1. Capital Gain from Zero Coupon Bonds
(1) Maturity and redemption of zero coupon bond to be regarded as a transfer [Section 2(47)]:
As per clause (b) above, the payment of and benefit from zero coupon bond shall be received or receivable from the issuing company/fund only at the time of maturity or redemption. Consequently, clause (iva) has been inserted in section 2(47) to provide that the maturity or redemption of a zero coupon bond shall be regarded as a transfer.
(2) Transfer of zero coupon bond will be subject to capital gain tax:
The profits arising on the transfer of such zero coupon bond shall be chargeable under the head “capital gains”. Further, if such zero coupon bonds are held for not more than 12 months, such capital asset shall be treated as shortterm capital asset and hence shall be subject to short-term capital gain. On the other hand, where these bonds are held for more than 12 months, such capital gain shall be treated as long-term capital gain.
(3) Taxability of long-term capital gain from zero coupon bond [Proviso to section 112(1)]:
The long-term capital gain on zero coupon bonds shall be chargeable to tax at 10% of long-term capital gain without indexation of cost of such bonds.
(1) Meaning of Zero Coupon Bond [Section 2(48)]: “Zero Coupon Bond” means a bond—
- issued by any infrastructure capital company or infrastructure capital fund or public sector company or scheduled bank;
- in respect of which no payment and benefit is received or receivable before maturity or redemption from infrastructure capital company or infrastructure capital fund or public sector company; and
- which the Central Government may, by notification in the Official Gazette, specify in this behalf.
2. Capital Gain in case of amount Received from an Insurer on account of Damage or Destruction of any Capital Asset [Section 45(1A)]:
Where any person receives at any time during any previous year any money or other assets under an insurance from an insurer on account of damage to, or destruction of, any capital asset, as a result of—
- flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or
- riot or civil disturbance; or
- accidental fire or explosion; or
- action by an enemy or action taken in combating an enemy (whether with or without a declaration of war),
then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax under the head “Capital gains”.
In which previous year the capital gain shall arise:
In the above case, the capital gain shall be deemed to be the income of the previous year in which such money or other asset was received.
What shall be full value of consideration in this case?:
It shall be value of any money or the fair market value of other assets for the date of such receipt.
3. Capital Gain in the case of Transfer of Depreciable Assets [Section 50] –
The following rules are applicable –
- Capital gain arises only in two cases –
If a depreciable asset is transferred, capital gain (or loss) will arise only in the following two cases –
- When on the last day of the previous year written down value of the block of assets is 0 (zero) [sec. 50(1)].
- When the block of assets is empty on the last day of the previous year [sec. 50(2)].
In no other case capital gain is chargeable to tax, when a depreciable asset is transferred. This rule is equally applicable whether depreciation is allowed in the current year (or any of earlier years).
- Cost of acquisition –
In the above two cases, cost of acquisition shall be the aggregate of the following–
- Step 1 : Find out written down value of block of assets at the beginning of the previous year.
- Step 2 : Add: Actual cost of‡ any asset(s) falling within that block of asset acquired by the assessee during the previous year (whether put to use or not).
- Always Short-Term –
On transfer of depreciable assets gain (or loss) is always short-term capital gain (or loss). It can never be treated as long-term capital gain (or loss).
4. Capital Gain on Conversion of Capital Asset into Stock-in-Trade [Section 45(2)]-
If capital asset is converted into stock-in-trade during a previous year relevant to the assessment year 1985-86 (or any subsequent year), the following special rules are applicable–
- The conversion of capital asset into stock-in-trade is treated as a ‘transfer’ within the meaning of section 2(47).
- However, section 45(2) provides that although such a conversion of capital asset into stock-intrade will be a transfer of the previous year in which the asset is so converted, but the capital gain will not arise in the previous year in which the asset is converted, it will arise in the previous year in which such converted asset is sold or otherwise transferred.
- Indexation of cost of acquisition and improvement, if required, will be done till the previous year in which such conversion took place.
- Further, the fair market value of the asset, as on the date of such conversion, shall be deemed to be full value of the consideration of the asset.
- The sale price minus market value as on the date of conversion shall be treated as business income and taxed under the head ‘Profits and gains of business and profession’.
