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INTRODUCTION
A capital gains tax (CGT) is a tax charged on capital gains, the profit realized onthe sale of a non-inventory asset that was purchased at a lower price. The most
common capital gains are realized from the sale of stocks, bonds, precious metals
and property. Not all countries implement a capital gains tax and most have
different rates of taxation for individuals and corporations.
For equities, an example of a popular and liquid asset, national and state
legislation often has a large array of fiscal obligations that must be respected
regarding capital gains. Taxes are charged by the state over the transactions,
dividends and capital gains on the stock market. However, these fiscal obligations
may vary from jurisdiction to jurisdiction because, among other reasons, it couldbe assumed that taxation is already incorporated into the stock price through the
different taxes companies pay to the state, or that tax-free stock market
operations are useful to boost economic growth.
India
As of 2008, equities are considered long term capital if the holding period is one
year or more. Long term capital gains from equities are not taxed if shares are
sold through recognized stock exchange and STT is paid on the sale . However
short term capital gain from equities held for less than one year, is taxed at 15%
[7] (w.e.f. 1 April 2009.[8]) (plus surcharge and education cess). This is applicable
only for transactions that attract Securities Transaction Tax (STT).
Many other capital investments (house, buildings, real estate, bank deposits) areconsidered long term if the holding period is 3 or more years.[9] Short term
capital gains are taxed just as any other income and they can be negated against
short term capital loss from the same business.
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MEANING OF CAPITAL GAINS :-
Capital gains means profits or gains arising to the assesse from the transfer of a
capital asset. Such capital gain is added to the total income of the previous year
in which the transfer of the assets took place.
Capital Gains is the fourth head of income. Section 45(1) of the Income Tax Act,
1961 talks about any profits or gains arising from the transfer of a capital asset
effected in the previous year.
In C.I.T. V. H.H. Maharani Usha Devi case the Supreme Court has made it
clear that heirloom jewellery constitutes personal effects under section 2(14) and
its sale would not give rise to any taxable capital gains.
A.I.R. 1998 S.C. 2309
Thus, the essential elements of capital gains are:-
(A)Capital Asset.(B)Transfer of Capital Asset,(C)Computation of Capital gain.
Capital Asset [Sec. 2(14)]
Capital Asset means property of any kind held by an assessee, whether connected
with his business, profession or not. Capital Asset may be movable or immovable,
tangible or intangible, fixed or floating. A.I.R. 2005 S.C. 796
In C.I.T V. D.P. Sandu Brothers case it was held that the value or income
from transfer of capital asset can be taxed only under the headCapital Gain
and if it cannot be taxed under this head, then it cannot be taxed at all. Such
income cannot be taxed under the headIncome from other sources.
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WHAT ALL CAPITAL ASSET INCLUDES :-
1. Goodwill of a business.2. Partners share in a firm.3. Tenancy rights.4. Actionable claim.5. Loom hours (Hours for which a worker works in a factory).6. Patent.7. Trade-Marks.8. Lease hold right in mines.9. License for manufacturing of a commodity.
EXCEPTIONS :-
The term Capital Asset doesnt include the following :
1. Any stock in trade, consumable stores or raw materials.2. Movable Assets for personal use i.e. Apparel & furniture but excluding
jewellery held for personal use by the assesse or any member of his familydependent on him.
3. Agricultural Land in India.4. Gold bonds issued by the Central Government.5. Special bearer bonds.6. Gold Deposit bonds.
In C.I.T V. B.C Srinivasa Setty case the Supreme Court has made it
clear that the goodwill generated in a newly commenced business cannot
be described as an asset within the meaning of the terms of Section 45
and therefore its transfer is not subject to income tax under the head
capital gains. 1981 Tax L.R. 641 (S.C.)
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CLASSIFICATION OF CAPITAL ASSETS:-
It is divided into 2 categories :
A)Short-Term Capital Asset.B) Long-Term Capital Asset
SHORT-TERM CAPITAL ASSET-
It means a Capital Asset held by an assesse for not more than 36 months
immediately preceeding the date of its transfer:
Provided that in the case of a share held in a company or any other security listed
in a recognized stock exchange in India or a zero- coupon bond, the provisions of
this clause shall have effect as if for the words 36 months, the words 12
months had been substituted.
