Capital Gains

CA Pinky Agarwal Page 1

INCOME FROM CAPITAL GAINS

BASIS OF CHARGE

The capital gain is chargeable to income tax if the following conditions are satisfied: i]. There is a capital asset. ii]. Assessee should transfer the capital asset. iii]. Transfer of capital assets should take place during the previous year. iv]. There should be gain or loss on account of such transfer of capital asset. Thus Profits or gains arising from the transfer of a capital asset is chargeable to tax in the year in which transfer takes place under the head "Capital Gains".

DEFINITIONS

Capital Asset means property of any kind (fixed, circulating, movable, immovable, tangible or intangible) whether or not connected with business or profession. Exclusions are;

Capital Asset [Sec. 2(14)]

i]. Stock-in-trade, consumable stores or raw materials held for the purpose of the business or profession ii]. Personal effects of the assessee i.e. movable property including wearing apparel and furniture held for

personal use by the assessee or any members of his family dependent on him but excludes; (a) Jewellery which includes ornaments made of gold, silver, platinum or any other precious metal, precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel; (b) Archaeological collection; (c) Drawings; (d) Paintings; (e) Sculptures; (f) Any work of art

iii]. Agricultural land in a rural area provided land is situated; (a) In a municipality or a cantonment board and which has a population of less than 10,000 (b) In any area within a distance of;

more than 2 km. from the local limits of any municipality or cantonment board and which has a population of more than 10,000 but less than 1,00,000, or

more than 6 km. from the local limits of any municipality or cantonment board and which has a population of more than 1,00,000 but less than 10,00,000, or

more than 8 km. from the local limits of any municipality or cantonment board and which has a population of more than 10,00,000

iv]. 6% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Bonds, 1980 issued by the Central Government

v]. Special Bearer Bonds, 1991 issued by the Central Government. vi]. Gold Deposit Bonds issued under Gold Deposit Scheme 1999

Transfer in relation to a capital asset includes; Transfer [Sec. 2(47)]

the sale, exchange or relinquishment of the asset; or the extinguishment of any right on asset; or the compulsory acquisition of asset under any law; or the conversion of capital assets into stock-in-trade of a business; or the maturity or redemption of a zero coupon bond; or any transaction involving the allowing of the possession of any immovable property to be taken or

retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882; or


any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enable the enjoyment of, any immovable property.

Section 47 specifies certain transactions which will not be regarded as transfer for the purpose of capital gains tax;

Transactions not regarded as Transfer [Section 47]

(1) Any distribution of capita l assets on the total or partial partition of a HUF; (2) Any transfer of a capital asset under a gift or will or an irrevocable trust; (3) Any transfer of bonds or shares referred to in section 115AC(1); (4) Any transfer of any of the following capital asset to the government or to the University or the National

Museum, National Art Gallery, National Archives or any other public museum or institution notified by the Central Government to be of (national importance or to be of) renown throughout any State; (a) work of art; (b) archaeological, scientific or art collection; (c) book; (d) manuscript; (e) drawings; (f) paintings; (g) photographs; (h) printings.

(5) Any transfer by way of conversion of bonds or debentures, debenture stock or deposit certificates in any form, of a company into shares or debentures of that company;

(6) Any transfer by way of conversion of Foreign Currency Exchangeable Bonds into shares or debentures of a company;

(7) Any transfer of a capital asset in a scheme of reverse mortgage under a scheme made and notified by the Central Government.

The list is inclusive. Text book can be referred for further reference.

Short term capital assets means a capital asset held by an assessee for not more than thirty six months immediately preceding the date of its transfer. However, in the following cases, an asset, held for not more than twelve months, is treated as short-term capital assets;

Short-Term Capital Asset [Sec. 2(42A)]

i]. Quoted or unquoted equity or preference shares in a company ii]. Quoted Securities iii]. Quoted or unquoted Units of UTI iv]. Quoted or unquoted Units of Mutual Funds specified u/s. 10(23D) v]. Quoted or unquoted zero coupon bonds

Long term capital assets means a capital asset which is not a short-term capital asset. Long-Term Capital Asset [Sec. 2(29A)]

The following points must be noted in this regard; Determination of Period of Holding

i]. In the case of a share held in a company in liquidation, the period subsequent to the date on which the company goes into liquidation should be excluded;

ii]. Section 49(1) specifies some special circumstances under which capital asset becomes the property of an assessee. E.g. an assessee may get a capital asset on a distribution of assets on the partition of a HUF or he may get a gift or he may get the property under a will or from succession, inheritance etc. In such cases, the period for which the asset was held by the previous owner should be taken into account.

iii]. In the case of a capital asset being a share or any other security or a right to subscribe to any share or security where such right is renounced in favour of any other person, the period shall be calculated from


the date of allotment of such share or security or from the date of offer of such right by the company or institution concerned.

