CAPITAL GAINS

CHAPTER IV-E
SECTION 45 TO 55A
 CHARGEABILITY SEC 45 (1)

• Any profits or gains arising from the transfer of a capital asset effected in
the P.Y, shall be chargeable to income tax under the head capital gains
unless such capital gain is exempt u/s 54,54B,54D,
54EC,54EE,54F,54G,54GA, or .
• The essential conditions for taxing capital gains:
• A) there must be a capital asset
• B) such capital asset must have been transferred.
• Some cases capital gains is chargeable to tax on accrual basis.
 CAPITAL GAINS TAX LIABILITY ARISES IF THE
FOLLOWING CONDITIONS ARE SATISFIED
1. There should be a capital asset
2. The capital asset is transferred by the assessee
3. The transfer of capital asset takes place during the previous year
4. Any profit or gain arises from transfer of capital asset.
5. Such profit or gain is not exempt from tax.
 CAPITAL ASSET SEC 2(14)

• Capital asset means

• A capital asset is a property that is expected to generate value over long period of
time.
• EX- land , other real estate of property, vehicles, trade marks, machinery, gold,
shares, mutual funds etc..
• A) property of any kind held by the 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.
 DOES NOT INCLUDE CAPITAL ASSET

• Any stock in trade, consumable stores or raw materials held for the
purposes of his business or profession.
• Movable personal effects. ( assets held for personal use by the assessee or any
member of his family dependent on him)
• EX- chair, cloths, table, etc
• However, the following assets shall not treated as personal effects though these assets
are moveable any may be held for personal use.
• A) jewellery (1973-1974)
• B) archaeological collections
• C) drawings
• D) paintings
• E) sculptures
• f) any work of art
 JEWELLERY INCLUDES

• A) ornaments made of gold, silver, platinum or

• Any other precious metal or any alloy containing one or more of such
precious metals,
• Whether or not containing any precious or semi-precious stone and whether
or not worked or sewn into any wearing apparel,
• B) precious or semi precious stones, whether or not set in any furniture,
utensil or other article or worked or sewn into any wearing apparel.
 RURAL AGRICULTURAL LAND IN INDIA. IT MUST NOT
BE AN URBAN AGRICULTURAL LAND. (2014-2015
FINANCIAL YEAR)
• Rural agricultural land means and agricultural land in India
• A) any area which is comprised within the jurisdiction of a
municipality or cantonment board having a population of 10,000
or more
• B) any area within the distance, measured aerially:
• More than 2 kms from the local limits of any municipality or cantonment board having
a population of more than 10,000 but not exceeding 1,00,000; or
• More than 6 kms from the local limits of any municipality or cantonment board having
a population of more than 1,00,000 but not exceeding 10,00,000;
• More than 8 kms from the local limits of any municipality or cantonment board having
a population of more than 10,00,000
 GOLD BONDS

• Specified gold bonds 6.5% gold bonds 1977 or

• 7% of gold bonds 1980 or
• National defense gold bond 1980 issued by the central government
• Gold deposit bonds issued under the gold deposit scheme 1999 or
• Gold deposit certificates issued under the Gold Monetization scheme,2015.
TYPES OF CAPITAL GAINS AND CAPITAL ASSET

• 1. short term capital gain

• 2. long term capital gain

1. short term capital asset

• 2. long term capital asset
 SHORT TERM CAPITAL GAIN

• Gain arising on the transfer of short term capital asset

• Sec 2(42B) “short-term capital gain” means capital gain arising from the
transfer of a short-term capital asset
 LONG TERM CAPITAL GAIN

• Gain arising on the transfer of long term capital asset.

• Sec 2(29A) “long-term capital asset” means a capital asset which is not a
short term capital asset .
• Sec 2(29B) “long-term capital gain” means capital gain arising from the
transfer of a long-term capital asset
 CAPITAL ASSETS-TIME PERIOD

• Short term capital asset, an assets which is held for less than 36 month is a
short term capital assets and
• Long term capital asset an assets that is held for more than 36 month is a
long term capital assets
 TWO EXEMPTION