LONG-TERM CAPITAL ASSET-
According to section 2(29-A), it means an asset which is not a short-term capital
asset.
TRANSFER [Sec. 2(47)]
Any transaction whereby the ownership of an assessee in a capital asset ceases is
transfer according to Sec.2 (47).
Transfer includes:
i) Sale, exchange or relinquishment of a capital asset
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ii) Extinguishment of any rights in a capital asset
iii) Compulsory acquisition of the capital asset under any law
iv) Conversion of a capital asset into stock-in-trade
v) Part performance of a contract of sale
vi) Transfer of rights in immovable properties through the medium of co-
operative societies, companies etc.
vii) Transfer by a person to a firm or other or Body of a person to a Association ofPersons (AOP) Individuals (BOI)
viii) Distribution of capital assets on Dissolution
ix) Distribution of money or other assets by a Company on liquidation
TRANSACTIONS NOT REGARDED ASTRANSFER (Section 47).
Nothing contained in section 45 shall apply to the following transfers:
(i) Any distribution of capital assets on the total or partial partition of aHindu undivided family;
(ii) This clause has been omitted by the Finance Act, 1987 w.e.f 1-4-1988;
(iii) Any transfer of a capital asset under a gift or will or an irrevocable trust;
http://www.vakilno1.com/bareacts/incometaxact/s47.htm
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(iv) Any transfer of a capital asset by a company to its subsidiary company, if:
(a) the parent company or its nominees hold the whole of the share capital of the
subsidiary company; and
(b) The subsidiary company is an Indian company;
(v) Any transfer of a capital asset by a subsidiary company to the holding
company, if:
(a) The whole of the share capital of the subsidiary company is held by the holdingcompany, and
(b) The holding company is an Indian company :
Provided that nothing contained in clause (iii) or clause (iv) shall apply to the
transfer of a capital asset made after the 29th day of February, 1988, as stock-in-
trade; (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;
(via) Any transfer, in a scheme of amalgamation, of a capital asset being a share or
shares held in an Indian company, by the amalgamating foreign company to the
amalgamated foreign company, if - (a) At least twenty-five per cent of the
shareholders of the amalgamating foreign company continue to remain
shareholders of the amalgamated foreign company, and
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(b) Such transfer does not attract tax on capital gains in the country, in which the
amalgamating company is incorporated;
(vib) 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;
(vic) 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 - (a) At least seventy-five per cent of the shareholders of the
demerged foreign company continue to remain shareholders of the resulting
foreign company; and
(b) Such transfer does not attract tax on capital gains in the country, in which the
demerged foreign company is incorporated :
Provided that the provisions of sections 391 to 394 of the Companies Act, 1956 (1
of 1956) shall not apply in case of demergers referred to in this clause;
(vid) 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;
(vii) Any transfer by a shareholder, in a scheme of amalgamation, of a capital
asset being a share or shares held by him in the amalgamating company, if - (a)The transfer is made in consideration of the allotment to him of any share or
shares in the amalgamated company, and
(b) The amalgamated company is an Indian company;
(viia) Any transfer of capital asset, being bonds or shares referred to in sub-
section (1) of section 115AC, made outside India by a non-resident to another
non-resident;
(viii) Any transfer of agricultural land in India effected before the 1st day of
March, 1970;
(ix) 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,
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National Archives or any such other public museum or institution as may be
notified 753 by the Central Government in the Official Gazette to be of national
importance or to be of renown throughout any State or States.
(x) Any transfer by way of conversion of bonds or debentures, debenture-stock ordeposit certificates in any form, of a company into shares or debentures of that
company.
(xi) Any transfer made on or before the 753ca 31st day of December, 1998, 753ca
by a person (not being a company) of a capital asset being membership of a
recognised stock exchange to a company in exchange for shares allotted by that
company to the transferor.
