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Income Under the Head “Capital Gains” Notes

Capital Gains

Scope and year of chargeability [Section 45]

Any profits or gains arising from the transfer of a capital asset effected in the previous year will be chargeable to tax under the head ‘Capital Gains’, and shall be deemed to be the income of the previous year in which the transfer took place [Section 45(1)]

Section Profits and gains arising from the following transactions chargeable as income P.Y. in which income is chargeable to tax Deemed Full Value of consideration for computation of capital gains under section 48
45(1A) Money or other asset received under an insurance from an insurer on account of damage/destruction of any capital asset, as a result of, flood, hurricane, cyclone, earthquake or other convulsion of nature, riot or civil disturbance, accidental fire or explosion, action by an enemy or action taken in combating an enemy The previous year in which such money or other asset is received. The value of money or the fair market value of other asset received.
45(2) Transfer by way of conversion by the owner of a capital asset into stock-in-trade of a business carried on by him. The previous year in which such stock-in-trade is sold or otherwise transferred by him The fair market value of the capital asset on the date of such conversion
45(3) Transfer of a capital asset by a person to a firm or other association of persons (AOPs) or body of individuals (BOIs) in which he is or becomes a partner or member, by way of capital contribution or otherwise. The previous year in which such transfer takes place. The amount recorded in the books of account of the firm, AOPs or BOIs as the value of the capital asset.
45(4) Thetransfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other AOPs or BOIs or otherwise. The previous year in which the said transfer takes place. The fair market value of the capital asset on the date of such transfer.
45(5) Transfer by way of compulsory acquisition under any law, or a transfer, the consideration for which was determined or approved by the Central Government or RBI The previous year in which the consideration or part thereof is first received. Compensation or consideration determined or approved in the first instance by the Central Government or RBI

If the compensation or consideration is further enhanced by any court, Tribunal or other authority, the enhanced amount will be deemed to be the income

However, any amount of compensation received in pursuance of an interim order of a court, Tribunal or other authority shall be deemed to be income chargeable under the head “Capital Gains” of the previous year in which the final order of such court, Tribunal or other authority is made.

The previous year in which the amount was received by the assessee. Amount by which the compensation or consideration is enhanced or further enhanced. For this purpose cost of acquisition and cost of improvement shall be taken as ‘Nil’.
45(5A)

Transfer of a capital asset, being land or building or both, by anindividual or Hindu undivided family, who enters into a specified agreement for development of a project, provided he does not transfer his share in project on or before the date of issuance of completion certificate.

The previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority. The stamp duty value of his share in the project, being land or building or both, on the date of issuing of said certificate of completion

+

Consideration received in cash, if any,

Definitions [Section 2]

Section Term Definition
2(14) Capital Asset Capital Asset means –
(a) property of any kind held by an assessee, whether or not connected with his business or profession;
(b) any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992.Exclusions from the definition of Capital Asset:

Stock in trade [other than securities referred to in (b) above], raw materials or consumables held for the purposes of business or profession;

  • Personal effects except jewellery, archeological collections, drawings, paintings, sculptures or any work of art;
  • Rural agricultural land in India i.e. agricultural land not situated within specified urban limits.

The agricultural land described in (a) and (b) below, being land situated within the specified urban limits, would fall within the definition of “capital asset”, and transfer of such land would attract capital gains tax –
(a) agricultural land situated in any area within the jurisdiction of a municipality or cantonment board having population of not less than ten thousand, or
(b) agricultural land situated in any area within such distance, measured aerially, in relation to the range of population as shown hereunder –

Shortest aerial distance from the local limits of a municipality or cantonment board referred to in item (a) Population according to the last preceding census of which the relevant figures have been published before the first day of the previous year.
≤ 2 kms > 10,000
> 2 kms but ≤ 6 kms > 1,00,000
> 6 kms but ≤ 8 kms > 10,00,000
  • Gold Deposits Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under the Gold Monetisation Scheme, 2015 and Gold Monetisation Scheme, 2018 notified by the Central Government;
  • 6% 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.

Note: ‘Property’ includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever.

2(42A) Short-term capital asset
Asset Period of holding to be treated as STCA
A security (other than a unit) listed in a recognized stock exchange in India, a unit of UTI or a unit of an equity oriented fund or a zero coupon bond not more than 12 months immediately preceding the date of its transfer
A share of a company (not being a share listed in a recognized stock exchange in India) not more than 24 months immediately preceding the date of its transfer
An immovable property, being land or building or both not more than 24 months immediately preceding the date of its transfer
Any other capital asset not more than 36 months immediately preceding the date of its transfer
2(29A) Long-term capital asset Capital asset which is not a short-term capital asset is a long-term capital asset.

