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Method of Computing Capital Gain [Section 48]

Capital gains are of two types:

  1. Short-term capital gain which arises on the transfer of a short-term capital asset; and

  2. 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;

  2. expenses of transfer;

  3. 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:

  1. Expenses of transfer;

  2. Indexed cost of acquisition of the asset;

  3. Indexed cost of improvement.

From capital gain, computed as above, certain exemptions are available under sections 54/54B/ 54D/54EC/54F/54G/ 54GA/54GB. The capital gain after claiming the said exemption(s) is known as taxable long-term or short-term capital gain.

A format to compute the capital gain is given below:

Computation of Short-Term Capital Gain :

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, uls 54B/54D154G/S4GA

Taxable Short-term capital gains.

 

Computation of Long-Term Capital Gain :

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 54154B/54D/54EC/54EFJ/54F/54G/54GA/ 54GB

Taxable long-term capital gains

(A) Full Value of Consideration (Section 48) in lieu of Capital Asset for Calculating Capital Gain

Full value of consideration is the consideration received or receivable by the transferor in lieu of assets, which he has transferred. Such consideration may be received in cash or in kind. If it is received in kind, then fair market value of such assets is taken as full value of consideration. Full value of consideration does not mean market value of that asset which is transferred.

Tax on Long-Term Capital Gain

Adequacy of Consideration -

Adequacy or inadequacy of consideration is not a relevant factor for the purpose of determining full value consideration. However, in the case of transfer of land or building (or both), if stamp duty value is more than 105 per cent of sale consideration, the stamp duty value is taken as full value of consideration.

Receipt of Consideration -

It makes no difference whether (or not) “full value of consideration” is received during the previous year. Even if consideration is not received, capital gain is chargeable to tax in the year of transfer.

If consideration is not Determinable -

Where in the case of a transfer, consideration for the transfer of a capital asset(s) is not determinable, then for the purpose of computing capital gains, the fair market value of the asset shall be taken to be the full market value of consideration [sec. 50D].

(B) Expenditure on Transfer of Capital Asset for Calculating Capital Gain

Expenditure incurred wholly and exclusively in connection with transfer of capital asset is deductible from full value of consideration. The expression “expenditure incurred wholly and exclusively in connection with such transfer” means expenditure incurred which is necessary to effect the transfer.

Examples of such expenses are:

  • brokerage or commission paid for securing a purchaser,

  • cost of stamp,

  • registration fees borne by the vendor,

  • travelling expenses incurred in connection with transfer,

  • litigation expenditure for claiming enhancement of compensation awarded in the case of compulsory acquisition of assets.

(C) Cost of Acquistion of an Asset for Calculating Capital Gain

Cost of acquisition of an asset is the value for which it was acquired by the assessee.

  • Expenses of capital nature for completing or acquiring the title to the property are includible in the cost of acquisition.

  • Interest on money borrowed to purchase asset is part of actual cost of asset.

  • The amount paid for discharge of a mortgage is part of “cost of acquisition”, if the mortgage was not created by the transferor.

    For instance... , on June 1, 2013, X took a loan of Rs. 5 lakh by mortgaging his house property. X could not repay the loan during his lifetime and after his death on July 2, 2015, the property (with mortgage) is transferred to Mrs. X. Mrs. X transfers the property on May 2, 2017 and before transfer, a sum of Rs. 7.2 lakh is paid to clear the mortgage. Rs. 7.2 lakh will be deductible as part of cost of acquisition of the property while calculating capital gains in the hands of Mrs. X.

    If, however, loan is taken by Mrs. X, then repayment of loan will not be deductible as part of cost of acquisition of the property while calculating capital gains in the hands of Mrs. X.

(D) Cost of Improvement to the Capital Asset for Calculating Capital Gain

Cost of improvement is capital expenditure incurred by an assessee in making any additions / improvement to the capital asset. It also includes any expenditure incurred to protect or complete the title to the capital assets or to cure such title. Any expenditure incurred to increase the value of the capital asset is treated as cost of improvement.

Improvement cost incurred before April 1, 2001 -

Cost of improvement incurred before April 1, 2001 is never taken into consideration. This rule does not have any exception.

(E) How to covert Cost of Acquisiton / Improvement into Indexed Cost of Acquisition / Improvement.

  • Indexed Cost of Acquisition is calculated as follows : -

Indexed Cost of Acquisition Formula

  • Indexed Cost of Improvement is calculated as follows : -

Indexed Cost of Improvement Formulla

  • Cost of Inflation Index for different Previous Years : -

Cost of Inflation Index for different Previous Years

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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