(xii) Any transfer of a capital asset, being land of a sick industrial company, made
under a scheme prepared and sanctioned under section 18 of the Sick Industrial
Companies (Special Provisions) Act, 1985 (1 of 1986) where such sick industrial
company is being managed by its workers' co-operative :
Provided that such transfer is made during the period commencing from the
previous year in which the said company has become a sick industrial company
under sub-section (1) of section 17 of that Act and ending with the previous year
during which the entire net worth of such company becomes equal to or exceeds
the accumulated losses.
(xiii) Where a firm is succeeded by a company in the business carried on by it as a
result of which the firm sells or otherwise transfers any capital asset or intangible
asset to the company:
Provided that
(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 succession;
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(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; and
(d) The aggregate of the shareholding in the company of the partners of the firmis not less than fifty per cent of the total voting power in the company and their
share holding continues to be as such for a period of five years from the date of
the succession;
(xiv) 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 that
(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 fifty
per cent of the total voting power in the company and his shareholding continues
to so remain as such for a period of five 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;
(xv) Any transfer in a scheme for lending of any securities under an agreement or
arrangement, which the assessee has entered into with the borrower of such
securities and which is subject to the guidelines issued by the Securities and
Exchange Board of India, established under section 3 of the Securities and
Exchange Board of India Act, 1992 (15 of 1992), in this regard.
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COMPUTATION OF CAPITAL GAINS (Section 48).
Transfer of a short term capital asset gives rise to "Short Term Capital Gains'
(STCG) and transfer of a long capital asset gives rise to 'Long Term Capital Gains'
LTCG). Identifying gains as STCG and LTCG is a very important step in computing
the income under the head Gains as method of computation of gains and tax on
the gains is different for STCG and LTCG.
Short Term Capital Gains (STCG)
Computation of short - term Capital Gains:
1. Find out full value of consideration2. Deduct the following :
a. expenditure incurred wholly and exclusively in connection with suchtransfer
b. cost of acquisition; andc. cost of improvement
3. From the resulting sum deduct the exemption provided by sections 54B,54D, 54G
4. 4. The balancing amount is short-term capital gain
Long Term Capital Gains (LTCG)
Computation of long - term Capital Gains:
1. Find out full value of consideration2. Deduct the following:
a. expenditure incurred wholly and exclusively in connection with suchtransfer
b. indexed cost of acquisition; andc. indexed cost of improvement
3. From the resulting sum deduct the exemption provided by sections 54, 54B,54D, 54EC, 54ED, 54F and 54G
4. The balancing amount is long-term capital gain
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Full value of consideration (Section 50-C).
This is the amount for which a capital asset is transferred. It may be in
money or money's worth or a combination of both.
Where the transfer is by way of exchange of one asset for another, fair
market value of the asset received is the full value of consideration. Where
the consideration for the transfer is partly in cash and partly in kind Fair
market value of the kind portion and cash consideration together
constitute full value of consideration.
Cost of acquisition (Section 55(2)).
Cost of acquisition of an asset is the sum total of amount spent foracquiring the asset.
Where the asset was purchased, the cost of acquisition is the price paid.
Where the asset was acquired by way of exchange for another asset, the
cost of .acquisition is the fair market value of that other asset as on the
date of exchange.
Any expenditure incurred in connection with such; purchase, exchange or other
transaction e.g. brokerage paid, registration charges and legal expenses alsoforms I part of cost of acquisition.
Sometimes advance is received against agreement to transfer a particular asset.
Later on, if the advance is retained by the tax payer or forfeited for other party's
failure to complete the transaction, such advance is to be deducted from the cost
of acquisition.
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Cost of acquisition with reference to certain modes or acquisition
(Section 49(1)).
Where the capital asset became the property of the assessee:
a) on any distribution of assets on the total or partial partition of a Hindu
undivided family;
b) under a gift or will
c) by succession, inheritance or devolution;
d) on any distribution of assets on the dissolution of a 'firm, body of individuals, or
other association of persons, where such dissolution had taken place at any time
before 01.04.1987;
e) on any distribution of assets on the liquidation of a company;
f) under a transfer to a revocable or an irrevocable trust;
g) by transfer in a scheme of amalgamation;
h) by an individual member of a Hindu Undivided Family living his separate
property to the assessee HUF any time after 31.12.1969.
