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Introduction @ "Capital Gain"

Any gain arising on the transfer [except such transfers as are given in sections 46 and 47] of a capital asset [sec. 2(14)] is chargeable to tax under section 45, if it is not eligible for exemption under sections 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA, 54GB and 54H. Incidence of tax on capital gains, however, depends upon whether capital gain is a short-term capital gain or a long-term capital gain [sec. 2(42A)].

In other words, capital gain’s tax liability arises only when the following conditions are satisfied:

Condition-1

There should be a capital asset.

Condition-2

The capital asset is transferred by the assessee

Condition-3

Such transfer takes place during the previous year.

Condition-4

Any profit or gains arises as a result of transfer.

Condition-5

Such profit or gains is not exempt from tax under sections 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA and 54GB.

If the aforesaid conditions are satisfied, then capital gain is taxable in the assessment year relevant to the previous year in which the capital asset is transferred.


However, in a few cases different rules are applicable. These cases are narrated briefly in para 101.

1. What Is Included In And Excluded From Capital Asset

“Capital asset” is defined by section 2(14).

Positive list –

“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.

Negative list –

The following assets are excluded from the definition of “capital assets” –

  1. Stock-in-trade (other than securities referred to in point 3 above).

  2. Personal effects (movable assets).

  3. Agricultural land in a rural area in India.

  4. A few gold bonds and special bearer bonds (this point does not have any practical utility).

  5. Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under the Gold Monetisation Scheme, 2015.

Stock-in-trade is not a capital asset –

Any stock-in-trade, (not being securities held by a Foreign Institutional Investor), consumable stores or raw material held for the purpose of business or profession is not a capital asset. This is because of the fact that any surplus arising on sale or transfer of stock-in-trade, consumable stores or raw material is chargeable to tax as business income under section 28. What shall be included in the term “stock-intrade” must always be dependent upon the nature of the business of the taxpayer. For instance, if the taxpayer deals in house properties, then such properties are stock-in-trade and, consequently, they are not capital asset. If a dealer in properties transfers his stock-in-trade (i.e., house properties), the resulting profit is business income not capital gains. Conversely, if a doctor transfers a house property, the resulting income is taxable under the head “Capital gains”.

Personal effects (being movable assets) are not capital assets –

Any movable property (including wearing apparel and furniture) held for personal use of the owner or for the use of any member of his family dependent upon him, is not a “capital asset” for the purpose of income under the head “Capital gains”. However, the following are not “personal effects” (in other words, the following are “capital assets”) even if these are for personal use— jewellery, archaeological collections, drawings, paintings, sculptures, or any work of art.

Agricultural land situated in rural area is not a capital asset –

Agricultural land in India in a rural area† is not capital asset.

2. Short-Term/Long-Term Capital Assets –

“Short-term capital asset” means a capital asset held by an assessee for not more than 36 months, immediately prior to its date of transfer. In other words, if a capital asset is held by an assessee for more than 36 months, then it is known as “long-term capital asset”.


WHEN SUCH PERIOD IS TAKEN AS 12 MONTHS/ 24 MONTHS –

If a capital asset is transferred after 36 months, it is known as long-term capital asset. However, in the following cases a capital asset becomes long-term capital asset if it is transferred after 12 months or 24 months –

Category A –

Period of holding more than 12 months (if transfer takes place after July 10, 2014) –

  1. Equity or preference shares in a company (listed in a recognised stock exchange in India).

  2. Securities (like debentures, bonds, Government securities, derivatives, etc.) listed in a recognised stock exchange in India.

  3. Units of UTI (whether quoted or not).

  4. Units of an equity oriented mutual fund (whether quoted or not).

  5. Zero coupon bonds (whether quoted or not).

Category B –

Period of holding more than 24 months–

  1. Equity or preference shares in a company (unlisted) (if transfer takes place on or after April 1, 2016).

  2. Immovable property (being land or building or both) (if transfer takes place on or after April 1, 2017).

HOW TO DETERMINE PERIOD OF HOLDING –

Specific rules are provided by the Income-tax Act to determine period of holding of a capital asset in a few cases.

WHY CAPITAL ASSETS ARE DIVIDED IN SHORT/LONG-TERM ASSETS –

The tax incidence under the head “Capital gains” depends upon whether the capital gain is short-term or long-term. Long-term capital gain is generally taxable at a lower rate. If the asset transferred is a short-term capital asset, capital gain will be short-term capital gain. Conversely, long-term capital gain arises on transfer of a long-term capital asset.
In the case of transfer of a depreciable asset (other than an asset used by a power generating unit eligible for depreciation on straight line basis), capital gain (if any) is taken as short-term capital gain, irrespective of period of holding.

3.  What Is Transfer Of Capital Asset 94.

Transfer, in relation to a capital asset, includes sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law [sec. 2(47)].

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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