The list is inclusive. Text book can be referred for further reference.

SCOPE AND YEAR OF CHARGEABILITY TO TAX [Sec 45]

The scope of the head Capital Gains is explicitly clear if the provisions of sec 45 are analyzed in the following manner. Sub-section (1) is a general provision applicable to all transactions other than those covered by sub-sections (1A) to (6).

Sub-Section

Transaction Year of Chargeability Consideration

(1) Transfer of a Capital Asset Previous year in which transfer takes place

Consideration for the transfer

(1A) Damage to or destruction of any capital asset

Previous year in which money or other asset is received from the Insurance Company

The value of money or the fair market value of asset received on the date of such receipt

(2) Conversion of a capital asset into stock in trade

Previous year in which stock in trade is sold

Fair market value as on the date of conversion

(2A) Transfer of securities made by the depository who is deemed to be the registered owner under the Depositories Act, 1996

Previous year in which transfer takes place on first-in-first-out (FIFO) method

Consideration for the transfer is chargeable in the case of the beneficial owner and not in the case of the depository

(3) Transfer of a capital asset by a partner to the firm or by a member to the AOP or BOI by way of capital contribution or otherwise

Previous year in which transfer takes place

The value of the asset recorded in the books of the firm or AOP or BOI

(4) Transfer of a capital asset by way of distribution on dissolution or otherwise of a firm or AOP or BOI

Previous year in which transfer takes place

Fair market value as on the date of transfer

(5) Transfer of a capital asset by way of Compulsory acquisition under any law

When consideration or part thereof is first received

The initial compensation or enhanced compensation as the case may be

(6) Repurchase of mutual fund units referred to in Sec 80CCB

Previous year in which such repurchase takes place or the scheme terminates

Repurchase Price

(7) Maturity and redemption of Zero Coupon Bonds

At the time of maturity or redemption

Redeemed Value


EXEMPT CAPITAL GAINS UNDER SECTION 10

10(33) Transfer units of US 64 on or after April 1, 2002

10(37) Compulsory acquisition of Urban Agriculture Land where consideration is received after March 31, 2004.

10(38) Long-term capital gain arising on transfer on or after October 1, 2004 of equity shares or units of equity oriented mutual fund and the STT is paid at the time of transfer.

COMPUTATION OF CAPITAL GAINS [SEC. 48]

The method of computation depends on the nature of capital asset transferred. It is calculated as follows:-

Short-term Capital Gain Long-term Capital Gain A. Find out Full Value of Consideration A. Find out Full Value of Consideration B. Deduct: B. Deduct: (i) expenditure incurred wholly and exclusively in connection with such Transfer. (ii) Cost of Acquisition (iii) Cost of Improvement (iv) Exemption provided by Sec 54B, 54D & 54G, 54GA

(i) expenditure incurred wholly and exclusively in connection with such Transfer. (ii) Indexed Cost of Acquisition (iii) Indexed Cost of Improvement (iv) Exemption provided by Sec 54, 54B, 54D, 54EC, 54ED, 54F & 54G, 54GA,54GB

C. (A B) is Short-term Capital Gain C. (A B) is a Long-Term Capital Gain

FULL VALUE OF CONSIDERATION

Full value of consideration means & includes the whole/complete sale price or exchange value or compensation including enhanced compensation received in respect of capital asset in transfer. The following points are important to note in relation to full value of consideration; The consideration may be in cash or kind. The consideration received in kind is valued at its fair market value. It may be received or receivable. In the following cases Fair Market Value is taken as full value of consideration; Conversion of Capital Asset into stock in trade Distribution of Capital Assets by a firm, AOP, BOI Barter/Exchange Assets distributed in kind at the time of liquidation of a company Special provision for full value of consideration as mentioned in Section 50C;

i]. If consideration received on transfer of capital asset (land or building or both) < value adopted or assessed by Stamp Valuation Authority, such value adopted is deemed as full value of consideration.

ii]. If assessee claims that Stamp value > FMV and he has not gone for appeal, revision etc. before any court, then, the A.O. may refer the valuation to the valuation officer.

iii]. If the value determined by the valuation officer > stamp value, then stamp value will be the consideration .


