CAPITAL GAINS
INTRODUCTION
• CAPITAL GAINS
“Any profit or gains arising from the
transfer of capital assets is taxable
under the head capital gains in the
previous year in which the transfer has
taken place.”
• Conditions for Gains to be charged
under Capital Gains
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There should be a capital asset.
The capital asset should be transferred by the
assessee.
Such transfer should take place during the
previous year.
The profits or gains should arise as a result of
this transfer.
Such profit or gain should not be exempted
from tax under sections 54, 54B, 54D, 54EC,
54F and 54G & 54GA.
DEFINITION OF CAPITAL
ASSETS
• Capital asset is defined to include property
of any kind, whether fixed or circulating,
movable or immovable, tangible or
intangible.
EXCEPTIONS TO CAPITAL
ASSETS
a) Any stock-in-trade, consumable stores or raw
material held for the purposes of business or
profession.
b) Movable property of the Assessee including
wearing apparel and furniture held for his
personal use or for the use of any member of
his family dependent on him.
The exception to this condition is jewellery,
which is treated as a capital asset, even though
it is meant for personal use.
CONTD…….
c) Agricultural land in India provided it is not
situated in urban area.
d) 6 ½ % Gold Bonds, 7% Gold Bonds or National
Defence Gold Bonds, issued by the central
government.
e) Special Bearer Bonds, and
f) Gold Deposit bonds issued under Gold Deposit
Scheme of 1999.
SHORT TERM AND LONG
TERM CAPITAL ASSETS
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“Short term capital assets” means a capital asset held by the
assessee for not more than 36 months, immediately prior to
its date of transfer. However, the following assets are
treated as short term assets if they are held for not more
than 12 months, they are:
Equity or preference shares in a company
Securities like debentures, government securities listed in a
recognized stock exchange in India.
Units of UTI and
Units of mutual funds.
An asset other than a short-term capital asset is regarded as
a “long term capital asset”.
METHOD OF DETERMINING
PERIOD OF HOLDING
• In case when the assessee acquires an asset
as a gift or by a will, the period for which
the previous owner holds the asset is also
included.
TRANSFER OF CAPITAL ASSET
[Sec2(47)]
•Any transaction involving the allowing of the possession
of any movable property to be taken or retained in part of
performance of contract of the nature referred to in the
sec53a of the transfer of property act,1982
•Any transaction (whether by way of becoming a member
of, or acquiring shares in a co-operative society, company
association of person or by way of agreement or any
arrangement or in any other manner whatsoever) which
has the effect of transferring or enabling the enjoyment of
any immovable property
WHAT IS INCLUDED IN
TRANSFER
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Transfer Includes
Sale
Exchange
Relinquishment
Extinguishment
Compulsory Acquisition
Conversion of Capital Asset Into Stock in Trade[sec(47)(iv)]
WHAT IS NOT INCLUDED IN
TRANSFER
•Distribution of Assets to Its Shareholder on Its Liquidation
[Sec46(1)]
•Distribution of Capital Assets in HUF to Its Member at the Time of
Total or Partial Partition [Sec 47(1)]
•Transfer of a Capital Asset Under a Will or an Irrevocable Trust or a
Gift [Sec 47(iii)]
• Transfer of a Capital Asset by a Company to Its Wholly Owned
Indian Subsidiary Company [Sec 47(iv)]
• Transfer of a Capital Asset by a Wholly Owned Subsidiary
Company to Its Indian Holding Company [Sec 47(v)]
CONTD….
•Transfer in Case of Amalgamation Sec[47(vi)]
•Transfer in Case of Demerger Sec[47(vi B)]
•Transfer of Agricultural Land in India Effected Before March 1,
1970 [Sec 47(viii)]
• Transfer of a Capital Asset , Being Any Work of Art ,Scientific or
Art Collection, Book, Drawing, painting, photograph Etc [Sec47(ix)]
•Transfer by Way of Conversion of Bonds or Debenture of a
Company Into Shares or Debenture of That Company [ Sec 47(x)]
SHORT TERM CAPITAL
GAIN
1)Find full value of consideration
2)Deduct the followings.
a) Expenditure incurred wholly and exclusively
in connection with such transfer.
b) Cost of acquisition.
c) Cost of improvement
3) From resulting sum deduct exemption provided
by u/s54 B, 54 D, 54 G, 54GA
4) The balancing amount is Short Term Capital
Gain.