The cost of acquisition of the asset shall be the cost for which the previous owner
of the property acquired it, as increased by the cost of any improvement of the
asset incurred or borne by the previous owner or the assessee, as the case may
be, till the date of acquisition of the asset by the assessee.
If the previous owner had also acquired the capital asset by any of the modes
above, then the cost to that previous owner who had acquired it by mode of
acquisition other than the above, should be taken as cost of acquisition.
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(v) The new house property purchased or constructed has not been transferred
within a period of three years from the date of purchase or construction.
Amount of Exemption. The amount of exemption under section 54 is
Equal to the amount of the capital gain if cost of new house property is morethan the capital gain, or
Equal to the cost of the new house property if the cost is less than thecapital gain.
Deposit Scheme under Section 54. Where the amount of capital gain is not so
utilized for the purchase or construction of a new residential house before the due
date of furnishing of the return of income, it shall be deposited by him on orbefore the due date in an account with a public sector bank in accordance with the
Capital Gain Account Scheme, 1988. The amount already utilized on the new house
together with the amount deposited shall be deemed to be the amount utilized for
the purchase of new house under section 54. If the amount deposited is not
utilized for the purpose of purchase or construction of new house within the
stipulated period, then the amount not so utilized will be treated as long term
capital gain of the previous year in which the period of three years expires. In such
case the assessee is entitled to withdraw the amount from the bank.
Consequences of Selling the New House Before 3-years. If the new house property
is transferred within a period of three years from the date of the purchase or
construction, the amount of capital gains arising therefrom, together with the
amount of gains exempted earlier, will be chargeable to tax in the year of sale of
the house property. To attain this, the amount of exemption under section 54 shall
be reduced from the cost of acquisition to the new house, while calculating short-
term capital gains on the transfer of the new asset.
Capital Gain on the Transfer of Agricultural Land (Section 54B)
Capital gains arising on the transfer of land used by an individual or his parents for
agricultural purposes for a period of two years immediately preceding the date of
transfer is exempt form the tax if the individual assessee has purchased another
agricultural land within a period of two years from the date of such transfer
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(subject to the requirements).
(Not covered: Amount of exemption, scheme of deposit and consequences on not
meeting the requirements).
Capital Gain on Compulsory Acquisition of Land and Building of anIndustrial Undertaking (Section 54D)
Capital gains arising on the compulsory acquisition of any land or building forming
a part of an industrial undertaking is exempt subject to the following
requirements:
Such land or building was used by the assessee for the purpose of industrialundertaking for two years preceding the date of compulsory acquisition,
The assessee has purchased any land or building or constructed a buildingwithin 3 years from the date of the receipt of the compensation, and
Newly acquired land or building should be used for the purpose of shifting orreestablishing the said undertaking or setting up another industrial
undertaking.
(Not covered: Amount of exemption, scheme of deposit and consequences on not
meeting the requirements).
Long Term Capital Gain Exemption for Investment in Certain Bonds
(Section 54EC)
This exemption is available to an individual, HUF, company or any other person
who invests the long term capital gain, within 6 months of a the transfer of the
capital asset, in any of the specified bond (issued on or after April 1, 2006)
redeemable after 3 years:
National Highway Authority of India (NHAI), or Rural Electrification Corporation Ltd. (REC)
There is a limit of Rs. 50 lakh on the investments on or after April 1, 2007.
The face value of a bond is generally Rs. 10,000 and the rate of return correctly
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Section Asset
Transferred
Who
Entitle
d
Use or
Holding
Period
Prescribed
Period for
Investment
Other
Conditio
ns/
Incidents
Sales of New
Asset
requirements).
