Capital GainsGroup 10

Why charged differently ?

Benefit to long term investors / encourages safer investments

Buffett (15% slab) vs his secretary (30-40% slab)

Basis of charge

Should be a capital asset (in view of assessee)

Transfer takes place; during previous year

Profit is realized Not exempted under any section 54

and other 54s

What is not capital asset?

Stock in trade, consumables, raw material

Personal effects like clothes, furniture

Agricultural land in India (except in municipality)

Gold bonds, National defense bonds etc

Special bearer bonds Gold deposit bonds under Gold

deposit scheme 1999

Short term / long term

Held by assessed for not more than 36 months is short term capital asset; longer than that is long term capital asset For shares period is 12 months

Other transactions not considered capital transfer

Distribution of assets during liquidation Partition of family Gift

Under gift rules By will Under irrevocable transfer

Transfer from holding to subsidiary domestic company and vice-versa

Scheme of amalgamation, amalgamation of banking company, demerger

And many others

Computation of gain

Find full value of consideration Deduct following costs

Expenditure incurred for transfer (stamp duty papers etc)

Cost of acquisition (Indexed for long term)

Cost of improvement (Indexed for long term)

Deduct exemptions under sections 54B,D,G,GA,EC,F

1. Full value of consideration

In money, in kind, in reverse transfers

Not necessarily market value, maybe more maybe less

Consideration received may not be accepted by AO

Accrual not receipt considered

2. Expenditure on transfer

Brokerage, stamp duty paid, papers, registration fees, travel expenses etc

Vague claims not accepted eg relocation charges or food consumed at court

Cannot be same as heads allowed for deduction under exemption under sec 54

3. Cost of acquisition

Cost of asset to previous owner Purpose important Son inheriting house worth 50,000 bought

at value 10,000 is capital gains exempt. But if son sells house for 65,000 total capital gains would be 65,000 realization minus 10,000 cost of acquisition = 55,000

Cost of asset being fair market value Actual cost or cost on 1/4/1981 as fair

market value

3. Cost of acquisition

Depreciable assets always under short term capital gains

Bonus shares, rights Advance money, forfeiture

Deducted from cost of acquisition Not free money, government closes

window of tax free money transfer

4. Cost of improvment

Additions to the capital asset Added to expenditure for subtraction

while calculating capital gains

Indexed Costing

Adjusting acquisition and improvement prices to reflect inflation effect; to protect assessed from unfair taxation

If asset is acquired before 1/4/81 Indexed cost = (Fair market value of asset on

1/4/81 or cost of acquisition whichever is higher / cost inflation index of 1981-82) * Cost inflation index of previous year or year of transfer

If asset acquired after 1/4/81 Indexed cost = (Cost of acquisition / Cost inflation

index of year of acquisition) * Cost inflation index of year of transfer

Capital gain in special cases

When capital asset is converted to stock in trade (45(2)) Fair value taken in the year of

conversion Capital gain for total period of asset

holding Business gain there-after

Capital asset transferred from partnership firm to partners

Transfer on dissolution of firm

Special cases

Compulsory acquisition Taxable as long term gain; cost of

acquisition is fair market value of asset Enhanced compensation

No re-consideration of cost of acquisition or improvement considered

Receipt is reduced by court after being appreciated Assessee can re-open previous

assessment

Capital gain for non resident Gains counted in same currency in which

shares/debentures acquired and reconverted to INR

No benefit of indexation How to compute-

Sale consideration, cost of acquisition & improvement taken on average conversion rate of the previous year from State Bank of India

All amounts would be converted into INR and the capital gain is Sale consideration (-) cost of acquisition (-) cost of improvement

Special cases

For self generated assets eg. Goodwill, process patent, manufacturing right etc Purchase price considered as cost of

acquisition

Bonus shares, rights etc.Holding period from allotment date to sale date, cost of acquisition is zero, for rights cost of acqu. Is amount paid

Special cases

Liquidation Transfer in demat form Insurance claim on

damage/destruction Share buybacks

Computation in case of land & building

State governments set aside value given by Stamp duty authority to prevent income-degradation

Consideration value shall be greater than or equal to the value adopted by stamp duty authority (jantri)

Exemption from capital gains

Residential house property for- Individual or HUF Long term house property is transferred

ONLY IF Another house is purchased within 1

year before transfer or 2 years after transfer

Constructed 3 years within transfer Amount not less than consideration

Exemptions …

Transfer of agricultural land for agricultural purposes only

Compulsory acquisition Bonds

Exemptions …

Asset other than house property Cap gain on any asset can be set-off

against acquiring a house property with same conditions as above;

Exemptions limited to amount of capital gain

When any industrial undertaking transfers from urban to rural area, exemption upto investment in new asset or capital gain, whichever is lower

How charged?

Long term gains For shares and securities – 10% Others – 20%

Short term gainsOn shares zero, if STT has been paid