Asset Period of holding to be treated as LTCA
A security (other than a unit) listed in a recognized stock exchange in India, a unit of UTI or a unit of an equity oriented fund or a zero coupon bond More than 12 months immediately preceding the date of its transfer
A share of a company (not being a share listed in a recognized stock exchange in India) More than 24 months immediately preceding the date of its transfer
An immovable property, being land or building or both More than 24 months immediately preceding the date of its transfer
Any other capital asset More than 36 months immediately preceding the date of its transfer

Transactions not regarded as transfer [Section 47]: Some Examples

  • Any distribution of capital assets on the total or partial partition of a HUF
  • Any transfer of capital asset under a gift or will or an irrevocable trust
  • Any transfer of capital asset by a holding company to its 100% subsidiary Indian company or by a subsidiary company to its 100% holding Indian company
  • Any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company
  • Any transfer by a shareholder in a scheme of amalgamation of shares held by him in the amalgamating company
  • Any transfer by an individual of sovereign gold bonds issued by RBI by way of redemption
  • Any transfer by way of conversion of bonds, debentures, debenture stock, deposit certificates of a company, into shares or debentures of that company.
  • Any transfer by way of conversion of preference shares of a company into equity shares of that company
  • Any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the Central Government

Mode of computation of Capital Gains [Section 48]

Computation of long-term capital gains

Notes:

(i) Deduction on account of securities transaction tax paid will not be allowed.

(ii) Indexed Cost of Acquisition =
Cost of acquisition

(iii) Indexed Cost of Improvement =
Cost of improvement

(iv) Benefit of indexation will, however, not be available in respect of long term capital gains from transfer of bonds or debentures other than capital indexed bonds issued by the Government and sovereign gold bonds issued by RBI and in respect of long-term capital gains chargeable to tax under section 112A.

Computation of short-term capital gains

Computation of short term capital gain

Capital Gains on Transfer of Depreciable Assets (Section 50)

Any income from transfer of depreciable assets is deemed to be capital gains arising from transfer of short-term capital assets, irrespective of the period of holding (i.e., indexation benefit would not be available even if the period of holding of such assets is more than 36 months).

Capital Gains on Slump Sale (Section 50B)

Any profits and gains arising from slump sale effected in the previous year shall be chargeable to income-tax as capital gains arising from the transfer of capital assets and shall be deemed to be the income of the previous year in which the transfer took place.

Where the undertaking being transferred under slump sale is held for more than 36 months, the resultant gain is long-term; However, no indexation benefit would be available. If the undertaking is held for less than 36 months, the resultant gain is short-term.

Net worth is deemed to be the cost of acquisition and the cost of improvement. ‘Net worth’ shall be aggregate value of total assets minusvalue of liabilities of such undertaking as per books of account.

Capital gains = Sale consideration – Net Worth.

Aggregate value of total assets would be the aggregate of the following :

  1. Written Down Value of depreciable assets;
  2. Nil, in case of capital assets in respect of which the whole ofthe expenditure has been allowed or is allowable as deductionunder section 35AD; and
  3. Book value for other assets.

Revaluation of assetsshall be ignored for computing Net Worth.

Computation of capital gains on sale of land or building or both (Section 50C)

Sl. No. Condition Deemed Sale Consideration
1. Stamp Duty Value > Actual Consideration

If Stamp Duty Value > 110% of actual consideration

If Stamp Duty Value ≤ 110% of actual sale consideration

 

Stamp Duty Value

Actual sale consideration

2. Actual Consideration >Stamp Duty Value Actual Sale Consideration
3. Value ascertained by Valuation Officer > Stamp Duty Value Stamp Duty Value
4. Value ascertained by Valuation Officer < Stamp Duty Value Value ascertained by Valuation Officer

Fair Market Value deemed to be full value of consideration in case of transfer of unlisted shares in certain cases (Section 50CA)

Condition Deemed Sale Consideration

If consideration received or accruing as a result of transfer of unquoted share < FMV of such share determined in the prescribed manner

The provisions of this section would not, however, be applicable to any consideration received or accruing as a result of transfer by such class of persons and subject to such conditions as may be prescribed.

FMV of such share determined in the prescribed manner would be deemed as the full value of consideration.