Capital Gain on Transfer of Capital assets in Case of Shifting of
Industrial Undertaking from Urban Area to any SEZ (Section 54GA)
This exemption is available to an individual, HUF, company or any other person
who transfers the capital assets (being plant, machinery, land or building or any
right in the land or building) being used for the purpose of industrial undertaking
situated in an urban area to a special economic zone (SEZ). The assessee purchases
within one year before or 3 years after the date of transfer:
(i) Purchases plant or machinery for the purpose of business of industrial
undertaking in the area to which the said undertaking has shifted,
(ii) Acquires building or land or constructed building for the purpose of his business
in the said area,
(iii) Shifts the original asset and transferred the establishment in the said area, and
(iv) Incurs expenses on such other purpose as may be specified in a scheme framed
by Central Government for the purpose of this section.
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54 Residential
House
Individ
ual or
HUF
Exceedin
g 3 years.
Within 1 year
before, or 2
years after
the date of
transfer (ifpurchased) or
3 years after
the date of
transfer (if
constructed).
If sold within
3 years from
the date of
purchase /
construction,capital gains
claimed as
exempt
assessable to
tax together
with
additional
capital gains
in the year of
transfer of
new asset as
Short Term
Capital Gain
(STCG)
54B Agricultural
Land
Individ
ual
Use for 2
years
Within 2
years after
the date oftransfer.
Must
have
beenused by
assessee
or his
parents
for
agricultur
al
purposes
SeeNotes 1,
2 and 10
If sold within
3 years from
the date ofpurchase /
construction,
capital gains
claimed as
exempt
assessable to
tax together
with
additionalcapital gains
in the year of
transfer of
new asset as
Short Term
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Capital Gain
(STCG)
54D Land or
Building for
Industrial
undertaking
.
Any
Assess
e
Use for 2
years
Within 3
years after
the date of
transfer.
Must
have
been
compulso
rilyacquired
If sold within
3 years from
the date of
purchase /
construction,capital gains
claimed as
exempt
assessable to
tax together
with
additional
capital gains
in the year oftransfer of
new asset as
Short Term
Capital Gain
(STCG)
54EC Any Long-
term Capital
Asset (LTCA)
Any
Assess
e
Shares,
Listed
Securities, Units
of
UTI/Mut
ual Fund
covered
Within 6
months of
transfer oforiginal asset.
If sold within
3 years,
exemptedcapital gain
will be
deemed to be
income from
Long Term
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u/s.
10(23D)
:1 year
Others :
3 years
Capital Gain
(LTCG) of the
assesse in the
year of
transfer of thenew asset.
54ED LTCA being
listed
securities or
units
Any
Assess
e
Listed
Securitie
s or units
of
UTI/Mut
ual Fund
coveredu/s.
10(23D) :
1 year
Within six
months from
the date of
transfer in
acquiring
eligible issue
of capital
exemptio
n is
available
only in
respect
of the
assetstransferr
ed before
1-4-2006
If sold within
3 years,
exempted
capital gain
will be
deemed to be
income fromLong Term
Capital Gain
(LTCG) of the
assesse in the
year of
transfer of the
new asset.
54F Any Assetother than
residential
house.
Individual or
HUF
Shares,Listed,
Securitie
s, Units
of
UTI/Mut
ual Fund
covered
u/s.
10(23D) :1 year
Others :
3 years
Within 1 yearbefore, or 2
years after
the date of
transfer (if
purchased),
or 3 years
after the date
of transfer (if
constructed).
Same as forSections 54,
54B, 54D
except that
under section
54F it will be
taxed as LTCG.
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54G Plant and
Machinery
or Land and
Building
used forIndustrial
undertaking
in Urban
area.
Any
Assess
e
May be
L.T.C.A
or
S.T.C.A
Within 1 year
before, or 3
years after
the date of
transfer.
Same as for
Sections 54,
54B and 54D.
54GA Plant and
Machinery
or Land and
Building
used for
Industrial
undertaking
in Urban
area.
Any
Assess
e
May be
L.T.C.A
or
S.T.C.A
Within 1 year
before or 3
years after
the date of
transfer.
Same as for
Sections 54,
54B and 54D.
115F Foreign
Exchange
Asset.
Non-
Reside
nt
Indian
Shares,
Listed
Securitie
s, Units
of
UTI/Mut
ual Fund
covered
u/s.
10(23D) :
1 year
Others :
3 years
Within 6
months after
the date of
transfer.
Same as u/s.
54F above.
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