LONG TERM CAPITAL
GAIN
1) Find full value of consideration
2) Deduct the followings
a) Expenditure incurred wholly and exclusively
in connection with such transfer.
b) Indexed Cost of acquisition.
c) Indexed Cost of improvement.
3) From resulting sum deduct the exemption
provided by section 54, 54 B, 54 D,
54 EC, 54 F, 54 G, 54 GA
The balancing amount is Long Term Capital
Gain/Loss.
FULL VALUE OF
CONSIDERATION
Full value means whole price without any
deduction and consideration in which
transferor receives in lieu of asset he parts
with.
EXPENDITURE ON
TRANSFER
Expenditure incurred wholly and exclusively in
connection with transfer of capital asset is
deductible from full value of consideration. This
means expenditure incurred which is necessary to
effect the transfer like brokerage commission, cost
of stamp, registration fees and all
COST OF ACQUISITION
Cost of acquisition of an asset is the value
for which it is acquired by the Assessee,
expenses of capital nature for acquiring
the title are include in cost of acquisition.
NOTIONAL COST OF
ACQUISITION
Cost to previous owner is considered as cost of
acquisition to the assessee if that capital asset
become property in cases like.
a) Distribution of asset on partial or total partition
of Hindu Undivided Family.
b) Acquisition of property under gift and will.
c) Acquisition of property by a HUF where one of
its member has converted his self acquired
property into joint family property after Dec 311969.
COST OF IMPROVEMENT
- It means all expenses of capital nature
incurred in making any addition/ alteration
to capital asset by assessee.
1) Expenditure after 31 mar 1981
INDEXED COST OF
ACQUISITION OR
IMPROVEMENT
Cost Inflation Index.
Cost inflation Index for any year means such
index as the central government may , having
regard to 75% of average rise in consumer price
index for urban non manual employees of the
immediate preceding pervious year to such year,
by notifying in official gazette
COMPUTATION OF
INDEXED COST.
Case1) Capital asset acquired before 1-4-1981
Cost
X
Cost Inflation Index in the year of Transfer
Or FMV on 01.04.1981
Cost Inflation Index for yr 1981-82
(whichever is high)
2) Capital asset acquired after 1-4-1981
Cost
X
Cost Inflation Index in the year of Transfer
Cost Inflation Index for yr of purchase
3) Capital asset acquired by assesse before 1-4-1981 & originally acquired by previous
owner before 1-4-1981.
Cost to Previous Owner X Cost Inflation Index in the year of Transfer
Or FMV on 01.04.1981
Cost Inflation Index for yr 1981-82
(whichever is high)
4) Capital asset acquired by assesse after 1-4-1981 & originally acquired by previous owner
before 1-4-1981.
Cost to Previous Owner X Cost Inflation Index in the year of Transfer
Or FMV on 01.04.1981
CI Index for yr the asset is first held by assesee
(whichever is high)
5) Capital asset acquired by assesse after 1-4-1981 & originally acquired by previous owner
after 1-4-1981.
Cost to Previous Owner X Cost Inflation Index in the year of Transfer
CI Index for yr the asset is first held by assese
Indexed Cost of Improvement
• 1. Ignore Improvement Before 1.04.1981
• Indexed Cost
• =Cost of Improvement X CI Index in Yr of Transfer
•
CI Index in Yr of Improvement
INTRODUCTION OF A
CAPITAL ASSET AS CAPITAL
CONTRIBUTION
Section 45(3)
Taxable in the hands of the partner
Consideration: Amount recorded in
the books of accounts
DISTRIBUTION OF CAPITAL
ASSETS ON A FIRMS DISSOLUTION
Section 45(4)
Chargeable in the hands of the firm
Consideration : fair market value as
on the date of transfer
SLUMP SALE
SEC 50B
Slump sale means transfer of one or
more undertakings as a result of sale
for lump sum consideration without
values being assigned to individual
assets and liabilities in such sales –
Section 2(42C).
