What is a Capital Asset ?
Capital Asset means property of every description.
It may be ;
– Movable or immovable
– Tangible or intangible
What is not a Capital Asset?
Section 2(14)
• Any stock-in-trade, consumable stores or raw materials held
for the purpose of business or profession.
• Personal effects (except jewelry and immovable property)
held for personal use of the tax payer or any member of
his family.
• Agricultural land in India subject to exception.
Types of Capital Asset
1. Short term Capital Asset Section 2(42A)
2. Long term Capital Asset Section 2(29A)
Tax on Capital Gains - Essential conditions
• Existence of a capital asset
• Transfer of such asset during the Previous Year.
• Profit and Gain must arise from such transfer
Transfer of Capital Assets - Sec.45(1)- r/w Sec.2(47)
• Transfer includes:
– the sale, exchange or relinquishment of the asset
– the extinguishment of any right therein
– the compulsory acquisition thereof under any law
– In a case where the asset is converted by the owner thereof into, or is
treated by him as, stock-in-trade of a business carried on by him, such
conversion or treatment;
Transaction not treated as Transfers-Sec. 47
• Transfer on partition/partial partition of HUF.
• Transfer under gift of will
• Transfer by a company to its’ subsidiary company and vice-a-versa.
Subject to certain conditions.
• Transfer on amalgamation of an Indian company.
Transaction not treated as Transfers-Sec. 47-cont
Transfer in a case of demerger of Indian company.
Transfer of shares in case of demerger / amalgamation
Transfer in case of a firm/prop. concern succeeded by a company
subject to conditions.
Transfer by way of conversion of bonds/debenture into shares.
Compulsory Acquisition of Capital Asset
• Compulsory Acquisition of any asset under any state law is a transfer for
the purpose of Capital Gain. Compensation received is liable for Capital
gain tax.
• Examples :
– Acquisition of land under Land Ceiling Act and Other Acts of the
State.
– Pre-emptive purchase by the I.T. department.
Short Term Capital Asset
• Any capital asset held by the assessee for not more than 36 months
immediately preceding the date of transfer.
• The following assets held by the assessee for not more than 12 months are to
be treated as Short term Capital Asset :
– Equity or preference shares held in a company
– Securities listed in a recognized Stock Exchange
– Units of the UTI or units of Mutual Funds specified u/s 10(23D)
LONG TERM CAPITAL ASSET
Any other asset not within the scope of Short term Capital asset is considered
as a Long term capital asset
Year of Chargeability
• CG is chargeable in the year in which the transfer of capital asset take place.
• The exception are provided in Sec. 45(2) , Sec. 45(5)
Computation of STCG-Section 48
1. Full value of consideration received or accruing
2. Less
– Expenditure incurred wholly and exclusively in connection with such transfer
– Cost of acquisition
– Cost of improvement
3. Gross short term capital Gain
4. Less : Exemption u/s 54B/54D/54G
5. Net Short Term Capital Gain which is taxable..
Computation of LTCG- Sec48.
1. Full value of consideration received or accruing
2. Less :
– Expenditure incurred wholly and exclusively in connection with such transfer
– Indexed cost of acquisition
– Indexed cost of improvement
3. Gross Long Term Capital Gain
4. Less: Exemption available u/s 54/54B/54D/54EA/54EB/ 54EC/54F/54G
5. Net Long Term Capital Gain which to be taxed.
Full Value of Consideration
• It is the entire amount or the aggregate amount for which a capital asset is
transferred. In case of an exchange of an asset, it will be the market value of
the asset transferred.
• Exceptions:
– Sections 45(2), 45(3) and 45(4) specifies full value of consideration in certain
special cases mentioned in those section.
Cost of Acquisition
• Price paid by a person to acquire an asset and
• Expenses connected with the acquisition of asset like,
– Brokerage, stamp duty, advertisement, legal
expenses, interest on loan.
• Exceptions : sec. 49(1), 49(2), 49(2A),50A, 55(2), 55(3).
Cost of Acquisition to previous
owner sec.49(1).
• Cost of acquisition & improvement to previous owner will be deemed to be
cost of acquisition and improvement if the asset is acquired by the following
mode of transfer:
– By succession, inheritance etc.
– By distribution of an asset by liquidation
– Under a gift/will
– On partial/total partition of HUF
COST OF ACQUISITION OF SELF GENERATED CAPITAL
ASSET - SEC.55(2)(A)
• The cost of acquisition of certain self generated capital assets like - Goodwill of a business, Tenancy Rights, Route Permits, Loom Hours, Right of
manufacture, produce or process any article or thing is the cost at which the
same is purchased.
