KMs , if population of such area is more than 10 lakhs.

Population is to be considered according to the figures of last preceding census of which relevant figures have been published before the first day of the year.

  • 6½% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government.
  • Special Bearer Bonds, 1991, issued by the Central Government
  • Gold Deposit Bonds issued under Gold Deposit Scheme, 1999.
  • Deposit certificates issued under the Gold Monetisation Scheme, 2015.

Following points should be kept in mind :

  • The property being capital asset may or may not be connected with the business or profession of the taxpayer. g.Bus used to carry passenger by a person engaged in the business of passenger transport will be his Capital asset.
  • Any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 will always be treated as capital asset, hence, such securities cannot be treated as stock-in-trade.
  • What is the meaning of the term ‘long-term capital asset’?

 

Any capital asset held by a person for a period of more than 36 months immediately preceding the date of its transfer will be treated as long-term capital asset.

However, in respect of certain assets like shares (equity or preference) which are listed in a recognised stock exchange in India, units of equity oriented mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months.

In case of unlisted shares in a company, the period of holding to be considered is 24 months instead of 36 months.

With effect from Assessment Year 2018-19, the period of holding of immovable property (being land or building or both), shall be considered to be 24 months instead of 36 months.

  • What is long-term capital gain and short-term capital gain?

Gain arising on transfer of long-term capital asset is termed as long-term capital gain and gain arising on transfer of short-term capital asset is termed as short-term capital gain. However, there are a few exceptions to this rule, like gain on depreciable asset is always taxed as short-term capital gain.

  • Why capital gains are classified as short-term and long-term?

The taxability of capital gain depends on the nature of gain, i.e. whether short-term or long-term. Hence to determine the taxability, capital gains are classified into short-term capital gain and long-term capital gain. In other words, the tax rates for long-term capital gain and short-term capital gain are different. Similarly, computation provisions are different for long-term capital gains and short-term capital gains.

  • How to compute long-term capital gain?

​​​

Long term capital gain arising on account of transfer of long-term capital asset will be computed as follows:

 

Particulars Rs.
Full value of consideration (i.e., Sales consideration of asset) XXXXX
Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (E.g., brokerage, commission,  etc.)  

(XXXXX)

Net sale consideration XXXXX
Less: Indexed cost of acquisition (*) (XXXXX)
Less: Indexed cost of improvement, if any (*) (XXXXX)
Long-Term Capital Gain XXXXX

 

Indexed cost of acquisition is computed with the help of following formula :

 

Cost of acquisition × Cost inflation index of the year of transfer of capital asset

Cost inflation index of the year of acquisition

Indexed cost of improvement is computed with the help of following formula :

 

Cost of improvement × Cost inflation index of the year of transfer of capital asset

Cost inflation index of the year of improvement

  • How to compute short-term capital gain?

Short-term capital gain arising on account of transfer of short-term capital asset is computed as follows:

 

Particulars Rs.
Full value of consideration (i.e., Sales value of the asset) XXXXX
Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (E.g., brokerage, commission, etc.)  

(XXXXX)

Net Sale Consideration XXXXX
Less: Cost of acquisition (i.e., the purchase price of the capital asset) (XXXXX)
Less: Cost of improvement (i.e., post purchase capital expenses incurred  on  addition/improvement to the capital asset)  

(XXXXX)

Short-Term Capital Gain XXXXX

  • Is the benefit of indexation available while computing capital gain arising on transfer of short-term capital asset?

​​​​Indexation is a process by which the cost of acquisition/improvement of a capital asset is adjusted against inflationary rise in the value of asset. The benefit of indexation is available only in case of long-term capital assets and is not available in case of short-term capital assets.​​

  • In respect of capital asset acquired before 1st April, 2001 is there any special method to compute cost of acquisition?

​​​​Generally, cost of acquisition of a capital asset is the cost incurred in acquiring the capital asset. It includes the purchase consideration plus any expenditure incurred exclusively for acquiring the capital asset. However, in respect of capital asset acquired before 1st April, 2001, the cost of acquisition will be higher of the actual cost of acquisition of the asset or fair market value of the asset as on 1st April, 2001. This option is not available in the case of a depreciable asset.​

  • If any undisclosed income [in the form of investment in capital asset] is declared under Income Declaration Scheme, 2016, then what should be the cost of acquisition of such capital asset?

