Capital Gains - Income Tax Notes Part - 05
Basis of Charge [Sec. 45]
Income is taxable under the head “Capital Gains” if the following conditions are satisfied:
1. There should be a capital asset.
2. The capital asset is transferred by the assessee during the previous year.
3. Any profit or gains arises as a result of such transfer.
4. Such profit or gains is not exempt from tax under section 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA and 54GB.
If the aforesaid conditions are satisfied, then capital gain is taxable in the assessment year relevant to the previous year in which the capital asset is transferred.
Capital Asset [Sec. 2(14)]
“Capital asset” means –
1. Property of any kind held by an assessee (whether or not connected with his business or profession).
2. Any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the SEBI Act.
However, “capital asset” does not include the following:
1. Any stock-in-trade (other than the securities referred to in point 2 above), consumable stores or raw material held for the purpose of business or profession;
2. All personal belongings of the assessee except Jewellery;
3. Agricultural land in India in a rural area;
Note:
Rural area for this purpose means any area which is outside the jurisdiction of a municipality or a cantonment board having a population of 10,000 or more and also which does not fall within distance given below:
a. 2 kilometres from the local limits of municipality/ cantonment board, if the population of the municipality/ cantonment board is more than 10,000 but not more than 1 lakh; or
b. 6 kilometres from the local limits of municipality/ cantonment board, if the population of the municipality/ cantonment board is more than 1 lakh but not more than 10 lakh; or
c. 8 kilometres from the local limits of municipality/ cantonment board, if the population of the municipality/ cantonment board is more than 10 lakh.
4. 6½ per cent Gold Bonds, 1977, or 7 per cent Gold Bonds, 1980, or National Defence Gold Bonds, 1980;
5. Special bearer bonds, 1981;
6. Gold Deposit Bonds issued under Gold Deposit Scheme, 1999; and
7. Deposit certificates issued under the Gold Monetisation Scheme, 2015.
Long-term Capital Asset
“Long-term capital asset” means a capital asset held by an assessee for more than 36 months immediately prior to its date of transfer. However, unlisted shares and immovable property (being land or building or both) will be treated as long-term when these are held by an assessee for more than 24 months (and not 36 months) immediately prior to its transfer. Capital gain arising from the transfer of long-term capital asset is called Long-term capital gain.
Short-term Capital Asset
“Short term capital asset” means a capital asset held by an assessee for not more than 36 months (or 24 months in case of unlisted shares and immovable property), immediately prior to its date of transfer.
In the following cases, however, such period is taken as 12 months:
1. Equity or preference shares in a company listed on a recognized stock exchange in India.
2. Securities (like debentures, bonds, Government securities, etc.) listed on a recognized stock exchange in India.
3. Units of UTI (whether quoted or not).
4. Unit of an equity oriented mutual fund (whether quoted or not).
5. Zero coupon bonds (whether quoted or not).
In the aforesaid cases, if the asset is held for more than 12 months immediately prior to its date of transfer, then it is “long-term capital asset”.
Note: In the case of transfer of a depreciable asset (other than an asset used by a power generating unit eligible for depreciation on straight line basis), capital gain (if any) is taken as short-term capital gain, irrespective of period of holding.
Computation of Capital Gain/ Loss [Sec. 48]
Short Term Capital Gain/ Loss – Computation
| Amount (Rs.) | ||
| Full value of consideration | XX | |
| Less: Expenses on transfer | XX | |
| Cost of acquisition | XX | |
| Cost of improvement | XX | XX |
| Balance | XX | |
| Less: Exemption under sections 54B, 54D, 54G and 54GA | XX | |
| STCG/ STCL Long Term Capital Gain/ Loss – Computation | XXX | |
| Amount (Rs.) | ||
| Full Value of Consideration | XX |
2. In case of gift of ESOP shares, fair market value on the date of gift is taken as full value of consideration.
| Less: Expenses on transfer | XX | |
| Indexed cost of acquisition (ICA) | XX | |
| Indexed cost of improvement (ICI) | XX | XX |
| Balance | XX | |
| Less: Exemption under sections | ||
| 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA and 54GB | XX | |
| LTCG/ LTCL | XXX |
It is to be noted that no deduction is allowed in respect of securities transaction tax in computing income under the head “Capital gains”.
Indexed Cost of Acquisition -: Computation
Indexed cost of acquisition = {Cost of acquisition/CII for the year in which the asset was first held by the assessee or CII for 2001-02, whichever is later} * CII for the year in which the asset is transferred
CII - Cost Inflation Index
Indexed Cost of Improvement –: Computation
Indexed cost of improvement = {Cost of improvement / CII for the year in which improvement took place} * CII for the year in which the asset is transferred.