• 1st is from financial year 2017-2018 onwards criteria of 36 months has been reduce to 24 months
in case of immovable property that is land, building and house property and also unlisted
shares of company.
• 2nd some assets are consider short term capital assets when they are held for only 12 months
are less.
• EX- These assets are equity or preference company shares recognizes stock in India,
debentures, bonds, government security, etc..
• Listed on recognizes stock exchange in India , unit of equity oriented mutual funds, zero coupon
bonds so, if these assets are held for period for more than 12 months.
 CAPITAL ASSET MUST HAVE BEEN
TRANSFERRED
• Transfer, in relation to capital assets, includes
sale, exchange relinquishment of the asset
• Extinguishments of any rights there in, or
• Compulsory acquisition under any law, or
• Maturity or redemption of zero coupon bonds, or
• Possession of any immovable property in part performance of a contract
• Sale : sale means voluntary conveyance of property in the goods by one person to
another for consideration in money.
• Exchange : exchange means voluntary conveyance of property in the goods by
one person to another for consideration in kind.
• Remember no capital gains are applicable, when an asset is inherited or gifted,
because there is no sale or exchange
 TRANSACTION NOT REGARDED AS TRANSFER
SEC 47
• Any distribution of capital assets on the total or partial partition of HUF.
• Any transfer of a capital assets under a gift or will or an irrevocable trust.
• Any transfer of a capital asset by a company to its 100% subsidiary company provided the
subsidiary company is an Indian company.
• Any transfer of a capital asset by a 100% subsidiary company to its holding company, if the
holding company is an Indian company.
• 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.
• Any transfer, in a demerger, of capital assets by the demerged company to the
resulting company, if the resulting company is an Indian company.
• Any transfer, in a scheme of amalgamation of a banking company with a banking
institution of a capital asset by the banking company to the banking institution.
• 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 etc..
 FULL VALUE CONSIDERATION SEC 48
• ◦ Full value of consideration is the consideration received or receivable by the transferor in lieu of
assets, which he has transferred, asset acquired may be received in cash or kind. If it is received in
kind, then fair market value of assets acquired is taken as full value of consideration.
• ◦ This applies where the computation of capital gains is u/s 48 and where the transaction involves
transfer of land or building or both.
• ◦ If the assessee claims that the stamp duty value exceeds the fair market value of the property as
on the date of transfer, the Assessing Officer may refer the valuation of the capital asset to a
Valuation Officer.
• ◦ If the value ascertained as per the valuation report exceeds the stamp duty value, then the stamp
duty value shall be taken as the full value of the consideration for computation of capital gains.
 EXPENSES IN CONNECTION WITH
TRANSFER

• Any expenditure incurred in connection with transfer of a capital asset may be in the nature
of those related with the physical transfer of the property and those related with realisation
of sale consideration or enhanced sale consideration. E.g.:
• ◦ Expenditures such as advertisement, brokerage or commission paid for securing a
purchase, legal expenses, cost of stamp, registration fees, travelling expenditure
• ◦ Payment made to obtain vacant possession of property. When property is obtained under
a will, any probation charges, legal and travelling expenses
 TREATMENT OF ADVANCE MONEY – S.
51
• ◦ If the capital asset was the subject matter of negotiation on any previous occasion in
respect of which advance money was received but later on forfeited as the transfer did not
take place, any such advance amount received and retained shall be reduced from the cost
of acquisition or the fair market value or the written down value as the case may be for the
computation of capital gains on transfer. This applies only if the forfeiture happened before
1st April 2014
 COST OF IMPROVEMENT – S. 55

• ◦ Any capital expenditure incurred towards the improvement of a capital asset and not
allowed as deduction under any other head of income can be claimed as cost of
improvement.
• ◦ The cost of improvement of goodwill of a business, right to manufacture, produce or
process an article or thing and right to carry on a business or profession shall always be
nil.
• ◦ Where the asset was acquired prior to 1.4.01, only the cost of improvement incurred
after 1.4.01 can be deducted.
 INDEXATION

• ◦ While computing long term capital gains, cost of acquisition and improvement can be
claimed only after indexation. The Cost Inflation Index is used for this purpose.
• ◦ The price of a product increase overtime, and this brings down the purchasing power of
money. Say, if 5 items can be bought for Rs. 500 today, tomorrow you may only be able to
buy 4 items at the same rate on account of inflation. Cost inflation index calculates the
estimated rise in the cost of goods and assets year-by-year as a result of inflation. It is
fixed by the CG in its official gazette to measure inflation.
• ◦ The entire process where the capital asset’s cost price is adjusted with the effect of
inflation using the cost inflation index number is referred to as indexation
• For Financial Year 2018-19 it is 280 and for 2019-20 it is 289.
• ◦ Base year 2001-02 is 100, 2002-2003 is 105, 2003-2004 is 109, etc…
• Indexed cost of acquisition for assets acquired before 1.4.2001=(Cost of acquisition or
FMV on 1.4.01 Whichever is higher/) x Index factor for the year of transfer / Index factor for
the base year2001-02
• After 1.04.2001 acquisition property
• ◦ Indexed cost of acquisition=(Cost of acquisition ) x Index factor for the year of transfer
/Index factor for the first year in which the asset was held by the assessee
• ◦ Indexed cost of improvement= (Cost of improvement incurred after 1.4.01)*Index factor
for the year of transfer / Index factor for the year in which improvement was made to the
asset
 COMPUTATION OF CAPITAL GAINS
NON-DEPRECIABLE ASSET – S. 48

• Short-term capital gain

• Full value of consideration -------------------- A
• Less: Expenses incurred in connection with the transfer -----------B
• Net Consideration (A-B) --------------C
• Less: Cost of acquisition and cost of improvement -----------------D
• Gross Capital Gains (C-D) -------------------------------------- E
• Less: Exemptions u/s 54B, 54D, 54G and 54GA, if applicable --------F
• Net Capital Gains (E-F) ---------------G
 LONG-TERM CAPITAL GAIN

