Capital Gain

CAPITAL GAINIncome under the Capital Gains4.1 Chargeability: Capital gains shall be chargeable to tax if the following conditions are satisfied:

1. There should be a capital asset. In other words, the asset transferred should be a capital asset on the date of transfer;
2. It should be transferred by the taxpayer during the previous year;
3. There should be profits or gain as a result of the transfer.

4.2 Meaning of Capital Asset [Sec 2(14)] Capital Asset is defined to include:

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

However, the term ‘capital asset’ shall exclude the following:

1. Stock-in-trade, consumable stores, raw materials held for the purpose of business or profession;
2. Movable property held for the personal use of the taxpayer or for any member of his family dependent upon him. However, jewelry, costly stones, and ornaments made of silver, gold, platinum or any other precious metal, archaeological collections, drawings, paintings, sculptures or any work of art shall be considered as a capital asset even if used for personal purposes;
3. Specified Gold Bonds and Special Bearer Bonds;
4. Agricultural Land in India, not being a land situated:
5. Within the jurisdiction of the municipality, notified area committee, town area committee, cantonment board and which has a population not less than 10,000;
6. Within the range of following distance measured aerially from the local limits of any municipality or cantonment board:
   • not being more than 2 KMs, if the population of such area is more than 10,000 but not exceeding 1 lakh;
   • not being more than 6 KMs, if the population of such area is more than 1 lakh but not exceeding 10 lakhs;or
   • not being more than 8 KMs, if the population of such area is more than 10 lakhs.
7. Deposit certificates issued under the Gold Monetisation Scheme, 2015

4.3 Type of Capital Assets

1. Short Term Capital Asset

Capital assets held for not more than 36 months immediately prior to the date of transfer shall be deemed as a short-term capital asset. However, the following assets held for not more than 12 months shall be treated as short-term capital assets:

• Equity or preference shares in a company which are listed in any recognized stock exchange in India;
• Other listed securities;
• Units of UTI;
• Units of equity-oriented funds; or
• Zero-Coupon Bonds.

Note: Unlisted shares and immovable property (being land or building or both) held for not more than 24 months immediately prior to the date of transfer shall be treated as a short-term capital assets.

1. Long Term Capital Asset

Capital Asset that held for more than 36 months or 24 months or 12 months, as the case may be, immediately preceding the date of transfer is treated as a long-term capital asset. 4.4 Period of Holding The period of holding shall be determined as follows:

4.5 Meaning of Transfer [Section 2(47)] “Transfer”, in relation to a capital asset, includes: (i) Sale, exchange or relinquishment of the asset; (ii) Extinguishment of any rights in relation to a capital asset; (iii) Compulsory acquisition of an asset; (iv) Conversion of capital asset into stock-in-trade; (v) Maturity or redemption of a zero-coupon bond; (vi) 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. 4.6 Transactions which are not regarded as transfer [Section 47] The following transactions shall not be regarded as transfer (subject to certain conditions). Hence, the following transaction shall not be charged to capital gains:

4.7 Computation of capital Gain: Computation of capital gain depends upon the nature of the capital asset transferred during the previous year, vis-à-vis, short-term capital asset, long-term capital asset or depreciable asset. Capital gain arising on transfer of short-term capital asset or depreciable asset is considered as short-term capital gain, whereas transfer of long-term capital asset gives rise to long-term capital gain. The capital gains on transfer of capital asset shall be computed in the following manner:

* Short-term capital gain or loss from the sale of depreciable asset will arise only in the following two situations:

1. When on last day of the previous year, WDV of the block of asset is nil; or
2. When on the last day of the previous year, block ceases to exist.

Note 1: Indexed Cost of Acquisition and Improvement [Second Proviso to Section 48]

1. In case of transfer of long-term capital assets, indexed cost of acquisition and indexed cost of improvement shall be deducted from the full value of consideration;
2. Indexed cost of acquisition and indexed cost of improvement shall be computed with reference to Cost Inflation Index (ASCII’) in the following manner:

Indexed Cost of Acquisition:-[(Cost of Acquisition) × (CII for the year of transfer)] (CII for the year of the acquisition or for the Financial Year 2001-02, whichever is later) Indexed Cost of Improvement:-[(Cost of Improvement) × (CII for the year of transfer)] CII for the year of Improvement Note: The base year for computation of capital gains has been shifted from 1981 to 2001 with effect from the assessment year 2018-19. Thus, if any capital asset (acquired before April 1, 2001) is transferred then the assessee has an option to take its cost of acquisition either as fair market value as on April 1, 2001, or its actual cost. However, there are some cases where the benefit of indexation is not available, which are as under:

CII in relation to a previous year means such an index, as Central Government notifies on year to year basis. The Central Government has notified the following Cost Inflation Indexes

4.8 Computation of capital gain in case of sale of shares or debentures of an Indian company purchased by a non-resident in foreign currency [ first proviso to section 48] In such a case, capital gain shall be determined as under:-

* Average exchange rate means the average of the telegraphic transfer buying rate and telegraphic transfer selling rate of the foreign currency initially utilized in the purchase of the capital asset. ** Buying rate is the telegraphic transfer buying rate of such currency. 4.9 Full Value of Consideration The full value of consideration is the consideration received or receivable by the transferor in lieu of assets, which he has transferred. Such consideration may be received in cash or in kind. If it is received in kind, then the fair market value (‘FMV’) of such assets shall be taken as the full value of consideration. However, in the following cases “full value of the consideration” shall be determined on a notional basis as per the relevant provisions of the Income-tax Act, 1961:

4.10 Cost of Acquisition The cost of acquisition of an asset is the amount for which it was originally acquired by the assessee. It includes expenses of capital nature incurred in connection with such purchase or for completing the title of the property. However, in cases given below, the cost of acquisition shall be computed on a notional basis:

* Terminal Depreciation/Balancing Charge:

1. Balancing Charge = Sales Consideration – WDV of the depreciable asset
2. Terminal Depreciation = WDV – Sales Consideration

When a depreciable asset (which was subject to depreciation on straight line basis) of a power generating units is sold, discarded, demolished or destroyed then terminal depreciation shall be deductible from sale consideration while computing capital gains, or balancing charge is taxable in the relevant year, as the case may be. 4.11 Cost to the Previous Owner [sec. 49(1)] Cost to the previous owner shall be deemed to be the cost of acquisition in the hands of the taxpayer in cases where a capital asset becomes the property of the assessee under any of the modes given below:

1. On any distribution of assets on the total or partial partition of a HUF
2. Under a Gift or Will;
3. By Succession, Inheritance or Devolution;
4. On any distribution of assets on dissolution of a firm, BOI or AOP (where such dissolution had taken place at any time before the 01-04-1987);
5. On any distribution of assets on liquidation of a company;
6. Under a transfer to a revocable or an irrevocable trust;
7. On any transfer by a holding company to its wholly owned Indian subsidiary company;
8. On any transfer by a wholly owned subsidiary company to its Indian holding company;
9. On any transfer by the amalgamating company to the Indian amalgamated company;
10. In a scheme of amalgamation, any transfer of shares held in an Indian company by an amalgamating foreign company to the amalgamated Foreign company;
11. Consequent to transfer of share(in a scheme of amalgamation as referred to in Section 47(viab) of a foreign company which derives, directly or indirectly, its value substantially from the share or shares of an Indian company held by amalgamating foreign company to the amalgamated foreign company.
12. Consequent to transfer of capital asset by the demerged company to the resulting Indian company. (in case of demerger)
13. Consequent to transfer of share (in case of demerger as referred to in Section 47(vic) of a foreign company which derives, directly or indirectly, its value substantially from the share or shares of an Indian company held by a demerged foreign company to resulting foreign company.
14. Any transfer, in a scheme of amalgamation of a banking company with a banking institution;
15. On any transfer in a scheme of business reorganization of a cooperative bank;
16. On any transfer in a scheme of conversion of a private company or unlisted company into LLP;
17. On any transfer in case of conversion of Firm or Sole proprietary concern into Company;
18. By HUF where one of its members has converted his self-acquired property into a joint family property.

Note: Where previous owner has also acquired the property in the aforesaid manner the ‘previous owner’ of the property shall be construed as the last previous owner who acquired the property by means other than those stated above. 4.12 Cost of Improvement [Sec. 55(1)(b)] Cost of improvement, in relation to the capital assets shall include all capital expenditure incurred in making addition or alteration to the capital assets by the assessee or the previous owner. However, the cost of improvement does not include any expenditure incurred prior to 01-04-2001. Cost of improvement shall be computed in the following manner:

4.13 Rates of tax on capital gains: Short Term Capital Gains

1. Short-term capital gains shall be included in the gross total income of the taxpayer and will be taxed at the normal rates;
2. Short-term capital gains arising from transfer of Equity Shares, Units of an Equity Oriented Funds or a unit of a business trust which is chargeable to securities transaction tax shall be taxed at 15% under Section 111A;

Note:- Now benefit of reduced rate of tax (i.e., 15%) shall be available w.e.f. 1-4-2016 even in respect of income arising from the transfer of units of a business trust which were acquired by assessee in lieu of shares of special purpose vehicle as referred to in section 47(xvii). Long Term Capital Gains

1. Long-term capital gains are subject to tax at 20%;
2. Long-term capital gains arising from the transfer of listed securities, units or a zero coupon [other than as referred to in point d) below] bonds shall be taxable at lower of following:
   • 20% after taking benefit of indexation; or
   • 10% without taking the benefit of indexation.
3. Long-term capital gains arising to a non-resident or foreign company from transfer of unlisted securities shall be taxed at without giving benefit for indexation;
4. Long-term capital gains arising from the transfer of listed equity share, or a unit of an equity oriented fund or a unit of a business trust as referred to in Section 112Ashall be chargeable to tax at the rate of 10% in excess of Rs. 1 Lakh.

4.14 Reference to valuation officer [Section 55A] With a view to ascertaining the fair market value of a capital asset, the concerned Assessing Officer may refer the valuation of the capital asset to a Valuation Officer appointed by the Income-tax Department in the following cases: 1) Where the value of the asset as claimed by the assessee is in accordance with the estimate made by a registered valuer (who works in a private capacity under a license issued by the Board and his valuation is not binding on the Assessing Officer), but the Assessing Officer is of opinion that the value so claimed is at variance with the fair market value of the asset; 2) Where the Assessing Officer is of opinion that the fair market value of the asset exceeds the value of the asset by more than Rs. 25,000 or 15 per cent of the value claimed by the assessee, whichever is less; or 3) Where the Assessing Officer is of opinion that, having regard to nature of an asset and relevant circumstances, it is necessary to make a reference to the Valuation Officer 4.15 Deduction/ Exemption under Capital Gain

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Capital Gain Account Scheme 1988

1. The scheme is open to all taxpayers, who wish to claim exemption under Sections 54, 54B, 54D, 54F, 54Gor 54GB.
2. If taxpayer could not invest the capital gains to acquire new asset before due date of furnishing of return, the capital gains can be deposited before due date for furnishing of return of income in deposit account in any branch of a nationalized bank in accordance with Capital Gain Account Scheme 1988.

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