Cost inflation index for different years –
| Financial year | CII | Financial year | CII |
| 2001-02 | 100 | 2011-12 | 184 |
| 2002-03 | 105 | 2012-13 | 200 | 2003-04 | 109 | 2013-14 | 220 |
| 2004-05 | 113 | 2014-15 | 240 |
| 2005-06 | 117 | 2015-16 | 254 |
| 2006-07 | 122 | 2016-17 | 262 |
| 2007-08 | 129 | 2017-18 | 272 |
| 2008-09 | 137 | 2018-19 | 280 |
| 2009-10 | 148 | 2019-20 | 289 |
| 2010-11 | 167 | 2020-21 | 301 |
When the benefit of indexation is not available
In the following cases, benefit of indexation is not available even if a long-term capital asset is transferred:
1. Bonds or debentures (other than capital indexed bonds issued by the Government);
2. Shares in or debentures of an Indian company acquired by utilizing convertible foreign exchange as mentioned under first proviso to section 48* (applicable to a non-resident assessee only); and
3. Bonds/ debentures or Sovereign Gold Bond issued by the RBI under the Sovereign Gold Bond Scheme, 2015.
4. Depreciable asset (however, in case of a power generating unit eligible for depreciation on straight line basis, indexation benefit is available).
5. Equity shares in a company or a unit of equity oriented mutual fund or a unit of a business trust referred to in section112A.
6. Undertaking / division transferred by way of slump sale as covered by section 50B.
Conversion of capital asset into Stock-in-trade [Sec. 45(2)]
Any conversion of capital asset into stock-in-trade during the previous year 1984-85 (or thereafter) is subject to the following provisions:
1. It is treated as transfer in the year in which such conversion took place.
2. Although such a conversion is treated as transfer in the year in which the asset is so converted, but the notional capital gain will arise in the previous year in which such converted asset is sold or otherwise transferred.
3. Indexation of cost of acquisition and improvement, if required, will be done till the previous year in which such conversion took place. Further, the fair market value of the capital asset, as on the date of such conversion, shall be deemed to be full value of the consideration of the asset.
4. The sale price of stock-in-trade minus market value as on the date of conversion shall be treated as business income and taxed under the head “Profits and gains of business or profession”.
Compulsory acquisition of an asset [Sec. 45(5)]
This section is applicable in the following two cases:
1. When the transfer of a capital asset is by way of compulsory acquisition under any law; or
2. When the consideration is approved or determined by the Central Government (not by a State Government) or the RBI (even if there is no compulsory acquisition).
Initial compensation:
Initial compensation is taken as full value of sale consideration and capital gain is chargeable to tax in the previous year in which the initial compensation (or part thereof) is first received (and not taxable in the year in which capital asset is transferred). Indexation benefit is, however, available up to the year in which the asset is compulsorily acquired.
Enhanced compensation:
If compensation is subsequently increased (i.e., enhanced by a court, Tribunal or any authority), then the enhanced compensation shall be taxable in the previous year in which it is received. It will be taxable in the year of receipt even if appeal is pending in any court or Tribunal. For this purpose, cost of acquisition and the cost of improvement shall be taken as nil. However, litigation expenses for getting the compensation enhanced are deductible as expenses on transfer.
If the enhanced compensation is received by any other person, (because of the death of the transferor or for any other reason), it is taxable as income of the recipient.
Where such amount of the compensation is subsequently reduced by any court, Tribunal or other authority, the capital gain of that year, in which the additional compensation received was taxed, shall be recomputed accordingly.
Transfer of shares/ debentures in case of Non-Resident [First proviso to sec. 48]
If a non-resident acquires shares in, or debentures of, an Indian company by utilizing foreign currency, the gain will be calculated in the same foreign currency, which was initially utilized in acquiring shares/ debentures. After calculating capital gain in foreign currency, it will be converted into Indian currency.
This rule is not optional but it is compulsory and applicable whether the asset is short-term or long-term. The benefit of indexation shall not be available but the option of taking fair market value on April 1, 2001 is available. Provisions of securities transaction tax (i.e., sec. 10(38) or sec. 111A, as the case may be) are applicable in case shares are transferred.
Following steps are to be applied to compute capital gain (whether short-term or long-term) under this provision:
| Step 1 | Find out sale consideration in Indian currency and convert it into foreign currency at “average exchange rate” on the date of transfer |
| Step 2 | Find out the expenditure on transfer in Indian currency and convert it into foreign currency at “average exchange rate” on the date of transfer (and not on the date when expenditure is incurred) |
| Step 3 | Find out the cost of acquisition in Indian currency and convert it into foreign currency at “average exchange rate” on the date of acquisition |
| Step 4 | Capital gain (1 – 2 – 3) will be reconverted in to Indian currency at “buying rate” on the date of transfer |
Computation of capital gain in case of Self-generated assets
An asset which does not cost anything to the assessee in terms of money in its creation or acquisition is a self-generated asset.
When a self-generated asset is transferred, the following special rules are applicable:
1. Goodwill of a business (not a profession), right to manufacture/ produce any article/ thing or right to carry on any business or profession:
In the case of transfer of these capital assets, cost of acquisition and improvement are taken as nil. Expenses on transfer are, however, deductible on the basis of actual expenditure.