SLUMP SALE
• Cost of acquisition : Net worth
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No indexation
Short term/long term
Value of assets : Depreciable/non-depreciable
Value in the hands of purchaser.
CAPITAL GAINS ON CONVERSION OF
DEBENTURES INTO SHARES [SEC
49(2A)]:
• 1) Any transfer by way of conversion of debentures,
debenture – stock, or deposit certificates in any form, of a
Co. into shares or debentures of that co. is not regarded as
a transfer giving rise to Capital gains.
• 2) Cost of Acquisition will be the cost of debentures,
debentures – stock or deposit certificates which has been
appropriated towards to shares or debentures in case there
is sale of above transferred assets giving rise to capital
gains.
CAPITAL GAINS ON CONVERSION OF
DEBENTURES INTO SHARES
[SEC 49(2A)]:
In case of conversion of debentures into Shares:
1) Cost of Debentures will be the Cost of acquisition of
shares.
2) To find out whether or not shares are LTCA or STCA,
the period of holding shall be determined from date of
allotment of shares.
3) The indexation will start from the date of conversion
of debentures into shares.
4) Not applicable for preference shares converted into
equity shares.
CAPITAL GAINS ON TRANSFER OF
SECURITY BY DEPOSITORY
[ SEC 45(2A) ]
1) Any beneficial will be chargeable to Income tax, if in PY
he has had
any profits or gains by virtue of transferring of any
securities through
depository or participant of such beneficial interest.
2) It shall not be income of the depository.
3) Cost of Acquisitions and the period of holding of any
securities shall be determined on the basis of the First – In
– First – Out (FIFO)
Sec 45(2A)(contd.)
4)FIFO shall be applied only in respect of
dematerialized holdings, as physical form of
shares are still in possession of the investor when
there is sale of dematerialized shares.
5) FIFO shall be applied accountwise incase if there
are multiple depository accounts, as sale in
particular account shall not be construed as sale in
other accounts.
6) Date of entry is used for the basis of FIFO.
COMPUTATION OF CAPITAL GAINS IN
THE CASE OF SELF GENERATED
ASSETS.
Self Generated
Assets
Sale
Consideration
Cost of
Acquisition
Cost of
Improvement
Expenses on
transfer
1. Goodwill of a
Business
Actual
Nil
Nil
Actual
2. Tenancy
Rights, Route
Permits & loom
Hours
Actual
Nil
Actual
Actual
3.Rights to
manufacture,
Produce or
Process any
article
Actual
Nil
Nil
Actual
4. Trade mark or
brand name
associated with
a business
Actual
Nil
Actual
Actual
CAPITAL GAINS IN CASE OF
BONUS SHARES
Original Shares
Bonus Shares
Acquisition
Cost of
Acquisition
Acquisition
Cost of
Acquisition
Acquired before
April1, 1981
Actual Cost or Fair
Market Value on
1st April 1981
whichever is more
Acquired before
April1, 1981
Fair Market Value
on 1st April 1981
Acquired before
April1, 1981
Actual Cost or Fair
Market Value on
1st April 1981
whichever is more
Acquired after
April1, 1981
Nil
Acquired after
April1, 1981
Actual Cost
Acquired after
April1, 1981
Nil
CAPITAL GAIN ON TRANSFER OF
RIGHTS SHARES
• For Original Shareholder ( Renouncer )
– Cost of Acquisition :
• Cost of acquiring original shares.
• Cost of aquiring Rights shares.
– Premium Received on renouncement – Short Term
Capital Gain.
• For the Renouncee
– Cost of Acquisition :
• Amount paid to Company
• Premium paid to the renouncer.
CAPITAL GAINS IN CASE OF
COMPULSORY ACQUISITION OF
AN ASSET [SEC 45(5)]
• Applicability :
– Transfer of capital asset by way of compulsory
acquisition under any law.
– Capital asset is transferred (not by way of compulsory
acquisition), & consideration is approved or determined
by central Gov. or RBI.
• Chargeability :
– Initial Compensation is full value of consideration.
– Charged in the year in which Initial Compensation is
received
• Enhanced Compensation.
