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Capital Assets, Capital Gain & Transfer of Capital Assets for Taxation of 'Capital Gain'

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

  2. Capital Asset for Computing Capital Gain [Section 2(14)]

  3. Types of Capital Sssets:

  4. Type of Capital Gains:

  5. Transfer of Capital Assets to arise Capital Gain

  6. Capital Gain should arise in the previous year in which Transfer took place.

1. Basis of Charge in case of Capital Gain [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.

The following are the essential conditions for Taxing capital gains:

  1. there must be a capital asset;

  2. the capital asset must have been transferred;

  3. there must be profits or gains on such transfer, which will be known as capital gain;

  4. 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..

Note :

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

Capital Assets, Capital Gain & Transfer of Capital Assets for Taxation of 'Capital Gain'

2. Capital Asset for Computing Capital Gain [Section 2(14)]

“Capital asset” means : -

Property of any kind, whether fixed or circulating, movable or immovable, tangible or intangible. Besides,

it Includes the following –

  1. Any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever.

  2. Property of any kind held by an assessee (whether or not connected with his business or profession).

  3. Any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the SEBI Act.

but Does Not Include––

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

  2. 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:

    1. jewellery;

    2. archaeological collections;

    3. drawings;

    4. paintings;

    5. sculptures; or

    6. any work of art.

  3. Agricultural land in India, which is not an urban agricultural land. In other words, it must be a rural agricultural land;

  4. Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under Gold Monetisation Scheme, 2015 notified by the Central Government.

3. Types of Capital Assets:

Capital assets are of two types:

  1. Short-Term Capital Asset (STCA)

  2. Long-Term Capital Asset (LTCA)

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

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

Exceptions :

  1. 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:

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

    2. a unit of an equity oriented fund

    3. a zero coupon bond

  2. 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:

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

    2. 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 - LTCA [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

(3) Meaning of Capital Assets in Graphical Chat (Section 2(14) :

Meaning of Capital Assets in Graphical Chat (Section 2(14)

4. Type of Capital Gains:

Since there are two types of capital assets, there will be two types of Capital Gains i.e.—

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

  2. Gain arising on the transfer of short-term capital asset.

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

    Gain arising on the transfer of long-term capital asset.

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.

 

5. Transfer of Capital Assets to arise Capital Gain

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 transfer (See para 7.3b), 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.

1. What is Transfer of Capital Assets [Section 2(47)]:

Transfer, in relation to capital asset, includes:

  1. the sale, exchange or relinquishment of the asset; or

  2. the extinguishment of any rights therein; or

  3. the compulsory acquisition thereof under any law; or

  4. in a case where the asset is converted by the owner thereof into, or is treated by him, as stockin-trade of a business carried on by him, such conversion or treatment; or

  5. the maturity or redemption of zero coupon bonds; or

  6. 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

  7. 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.

2. Transactions Not regarded as Transfer of Capital Assets [Sections 46 and 47]:

The meaning of transfer is given in section 2(47), whereas transactions not regarded as transfer are covered u/ss 46 and 47. In many transactions although there is a transfer, but these are not considered to be transfer for purposes of capital gains.

Some of the relevant transactions which are not regarded as transfer are:

  1. where the assets of a company are distributed to its shareholders on liquidation of a company, such distribution shall not be regarded as transfer in the hands of the company [Section 46(1)];

  2. any distribution of capital assets on the total or partial partition of Hindu Undivided Family [Section 47(i)];

  3. any transfer of a capital asset under a gift or will or an irrevocable trust [Section 47(iii)];

  4. any transfer of a capital asset by a company to its 100% subsidiary company provided the subsidiary company is an Indian company [Section 47(iv)];

  5. any transfer of a capital asset by a 100% subsidiary company to its holding company, if the holding company is an Indian company [Section 47(v)];

  6. any transfer in a scheme of amalgamation of a capital asset by the amalgamating company to the amalgamated company, if the amalgamated company is an Indian company [Section 47(vi)];

  7. any transfer in a scheme of amalgamation of shares held in an Indian company by the amalgamating foreign company to the amalgamated foreign company if certain conditions are satisfied.

  8. any transfer, in a demerger, of a capital asset by the demerged company to the resulting company, if the resulting company is an Indian company [Section 47(vib)];

  9. any transfer in a demerger, of a capital asset, being a share or shares held in an Indian company, by the demerged foreign company to the resulting foreign company, if certain conditions are satisfied.

  10. any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company if the transfer or issue is made in consideration of demerger of the undertaking [Section 47(vid)];

  11. any transfer by a shareholder, in a scheme of amalgamation, of shares held by him in the amalgamating company if certain conditions are satisfied:

  12. any transfer, made outside India, of a capital asset being rupee denominated bond of an Indian company issued outside India, by a non-resident to another non-resident; [Section 47(viiaa)]

3. Transfer in case of Immovable and Movable Property

Different rules are applicable in case of movable/immovable assets to find out when a capital asset is “transferred”.

1. Transfer in case of Immovable property when documents are registered -

Title to immovable assets will not pass till the conveyance deed is executed or registered.