COST OF ACQUISITION

Cost of Acquisition (COA) means any capital expense at the time of acquiring capital asset under transfer, i.e., to include the purchase price, expenses incurred on completing transfer in the form of registration, storage etc. In other words, cost of acquisition of an asset is the value for which it was acquired by the assessee. Expenses of capital nature for completing or acquiring the title are included in the cost of acquisition. Indexed Cost of Acquisition =

CII for the first financial year in which the asset was held by the [COA CII for the financial year in which the asset is transferred]

Assessee or the year beginning on 1.4.1981, whichever is later or the year of Improvement of the asset

** However, in case of Bonds, Debentures except capital indexed bonds, depreciable assets, and for non-residents even if they are long term capital assets the benefit of indexation is not available.

COST OF ACQUISITION IN SPECIAL CASES

(1). If capital assets were acquired before 1.4.81, the assessee has the option to have either actual cost of acquisition or fair market value as on 1.4.81 as the cost of acquisition. If assesses chooses the value as on 1.4.81 then the indexation will also be done as per the CII of 1981 [Sec 55(2)]. not applicable to depreciable/self generated asset applicable if acquired in any mode referred to in sec.49(1) and the property of previous owner relates

prior to 1.4.81

(2). In case of conversion of bonds, debenture stock, deposit certificates into shares/ debentures of a Company, cost of acquisition of bonds etc. will be the COA of shares or debentures.

(3). Advance money received earlier on any previous occasion by the assessee and forfeited will be reduced from COA [Section 51]. However, advance money received and forfeited by the previous owner should not be reduced from COA.

If advance money is forfeited during the previous year 2014-15, it is taxable under the head Income from other sources in the year in which advance money is forfeited. It will not be deducted from COA.

(4). In case of transfer u/s 49 by Gift / Inheritance, cost to previous owner is taken to be the cost of acquisition. Period of holding of previous owner is considered. Indexation benefit will be available only from the year in which the assessee first held the asset [for cost of acquisition]. In case of improvement, indexation benefit will be available from the year of improvement.

(5). In case of transfer of specified security/sweat equity shares u/s 17(2)(vi) Fair Market value on the date of transfer will be considered as Cost of acquisition

(6). Goodwill of a business or a trademark or brand name associated with a business or a right to manufacture, produce or process any article or thing, or right to carryon any business, tenancy rights, stage carriage permits and loom hours;

If purchased COA = Purchase value If self Generated COA = NIL However, the above provision does not cover self-generated goodwill of a profession. (7). Bonus and Right Shares

i]. Original and Bonus Shares Particulars Cost of Acquisition If original and bonus shares are acquired before 01.04.81

Original shares = Actual cost or FMV on 01.04.81 whichever is more. Bonus shares = FMV as on 01.04.81


If original shares acquired before 01.04.81 but bonus shares allotted after 01.04.81

Original shares = Actual cost or FMV on 01.04.81 whichever is more. Bonus shares = NIL

If original and bonus shares are acquired on or after 01.04.81

Original shares = Actual cost Bonus shares = NIL

ii]. Right Shares (a) When such a right is renounced by the assessee in favour of any person, then COA=NIL. (b) When it is subscribed on the basis of the said entitlement, then COA= amount actually paid by him

for acquiring such asset. (8) Special provision for non-residents - In order to give protection to non-residents who invest foreign

exchange to acquire capital assets, section 48 contains a proviso. Accordingly, in the case of non-residents, capital gains arising from the transfer of shares or debentures of an Indian company is to be computed as follows; The cost of acquisition, the expenditure incurred wholly and exclusively in connection with the transfer and the full value of the consideration are to be converted into the same foreign currency with which such shares were acquired. The resulting capital gains shall be reconverted into Indian currency. The aforesaid manner of computation of capital gains shall be applied for every purchase and sale of shares or debentures in an Indian company. Rule 115A is relevant for this purpose.

COST OF IMPROVEMENT

Cost of improvement is the capital expenditure incurred by an assessee for making any addition or improvement in the capital asset. In other words, cost of improvement includes all those expenditures, which are incurred to increase the value of the capital asset. In case of transfer u/s 49(1), cost of improvement means capital expenditure in making any addition or alterations to the capital assets incurred by the previous owner. It do not includes; Expenditure allowed under other head of income Amount spent prior to 1.4.81 Self generated assets

EXPENDITURE ON TRANSFER

Expenditure incurred wholly and exclusively for transfer of capital asset is called expenditure on transfer. It is fully deductible from the full value of consideration while calculating the capital gain. It includes; i]. Brokerage/Commission ii]. Cost of Stamp iii]. Registration Fees iv]. Travelling Expenditure in connection with transfer v]. Litigation Expenditure claiming enhancement of compensation awarded in the case of compulsory

acquisition of assets Expenditure on transfer do not include Securities Transaction tax paid by the seller


