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Capital Gains: Few Basics that you should Know

Damandeep Singh 
on 13 November 2015

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Capital Gains is the 3rd Head of Income described under Income Tax Act, 1961 and provisions relating to it are given from Sec. 45 to 55A.  Capital gains refers to profits & gains on transfer of any capital asset.

Meaning of Capital Asset

In general all assets are Capital assets and even Intangible assets are Capital assets. However, the following shall NOT be considered to be Capital Asset:

1. Any stock-in-trade

2. Any personal moveable effect, i.e., Moveable items of personal use

However following personal moveable effects shall be considered to be Capital Assets:

• Ornaments (Gold/Silver) including coins
• Archaeological Collections
• Drawings
• Paintings
• Sculptures
• Work of Art

3.  Agricultural land in Rural area in India and any such rural land which is near urban land shall be considered to be urban land and shall be in following manner:

• If it is within distance of 2 kms. From urban area having population exceeding 10,000 but not more than 1,00,000

• If it is within distance of 6 kms. From urban area having population exceeding 1,00,000 but not more than 10,00,000

• If it is within distance of 8 kms. From urban area having population exceeding 10,00,000

4.  Gold deposit Bonds

Classification of Capital Gains

As per Income Tax Act, 1961; capital gains are taxed on basis of following 2 classifications:

1. Long Term Capital Gains (LTCG)

Capital gains shall be considered Long Term if asset has been transferred after a period of 3 years from date of acquisition. But, in following cases period of 3 years shall be reduced to 1 year:

• Shares listed in Recognized Stock Exchange
• Units of Unit Trust of India
• Units of Equity Oriented Mutual funds
• Zero Coupon Bonds
• Any other security listed in Recognized Stock Exchange

2.  Short Term Capital Gains (STCG)

Capital gains shall be considered to be Short term if asset has been transferred within a period of 3 years. But, in case above mentioned assets, it shall be considered to Short Term if transferred within a period of 1 year.

Taxability of Capital Gains

Capital Gains are taxed in the given manner:

S.No.

Type of Capital Gains

Taxability

1.

LTCG, on which Securities Transaction Tax (STT) is paid , i.e, any securities listed on Recognized Stock Exchange

 Exempt u/s 10(38)

2.

LTCG, other than those on which STT is paid

Taxable at flat rate of 20 % u/s 112

3.

STCG, on which STT is paid

Taxable at flat rate of 15% u/s 111A

4.

STCG, on which STT is not paid

Taxable at Normal rate / slab rate

Computation of Capital Gains

1. Computation of STCG
Full Value of Consideration (FVC)     xxx
Less: Cost of Acquisition (CoA)       (xxx)
Less: Cost of Improvement             (xxx)
Less: Selling Expenses                   (xxx)
                                                   _______
Short Term Capital Gain (STCG)       xxx
                                                    _______

2.  Computation of LTCG

Full Value of Consideration (FVC)       xxx
Less: Indexed Cost of Acquisition      (xxx)
Less: Indexed Cost of Improvement   (xxx)
Less: Selling Expenses                     (xxx)
                                                      ________ 
Long Term Capital gains (LTCG)          xxx
                                                      ________

Indexed Cost means the cost adjusted as per Cost Inflation Index.

Cost Inflation Index number is prescribed by Income Tax Department every year for the purpose of this calculation starting from F.Y. 1981-82. And for assets purchased before 01.04.1981, Cost of Acquisition (CoA) shall be

i. the amount for which asset was purchased, OR
ii. its Fair Market Value (FMV) as on 01.04.1981,whichever is higher.

And any improvement before 01.04.1981 shall be ignored for the purpose of calculation of Capital Gains.

3.  Computation in case of Depreciable Assets

Full Value of Consideration (FVC)                                    xxx
Less: WDV of Asset as on 1st day of year in which         (xxx)
asset is sold
Less: Selling Expenses                                                  (xxx)
                                                                                 ________
Short Term Capital Gains (STCG)                                   xxx
                                                                                 ________

Index is Not applicable in case of Depreciable Assets & Gain or Loss is always Short term.

Capital Loss

In case, there is loss on sale of Capital Asset, it can be Set-off or Carried forward as per provisions of Sec. 70, 71 & 74 of the Income Tax Act, 1961 in the following manner:

Loss under the head Capital Gains is NOT allowed to be set-off from Income under any other head.

      S.No.

Type of Loss

Set-off Allowed from

  1.  

Long Term Loss, on which STT is paid

NOT Allowed to be Set-off from any income as it is Exempted in case of gains also

     2.

Other Long Term Loss

Set-off allowed only from LTCG, on which STT is not paid

     3. 

Short Term Loss, on which STT is paid

Set-off allowed from Long Term (STT not paid) or Short Term Capital Gains (no matter whether STT paid or not)

     4. 

Other Short Term Loss

Set-off allowed from Long Term (STT not paid) or Short Term Capital Gains (no matter whether STT paid or not)

Carry-forward of Loss under head Capital Gains is allowed for 8 years and even in subsequent years, set-off shall be allowed in the similar manner as above described.

That’s All Folks!! It was just a brief overview of Capital Gains head under Income Tax Act.

Although, I have tried to put in best of my efforts & have taken due care in writing this article, but if there has been left any mistake or mis-conception or doubt, feel free to contact.

About the Author:
Damandeep Singh
CA-IPCC Student
E-mail: damanoberoi@hotmail.com


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