Any profit or gain which is earned by transferring the capital assets which was held for investment will be taxable under the head of ‘Income from Capital Gain’. The gain can be earned from any of the Short Term Capital Asset and Long Term Capital Asset. When Capital Asset is transferred then only you can earn Capital Gain. In other words if the asset which is being transferred is not capital asset then it will be not Capital Gain. If the asset is transferred in a previous year then it will be the income of previous year and will be taxable under the head of Income from Capital Gains.
WHAT IS CAPITAL ASSET?
Capital Asset is an asset or property which is held by tax payer but it excludes the following assets:
- If any item is being held for the purpose of business and profession will be taxed under the head of Income from Business and Profession, the asset can be stock, ready goods or raw material etc.
- Agriculture land.
(Agriculture land can be any land from which a person is deriving agriculture income, and the land which is not an urban land and it is outside of 8 kilometers of a municipality, and lastly agriculture land is a land where there is less than 10,000 population.)
TYPES OF CAPITAL ASSET
There are two types of Capital Assets which are as follows:
- Short-term capital asset: This asset means an asset which is held for not more than 36 months immediately preceding the transfer.
- Long term capital asset: This asset means an asset which is held for more than 36 months or 24 months or 12 months as the case may be.
CAPITAL GAINS
Any profit which is earned by transferring a capital asset will be known as capital gains, and it will be taxable under the head of Income from Capital Gains if the transfer was made in the previous year. There can be two types of capital gains which is as follows:
- Short-term capital gain: Capital gain which arises on transfer of short term capital asset.
- Long term capital gain: Capital gain which arises on transfer of long term capital asset.
CONDITION FOR TAX ON CAPITAL GAIN
- The tax payer must be the owner of capital asset.
- There shall be transfer of capital asset.
- There shall be either profit or gain from such transfer.
INDEXATION
The value of rupee is not same as it was in past when the asset was acquired. So while paying the tax the effect of the same shall be taken into consideration. The authorities of tax allows a tax payer to charge the value as per the cost of indexation so that tax payer can show higher purchase cost and lower the overall profit so that it reduces the tax liability on gain. Though, the benefit of concept of indexation is only available to long term capital gains.
COST OF ACQUISITION IN CASE OF LONG TERM ASSET
Index of Cost of Acquisition= Cost Inflation Index (for year in which asset is sold) shall be divided by Cost Inflation Index (for year in which asset is purchased).
Authored by Adv Shivam Kumar
CAclubindia