5. Capital Gain on Transfer of Capital Asset by a Partner/Memeber to a Firm/AOP/BOI as Capital Contribution [Section 45(3)]-
A capital asset is transferred by a partner to his partnership firm by way of his capital contribution (or otherwise). It is treated a “transfer” and capital gain will be taxable in the hands of the partner. The amount recorded in the books of account is taken as full value of consideration. This rule is also applicable when a member transfers a capital assets to his association of persons or body of individuals.
X, Y and Z form a partnership firm. Soon after formation of the firm, X brings a house property as his capital contribution on August 20, 2018. On the date of transfer fair market value of the house is Rs. 20,00,000. However, the amount recorded in the books of firm is Rs. 18,00,000. The house was purchased by X in 2005-06 for Rs. 2,50,000. Find out the amount of capital gain.
Capital gain will be taxable in the hands of X for the assessment year 2019-20 –
|Full value of consideration (i.e., amount recorded in the books of account of the firm)||Rs. 18,00,000|
|Less: Indexed cost of acquisition (Rs. 2,50,000 × 280 ÷ 117)||Rs. 5,98,291|
|Long-term capital gain||Rs. 12,01,709|
6. Capital Gain on Distribution of Capital Assets by a Firm, AOP/BOI to Partners at the time of Dissolution [Section 45(4)]-
It is treated as transfer. Capital gain is taxable in the hands of firm. The fair market value of the asset on the date of distribution is taken as full value of consideration. This rule is also applicable when an asset is transferred by an association of persons or body of individuals.
X and Y are two partners of a hardware trading firm. It is dissolved on March 10, 2019. At the time of dissolution, a plot of land owned by the firm is given to X (amount recorded in books of the firm is Rs. 45,00,000, however, fair market value is Rs. 66,00,000). This plot was purchased by the firm for Rs. 36,00,000 on March 5, 2012. Find out the amount of capital gain.
Capital gain will be taxable for the assessment year 2019-20 –
|Full value of consideration (i.e., fair market value on the date of distribution)||Rs. 66,00,000|
|Less: Indexed cost of acquisition (Rs. 36,00,000 × 280 ÷ 184)||Rs. 54,78,261|
|Long-term capital gain||Rs. 11,21,739|
7. Capital Gain on Compulsory Acquisition of a Capital Asset [Section 45(5)]-
The special rules given below are applicable where the Government has acquired an asset of a person by way of compulsory acquisition. These rules are also applicable when consideration is approved or determined by the Central Government or RBI (even if there is no compulsory acquisition).
Initial Compensation –
Initial compensation† is taken as full value of consideration. Capital gain is chargeable to tax in the year in which the initial compensation (or part thereof) is first received. Indexation benefit is, however, available up to the year in which the asset is compulsorily acquired.
Additional Compensation –
If a Court/Tribunal/authority enhances compensation, it will be taxable in the year in which enhanced compensation or additional compensation is received. For this purpose cost of acquisition and cost of improvement are taken as nil. However, litigation expenses or incidental expenditure for obtaining additional compensation is deductible.
If the enhanced compensation is received by any other person (because of the death of the transferor or for any other reason), it is taxable as income of the recipient.
8. Computation of Capital Gains in case of Joint Development Agreement [Section 45(5A)] [W.e.f. A.Y. 2018-19]
Where the capital gain arises to an assessee, being an individual or a Hindu undivided family, from the transfer of a capital asset, being land or building or both, under a specified agreement, the capital gains shall be chargeable to income-tax as income of the previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority provided the following conditions satisfied :
- the assessee should be an individual or HUF
- he holds the land or building or both
- he transfers such land or building or both to the developer
- he has entered into a specified agreement with such developer for developing a real estate project. (For meaning of specified agreement see box above)
If the above conditions are satisfied, the capital gains shall be chargeable to income-tax as income of the previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority.
Full value of the Consideration for Computing the Capital Gain under Section 45(5A):
The stamp duty value of his share (i.e. share of the individual or HUF), being land or building or both, in the project on the date of issuing of said certificate of completion as increased by any monetary consideration received, if any, shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.
