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:
Condition-1 : there must be a capital asset;
Condition-2 : the capital asset must have been transferred;
Condition-3 : there must be profits or gains on such transfer, which will be known as capital gain;
Condition-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.
1. Capital Asset [Section 2(14)]- for Compurting Tax on 'Capital Gain'
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,
(c) any unit linked insurance policy to which exemption under section 10(10D) does not apply on account of the applicability of the fourth and fifth provisos thereof. Fourth and fifth provisos of section 10(10D) relate to payment or aggregate payments of premium exceeding 2,50,000 made in any previous year in case of Unit Linked Insurance Policy/Policies issued on or after 1-2-2021.
but does not include—
(i) 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,
(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:
jewellery;
archaeological collections;
drawings;
paintings;
sculptures; or
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;
Rural agricultural land means an agricultural land in India—
(a) if situate in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town committee or by any other name) and its population should be less than 10,000, or
(b) If situate outside the limits of municipality, etc. it should be situated at a distance, measured aerially (shortest aerial distance),—
(I) being more than two kilometers, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than 10,000 but not exceeding 1,00,000; or
(II) being more than six kilometers, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than 1,00,000 but not exceeding 10,00,000; or
(III) being more than eight kilometers, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than 10,00,000.
The expression "population" means population according to the last preceding census of which the relevant figures have been published before the first day of the previous year.
(c) Urban agricultural land is although a capital asset but any capital gain arising from the compulsory acquisition of such land shall be exempt as per section 10(37) if certain conditions mentioned in that section are satisfied. |
(iv) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under Gold Monetisation Scheme, 2015 notified by the Central Government.
Capital assets are of two types:
(1) Short-term capital asset
(2) Long-term capital asset
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 :
(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.
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. |
There is a need to make the distinction between short-term and long-term capital gain as short-term capital gain (other than referred to in section 111A) like any other incomes is taxable at normal rate of income-tax, whereas long-term capital gain is taxed at a concessional rate. |
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, 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.
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
(iva) the maturity or redemption of zero coupon bonds; or
(v) 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
(vi) 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.
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:
(i) 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)];
(ii) any distribution of capital assets on the total or partial partition of Hindu Undivided Family [Section 47(i)];
(iii) any transfer of a capital asset under a gift or will or an irrevocable trust [Section 47(iii)];
(iv) 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)];
(v) 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)].
(vi) 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)];
(vii) 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;
(viii) 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)];
(ix) 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;
(x) 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)];
cxi) any transfer by a shareholder, in a scheme of amalgamation, of shares held by him in the amalgamating company if certain conditions are satisfied;
(xii) any transfer of Sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme, 2015, by way of redemption, by an assessee being an individual;
(xiii) any transfer of a capital asset, being—
(a) bond or Global Depository Receipt referred to in section 115AC(1); or
(b) rupee denominated bond of an Indian company; or
(c) derivative, or
(d) such other securities as may be notified by the Central Government in this behalf, made by a non-resident on a recognised stock exchange located in any International Financial Services Centre and where the consideration for such transaction is paid or payable in foreign currency. [Section 47(viiab)];
(xiv) any transfer of a capital asset, being any work of art, archaeological, scientific or art collection, book, manuscript, drawing, painting, photograph or print, to the Government or a University or the National Museum, National Art Gallery, National Archives or any such other public museum or institution, as may be notified by the Central Government in the Official Gazette to be of national importance, or to be of renown throughout any State or States [Section 47(ix)];
(xv) any transfer by way of conversion of bonds or debentures, debenture-stock or deposit certificates in any form, of a company into shares or debentures of that company [Section 47x)];
(xvi) any transfer by way of conversion of preference shares of a company into equity shares of that company [Section 47(xb)];
(xvii) any transfer of a capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm provided the following conditions are satisfied:
(a) all the assets and liabilities of the firm, relating to the business immediately before the succession become the assets and liabilities of the company;
(b) all the partners of the firm immediately before the succession become the shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of the succession;
(c) the partners of the firm do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company;
(d) the aggregate of the shareholding in the company of the partners of the firm is not less than 50% of the total voting power in the company and their shareholding continues to be as such for a period of 5 years from the date of the succession [Section 47(xiii)]; and
(xviii) any transfer of a capital asset or intangible asset by a private company or unlisted public company (hereafter in this clause referred to as the company) to a limited liability partnership or any transfer of a share or shares held in the company by a shareholder as a result of conversion of the company into a limited liability partnership in accordance with the provisions of section 56 or section 57 of the Limited Liability Partnership Act, 2008 provided following conditions are satisfied:
(a) all the assets and liabilities of the company immediately before the conversion become the assets and liabilities of the limited liability partnership;
(b) all the shareholders of the company immediately before the conversion become the partners of the limited liability partnership and their capital contribution and profit sharing ratio in the limited liability partnership are in the same proportion as their shareholding in the company on the date of conversion;
(c) the shareholders of the company do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of share in profit and capital contribution in the limited liability partnership;
(d) the aggregate of the profit sharing ratio of the shareholders of the company in the limited liability partnership shall not be less than fifty per cent at any time during the period of five years from the date of conversion;
(e) the total sales, turnover or gross receipts in business of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed sixty lakh rupees; and
(ea) the total value of the assets as appearing in the books of account of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed 5 crore; and
(f) no amount is paid, either directly or indirectly, to any partner out of balance of accumulated profit standing in the accounts of the company on the date of conversion for a period of three years from the date of conversion. [Section 47(xiiib)j;
(xix) where a sole proprietary concern is succeeded by a company in the business carried on by it as a result of which the sole proprietary concern sells or otherwise transfers any capital asset or intangible asset to the company provided the following conditions are satisfied:
(a) all the assets and liabilities of the sole proprietary concern relating to the business immediately before the succession become the assets and liabilities of the company;
(b) the shareholding of the sole proprietor in the company is not less than 50%, of the total voting power in the company and his shareholding continues to remain as such for a period of 5 years from the date of the succession; and
(c) the sole proprietor does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company [Section 47 (xiv)]
(xx) any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the Central Government [Section 47(xvi)];
(xxi) any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating scheme of a mutual fund, made in consideration of the allotment to him of a capital asset, being a unit or units, in the consolidated scheme of the mutual fund shall not be regarded as transfer:
Provided that the consolidation is of two or more schemes of equity oriented fund or of two or more schemes of a fund other than equity oriented fund [Section 47(xviii)j;
(xxii) any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating plan of a mutual fund scheme, made in consideration of the allotment to him of a capital asset, being a unit or units, in the consolidated plan of that scheme of the mutual fund. [Section 47(xix)J;
It may be observed that the above transactions are not treated as transfer for purposes of capital gains.