COST INFLATION INDEX (CII)

The Central Govt. has notified the CII for the purpose of LTCG as follows; Financial Year CII Financial Year CII Financial Year CII

1981-82 100 1992-93 223 2003-04 463 1982-83 109 1993-94 244 2004-05 480 1983-84 116 1994-95 259 2005-06 497 1984-85 125 1995-96 281 2006-07 519 1985-86 133 1996-97 305 2007-08 551 1986-87 140 1997-98 331 2008-09 582 1987-88 150 1998-99 351 2009-10 632 1988-89 161 1999-00 389 2010-11 711 1989-90 172 2000-01 406 2011-12 785 1990-91 182 2001-02 426 2012-13 852 1991-92 199 2002-03 447 2013-14 939

2014-15 1024

CAPITAL GAIN ON DEPRECIABLE ASSETS

Section 50 provides for the computation of capital gains in case of depreciable assets which have overriding effect in spite of anything contained in section 2(42A) which defines a short-term capital asset. In Income Tax Act, depreciation is provided block wise i.e. Assets are divided into four different blocks; (i) Buildings; (ii) Furniture; (iii) Plant and Machinery; and (iv) Intangible Assets. Capital gains in case of transfer of asset on which depreciation has been allowed under Section 32(1)(ii) in respect of block of assets shall be computed as follows; (a) Block of assets does not cease to exist but WDV of block is reduced to zero [Section 50(1)]:

Full value of consideration Less : (1) Expenses on transfer (2) WDV of asset on 1st day of the previous year (3) Cost of assets acquired during the previous year and falling within that block

*** *** *** ***

Short Term Capital Gains **** (b) Block of assets ceases to exist due to the sale of all assets falling within that block [Section 50(2)]:

Full value of consideration Less : (1) Expenses on transfer (2) WDV of asset on 1st day of the previous year (3) Cost of assets acquired during the previous year and falling within that block

*** *** *** ***

Short Term Capital Gains/Loss ****


SHORT TERM CAPITAL GAINS IN RESPECT OF EQUITY SHARES AND UNITS OF AN EQUITY ORIENTED FUND [SECTION 111A]

Any STCG arising from the transfer of an equity share in a company or a unit of an equity oriented fund shall be liable to concessional rate of tax @15% if the following conditions are satisfied: i]. The transaction of sale should take place through a recognized stock exchange. ii]. Such transaction is chargeable to STT. Assessee is not entitled to claim any deductions provided under chapter VI-A in respect of STCG u/s 111A. In the case of resident an Individual or a HUF, if the basic exemption not exhausted by any other income

then STCG u/s 111A shall be reduced by the unexhausted basic exemption limit and only the balance STCG shall be chargeable to tax@15%.

TAXATION OF LTCG [SECTION 112]

Where the transferred long term asset is in the nature of listed securities or units of UTI or mutual fund or zero coupon bonds which are sold outside the stock exchange, then the gain arising from the transfer of such securities or units shall be liable to tax; i]. @10% on such LTCG computed without the benefit of indexation, OR ii]. @ 20% on such LTCG computed availing the benefit of indexation Whichever is more beneficial to the assessee. In the case of a resident Individual or a resident HUF, if the basic exemption not exhausted by any other

income then LTCG shall be reduced by the unexhausted basic exemption limit and only the balance LTCG shall be chargeable to tax.

Assessee is not entitled to claim any deductions provided under chapter VI-A in respect of LTCG. It may be noted that the possibility of applying 10% or 20% tax rate shall arise only in a case where the

listed shares are not traded through a recognized stock exchange and not chargeable to STT. The long term capital gain on equity shares or units of equity oriented mutual fund which are sold in the stock exchange and on which securities transaction tax is paid, is exempt u/s 10(38).

Page | 9

CAPITAL GAINS VARIOUS EXEMPTION DETAILS

Section 54 54B 54D 54EC 54F 54G 54GA 54GB

1 Kind of assets transferred

Long-term Capital Assets being House Property used for residential purpose

Land used for agricultural purposes

Land & Building or any right therein used by an industrial undertaking compulsorily acquired under any law

Any Long Term Capital Assets

Any long term capital asset other than residential house

Land or Building or any right therein or Plant or Machinery in Urban Area used for the business

Land or Building or any right therein or Plant or Machinery in Urban Area used for the business