​​​The fair market value of the asset as on 1st June, 2016 [which has been taken into account for the purpose of said declaration Scheme, 2016] shall be deemed as cost of acquisition of the asset. [This provision is applicable w.e.f. 1-4-2017]​

  • As per the Income-tax Law, gain arising on transfer of capital asset is charged to tax under the head “Capital gains”. What constitutes ‘transfer’ as per Income-tax Law?

Generally, transfer means sale, however, for the purpose of Income-tax Law “Transfer”, in relation to a capital asset, includes:

  1. Sale, exchange or relinquishment of the asset;
  2. Extinguishment of any rights in relation to a capital asset;

iii. Compulsory acquisition of an asset;

  1. Conversion of capital asset into stock-in-trade;
  2. Maturity or redemption of a zero coupon bond;
  3. Allowing possession of immovable properties to the buyer in part performance of the contract;

vii. Any transaction which has the effect of transferring an (or enabling the enjoyment of) immovable property; or

viii. Disposing of or parting with an asset or any interest therein or creating any interest in any asset in any manner whatsoever.

  • What are the provisions relating to computation of capital gain in case of transfer of asset by way of gift, will, etc.?

​​​​ Capital gain arises if a person transfers a capital asset. section 47 excludes various transactions from the definition of ‘transfer’. Thus, transactions covered under section 47 are not deemed as ‘transfer’ and, hence, these transactions will not give rise to any capital gain.  Transfer of capital asset by way of gift, will, etc., are few major transactions covered in section 47. Thus, if a person gifts his capital asset to any other person, then no capital gain will arise in the hands of the person making the gift (*).

If the person receiving the capital asset by way of gift, will, etc. subsequently transfers such asset, capital gain will arise in his hands. Special provisions are designed to compute capital gains in the hands of the person receiving the asset by way of gift, will, etc. In such a case, the cost of acquisition of the capital asset will be the cost of acquisition to the previous owner and the period of holding of the capital asset will be computed from the date of acquisition of the capital asset by the previous owner.

(*) As regards the taxability of gift in the hands of person receiving the gift, separate provisions are designed under section 56.

  • I have sold a house which had been purchased by me 5 years ago. Am I required to pay any tax on the profit earned by me on account of such sale?

​​​​​House sold by you is a long-term capital asset. Any gain arising on transfer of capital asset is charged to tax under the head “Capital Gains”. Income-tax Law has prescribed the method of computing capital gain arising on account of sale of capital assets. Thus, to check the taxability in your case, you have to compute capital gain by following the rules laid down in this regard, and if the result is gain, then the same will be liable to tax.​

  • Are any capital gains exempt under section 10?

Section 10 provides list of incomes which are exempt from tax amongst those the major exemptions relating to capital gain are as follows:

Section 10(33): Long-term or short-term capital gain arising on transfer of units of Unit Scheme, 1964 (US 64) referred to in Schedule I to the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 (58 of 2002) and where the transfer of such asset takes place on or after 1-4-2002.

Section 10(37) : An individual or Hindu Undivided Family (HUF) can claim exemption in respect of capital gain arising from the transfer of agricultural land situated in an urban area by way of compulsory acquisition under any law or a consideration for such transfer is determined or approved by the Central Government or the Reserve Bank of India. This exemption is available if the land was used by the taxpayer (or by his parents in the case of an individual) for agricultural purposes for a period of 2 years immediately preceding the date of its transfer. Such income has arisen from the compensation or consideration for such transfer received by an assessee on or after the 1st day of April, 2004.

Section 10(37A): An individual or Hindu Undivided Family (HUF) can claim exemption in respect of capital gain arising from the transfer of land or building or both under Land Pooling Scheme under the Andhra Pradesh Capital City Land Pooling Scheme (Formulation and Implementation) Rules, 2015 made under the provisions of the Andhra Pradesh Capital Region Development Authority Act, 2014 (Andhra Pradesh Act 11 of 2014) and the rules, regulations and Schemes made under the said Act. This exemption is available if an individual or HUF was owner of such land or building as on 02-06-2014.

