Income from Capital Gains

Any profits and gains arising from the transfer of a capital assets effected in the previous year shall be chargeable to income tax under the head capital gain in the PY in which the transfer took place.

It should satisfy the following conditions

  1. There should be a capital asset
  2. The capital assets should be transferred.
  3. Transfer should result in profit or gains

Capital Asset means any property of any kind held by an assessee whether or not connected with his business or profession.

                But the following assets are not capital assets.

  1. Any stock in trade, consumable stores or raw materials held for the purpose of his business or profession.
  2. All personal effects except jewellery
  3. Agricultural land in India which is situated in rural area etc.

                For the purpose of computation the capital assets can be classified into two.

  1. Short term capital assets
  2. Long term capital assets

Short term capital assets means a capital asset held for not more than 36 months immediately preceding the date of its transfer. But in the case of the following assets , the period of 36 months shall be substituted by 12 months. i.e. share in a company, any security listed in stock exchange, a unit of UTI, any unit of a mutual fund. A capital gain arising from the transfer of short term capital asset is called short term capital gain (STCG).

Long term capital assets mean capital assets which are not a short term capital assets. Capital gain arising from the long term capital asset is called long term capital gain (LTCG). LTCG is computed in a different manner and is qualified for concessional tax treatment under the Income Tax Act.LTCG is taxed @ 20% plus surcharge and education cess.

Capital gains arise only when capital asset is transferred The term transfer includes:

  1. Sale , exchange or relinquishment  of a capital asset
  2. Extinguishment of any rights in a capital asset.
  3. Compulsory acquisition of a capital asset under any law.
  4. Conversion of capital asset into stock in trade.

The capital gain is taxable in the year in which capital asset is transferred. In the case of an immovable property the ownership is considered as transferred if it satisfies the following conditions.

  1. There should be a contract in writing
  2. The transferee has paid consideration or is willing  to perform his part of the contract
  3. The transferee should have taken possession of the property.
  4. Title to a movable property passes at the time when property is delivered pursuant to a contract to sell.

SCHEME OF TAXATION [SHORT TERM CAPITAL GAIN]

Particulars Amount
Full value of consideration

Less : expenses in connection with transfer

Net consideration

Less : Cost of acquisition

Less : cost of improvement

Gross short term capital gain

Less ; Exemption under Sec 54B, 54D & 54G if applicable

Short term capital gain

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

SCHEME OF TAXATION  [LONGTERM CAPITAL GAIN]

Particulars Amount
Full value of consideration

Less : expenses in connection with transfer

Net consideration

Less : Indexed Cost of acquisition

Less : Indexed cost of improvement

Gross short term capital gain

Less ; Exemption under Sec 54,54B, 54D,54EC,54F & 54G if applicable

Long term capital gain

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

 

Full value of consideration means the whole price without any deduction whatsoever and it cannot refer to adequacy or inadequacy of price bargained. The market value of the capital asset transferred has no relevance.

Cost of acquisition means the amount for which capital assets was acquired by the assessee. [Sec 49 (1)]. If the capital asset is acquired by the assessee before 1st April 1981, the cost of acquisition shall be taken highest of the following

a. actual cost incurred

b. fair market value of the assets as on 1st April 1981.

If the capital asset came into possession of the assessee by means of gift , inheritance, succession, partition of HUF etc then cost of acquisition to the assessee means cost of the asset to the previous owner. If cost of acquisition to the  previous owner cannot be ascertained then fair market value on the date on which the capital asset became the property of the previous owner shall be taken as cost to the assessee.

In the following cases, fair market value on 31st April, 1981 will be treated as the cost of acquisition.

  1. Capital asset became the property of the assessee before 1st April ,1981 or
  2. Where the capital assets became the property of the previous owner before 1st April 1981, in case where [Sec 49(1)] is applied.

Cost of improvement means all expenses of capital nature incurred in making any addition , alteration to the capital asset by the assessee or the previous owner in case of [Sec49(1)].Cost of improvement incurred before 1st April 1981 is not considered while calculating the capital gain.

                Indexed cost of acquisition means cost of acquisition which is indexed on the basis of cost inflation index(CII) notified by the central govt. having regard to average rise in the consumer price index.

Indexed cost of acquisition = Cost of acquisition x C.I.I for the year of transfer

                                                                       C.I.I for the year of acquisition

Indexed cost of improvement = Cost of improvement  x C.I.I for the year of transfer

                                                             C.I.I for the year in which improvement took place

DEDUCTION FROM CAPITAL GAIN UNDER SEC 54

  Sec 54 Sec 54B Sec 54D Sec 54EC Sec 54F Se c 54G
Assessee Individual/

HUF

Individual Any person Any person Individual/

HUF

Any person
Nature of assets transferred Long term Long term /

Short term

Long term /

Short term

Long term Long term Long term /

Short term

Specification

Of asset transferred

Residential

House

Urban

Agricultural

Land

Land or building forming part of industrial undertaking Any LTCA transferred after

31-03-2000

Any LTCA other than residential

House

Land, building, plant or machinery for shifting of industrial undertaking
Assets to be acquired Residential

House

Agricultural land Land or building  for industrial purpose Specified bonds A residential house Land, building, plant or machinery
Time limit Purchase 1 year back or 3 year forward.