Residential Property owned by the eligible assessee

2 Eligible Assessee

Individual & HUF

Individual & HUF

All All Individual & HUF

Industrial undertakings in urban area shifting to an area other than urban area

Industrial undertakings in urban area shifting to any Special Economic Zone

Individual & HUF

3 Condition of period of holding of original Asset

3 years 2 years 2 years 1 year for Shares, Listed Securities, Units of UTI/ Mutual Fund specified u/s 10(23D), Zero coupon bonds, 3 years for any other capital assets

1 year for Shares, Listed Securities, Units of UTI/Mutual Fund specified u/s 10(23D), Zero-coupon bonds, 3 years for other capital assets

No period specified

No period specified

No period specified

4 Condition of

Purchase of Residential

Purchase of Agricultural

Purchase/construction of

Investment of whole or

Purchase of Residential

Acquire similar assets

Acquire similar assets

(a) The eligible assessee, before the

Page | 10


utilization of consideration

House within 2 years after or 1 year prior to date of transfer: or construction of residential house within 3 years from the date of transfer

Land within 2 years from the date of transfer

land, building, or any right therein within 3 years from the date of transfer by way of compulsory acquisition for the purpose of shifting/ re-establishing/ setting up another industrial undertaking

any Part of Capital Gain in specified assets as stipulated in the section.

Investment should be made within 6 months from the date of transfer

House within 2 years after or 1 year prior to date of transfer; or construction of residential house within 3 years from date of transfer

& incur expenses on shifting original asset, within 1 year before, or 3 years from the date of transfer

& incur expenses on shifting original asset, within 1 year before, or 3 years from the date of transfer

due date of furnishing the return of income u/s 139(1) of the Act, utilizes the amount of Net Consideration, for subscribing to the Ordinary Shares of an eligible company; and (b) The eligible company, within one year from the date of subscription, utilizes the amount for purchase of new plant and machinery.

5 Exempt Amount

The amount of gain or, the cost of new asset, whichever is less

Lower of the Capital Gain or the Cost of acquisition of new agricultural land

Lower of the Capital Gain or the Cost of acquisition of new land and building

Lower of the Capital Gain or the investment in specified assets subject to a maximum of Rs. 50 lakhs.

Refer Note No. 5

The amount of gain or the aggregate cost of new asset, and shifting expenses, whichever is lower

The amount of gain or the aggregate cost of new asset, and shifting expenses, whichever is lower

Capital Gains are fully exempt, if the cost of the new Asset acquired by the Company, is MORE than the net consideration you received for the transfer of the old Long-term capital asset; or

If the Cost of New Asset is LESS than the net consideration, then so much of the capital gain as the whole of the capital gains bears to the net consideration is

Page | 11


exempt.

6 Other requirements

See notes 1, 2 & 4

Assessee or his parents must have used the land for agricultural purpose for preceding two years

See notes 1, 2 & 4 Must have been used for business of industrial undertaking for preceding 2 years

See notes 1, 2 & 4 Rebate u/s 88 or deduction u/s 80C not to be granted for the same investment. New Asset must be retained for a period of 3 years

Must not own more than 1 residential house other than the new asset on the date of transfer of original asset

Must have been shifted to non-urban area. See Notes 1 & 2

See Notes 1, 2, 3 and 4

Post subscription of the shares, the eligible assessee u/s 54GB should hold more than 50% of the share capital of the Company or should be entitled to more than 50% of the voting rights in the company. Company should qualify as a SME under the Micro, Small and Medium Enterprises Act, 2006

(1) In case New Asset is transferred before 3 years from date of purchase/construction, the Capital Gains exempted earlier will be chargeable to tax in year of transfer of new asset. NOTES

(2) In order to avail the exemption, gains are to be reinvested, before the due date of return u/s 139(1). If the amount is not so reinvested, it is to be deposited on or before that date in account of specified bank/institution and it should be utilised within specified time limit for purchase/construction of new asset.

(3) U/s 54F Capital Gains exempted earlier shall be chargeable to tax if a) If the assessee purchases within 2 years or constructs within 3 years any residential house other than the one in which reinvestment is made & b) If the new asset is transferred within a period of 3 years from the date of its purchase/construction.

(4) As per Section 54H, where the transfer is by way of compulsory acquisition, the period available for acquiring the new asset u/ss. 54, 54B, 54D, 54EC and 54F shall be computed from the date of receipt of compensation and not the date of transfer.

(5) If cost of new house is more than the net consideration of original asset, the whole of the gains is exempt. If cost of specified asset is less than net consideration, proportionate amount of the gains will be exempt i.e. Capital Gain X cost of New Asset/Net consideration on sale of asset.

****

Documents

Capital Gains