Section 10(38): Long-term capital gain arising from the transfer of equity shares or units of an equity oriented mutual fund or units of a business trust other than a unit allotted by the trust in exchange of shares of a special purpose vehicle as referred to in section 47(xvii), will be exempt from tax, if the following conditions are satisfied (not applicable from A.Y 2019-20):

  • The asset transferred should be equity shares of a company or units of an equity oriented mutual fund or units of a business trust other than a units allotted by the trust in exchange of shares of a special purpose vehicle as referred to in section 47(xvii).
  • Securities transaction tax (STT) is paid at the time of transfer.

 

  • Such asset should be a long-term capital asset.
  • Transfer should take place on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force.

Note: Any long-term capital gain arising from a transaction undertaken in recognized stock exchange located in an International Financial Services Center shall be exempt from tax and such exemption is available if consideration for such transaction is paid or payable in foreign currency, even if no STT is paid on such transaction.

Long term capital gain arising on the transfer of equity shares of a company is exempt from tax if the transaction of acquisition, other than the acquisition notified by the Central Government in this behalf, of such equity share is entered into on or after the 1stday of October, 2004 and such transaction is not chargeable to securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004 (23 of 2004) [Inserted by Finance Act 2017]

From A.Y 2019-20, Long term capital gain arising from transfer of equity shares/units of an equity oriented mutual fund/ units of a business trust on or after April 1, 2018 will not be exempt under section 10(38) as this section has been withdrawn by Finance Act, 2018. Tax on such long term capital gain will be computed in accordance with the provisions of Section 112A.

  • At what rates capital gains are charged to tax?

​​​For provisions in this regard check tutorials on “Tax on Short-Term Capital Gains and Tax on Long-Term Capital Gains”.​​

  • Is there any benefit available in respect of re-investment of capital gain in any other capital asset?

A taxpayer can claim exemption from certain capital gains by re-investing the amount of capital gain into specified asset. The following table highlights the assets in respect of which the benefit of re-investment is available:

Section under

which bene fit

is available

Eligible Assessee

 

Gain eligible for claiming exemption Asset in which the capital gain is to be re-invested to claim exemption
section 54 Individual/HUF Long-term capital gain arising on transfer of residential house property. Gain to be re-invested in purchase or construction of one residential house property in India.
section 54B Individual/HUF Long-term or short-term capital gain arising on transfer of agricultural land which was used by individual or his parents or HUF for agriculture purposes for atleast 2 years immediately prior to transfer. Gain to be re-invested in purchase of agricultural land (may be in rural arear or urban area).
section 54EC Any person Long-term capital gain arising on transfer of any long term capital asset (upto A.Y 2018-19).

Long term capital gain arising on transfer of land or building or both (Form A.Y 2019-20).

Gain to be re-invested in purchase of bonds specified under  section 54EC.
Section 54EE Any person Long-term capital gain arising on transfer of any capital asset. Gain to be re-invested in long-term specified assets to be notified by the Central Government to finance start-ups.
section 54F Individual/HUF Long-term capital gain arising on transfer of any capital asset other than residential house property, provided on the date of transfer the taxpayer does not more than one residential house property from the assessment year 2001-02 (except new house property) Net sale consideration to be re-invested in purchase or construction of only one residential house property in India.
section 54D Any person Long-term or Short-term capital gain arising on transfer of land or building forming part of an industrial undertaking which is compulsorily acquired by Government and was used for industrial purpose for a period of 2 years prior to its acquisition. Gain to be re-invested to acquire land or building for industrial purposes.
section 54G Any person Long term or Short term capital gain arising on transfer of land, building, plant or machinery in order to shift an industrial undertaking from urban area to rural area. Gain to be re-invested to acquire land, building, plant or machinery in order to shift an industrial undertaking to a rural area.
section 54GA Any person Long term or short term capital gain arising on transfer of land, building, plant or machinery in order to shift an industrial undertaking from urban area to any Special Economic Zone. Gain to be re-invested to acquire land, building, plant or machinery in order to shift an industrial undertaking to any Special Economic Zone.
section 54GB Individual/HUF Long-term capital gain arising on transfer of residential property (a house or a plot of land). The transfer should take place during 1st April, 2012 and 31st March 2017. However, in case of investment in “eligible start-up”, the residential property can be transferred upto 31st march 2019. The net sale consideration should be utilised for subscription in equity shares of an “eligible company”.   W.e.f. April 1, 2017, eligible start-up is also included in definition of “eligible company” .

