Taxation of Income From Capital Gain

TAXATION OF INCOME FROM
CAPITAL GAIN
WHAT ARE CAPITAL GAINS?
 Section 45 of Income Tax Act, 1961 provides that any profits

or gains arising from the transfer of a capital asset affected in
the previous year will be chargeable to income-tax under the
head ‘Capital Gains’.
 Such capital gains will be deemed to be the income of the

previous year in which the transfer took place. In this
charging section, two terms are important. One is “capital
asset” and the other is “transfer”.
 Exceptions to the same are provided u/s. 54. 54B, 54D, 54E,
54EA, 54EB, 54F, 54G, 54H.
WHAT IS A CAPITAL ASSET?
 According to section 2(14), a capital asset means –

 property of any kind held by an assessee, whether or not connected with his business or
profession;
 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—

 Any stock-in-trade, consumable stores or raw materials held for the purpose of the
business or profession of the assessee;
 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, but excludes –
 Jewelry; [CIT v. H. H. Maharani Usha Devi (1998)]
 Archaeological collections;
 Drawings;
 Paintings;
 Sculptures; or
 Any work of art.
 Rural agricultural land in India

PROVISION REGARDING URBAN
AGRICULTURAL LAND
 Only rural agricultural lands in India are excluded from the purview of the
term ‘capital asset’.
 Hence urban agricultural lands constitute capital assets. Transfer of

agricultural land situated in any area within the jurisdiction of a municipality
or cantonment board having a population of 10000 or more shall be
chargeable to “Capital Gains” including the following limits:-
 Aerial distance from the local limits of a municipality or cantonment board is less than/equal to
2 kilometers & corresponding population is greater than 10,000 less than/equal 1,00,000
 Aerial distance from the local limits of a municipality or cantonment board less than/equal to 6
kilometers & corresponding population is greater than 1,00,000 less than/equal to 10,00,000
 Aerial distance from the local limits of a municipality or cantonment board less than/equal to 8
kilometers & corresponding population is greater than 10,00,000
SHORT TERM AND LONG TERM
CAPITAL ASSETS
 The short-term capital asset is a capital asset held by an assessee for not
more than 36 months immediately preceding the date of its transfer.
Therefore, 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.
 However, a security listed in a recognized stock exchange, or a unit of an

equity oriented fund or a unit of the Unit Trust of India or a Zero
Coupon Bond will 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.
 In the case of Immovable Property (land or building or both) hold for

more than 24 months then it 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.,
 Section 2(42B) Short-Term Capital Gain

 Gain arising on the transfer of short-term capital asset.
 Section 2(29B) Long-Term Capital Gain

 Gain arising on the transfer of long-term capital asset.
WHAT ARE THE TYPES OF TRANSFER
IN RELATION TO CAPITAL ASSET?
 Section 2(47) provides an inclusive definition of
“transfer”, in relation to a capital asset,
 The sale, exchange or relinquishment of the asset; or
 The extinguishment of any rights therein; or
 The compulsory acquisition thereof under any law; or
 The owner of a capital asset may convert the same into the stock-in-
trade of a business carried on by him. Such conversion is treated as a

transfer; or
 The maturity or redemption of a Zero Coupon Bond; or
 Part performance of the contract: Sometimes, possession of the
immovable property is given in consideration of part-performance of

a contract; or
 Lastly, there are certain types of transactions that have the effect of
transferring or enabling the enjoyment of the immovable property.

Even the power of attorney transactions is covered.
TRANSACTIONS WHICH ARE NOT
REGARDED AS TRANSFER (U/S. 47)
ARE:
 where the assets of a company are distributed to its shareholders on
liquidation of a company
 any distribution of capital assets on the total or partial partition of Hindu
Undivided Family
 any transfer of a capital asset 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 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.
TRANSFER IN CASE OF IMMOVABLE
AND MOVABLE PROPERTY
 Different rules are applicable in case of movable/immovable assets to find out when a
capital asset is “transferred”.
 Transfer in case of Immovable property