Fair Market Value deemed to be full value of consideration in certain cases (Section 50D)

Condition Deemed Sale Consideration
Where the consideration received or accruing as a result of the transfer of a capital asset by an assessee is not ascertainable or cannot be determined FMV of the said asset on the date of transfer would be deemed as the full value of consideration

Advance money received and forfeited (Section 51)

Advance money received and forfeited upto 31.3.2014

Where the assessee has received advance money on an earlier occasion for transfer of capital asset, but the transfer could not be effected due to failure of negotiations, then, the advance money forfeited by the assessee has to be reduced from the cost of acquisition (and indexation would be calculated on the cost so reduced) while computing capital gains, when the capital asset is transferred or sold.

Advance money received and forfeited on or after 1.4.2014

Such advance money received on or after 1.4.2014 would be taxable under section 56(2) under the head “Income from other sources”. Therefore, advance money received and forfeited on or after 1.4.2014 should not be deducted from the cost for determining the indexed cost of acquisition while computing capital gains arising on transfer of the asset.

Tax on short-term capital gains on sale of equity shares and units of equity oriented fund on which STT is chargeable (Section 111A)

  • Any short-term capital gains on transfer of equity shares or unitsof an equity oriented fund shall be liable to tax @15%, if securities transaction tax has been paid on such sale.
  • In case of resident individuals and HUF, the short-term capital gain shall be reduced by the unexhausted basic exemption limit and the balance shall be taxed at 15%.
  • No deduction under Chapter VI-A can be claimed in respect of such short-term capital gain.
  • Short-term capital gains arising from transaction undertaken in foreign currency on a recognized stock exchange located in an International Financial Services Centre (IFSC) would be taxable at a concessional rate of 15% even when STT is not paid in respect of such transaction.

Tax on long-term capital gains (Section 112)

  • Any long-term capital gains, other than long term capital gains taxable under section 112A, shall be liable to tax @20%.
  • In case of resident individuals and HUFs, the long-term capital gain shall be reduced by the unexhausted basic exemption limit, and the balance shall be subject to tax at 20%.
  • Capital gains on transfer of listed securities (other than units) or zero coupon bonds shall be chargeable to tax@10% computed without the benefit of indexation or @ 20% availing the benefit of indexation, whichever is more beneficial to the assessee.
  • In case of non-corporate non-resident or foreign company, capital gains arising from the transfer of a capital asset, being unlisted securities, or shares of a closely held company shall be chargeable to tax @10% without giving effect to the indexation provision under second proviso to section 48 and currency conversion under first proviso to section 48.
  • No deduction under Chapter VI-A can be claimed in respect of long-term capital gains.

Tax on long-term capital gains on certain assets (Section 112A)

  • Any long-term capital gains exceeding Rs. 1,00,000 on transfer of equity shares or units of an equity oriented fund or unit of a business trust shall be liable to tax @10% on such capital gain, if securities transaction tax has been paid on acquisition and such sale in case of equity share, and on such sale in case of units of an equity oriented mutual fund or business trust.
  • In case of resident individuals and HUF, the long-term capital gain shall be reduced by the unexhausted basic exemption limit and the balance shall be taxed at 10%.
  • No deduction under Chapter VI-A or rebate under section 87A can be claimed in respect of such long-term capital gain.
  • Long-term capital gains (in excess of Rs. 1,00,000) arising from transaction undertaken on a recognized stock exchange located in an International Financial Services Centre (IFSC) would be taxable at a concessional rate of 10%, where the consideration for transfer is received or receivable in foreign currency, even when STT is not paid in respect of such transaction.

Cost of Acquisition (Section 55)

Sl. No. Nature of asset Cost of acquisition
1 Goodwill of business, trademark, brand name etc.,

-Self generated

-Acquired from previous owner

The cost of improvement of such assetswould be Nil.

 

Nil

Purchase price

2 Bonus shares

If bonus shares are allotted before 1.4.2001

If bonus shares are allotted on or after 1.4.2001

 

FMV on 1.4.2001

Nil

3 Rights Shares

Original shares (which forms the basis of entitlement of rights shares)

Rights shares subscribed for by the assessee

Rights entitlement (which is renounced by the assessee in favour of a person)

 

Amount actually paid for acquiring the original shares

Amount actually paid for acquiring the rights shares

Nil

Rights shares which are purchased by the person in whose favour the assessee has renounced the rights entitlement Purchase price paid to the renouncer of rights entitlement as well as the amount paid to the Co. which has allotted the rights shares.
4 Long term capital assets being,

  • equity shares in a company on which STT is paid both at the time of purchase and transfer or
  • unit of equity oriented fund or unit of business trust on which STT is paid at the time of transfer.