Construct 3 years forward

2 years forward 3 years forward 6 months forward Purchase 1 year back. Construction 3 years forward 1 year back or 3 years forward
Exemption Investment in new assets or capital gain whichever is less Investment in new assets or capital gain whichever is less Investment in new assets or capital gain whichever is less Investment in new assets or capital gain whichever is less LTCGx amount invested /net consideration Investment in new assets or capital gain whichever is less

 

Cost Inflation Index as notified by the central govt

Financial year

C.I.I

Financial year

C.I.I

1981-82

100

1995-96

281

1982-83

109

1996-97

305

1983-84

116

1997-98

331

1984-85

125

1998-99

351

1985-86

133

1999-00

389

1986-87

140

2000-01

406

1987-88

150

2001-02

426

1988-89

161

2002-03

447

1989-90

172

2003-04

463

1990-91

182

2004-05

480

1991-92

199

2005-06

497

1992-93

223

2006-07

519

1993-97

244

2007-08

551

1994-95

259

2008-09

582

 

INCOME EXEMPTED FROM CAPITAL GAIN

1 .Income from self cultivated agricultural land in urban area [Sec 10(37)]

                in the case of an assessee , being an individual or a HUF , capital gain arising from the compulsory acquisition of self cultivated urban agricultural land shall be fully exempted.

3. Transfer of residential house property [Sec 54]

                Capital gains arising from the transfer of house property and investing in a new house property are exempted from tax if the following conditions are satisfied.

  1. Only individual and HUF can claim this deduction
  2. It should be a long term capital asset
  3. a new house should be purchased within a period of 1 year before or 2 years after the date of transfer or constructed a new residential house 3 years after the date of transfer.
  4. the capital gain is exempted is the cost of the new house purchased or constructed or capital whichever is less
  5. new house purchased or constructed cannot be sold  within 3 years
  6. if the amount of capital gain is not utilized by the assessee for purchasing or constructing a new house before the date of furnishing the return of income, it shall be deposited in Capital Gain Account Scheme (CGAS) with a public sector bank. If the amount so deposited is not utilized fully or partly for purchasing or constructing a house , then the amount not so utilized shall be treated as long term capital gain.

4. Transfer of land used for agricultural purpose

                Capital gain arising from the transfer of agricultural land in urban area and is invested in another agricultural land is exempted subject tot the following conditions

  1. assessee is an individual
  2. the land was used by the individual or his parents for agricultural purpose for a period of 2 years immediately preceding the date of transfer.
  3. assessee has purchased a new agricultural land either in rural or urban area within a period of 2 years from the date of such transfer.
  4. the amount of exemption is capital gain or investment in the new asset whichever is less
  5. if the new land is transferred , within a period of 3 years , then the amount of capital gain arising there from and together with the amount of capital gains exempted earlier, will be chargeable to tax in the year of sale of the new land. If the new land is situated in rural area it is not taxable.
  6. if the amount of capital gain is not utilized by the assessee for purchasing a new agricultural land  before the date of furnishing the return of income, it shall be deposited in Capital Gain Account Scheme (CGAS) with a public sector bank. If the amount so deposited is not utilized fully or partly for purchasing a land, then the amount not so utilized shall be treated as long term capital gain.

5. Compulsory acquisition of land and building forming part of industrial undertaking

 [Sec 54D]

The following conditions should be satisfied to get the benefit of exemption

  1. the asset may be short term or long term
  2. the land or building or any right therein should from part of the industrial undertaking
  3. such assets should have been compulsorily acquired under any law
  4. the assessee has used such land or building for the purpose of industrial undertaking in the 2 years immediately preceding the date on which the transfer took place.
  5. the assessee has purchased or constructed a new land or building within a period a 3 years for the purpose of shifting or re-establishing the industrial undertaking or setting up another industrial undertaking.
  6. the capital gain is exempted to the extent of cost of the new land or building purchased or constructed for the purpose of industrial undertaking.
  7. the new assets should not be transferred within a period of 3 years of its purchase.
  8. if the amount of capital gain is not utilized by the assessee for purchasing a new land or building on or before the date of furnishing the return of income, it shall be deposited in Capital Gain Account Scheme (CGAS) with a public sector bank.

6. Amount invested in certain bonds [Sec 54EC]

Capital gain arising from a long term capital assets is exempted if the assessee invested whole or any part of capital gain in , long term specified assets within a period of 6 months from the date of transfer of the asset.