2. Tenancy rights, route permit, loom hours, trade mark or brand name associated with a business:
In the case of transfer of these capital assets, cost of acquisition is taken as nil. Cost of improvement and expenses on transfer are, however, deductible on the basis of actual expenditure.
3. Any other self-generated asset:
In the case of transfer of any other self-generated capital asset, capital gain is not chargeable to tax.
It is to be noted that even if the above mentioned self-generated assets are acquired before April 1, 2001, the option of adopting the fair market value on the said date is not available.
Fair market value of the asset disclosed under Income Declaration Scheme, 2016
For ‘asset disclosed under Income Declaration Scheme, 2016, fair market value of the asset declared under the scheme on June 1, 2016 (on the basis of which tax, surcharge and penalty is paid under the scheme) is taken as the cost of acquisition.
Cost of acquisition of Bonus Shares
If bonus shares were allotted prior to 1st April, 2001, the fair market value on 1st April, 2001 is taken as the cost of acquisition. If bonus shares are allotted on or after April 1, 2001, cost of acquisition is taken as Nil.
Capital gain on transfer of Right Shares
Following two situations can arise in case of transfer of right shares –
1. Rights entitlement (which is renounced by the assessee in favour of a person): In such a case, cost of acquisition is Nil.
However, in such a case, the amount realized by the original shareholder by selling his rights entitlement will be short-term capital gains in his hands (as the cost is taken as nil). The period of holding of the rights entitlement will be considered from the date of offer made by the company to subscribe to shares to the date when such right entitlement is renounced by the person.
2. Right shares purchased by the person in whose favor rights entitlement has been renounced:
In such a case, cost of acquisition is equal to the purchase price paid to renouncer of rights entitlement plus amount paid to the company which has allotted the rights shares.
Computation of capital gain in case of transfer of unlisted shares in a company [Sec. 50CA]
Where consideration for transfer of shares in a company (other than quoted shares) is less than the FMV of such share, the FMV shall be deemed to be the full value of consideration for the purpose of computing “Capital Gains”.
Exemptions under Capital Gains
Transfer of residential house property [Sec. 54]
• Available to an individual or a HUF
• Residential house property (long-term) is transferred
• Assessee has purchased another residential house within one year before or within two years after sale of original house or constructed another house within three years after sale of original house
• Amount of exemption is investment in new asset or LTCG, whichever is lower
• Exemption is available if One (if the amount of CG does not exceed Rs. 2 crores, the assessee can purchase/construct two residential house properties. However, this benefit is available only once in lifetime) residential house is purchased or constructed in India. A taxpayer may sell two house properties and he may purchase/ construct 1 house property for the purpose of availing the exemption
• Deposit Scheme:
o In case, the assessee is not interested in purchasing or constructing the house till due date of filing return of income, he has to deposit the amount in Capital Gains Deposit Account Scheme till the due date of filing return of income to get the exemption. On the basis of this deposit, exemption under section 54 can be claimed. But assessee has to actually withdraw the deposited amount and utilize this deposited amount within the prescribed time limit for purchasing or constructing the house.
o In case the deposited amount is not fully utilized in purchasing or constructing the house within eligible time limit, then the unutilised amount will be taxable as LTCG in the year in which the maximum time limit for making new investment (i.e., 3 years for construction) expires.
Deposit scheme for exemption under section 54 has been explained below with the help of an example:
a. Suppose the assessee transfers the residential property on January 14, 2020 i.e., previous year 2019-20.
b. If assessee wants to purchase the house, the house should be purchased during January 15, 2019 to January 13, 2022 and if assessee wants to construct the house, the construction should be completed till January 13, 2023 to claim the exemption of section 54.
c. If the assessee is not interested in purchasing or constructing the house till July 31, 2020, the assessee has to deposit the amount in “Capital Gains Deposit Account Scheme” till July 31, 2020 (due date of filing return of income for individuals) to claim the exemption.
d. By withdrawing from this deposit account, the house should be purchased till January 13, 2022 or constructed till January 13, 2023.
e. On January 14, 2023 (Assessment year 2023-24), unutilised amount (if any) will be taxable as LTCG (taxable in the year in which maximum time limit expires). Also, on January 14, 2023 (or at any time thereafter), assessee can withdraw this unutilised amount. However, if the taxpayer dies before the expiry of specified time-limit (for making investment in new asset), then unutilized amount paid to the legal heirs is not taxable in the hands of recipient.
• Withdrawal of exemption:
If the new asset on which exemption is claimed under section 54 is transferred within 3 years of its acquisition/ construction, exemption given will be taken back. For calculating STCG on transfer of new asset, cost of acquisition will be calculated as original cost of acquisition minus exemption availed under section 54.
Note: The summary of Income Tax Notes Part-05 Capital Gains summarise from the content of Book of School of Open Learning. © School of Open Learning.
