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Basis of Charge in case of Capital Gains [Section 45(1)]

Any profits or gains arising from the transfer of a capital asset effected in the previous year, shall  be chargeable to income-tax under the head 'Capital Gains' and shall be deemed to be the income of  the previous year in which the transfer took place unless such capital gain is exempt under section 54,  54B, 54D, 54EC, 54EE, 54F, 54G, 54GA or 54GB. 

 

Conditions for taxing capital gains: 

 

(A)          there must be a capital asset; 

 

(B)          the capital asset must have been transferred; 

 

(C)          there must be profits or gains on such transfer, which will be known as capital gain; 

 

(D)          such capital gain should not be exempt under section 54, 54B, 54D, 54EC, 54EE, 54F, 54G,  54GA or 54GB. 

 

If the above conditions are satisfied, the capital gain shall arise and taxed in the previous year in  which the asset is transferred, subject to certain exceptions as mentioned -

 

>     Damage or destruction of any capital asset by fire or other calamities

 

>     Conversion of capital asset into stock-in-trade

 

>     Compulsory acquisition of an asset

 

>     Transfer of capital asset, being land or building or both by an individual HUF under a  specified agreement with the developer.

 

1.   Capital Gain arises only in case of Capital Asset [Section 2(14)]

Capital gain arises only when a capital asset is transferred. If the asset transferred is not a capital asset, it will not be covered under the head 'capital gain'.

 "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 Securities and Exchange Board of India Act,
1992,

but does not include—

(I)            any stock-in-trade lother than the securities referred to in sub-clause (b) above), consumable stores or raw materials held for the purposes of his business or profession,

(ii)           personal effects, that is to say, movable property (including wearing apparel and furniture), held for personal use by the assessee or any member of his family dependent on him.

However, the following assets shall not be treated as personal effects though these assets are moveable and may be held for personal use:

(a)          jewellery;

(b)          archaeological collections;

(c)           drawings;

(d)          paintings;

(e)           sculptures; or

(f)           any work of art.

 

(iii)          Agricultural Land in India, which is not an urban agricultural land. In other words, it must be a Rural Agricultural Land.

 

(iv)          Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under Gold Monetization Scheme, 2015 notified by the Central Government.

1.     Short-Term Capital Asset [Section 2(42A)]:

A capital asset held by an assessee for not more than 36 months immediately preceding the dale of its transfer is known as a short term capital asset.

Exceptions :

(i)            The following assets shall be treated as short-term capital assets if they are held for not more than 12 months (instead of 36 months mentioned above) immediately preceding the date of its transfer:

(a)          a security including shares (other than unit) listed in a recognised stock exchange in India

(b)          a unit of an equity oriented fund

(c)           a zero coupon bond

(ii)           The following assets shall be treated as short-term capital assets if they are held for not more than 24 months (instead of 36 months/ 12 months mentioned above) immediately preceding the date of its transfer:

(a)           Share of a company (not being a share listed in a recognised stock exchange in  India) 

 

(b)          An immovable property being land and building or both. 

 

Hence, if unlisted share or immovable property is transferred after 24 months from the date of  its acquisition, the gain arising from the transfer of share or immovable property shall be  treated as long-term capital gain.

 

2.     Long-term Capital Asset [Section 2(29A)]:

It means a capital asset which is not a short-term capital asset.

In other words, if the asset is held by the assessee for more than 36 months / 24 months / 12 months, as the case may be, such an asset will be treated as a long-term capital asset.

Type of capital gains: Since there are two types of capital assets, there will be two types of capital gains i.e.—

(I)

Section 2(42B) Short-Term Capital Gain—

gain arising on the transfer of Short-Term Capital Asset.

(ii)

Section 2(29B) Long-Term Capital Gain—

gain arising on the transfer of Long-Term Capital Asset.

Note :

There is a need to make the distinction between short-term and long-term capital gain as short-term capital gain  like any other incomes is taxable at normal rate of income-tax. whereas long-term capital gain is taxed at a concessional rate.

2.   Capital Asset must have been Transferred to arise Capital Gain [Section 2(47)]

Capital gain arises only when there is a transfer of capital asset. If the capital asset is not transferred or if there is any transaction which is not regarded as, there will not be any capital gain.

However, in case of profits or gains from insurance claim due to damage or destruction of property, there will be capital gain although no asset has been transferred in such case.

Under Section 2(47),  Transfer, in relation to capital asset, includes:

(i)            the sale, exchange or relinquishment of the asset; or

(ii)           the extinguishment of any rights therein; or

(iii)          the compulsory acquisition thereof under any law; or

(iv)          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, or

(v)          the maturity or redemption of zero coupon bonds; or

(vi)          any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882; or

(vii)        any transaction (whether by way of becoming a member of, or acquiring shares in a cooperative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of any immovable property.

 

3.   Capital Gain should arise in the previous year in which Transfer of Capital Asset took place

Normally, capital gain arises in the previous year in which the transfer of the asset takes place even if the consideration for the transfer is received or realised in a later year.

There are, however, 4 exceptional cases where capital gain is taxable not in the year of transfer of the asset, but in some other year. These exceptions are:

(I)            damage or destruction of any capital asset by fire or other calamities

(ii)           conversion of capital asset into stock-in-trade

(iii)          compulsory acquisition of an asset

(iv)         transfer of capital asset, being land or building or both by an individual HUF under a specified agreement with the developer [Section 45(5A)]

4.   Computation of Capital Gains [Section 48]

As already discussed, capital gains are of Iwo types:

(I)           Short-term capital gain which arises on the transfer of a short-term capital asset; and

(ii)           Long-term capital gain which arises on the transfer of a long-term capital asset.

Short-term capital gain is the excess of the full value of consideration over the aggregate of the following three:

  1.  cost of improvement;

(ii)           expenses of transfer,

(iii)          cost of acquisition of the asset.

Whereas in the case of long-term capital gain, the capital gain shall be the excess of the full value of consideration over the aggregate of the following three amounts:

(I)            Expenses of transfer;

(ii)           Indexed cost of acquisition of the asset

(iii)          Indexed cost of improvement

From Capital Gain, computed above, certain Exemptions are available under Section 54/54B/54D/54EC/54G/54GA/54GB. The Capital Gain after claiming the said Exemptions in known as Taxable Long-term or Short-term Capital Gain. A format to compute the capital gain is given in table below :

 

Computation of Capital Gains

 

Computation of Short-term Capital Gains

 

 

Full value of consideration

 — 

 

Less: (a) Expenditure incurred wholly and exclusively in connection with  such a transfer,

— 

 

(b) Cost of acquisition

 

(c) Cost of improvement

Gross short-term capital gains

 

Less: Exemption, if available, u/s 54B/54D/54G/54GA

 

Taxable Short-term capital gains

 

 

 

 

Computation of Long-term Capital Gains

 

 

Full value of consideration

 

Less: (a) Expenditure incurred wholly and exclusively in connection with  such a transfer

 

(b) Indexed Cost of acquisition

 

(c) Indexed Cost of improvement

Long-term capital gains

 

Less: Exemption if available u/s 54/54B/54D/54EC/54EE/54F/54G/54GA/  54GB

 

Taxable long-term capital gains

 

 

 

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