Long term specified asset means any bond, redeemable after 3 years and issued on or after the 1st day of April 2006, by National High way Authority of India (NHAI) or Rural Electrification Corporation Ltd.

The amount of exemption is capital gain or amount invested whichever is lower. If the specified assets are transferred within a period of 3 years from the date of its acquisition, the amount of capital gains charged to tax will be deemed to be long term capital gain in the PY in which such specified assets are transferred.

 

7. Transfer of a long term capital asset other than a house property [Sec 54F]

                Exemption is available subject to the following conditions

  1. assessee is an individual or HUF
  2. asset transferred being any long term capital asset other than a residential house
  3. assessee has purchased 1 year before or 2 years after the date of transfer or constructed within 3 years after the date of transfer, a residential house.
  4. assessee should not own, on the date of the transfer of original asset more than one residential house other than the new house. He should not purchase any residential house other than the new house within a period of 2 years after such date.
  5. the amount of exemption is the net consideration from the sale of capital asset invested in new house. If only a part of the net consideration is invested , capital gain will be exempted proportionately as follows

capital gain/ net sale consideration X Cost of new house

  1. if assessee transfers the new house within 3 years of its purchase or construction, capital gain which arises on the transfer of the new house will be taken as the capital gain.
  2. if the amount of net consideration is not utilized by the assessee for purchasing or constructing a new house on or before the date of furnishing the return of income, it shall be deposited in Capital Gain Account Scheme (CGAS) with a public sector bank. If the amount of so deposited is not utilized , then the proportionate amount shall be treated as capital gain of the PY in which the period 3 years from the date of transfer original asset expires. The proportionate amount is :

Amount deposited &claimed exemption but not utilized X amount of original capital gain / net sale consideration.

 

8. Transfer of assets in case of shifting of industrial undertaking from urban area [Sec54 G]

Exemption can be availed if the following conditions are satisfied.

  1. a capital asset used for the purpose of industrial undertaking in an urban area is being transferred
  2. the transfer is effected in the course of , or in consequence of the shifting of such industrial units to any other area other than an urban area
  3. the assessee , within a period of 1 year before or 3 year after the date on which the transfer took place , has purchased a new capital asset for the purpose of I.U in the area to which the said undertaking is shifted or shifted the original asset and transferred the establishments to such area or incurred expense on such other purpose.
  4. the amount of exemption is the amount of capital gain or cost and other expenses incurred for the purpose whichever is lower.
  5. if the new asset purchased is transferred within a period of 3 years of its purchase , the amount exempted earlier will be reduced from the cost of the new asset and the surplus will be taxed.
  6. if the amount of capital gain is not utilized by the assessee for the purpose aforesaid on or before the date of furnishing the return of income, it shall be deposited in Capital Gain Account Scheme (CGAS) with a public sector bank. If the amount of so deposited is not utilized within a period of 3 years , then the  amount not so utilized  shall be treated as capital gain of the PY in which the period 3 years from the date of transfer original asset expires.

Computation Of Capital Gain In Special Cases

  1. Conversion of capital asset into stock in trade [Sec 45(2)]

                Conversion of capital assets in to stock in trade will be treated as transfer. The notional capital gain arising from the transfer by way of conversion of capital asset into stock in trade will be chargeable to tax in which stock in trade is sold.

  1. Cost of acquisition of bonus share

                The cost of bonus share is determined as follows:

If original shares and bonus shares are acquired before 1-4-1981 Original shares: actual cost or FMV on 1-4-1981 whichever is more.

Bonus share: FMV on 1-4-1981

If original shares are acquired before 1-4-1981 but bonus shares are allotted after 1-4-1981 Original share: actual cost or FMV on 1-4-1981 whichever is more

Bonus share: Nil

If original shares & bonus shares are acquired after 1-4-1981 Original shares: actual cost

Bonus share: Nil

 

  1. Capital Gain in case of depreciable assets.[Sec 50]
Full value of consideration

Less: expenses for transfer

Less: WDV of the block of assets at the beginning of the PY

Less: assets acquired during the year at the beginning and belonging to the same block

Short term capital gain or loss

XXXXX

XXXX

XXXX

XXXX

 

XXXXX

Capital Gain Accounts Scheme

                Under Sec 54, 54B, 54D, 54EC, 54Fand  54G the capital gains is exempt if such gains are reinvested in new assets, within the time limit allowed for the purpose, if such re investment is not made before the date of furnishing the return of income then the amount of capital gain is required to be invested in CGAS, subject to the following conditions

  1. the deposit shall be made before furnishing the return of income or within the due date for furnishing the return of income u/s 139(1), whichever is earlier.
  2. the deposit shall be made in an account with a bank or financial institution approved for the purpose
  3. the return of income shall be accompanied by proof of such deposit
  4. the amount deposited can be withdrawn for utilization in accordance with the scheme, for the specified purpose

Source: Scribd.com

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