 

In order to claim the exemption on account of re-investment in various situations as discussed above, other conditions specified in the respective sections should also be satisfied and the re-investment should be made within the period specified in the respective sections.

 

  • Are there any bonds in which I can invest my capital gains to claim tax relief?

As per section 54EC –  An assesseecan claim tax relief by investing the amount of long-term capital gain arising from:

  1. a)        any long term capital asset  (upto A.Y 2018-19)
    b)        long term capital asset being land or building or both  (From A.Y 2019-20)
    in the specified bonds as follows:
    a)        Bond redeemable after 5 years from A.Y 2019-20 (3 years upto A.Y 2018-19) issued by National Highways Authority of India (NHAI) or
    b)        Bond redeemable after 5 years from A.Y 2019-20 (3 years upto A.Y 2018-19) issued by Rural Electrification Corporation Limited (REC) or
    c)        Bond redeemable after 5 years from A.Y 2019-20 (3 years upto A.Y 2018-19) issued on or after 15th June 2017 by Power Finance Corporation Limited or
    d)        Bond redeemable after 5 years from A.Y 2019-20 (3 years upto A.Y 2018-19) issued on or after 08th August 2017 by Indian Railway Finance Corporation Limited or
    e)        Bond redeemable after 5 years from A.Y 2019-20 (3 years for A.Y 2018-19) issued by any other authority but notified by Central Government [Applicable from A.Y 2018-2019]
    within a period of 6 months from the date of transfer of capital asset and such bonds should not be redeemed before 5 years from A.Y 2019-20 (3 years upto A.Y 2018-19) from the date of their acquisition.
    This benefit cannot be availed in respect of short-term capital gain.
    Maximum amount of investment in specified bonds cannot exceeds Rs. 50,00,000. Thus, deduction under section 54EC cannot be claimed for more than Rs. 50,00,000.

​What is the meaning of stamp duty value and what is its relevance while computing capital gain in case of transfer of capital asset, being land or building or both?

“Stamp duty value means the value adopted or assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty. As per section 50C, while computing capital gain arising on transfer of land or building or both, if the actual sale consideration on transfer of such land and/or building is less than the stamp duty value, then the stamp duty value will be taken as full value of consideration, i.e., as deemed selling price and capital gain will be computed accordingly.”  (not applicable from A.Y 2019-20)

From assessment year 2019-20 actual sales consideration will be treated as full value consideration if stamp duty value does not exceeds 105% of actual sales consideration. In case where stamp duty value exceeds 105%of actual sales consideration, then stamp duty value will be considered as full value of consideration for computing capital gain.

  • Is profits/gain earned from sale of land or building or both chargeable to capital gain tax?| Is value determined by stamp duty authorities considered as full value of consideration in case of sale of land or building or both?|What mode of computation cos
  • Profits and gains earned from sale of land or building or both are chargeable to tax under the head “Capital Gain”
  • In the case of sale of land or building or both, the value determined by stamp duty authorities will be considered as full value of consideration if the following conditions are satisfied –
    a)        The asset transferred is land or building or both.
    b)        Sale Consideration is less than the value as determined by the stamp duty authority for the payment of stamp duty.
    c)        Stamp Duty value exceeds 105% of the consideration received or receivable on account of transfer. [Applicable from A.Y 2019-20].
  • For the purpose of valuation, stamp duty valuation shall be considered on the date of registration of the property.

Exception – Where the date of agreement fixing the consideration and date of registration are not same, then the stamp duty value will be considered on the date of agreement for such transfer.

The above exception will be applicable if –
a)        Full consideration or part there-of is received by an account payee cheque/draft or by use of electronic clearing system through a bank account.
b)        Such amount is received before the date of agreement.
c)        It is applicable from the A.Y 2017-2018.

 

 

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