4. 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:
(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)]
Types of Capital Gains and a format for Computation of Capital Gains [Section 48] are described below:
Capital gains are of two 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:
(i) expenses of transfer;
(ii) cost of acquisition of the asset and cost of improvement thereto;
(iii)in case of value of any money or capital asset received by a specified person from a specified entity referred to in section 45(4), the amount chargeable to income-tax as income of such specified entity under that sub-section which is attributable to the capital asset being transferred by the specified entity, calculated in the prescribed manner.
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 (see also exceptions below);
(iii) Indexed cost of improvement (see also exceptions below).
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:
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, |
— |
|
Full value of consideration |
— |
|
Less: (a) Expenditure incurred wholly and exclusively in connection with such a transfer |
— |
|
(h) Indexed Cost of acquisition |
— |
|
(c) Indexed Cost of improvement |
— |
— |
Long-term capital gains |
— |
|
Less: Exemption if available u/s 54/54B/54D/54EC/54EE/54F154G/54GA! 54GB |
|
— |
Taxable long-term capital gains |
— |
|
Exceptions :
1. In the case of an assessee, who is a non-resident, capital gains arising from the transfer of a capital asset being shares in, or debentures of, an Indian company shall be computed by converting
- the cost of acquisition,
- expenditure incurred wholly and exclusively in connection with such transfer and
- the full value of the consideration received or accruing as a result of the transfer of the capital asset
into the same foreign currency as was initially utilised in the purchase of the shares or debentures, and the capital gains so computed in such foreign currency shall be reconverted into Indian currency, so however, that the aforesaid manner of computation of capital gains shall be applicable in respect of capital gains accruing or arising from every reinvestment thereafter in, and sale of, shares in, or debentures of, an Indian company. [First proviso to section 48]
Note: The above proviso has been inserted so as not to tax the capital gain in the hands of a nonresident on account of currency fluctuation in a transaction relating to purchase and sale of shares.
2. Where long-term capital gain arises from the transfer of a long-term capital asset, (other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso), the cost of acquisition and cost of improvement mentioned under clause (ii) of section 48, above, shall be substituted by the words “indexed cost of acquisition” and “indexed cost of improvement”, respectively. [Second proviso to section 48]
3. The above first and second provisos shall not apply to the capital gains arising from the transfer of a long-term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust referred to in section 112A. [Third proviso to section 48]
4. Indexation of cost of acquisition and indexed cost of improvement referred to in second proviso above shall not apply to the long-term capital gain arising from the transfer of a long-term capital asset, being a bond or debenture other than—
(a) capital indexed bonds issued by the Government; or
(b) Sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme, 2015. [Fourth proviso to section 48]
5. In case of an assessee being a non-resident, any gains arising on account of appreciation of rupee against a foreign currency at the time of redemption of rupee denominated bond of an Indian company held by him, shall be ignored for the purposes of computation of full value of consideration under this section. [Fifth proviso to section 48]
6. Full Value of Consideration of Capital Asset Transfer
Full value of consideration means what the transferor receives, or is entitled to receive as consideration for the capital asset transferred. It is not necessarily always the market value of the asset on the date of transfer. The Legislature has used the expression full value of consideration instead of merely saying consideration because the transfer for the purpose of section 45(1) includes not merely sale, but also other modes of transfer such as exchange, relinquishment of the asset, extinguishment of rights in the capital asset, etc. In a case of transfer where the consideration is not in money, the value placed by the parties to the transaction will have to be taken as the consideration.
The expression full value means the whole price without any deduction whatsoever and it cannot refer to the adequacy or inadequacy of the price bargained for. Nor has it any reference to the market value of the capital asset which is the subject matter of transfer.
Receipt Of Consideration In Instalments:
Even if the full value of consideration agreed upon is received in instalments in different years, the entire value of consideration has to be taken into account for computing the capital gains which become chargeable in the year of transfer.
Consideration in case of exchange:
In case of exchange, the full value of consideration shall be the market value of the property granted in exchange.
Deemed full value of consideration:
In some cases, instead of actual consideration, the full value of consideration shall be the deemed value.
7. Expenses on Transfer of Capital Asset
Expenses on transfer include any expenditure incurred, whether directly or indirectly, for the purpose of transfer like advertisement expenses, brokerage, stamp duty, registration fees, legal expenses, etc. However, any expenses which have been claimed as a deduction under any other provisions of the Act cannot be claimed as a deduction under this clause. |