 When documents are registered -
 Title to immovable assets will not pass till the conveyance deed is executed or registered.
 When documents are not registered -
 Even if the documents are not registered but the following conditions of section 53A of the Transfer of
Property Act are satisfied, ownership in an immovable property is “transferred”—
 there should be a contract in writing;
 the transferee has paid consideration or is willing to perform his part of the contract; and
 the transferee should have taken possession of the property.
When these conditions are satisfied, the transaction will constitute “transfer” for the purpose of capital gains.
 Transfer in case of Movable Property -

 Title of a movable property passes at the time when property is delivered pursuant to a contract
to sale.
 Entries in the books of account are not relevant for determining date of transfer.
COMPUTATION OF LONG-TERM
CAPITAL GAINS
 Step1- The assessee should start with the Full Value of Consideration
(u/s. 48) accruing or received.
 Step2- Deduct the indexed cost of acquisition + cost of transfer + indexed

cost of improvement.
 Hereby,
 Indexed cost of acquisition = cost of acquisition X cost of inflation index of the acquisition
year/cost of inflation index of the transfer year.
 Indexed cost of transfer = the brokerage paid for arranging legal expenses incurred, deals
and cost of advertising, etc. X cost of inflation index of the cost of inflation index of the
transfer year
 Indexed cost of improvement = cost of improvement X cost of inflation index of the
improvement year/cost of inflation index of the transfer year.
 Therefore, Long-term Capital Gains = FVC accruing or received-(Indexed

cost of acquisition + cost of transfer + indexed cost of improvement)
COMPUTATION OF SHORT-TERM
CAPITAL GAINS
 Step1- The assessee should start with the full value of
consideration.
 Step2- Deduct the cost of acquisition + cost of transfer +

cost of improvement
 Step3- The final amount will be short-term capital gain.

CAPITAL GAINS TAX EXEMPTION:
 U/s. 54B no capital gain is applicable to the sale of agriculture land in the rural areas of India and the
agricultural land in rural areas is not considered as a capital asset.
 U/s. 54 in case an individual uses the entire sale proceeds of the capital asset to purchase the house property
they will not be taxed.
 The assessment must satisfy the below-mentioned conditions in order to avail tax benefit under Section 54F:
 An individual requires buying a house within 2 years after or 1 year before the sale.
 Any under construction properties should be completed in the time period of 3 years from the transfer date of the original
house.
 The individual cannot sell the house property within 3 years of the buying or construction.
 It is important to keep in mind that the investment made on the house property should be situated in India.
 The individual should not own more than 1 residential house property other than the new one on the date of transfer.
 The individual will not have to pay tax in capital gain if they invest in CGAS (capital gains account scheme).
However, the person should make an investment for a specific time period as stated by the bank. If the
taxpayer fails to make the investment for a specific time period, then it will be considered as a capital gain.
 By buying capital gains bonds, the tax will be deducted. This is only applicable if it is a long-term capital
asset and the deduction is under Section 54EC. According to the union budget 2018, 10% tax is applicable on
long term capital gain more than Rs. 1 lakh on the sale of securities.

Taxation of Income From Capital Gain

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Taxation of Income From Capital Gain

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TAXATION OF INCOME FROM

 Section 45 of Income Tax Act, 1961 provides that any profits

 Such capital gains will be deemed to be the income of the

 According to section 2(14), a capital asset means –

securities in accordance with the SEBI regulations.

 However, it does not include—

 Any work of art.

 Rural agricultural land in India

 Hence urban agricultural lands constitute capital assets. Transfer of

 However, a security listed in a recognized stock exchange, or a unit of an

 In the case of Immovable Property (land or building or both) hold for

 Section 2(42B) Short-Term Capital Gain

 Section 2(29B) Long-Term Capital Gain

 The compulsory acquisition thereof under any law; or

trade of a business carried on by him. Such conversion is treated as a

 Part performance of the contract: Sometimes, possession of the

immovable property is given in consideration of part-performance of

transferring or enabling the enjoyment of the immovable property.

 any transfer of a capital asset by a company to its 100% subsidiary

 Transfer in case of Immovable property

 the transferee should have taken possession of the property.

 Transfer in case of Movable Property -

 Step2- Deduct the indexed cost of acquisition + cost of transfer + indexed

improvement year/cost of inflation index of the transfer year.

 Therefore, Long-term Capital Gains = FVC accruing or received-(Indexed

 Step2- Deduct the cost of acquisition + cost of transfer +

 Step3- The final amount will be short-term capital gain.

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