• Full value of consideration ------------------------ A

• Less: Expenses incurred in connection with the transfer ----------B
• Net Consideration (A-B) ---------------- C
• Less: Indexed cost of acquisition and indexed cost of improvement--- D
• Gross Capital Gains (C-D) -----------------E
• Less: Exemption u/s 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA and 54GB ----F
• Net Capital Gains (E-F) ------------------------------------G
 EXEMPTIONS
SEC ASSESSEE CONDITIONS Quantum of exemption

54 Individual / HUF 1. Residential house to be transferred Actual amount invested

2. Must be long term capital asset in new residential house
3. Income from which is chargeable under or the capital gain which
house property ever is lesser
4. The investment shall be in one residential
house situated in India
by purchase within 1 year before or 2 years
after the date of transfer OR
construction within a period of 3 years after
Transfer
 CASE LAWS SEC 54
• J.R. subramanya bhatt 165 ITR 571 (kar)
• Construction of new house started before the date of transfer but completed after the date
of transfer of the original house entitled for exemption u/s 54.
• V. Natarajan 287 ITR 271, & CIT vs Kamal wahal (2013) 351 ITR 4 (del)
• Assessee is entitled to exemption u/s 54, even if new house property is acquired in
spouse’s name, which was assessed in the hands of the assessee.
Section Assessee Conditions Quantum of
exemption

54 B Individual / HUF 1. Agricultural land is transferred Actual amount

2. Must have been used in the 2 years invested in new
Immediately preceding the date of agricultural land or
transfer for agricultural purposes the capital gain
either by the assessee or his parent. which ever lesser.
3. Another agricultural land is
purchased within 2 years of transfer
date
SEC ASSESSEE CONDITIONS Quantum of exemption

54 D Any assessee 1. There must be compulsory acquisition. Actual amount invested

which is an 2. The property compulsorily acquired should in new asset or the
industrial be of land or building forming part of an capital gain which ever
undertaking industrial undertaking is lesser.
3. It must have been used in the 2 preceding
years immediately preceding the date of
transfer of the assessee for the purpose
of the business of the undertaking.
3. Within 3 years of date of transfer, other
land or building is bought or constructed
for the industrial undertaking
section Assessee Conditions Quantum of exemption

54 EC Any assessee 1. The asset transferred should be a Long term Amount of investment
capital asset being a land or building or both. or capital gains
whichever is lower
2. Within a period of 6 months, after the date of
transfer, the capital gain must be invested in any
bonds specified by the central government
redeemable after 5 years( like NHAI, Rural
Electrification Corporation, power finance
corporation, IRFC)
3. The maximum amount of investment during the
financial year of the transfer and the subsequent
financial year cannot exceed Rs 50 lakhs
Sec Assessee Conditions Quantum of exemption

54 EE Any assessee 1. The asset transferred should be a long term Amount invested in long
capital asset. term specified assets or
capital gains, whichever
2. The capital gain must be invested in unit of is lower.
specified fund (fund financing start up India project)
(units issued before 1/4/19 of such notified fund)

3. Investment within 6 months from the date of

transfer.

4. Assessee shall not transfer or avail loan or

advance on security of such long term specified
asset within a period of 3 years from the date of
acquitision
4. The maximum amount of investment during the
financial year of the transfer and the subsequent
financial year cannot exceed Rs 50 lakhs
Sec Assessee Conditions Quantum of exemption

54 F Individual 1. Long term capital asset not being a LTCG x Amount invested
/HUF residential house ----------------------
2. Invests in a residential house within 1 net sale consideration
year before or 2 years after or
constructs in 3 years
3. The assessee should not own more
than 1 residential house other than
the new one as on date of transfer
Sec assessee Conditions Quantum of
exemption

54G Any assesse 1. Machinery or plant or building or land Actual amount

being an rights for industrial undertaking in an invested in new asset
industrial urban area should be transferred or the capital gain
undertaking 2. Due to shifting to another other than any whichever is less.
urban area
3. Within 1 year before or 3 years after the
date of transfer there has to be purchase of
new assets, construction of building, etc,.
Sec Assessee Conditions Quantum of exemption

54 GA Any 1. Machinery or plant or building or Actual amount invested in new

assessee land rights for industrial undertaking in asset or the capital gain
being an an urban area whichever is lesser.
industrial 2. Due to shifting from urban area to
undertakin SEZ
g 3. Within 1 year before or 3 years after
the date of transfer there has to be
Purchased machinery, plant, land, new
assets, construction of
Building and completed shifting to the
new area.
Sec Assessee conditions Quantum of
exemption

54 GB Individual, 1. Long term capital asset should be a Actual amount

HUF residential property (being house or plot of invested in new asset
land ) should be transferred. or the capital gain
2. Utilised to subscribe to equity shares of an whichever is lesser..
eligible company before due date of filing
return – more than 50% of share capital to
50% of voting rights.
3. Used by company to buy new asset within
1 year– lock in 5 years
* Not applicable to any transfer of
residential property made after 31.03.2019