- “competent authority”means the authority empowered to approve the building plan by or under any law for the time being in force;
- “specified agreement” means a registered agreement in which a person owning land or building or both, agrees to allow another person to develop a real estate project on such land or building or both, in consideration of a share, being land or building or both in such project, whether with or without payment of part of the consideration in cash;
- “stamp duty value” means the value adopted or assessed or assessable by any authority of Government for the purpose of payment of stamp duty in respect of an immovable property being land or building or both.
9. Capital Gain on Conversion of Debentures / Bonds into Shares [Section 47(x), 49(2A) and rule 8AA] :
When any debentures or part thereof of a company are converted into shares of that company, the transaction is not considered as a transfer and hence no capital gain is chargeable.
However, when these shares are, thereafter, actually transferred, capital gain shall arise and be chargeable in the previous year in which the shares are transferred.
The cost of acquisition of the shares shall be that part of the cost of debenture in relation to which shares were acquired by the assessee. [Section 49(2A)]
Further, for the purpose of computing the period of holding of such shares, the period for which the bond, debenture, debenture-stock or deposit certificate, as the case may be, was held by the assessee prior to the conversion shall also be included. [Rule 8AA(2)]
10. Capital Gain on Transfer of Shares / Debentures in the hands of Non-Residents (Proviso 1 to Section 48 and Rule 115A) :
If a non-resident acquires shares in, or debentures of, an Indian company by utilizing foreign currency, the gain will be calculated in the same foreign currency, which was initially utilized in acquiring shares/debentures. After calculating capital gain in foreign currency, it will be converted into Indian currency.
The aforesaid rule is not optional but it is compulsory and applicable whether the asset is short-term or long-term. The benefit of indexation is not available, even if the asset is long-term.
Capital Gain will now be computed as under :
|Ffull value of consideration (converted into foreign currency at average TT buying and TT selling rate on date of sale)||–|
Less: (i) expenses on transfer (converted into foreign currency at average TT buying and TT selling rate on the date of sale)
(ii) cost of acquisition (converted into foreign currency at average TT buying and TT selling rate on the date of acquisition)
Capital gain in foreign currency
- Telegraphic Transfer (TT) buying/selling rates in relation to a foreign currency is the rate of exchange adopted by the State Bank of India for purchasing or selling such currency, where such currency is made available by that bank through Telegraphic Transfer (TT).
- The transferor should be a non-resident at the time of transfer. Non-resident includes a foreign company who is non-resident.
- This proviso is not applicable to units of UTI and mutual funds.
- The shares and debentures (whether listed or non-listed) of Indian companies only are covered under this proviso. Indian company shall include Government company. However, bonds of Central Government/State Government and RBI are not covered for this purpose.
- The first proviso to section 48 is mandatory. Hence the non-resident covered by this proviso is not allowed to opt for indexation of cost (i.e. 2nd proviso to section 48).
11. Capital Gain on Transfer of Self-Generated Capital Assets :
An asset which does not cost anything to the assessee in terms of money in its creation or acquisition, is a self-generated asset. Generally there is no capital gain on transfer of self-generated assets as the cost of acquisition of such assets cannot be computed. But certain amendments have been made in the Income-tax Act and now capital gain arising on the transfer of the following assets is chargeable to tax:
- goodwill of a business. There will, however, be no capital gain on sale of goodwill of a profession;
- trademark or brand name associated with the business;
- right to manufacture, produce or process any article or thing, for a consideration e.g. patent, copyright, formula, design;
- right to carry on any business or profession,
- tenancy rights;
- route permits;
- loom hours.
When a self-generated capital asset is transferred, the following special rules are applicable –
Self-generated goodwill of a business, right to manufacture/produce an article/thing or right to carry on business or profession –
In the case of transfer of these capital assets, cost of acquisition and cost of improvement are taken as nil. Expenses on transfer are, however, deductible on the basis of actual expenditure.
Self-generated assets being tenancy right, route permit, loom hours, trade mark or brand name associated with a business –
In the case of transfer of these self-generated capital assets, cost of acquisition is taken as nil. Cost of improvement and expenses on transfer are, however, deductible on the basis of actual expenditure.
Any other Self-Generated asset –
In the case of transfer of any other self-generated capital asset, capital gain is not chargeable to tax.
Fair Market Value on April 1, 2001 –
Option not available – Even if the aforesaid assets self-generated were acquired before April 1, 2001, the option of adopting the fair market value on the said date is not available.