OTHER SPECIAL
PROVISIONS
• Capital Gains in case of Depreciable Assets
( Sec 50 )
• Buy Back of Shares
• Transfer of Land & Bldg ( Sec 50 [c])
EXEMPTION U/S 54
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Conditions :
Gains are from Transfer of Residential House Property
Applicable only to Individual / HUF
Asset Sold is a Long Term Capital Asset
Assessee should invest in another Residential House
Property within the specified time limit.
• New asset should not be sold within 3 years of acquisition,
otherwise will be treated as a short term capital gain.
• Exemption = Amount Invested OR Capital Gains
•
whichever is Less.
EXEMPTION U/S 54B
• Available if agricultural land transferred. The said land
should be used by the individual or his parents for
agricultural purposes during at least 2 years immediately
prior to transfer.
• Available only to an individual.
• Asset Sold should be Short term / Long term Capital Asset.
• Investment in agricultural land (rural or urban) within 2
years.
• New Asset should not be sold within 3 years of
acquisition, otherwise will be treated as a short term capital
gain.
• Exemption = Amount Invested OR Capital Gains
•
whichever is Less.
EXEMPTION U/S 54D
• Available if land or building forming part of an industrial
undertaking is compulsorily acquired by the govt and
which is used during 2 years for industrial purposes prior
to acquisition.
• Available to any person.
• Asset Sold should be Short term / Long term Capital Asset.
• Investment in land or building for industrial purposes
within 3 years.
• New Asset should not be sold within 3 years of
acquisition, otherwise will be treated as a short term capital
gain.
• Exemption = Amount Invested OR Capital Gains
•
whichever is Less.
EXEMPTION U/S 54EC
• Available if any long term capital asset is transferred after
31.3.2000.
• Available to any person.
• The asset should be a Long term capital asset.
• Investment within 6 months in bonds of NHAI or RECL
which are redeemable after 3 years.
• New Asset should not be sold within 3 years of
acquisition, otherwise will be treated as a short
term capital gain.
• Exemption = Amount Invested OR Capital Gains
•
whichever is Less.
EXEMPTION U/S 54F
• Available if any long term capital asset( other than
a residential house property) is transferred,
Available to an individual / HUF.
• Investment should be made in a residential house
property within time Limit .
• New Asset should not be sold within 3 years of
acquisition, otherwise will be treated as a short
term capital gain.
• Exemption = Amount Invested * Capital gains
Net sale consideration
EXEMPTION U/S 54G
• Available if any land, building, plant or machinery
is transferred in order to shift an industrial
undertaking from urban to rural area.
• Available to any person.
• Asset may be short term / long term.
• Investment should be made in land, building or
plant and machinery to shift the undertaking in a
rural area.
• New Asset should not be sold within 3 years of
acquisition,
• Exemption = Amount Invested OR Capital Gains
•
whichever is Less
EXEMPTION U/S 54GA
• Available if any land, building, plant or machinery
is transferred in order to shift an industrial
undertaking from any area to SEZ.
• Available to any person.
• Asset may be short term / long term.
• Investment should be made in land, building or
plant and machinery to shift the undertaking to
SEZ area.
• New Asset should not be sold within 3 years of
acquisition,
• Exemption = Amount Invested OR Capital Gains
•
whichever is Less
PROVISIONS OF SEC 112
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Section 112 provides an alternative option for charging
long term capital gains to tax, if the following conditions
are satisfied :
The taxpayer is an individual, HUF, company or any
other person(may be resident or non resident)
The asset is a long term capital asset
The long term capital asset is :
- a security listed in any recognised stock exchange in
India or,
- a unit of UTI or a mutual fund(whether listed or not)
Sec 112 (contd.)
• If the conditions are satisfied, then the other option is to
charge the capital gains at the rate of 10% without taking
the benefit of indexation in the cost of acquisition.
• The tax payable by the assessee will be lower of 20%(+
surcharge)on the capital gain calculated giving benefit of
indexation or @10% without the benefit of indexation,
whichever is lower.
• In the case of listed bonus shares, listed debentures and
listed bonds, Option u/s 112 will be better.
THANK YOU