• Otherwise the cost of acquisition is nil.
COST OF ACQUISITION OF BONUS/RIGHT SHARES SECTION 55(2)(AA)
• Cost of acquisition of bonus share is nil.
• Cost of Right share is cost at which it is purchased.
• If the Right is renounced - the cost of Right is nil.
• If Right share is purchased by others the cost of share is purchase price +
cost of purchase of Right
Cont..
COST OF IMPROVEMENT - SECTION 55(1)(B)
• It is capital expenditure incurred to make addition/alteration/renovation to
the capital asset, after the same was acquired by the assesse
• In case a property is acquired by the previous owner is the assesse prior to 0104-1981,it means all capital expenditure incurred to make addition / alteration
to the asset after 01-04-1981.
CONT..
• Cost of Improvement does not include any expenditure which is deductible
under Business Income, Income from House property, Income from Other
Sources. This means routine expenses on repairs, maintenance etc. cannot be a
part of cost of improvement.
• The cost of improvement in respect of assets like goodwill of a business, a
right to manufacture, produce, or process any article or thing is deemed to be
nil.
INDEXED COST OF ACQUISITION - INDEXED COST OF IMPROVEMENT
Indexation of Cost of Acquisition is done as below :
[Cost of Acquisition/Improvement] x [CII of the year of transfer ]
[CII of the year of acquisition/improvement or 01-04-1981 whichever is later]
Expenditure incurred wholly & exclusively in
connection with transfer..
• The expenses need not necessarily to be incurred prior to passing
of title or in the P.Y. in which the Capital Gain is taxed.
• Such expenses must not have been claimed as deduction under
any provision of the Act.
• Some examples of expenditure allowable are
– Brokerage paid for arranging the deal ,
– Advertisements, Litigation expenses
– Expenses on registration charges, stamp duty .
CG ON SLUMP SALE SEC. 50B
• Slump sale is defined in sec. 2(42C).
• Profit & Gains arising from slump sale is taxable as LTCG.
• If the undertaking/division is transferred is held < 36 months then the profit is
taxable as STCG.
• The cost of acquisition of undertaking is the net worth of the
division/undertaking.
Further Key Points
• When a person converts his capital asset to stock-in-trade of a business
carried on by him, such transaction is treated as transfer for the purpose
of Capital Gain Tax.
• In such cases Capital Gain will arise in the year in which the converted
asset is sold or transferred.
• For the purpose of computation of Capital Gain, the fair market value of
the asset, as on the date of such conversion shall be deemed to be full
value of consideration of the asset.
CALCULATION OF CAPITAL GAIN ON DEPRECIABLE ASSETS
 Capital gains or loss in case of depreciable asset can occur only when the value of the block is
reduced to NIL. The value of the block is reduced to NIL in 2 situations.
Case 1 : where all the assets of the block are transferred.
Case 2 : where some (not all) the assets are transferred for a value more than the
cost of the block.
 Capital assets are divided into blocks which consist of similar assets carrying the same rate of
depreciation
 Under the income tax Act, all the calculations for depreciation are made as on the 31st of
March of each year .i.e., depreciation does not accrue throughout the year
Calculation of capital gains in case of depreciable capital assets
Opening WDV as on the 1st April of the relevant previous Year
XXX
ADD: Actual Cost of assets purchased during the year
XX
COST OF BLOCK
XXX
LESS : Money receivable for asset sold, discarded, demolished or destroyed during the year. XX
VALUE OF BLOCK
XXX
LESS : Depreciation as per rates under the Income Tax Act
XX
Closing WDV as on the 31st of March of the relevant PY
XXXX
EXEMPTIONS FROM CERTAIN CAPITAL GAINS
There are certain cases where the transfer of capital assets is taking place but the capital gain arising out of such
transactions is exempt from income tax. Such exemptions are of two types:Exemption of capital gains under section 10 of the Income Tax Act. It contains exempted capital gain in the hands of
various categories of persons.
Exemptions of capital gains under the following sections:





Profit on sale of property used for residence(Section 54)
Capital gain on transfer of land used for agricultural purposes not to be charged in certain cases(Section 54B)
Capital gain on compulsory acquisition of lands and buildings not to be charged in certain cases (Section 54D)
Capital gain not to be charged on investment in certain bonds(Section 54EC)
Capital gain on transfer of certain listed securities or unit, not to be charged in certain cases(Section 54ED)
Capital gain on transfer of certain capital assets not to be charged in case of investment in residential
house(Section 54F)
 Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area
(Section 54G)