2. Transfer in case of Immovable Property when documents are not registered -

Even if the documents are not registered but the following conditions of section 53A of the Transfer of Property Act are satisfied, ownership in an immovable property is “transferred”—

  1. there should be a contract in writing;

  2. the transferee has paid consideration or is willing to perform his part of the contract; and

  3. the transferee should have taken possession of the property.

When these conditions are satisfied, the transaction will constitute “transfer” for the purpose of capital gains.

3. Transfer in case of Movable Property -

Title to a movable property passes at the time when property is delivered pursuant to a contract to sell. Entries in the books of account are not relevant for determining date of transfer.

6. Capital Gain should arise in the previous year in which Transfer 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:

  1. damage or destruction of any capital asset by fire or other calamities

  2. conversion of capital asset into stock-in-trade (discussed in para 7.13c);

  3. compulsory acquisition of an asset (discussed in para 7.13f).

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

 

Related Topics....Under the head 'Capital Gain'

Capital Assets, Capital Gain & Transfer of Capital Assets for Taxation of 'Capital Gain'
Types of Capital Assets for Computing ‘Capital Gain’
Computation Of ‘Period Of Holding of an Asset' for Computing Gapital Gain [Explanation 1(i) to Section 2(42A)]
Transfer Of A Capital Asset [Section 2(47)] for Computing Capital Gain
Transactions Not regarded as ‘Transfer’ for Computing Capital Gain [Section 46 and 47]
Method of Computing Capital Gain [Section 48]
Deemed Cost of Acquisition of Asset for Computing Capital Gain
[Section 55(2)] : Cost of Acquisiton of Assets for Computation of Capital Gain
Capital Gains Accounts Scheme, 1988.
Types of Capital Gain
Tax on Long-Term Capital Gain in certain Cases (Section 112A)
Exemption of Capital Gains under Section 10 and 115JG

Exemption of Capital Gains under Sections 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GB anf 54H

(Section 54) : Exemption of Capital Gains from the Transfer of Residential House Property
(Section 54B) : Exemption of Capital Gain on Transfer of Land used for Agricultural Purposes
(Section 54D) : Exemption of Capital Gains on Compulsory Acquisition Of Land And Buildings forming part of Industrial Undertaking
(Section-54EC) : Exemption of Capital Gain on Transfer of any Long Term Capital Asset on the basis of Investment in certain Bonds
(Section 54EE) : Capital Gain not to be charged on Investment in Units of a Specified Fund
[Section 54F] : Exemption of Capital Gain on Transfer Of Long-Term Capital Assets other than a House Property
[Section 54G] : Capital Gain on Shifting of Industrial Undertaking from Urban Areas to Non-Urban Areas :
[Section 54GA] : Exemption of Capital Gain on transfer of assets in case of shifting of Industrial Undertaking from an urban area to any Special Economic Zone (SEZ)
(Section 54GB) : Exemption of Long term Capital Gain Tax on Transfer of Residential Property if Net Consideration is Invested in the Equity Shares of a new Start-up SME Company :
(Section 54H) : Extension of time limit for acquiring new Asset or Depositing or Investing amount of Capital Gain, in case of Compulsory Acquisition :

Capital Gain in various Special Cases - How to Find Out or Calculate

  1. Capital Gain from Zero Coupon Bonds

  2. Capital Gain in case of amount Received from an Insurer on account of Damage or Destruction of any Capital Asset [Section 45(1A)]:

  3. Capital Gain in the case of Transfer of Depreciable Assets [Section 50] -

  4. Capital Gain on Conversion of Capital Asset into Stock-in-Trade [Section 45(2)]-

  5. Capital Gain on Transfer of Capital Asset by a Partner/Memeber to a Firm/AOP/BOI as Capital contribution [Section 45(3)]-

  6. Capital Gain on Distribution of Capital Assets by a Firm, AOP/BOI to Partners at the time of Dissolution [Section 45(4)]-

  7. Capital Gain on Compulsory Acquisition of a Capital Asset [Section 45(5)]-

  8. Computation of Capital Gains in case of Joint Development Agreement [Section 45(5A)] [W.e.f. A.Y. 2018-19]

  9. Capital Gain on Conversion of Debentures / Bonds into Shares [Section 47(x), 49(2A) and rule 8AA] :

  10. Capital Gain on Transfer of Shares / Debentures in the hands of Non-Residents (Proviso 1 to Section 48 and Rule 115A) :

  11. Capital Gain on Transfer of Self-Generated Capital Assets :

  12. Capital Gain on Transfer of Bonus Shares -

  13. Capital Gain on Transfer of Right Entitlement -

  14. Capital Gain on Transfer of Securities in Demat Form -

  15. Capital Gains on Distribution of Assets by Companies in Liquidation [Section 46]:

  16. Computation of Capital Gains in the case of Transfer of Land and Building or in Real Estate Transactions [Section 50C] -

  17. Capital Gains on Purchase by Company of its Own Shares or Other Specified Securities [Section 46A]:

  18. Capital Gain on Sale of Land and Building to be computed separately in case of Building Constructed by the Assessee:

 

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