DEFINITION OF CAPITAL ASSET

DEFINITION: ACCORDING TO SECTION 2(14), A 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 SEBI regulations.

However, it does not include—

i. Stock-in trade: The exclusion of stock-in-trade from the definition of capital asset is
only in respect of sub-clause (a) above and not sub-clause (b). For example: Gold for
goldsmith, flat for builder, car for car seller will come under PGBP.
ii. Personal effects: 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.
EXCLUSIONS:
(a) jewellery;
(b) archaeological collections;
(c) drawings;
(d) paintings;
(e) sculptures; or
(f) any work of art.

Definition of Jewellery- Jewellery is a capital asset and the profits or gains arising from the
transfer of jewellery held for personal use are chargeable to tax under the head “capital gains”.

iii. Rural agriculture land in India i.e., agricultural land in India which is not situated in
any specified area. Hence urban agricultural lands falls under capital assets.
Accordingly, the agricultural land described in (a) and (b) below, being land situated
within the specified urban limits, would fall within the definition of “capital asset”, and
transfer of such land would attract capital gains tax -
(a) agricultural land situated in any area within the jurisdiction of a municipality or
cantonment board having population of not less than ten thousand, or
 (b) agricultural land situated in any area within such distance, measured aerially, in
relation to the range of population as shown hereunder –

iv. Specified Gold Bonds:

v. Special Bearer Bonds, 1991 issued by the Central Government;
vi. Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999

SHORT TERM AND LONG TERM CAPITAL ASSET

Definition: As per Section 2(42A), short-term capital asset means a capital asset held by an
assessee for not more than 36 months immediately preceding the date of its transfer. As per
Section 2(29A), long-term capital asset means a capital asset which is not a short-term capital
asset. Thus, a capital asset held by an assessee for more than 36 months immediately
preceding the date of its transfer is a long-term capital asset.

Exceptions: A security (other than a unit) listed in a recognized stock exchange, or a Zero
Coupon Bond will, (listed shared) however, be considered as a long-term capital asset if the
same is held for more than 12 months immediately preceding the date of its transfer.
The period of holding of unlisted shares or an immovable property, being land or building or
both, for being treated as a long-term capital asset would be “more than 24 months” instead
of “more than 36 months”.
 CHARGEABILITY UNDER SECTION 45:
i. General Provision S. 45(1): Any profits or gains arising from the transfer of a capital
asset effected in the previous year (other than exemptions covered under this chapter)
shall be chargeable to Income-tax under this head in the previous year in which the
transfer took place.
ii. Insurance Receipts [Section 45(1A)]
iii. Unit Linked Insurance Policy Receipts [Section 45(1B)]
iv. Conversion or treatment of a capital asset as stock-in-trade [Section 45(2)]
v. Compensation on compulsory acquisition [Section 45(5)]

Full value of consideration: In order to compute the capital gains, the fair market value of the
asset on the date of such conversion or treatment shall be deemed to be the full value of the
consideration received as a result of the transfer of the capital asset.

MODE OF COMPUTATION OF CAPITAL GAINS (SECTION 48)

A. Computation of capital gains: The income chargeable under the head ‘capital gains’
shall be computed by deducting the following items from the full value of the
consideration received or accruing as a result of the transfer of the capital asset:
a) Expenditure incurred wholly and exclusively in connection with such transfer.
b) The cost of acquisition and cost of any improvement thereto.
 B. No deduction in respect of STT (Securities Transaction Tax)
C. Cost inflation index: Under Section 48, for computation of long-term capital gains,
the cost of acquisition (purchase price) and cost of improvement will be increased by
applying the cost inflation index (CII). Once the cost inflation index is applied to the
cost of acquisition and cost of improvement, it becomes indexed cost of acquisition and
indexed cost of improvement.
Cost of acquisition is defined under Section 55(2) and it means the amount of the purchase
price. Cost of improvement is covered within the ambit of Section 55(1).
“Cost Inflation Index” in relation to a previous year means such index as may be notified by
the Central Government having regard to 75% of average rise in the Consumer Price Index

Formulas:

Where the capital asset become the property of the assessee before 1-4-2001, cost of
acquisition means the cost of acquisition of the asset to the assessee or the fair market value of
the asset on 1-4-2001, at the option of the assessee. However, in case of capital asset, being
land or building or both, the fair market value of such asset on 1-4-2001 shall not exceed the
stamp duty value, wherever available, of such asset as on 1-4-2001.
Similarly, Where the capital asset became the property of the previous owner or the assessee
before 1-4-2001, cost of improvement means all expenditure of a capital nature incurred in
making any addition or alteration to the capital asset on or after the said date by the previous
owner or the assessee.

CAPITAL GAINS IN CASE OF DEPRECIABLE ASSET

(SECTION 50 AND 50A)

Section 50 provides for the computation of capital gains in case of depreciable assets.
When any depreciable asset is sold, it is always short-term capital gain because there is no
period of holding. It may be noted that where the capital asset is a depreciable asset forming
part of a block of assets, Section 50 will have overriding effect in spite of anything contained
in Section 2(42A) which defines a short-term capital asset.