acquired before 1st February, 2018

Cost of acquisition shall be the higher of-

  1. cost of acquisition of such asset; and
  2. lower of
    • the FMV of such asset on 31.1.2018; and
    • the full value of consideration recd or accruing as a result of the transfer of the capital asset.
5 Any other capital asset
Where such capital asset became the property of the assessee before 1.4.2001 Cost of the asset to the assesse, or FMV as on 1.4.2001, at the option of the assessee. However, in case of capital asset being land or building, FMV as on 1.4.2001 shall not exceed stamp duty value as on 1.4.2001.
Where capital assets became the property of the assessee by way of distribution of assets on total or partial partition of HUF, under a gift or will, by succession, inheritance, distribution of assets on liquidation of a company, etc and the capital asset became the property of the previous owner before 1.4.2001. Cost to the previous owner or FMV as on 1.4.2001, at the option of the assessee. However, in case of capital asset being land or building, FMV as on 1.4.2001 shall not exceed stamp duty value as on 1.4.2001.
Cost of the property in the hands of previous owner cannot be ascertained The FMV on the date on which the capital asset become the property of the previous owner would be considered as cost of acquisition.

Cost of improvement of certain assets [Section 55]

Sl. No. Nature of asset Cost of improvement
1 Goodwill of a business, right to manufacture, produce or process any article or thing, right to carry on any business or profession Nil
2 In relation to any other capital asset All capital expenditure incurred in making additions or alterations to the capital asset on or after 1.4.2001 –

  • by the assessee after it became his property; and
  • by the previous owner [in a case where the assessee acquired the property by modes specified insection 49(1)].

Capital Gains: Exemptions under section 10

Section Particulars
10(33) Any income arising from the transfer of a capital asset being a unit of Unit Scheme 1964 of UTI
10(37) Where any individual or HUF owns urban agricultural land which has been used for agricultural purposes for a period of two years immediately preceding the date of transfer by such individual or a parent of his or by such HUF and the same is compulsorily acquired under any law or the consideration for such transfer is determined or approved by the Central Government or the RBI, resultant capital gain will be exempt provided the compensation or consideration for such transfer is received on or after 1.4.2004.
10(43) The amount received by the senior citizen as a loan, either in lump sum or in installments, in a transaction of reverse mortgage would be exempt from income-tax.

Exemption of Capital Gains [Sections 54 to 54F]

S. No. Particulars Section 54 Section 54B Section 54D Section 54EC Section 54F
1 Eligible Assessee Individual / HUF Individual/ HUF Any assessee Any assessee Individual / HUF
2 Asset transferred Residential House (LTCA) Urban Agricultural Land Land & building forming part of an industrial undertaking Land or building or both (LTCA) Any LTCA other than Residential House.
3 Other Conditions Income from such house should be chargeable under the head “Income from house property” Land should be used for agricultural purposes by assessee or his parents or HUF for 2 years immediately preceding the date of transfer Land & building have been used for business of undertaking for at least 2 years immediately preceding the date of transfer.The transfer should be by way of compulsory acquisition of the industrial undertaking Assessee should not own more than one residential house on the date of transfer. He should not purchase within 2 years or construct within 3 years after the date of transfer, another residential house.
4 Qualifying asset i.e., asset in which capital gains has to be invested One Residential House situated in India/Two residential houses in India, at the option of the assessee, where capital gains does not exceed Rs. 2 crore Land for being used for agricultural purpose (Urban/ Rural) Land or Building or right in land or building Bonds of NHAI or RECL or any other bond notified by C.G.(Redeemable after 5 years) One Residential House situated in India
5 Time limit for purchase/ construction Purchase within 1 year before or 2 years after the date of transfer
(or)
construct within 3 years after the date of transfer
Purchase within a period of 2 years after the date of transfer Purchase/ construct within 3 years after the date of transfer, for shifting or re-establishing the existing undertaking or setting up a new industrial undertaking. Purchase within a period of 6 months after the date of transfer Purchase within 1 year before or 2 years after the date of transfer
(or)
Construct within 3 years after the date of transfer
6 Amount of Exemption Cost of new Residential House or two houses, as the case may be or Capital Gain, whichever is lower, is exempt Cost of new Agricultural Land or Capital Gain, whichever is lower, is exempt Cost of new asset or Capital Gain, whichever is lower. Capital Gain or amount invested in specified bonds, whichever is lower. Maximum permissible investment out of capital gains arising in any financial year is Rs. 50 lakhs, whether such investment is made in the current FY or subsequent FY or both. Cost of new Residential House ≥ Net sale consideration of original asset, entire Capital gain is exempt.Cost of new Residential House < Net sale consideration of original asset, proportionate capital gain is exempt.

 

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