12. Capital Gain on Transfer of Bonus Shares –
If bonus shares were allotted before April 1, 2001, cost of acquisition is the fair market value on April 1, 2001. If bonus shares are allotted after April 1, 2001, cost of acquisition is taken as zero.
13. Capital Gain on Transfer of Right Entitlement –
Amount realized by an existing shareholder by selling rights entitlement (i.e., right to acquire additional shares in the company at a pre-determined price) is taxable in the year of transfer of the right entitlement. Cost of acquisition of right entitlement is always taken as zero and the capital gain is deemed as short-term capital gain.
14. Capital Gain on Transfer of Securities in Demat Form –
Demat account is a safe and convenient means of holding securities just like a bank account is for funds. The idea of dematerialised account is to avoid the need to hold physical shares. The shares are virtually being bought and sold through the banking account.
- For computing capital gain chargeable to tax, the cost of acquisition and period of holding of any security in demat form shall be determined on the basis of First-in-First-Out (FIFO) method.
15. Capital Gains on Distribution of Assets by Companies in Liquidation [Section 46]:
Where the assets of a company are distributed to its shareholder on its liquidation, such distribution shall not be regarded as a transfer by the company. Therefore, there will be no capital gain to the company.
However, where a shareholder on the liquidation of a company, receives any money or other asset from the company in lieu of the shares held by him, such a shareholder shall be chargeable to income-tax under the head ‘Capital gains’ in respect of the money and the asset so received. In this case, the consideration price for capital gain purposes shall be money received and/or the market value of the other assets on the date of distribution minus deemed dividend within the meaning of section 2(22)(c).
Sale of Assets Received on Liquidation:
As per section 55(2)(b)(iii), if the asset (other than cash) acquired by the shareholder, at the time of liquidation, is subsequently transferred by the shareholder; then for the purpose of computation of capital gain of such transfer, the cost of acquisition of such asset shall be the market value of the asset on the date of distribution. In this case, deemed dividend will not be deducted.
16. Computation of Capital Gains in the case of Transfer of Land and Building or in Real Estate Transactions [Section 50C] –
Section 50C is applicable if the following conditions are satisfied—
- There is a transfer of land or building or both. The asset may be long-term capital asset or short-term capital asset. It may be depreciable or non-depreciable asset.
- Stamp duty value adopted (or assessed or assessable) by the Stamp duty authority in respect of such transfer, is more than 105 % of sale consideration.If the above conditions are satisfied, the value adopted by the Stamp duty authority shall be taken as “full value of consideration” for the purpose of computation of capital gains. In other words, section 50C is applicable only in those cases, where stamp duty value is more than 105 % of actual consideration .
If the stamp duty value on the date of agreement and on the date of registration is different –
It is quite possible that stamp duty on the date of agreement (fixing the value of consideration) is different from stamp duty on the date of registration. In such a case, the stamp duty on the date of agreement may be taken (and not as on the date of registration). However, this rule shall apply only in those cases where amount of consideration (or a part thereof) has been received by way of an account payee cheque/draft (or by use of electronic clearing system through a bank account) before the date of the agreement
17. Capital Gains on Purchase by Company of its Own Shares or Other Specified Securities [Section 46A]:
Where a shareholder or a holder of other specified securities receives any consideration from any company for purchase of:
- its own shares held by such shareholder or
- other specified securities held by holder of other specified securities,
then, subject to the provisions of section 48, the difference between the cost of acquisition and the value of consideration received by the shareholder or the holder of other specified securities, as the case may be, shall be deemed to be the capital gains arising to such shareholder or the holder of other specified securities, as the case may be, in the year in which such shares or other specified securities were purchased by the company.
|“Specified securities” includes employees stock option or other securities as may be notified by the Central Government from time to time.|
18. Capital Gain on Sale of Land and Building to be computed separately in case of Building Constructed by the Assessee:
Where the assessee acquires land and constructs the building on the same in any subsequent previous year then, for the purpose of computation of capital gain, the period of holding of the land and period of holding of the building shall be separately determined as below :
- The period of holding of land shall be from the date of purchase of land till the date of sale of the house property.
- On the other hand, the period of holding of the building shall be from the date of completion of building till the date of sale of the house property.
Thus, for computing capital gain, the indexation of cost, if required, will be computed separately for the land and for the building.