Accordingly, there will be Short term Capital Gain:

a) When all the assets of the block are sold
b) When selling price is more than the opening WDV of the block (unlikely to happen
because one cannot get more value of depreciable asset).
c) When block ceases to exist

Where all assets in a block are transferred during the previous year, the block itself will cease
to exist. In such a situation, the difference between the sale value of the assets and the WDV
of the block of assets at the beginning of the previous year together with the actual cost of any
asset falling within that block of assets acquired by the assessee during the previous year will
be deemed to be the capital gains arising from the transfer of short-term capital assets.

DEEMED FULL VALUE OF CONSIDERATION FOR COMPUTING

CAPITAL GAINS (SECTION 50C, 50CA & 50D)

50C – Land or building or both

50CA – Unquoted Shares: If consideration received is less than FMV, then FMV of shares
50D – Any Capital Asset: if value is not ascertainable or cannot be determined, then FMV of
shares
 Deemed a full value of consideration means by virtue of Section 50C we have to take the
stamp duty valuation as the deemed full value of consideration. Section 50 C stipulates that
when the actual sale consideration is less than the value adopted by the stamp valuation
authority for charging stamp duty and such SDV exceeds 110% of the actual sale consideration,
SDV shall be taken to be the full value of consideration.

TAX ON LONG TERM CAPITAL GAINS (SECTION 112)

 SECTION 112: TAX ON LTCG

 Concessional rate of tax: Where the total income of an assessee includes long-term
capital gains, tax is payable by the assessee @20% on such long- term capital gains.
 No Chapter VI-A deduction against LTCG: The provisions of section 112 make it
clear that the deductions under Chapter VIA cannot be availed in respect of the long-
term capital gains included in the total income of the assessee.

 SECTION 112A: TAX ON LTCG ON CERTAIN ASSETS

 Concessional rate of tax in respect of LTCG on transfer of certain assets: In order
to minimize economic distortions and curb erosion of tax base, section 112A provides
that notwithstanding anything contained in section 112, a concessional rate of tax
@10% will be leviable on the long-term capital gains exceeding Rs. 1,00,000 on
transfer of –
(a) an equity share in a company; or
(b) a unit of a business trust; or
(c) a unit of an equity oriented fund

EXEMPTION OF CAPITAL GAINS

 CAPITAL GAINS ON SALE OF RESIDENTIAL HOUSE (SECTION 54)

Eligible assessees – Individual & HUF

Conditions to be fulfilled:

 There should be a transfer of residential house (buildings or lands appurtenant thereto)

 It must be a long-term capital asset
 Income from such house should be chargeable under the head “Income from house
property”.
 Where the amount of capital gains exceeds 2 crore: Where the amount of capital
gain exceeds Rs. 2 crore, one residential house in India should be –
a) purchased within 1 year before or 2 years after the date of transfer; (or)
b) constructed within a period of 3 years after the date of transfer.
 Where the amount of capital gains does not exceed Rs. 2 crore: Where the amount
of capital gains does not exceed ` 2 crore, the assessee i.e., individual or HUF, may at
his option,
a) purchase two residential houses in India within 1 year before or 2 years after
the date of transfer (or)
b) construct two residential houses in India within a period of 3 years after the date
of transfer.

Where during any assessment year, the assessee has exercised the option to
purchase or construct two residential houses in India, he shall not be subsequently
entitled to exercise the option for the same or any other assessment year.

 If such investment is not made before the date of filing of return of income, then the
capital gain has to be deposited under the CGAS (Capital Gains Account Scheme).
Amount utilized by the assessee for purchase or construction of new asset and the
amount so deposited shall be deemed to be the cost of new asset.
 Quantum of Exemption: If cost of new residential house or houses, as the case may
be ≥ long term capital gains, entire long term capital gains is exempt. If cost of new
residential house or houses, as the case may be < long term capital gains, long term
capital gains to the extent of cost of new residential house is exempt.

 CAPITAL GAINS ON TRANSFER OF AGRICULTURAL LAND (SECTION 54B)

 If cost of new agricultural land ≥ capital gains, entire capital gains is exempt.
 If cost of new agricultural land < capital gains, capital gains to the extent of cost of new
agricultural land is exempt.
  CAPITAL GAINS ON TRANSFER BY WAY OF COMPULSORY ACQUISITION OF LAND AND
BUILDING OF AN INDUSTRIAL UNDERTAKING (SECTION 54D)

If cost of new asset ≥ Capital gains, entire capital gains is exempt.

If cost of new asset < Capital gains, capital gains to the extent of cost of new asset is exempt.

 CAPITAL GAINS NOT CHARGEABLE ON INVESTMENT IN CERTAIN BONDS SECTION

54EC)
 Capital gains arising out of the transfer of such assets should be invested in a long term
specified asset within 6 months from the date of transfer.
 Including NHAI, RECL, PFC and IRFC
 Assessee should not transfer or convert or avail loan on such specified bonds for a
period of 5 years from the date of acquisition of such bonds.
 However, the maximum investment which can be made in these assets shall not exceed
50,000.

 CAPITAL GAINS IN CASE OF INVESTMENT IN RESIDENTIAL HOUSE 54F)