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NOTES ON INCOME FROM CAPITAL GAIN

CA Puneet Jethliya 
Updated on 30 July 2020

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TRANSFER

It includes sales, exchange, redemption of zero coupon bonds and sale of any capital asset with consideration.

SHORT TERM CAPITAL GAIN

For shares, securities hold for 12 months or less.

Other assets hold for 36 months or less.

For the following purpose 12 months or less period considered for STCG :

(a) Equity shares or preference shares of any company whether listed or not.

(b) Securities listed in recognized stock exchange like debentures, govt. securities etc.

(c) Units of UTI and specified Mutual funds u/s 10(23D)

(d) Zero coupon bonds whether listed or not.

LONG TERM CAPITAL GAIN

Which is not STCG.

THE FOLLOWING ASSETS OR TRANSFER IS NOT INCLUDED IN CAPITAL GAIN

 Gift, Will, revocable transfer other than ESOP.

 Distribution of capital assets of HUF.

 Sale of stock-in-trade.

 Transfer of asset from holding company to subsidiary company and vice versa. But the transferee company must be Indian.

 Membership right of any stock exchange.

 6.5% and 7% Gold bond issued by Central Govt.

 Conversion of debentures into equity shares or new debentures .

 Agriculture land in India if such land :-

(a) Not in the municipal area of 10000 or more population.

(b) Not in the specified area.

Calculation of long term and short term capital gain

 Sales consideration XXXX

Less - Transfer expenses (XXXX)

 (brokerage, stamp duty) ____

 NET SALES CONSIDERETION (nsc) XXXX

Less- Cost of acquisition (when STCG)

 Or indexed cost of acquisition (XXXX)

Less - Cost of improvement or indexed (XXXX)

 STCG/LTCG XXXX

Less- Deduction u/s 54 to 54G (XXXX)

 NET TAXABLE CAPITAL GAIN XXXX

FOR STCG - DEDUCTION U/S 54B, 54D, 54G IS ALLOWED ONLY.

THE BENEFIT OF INDEXATION NOT GIVEN IN CASE TRANSFER TAKES PLACE U/S 115AB, 115AC, 115ACA, 115D.


Capital gain Exempted u/s 10


 Transfer of units US-64. Sec.10(33)

 LTCG on transfer of BSE-500 equity shares. Sec.10(36)

 Compulsory acquisition of urban land. Sec. 10(37)

· Allowed only to individual and HUF.

· Such land must be used for at least two years for agriculture purpose.

· Compensation received after 31 march 04.

 LTCG on transfer of securities on which STT paid :

· Capital asset should be equity shares or units of equity oriented mutual fund.

· Such transfer made on or after 01 oct.2004.

 Loan received under a scheme of reverse mortgage u/s 10(43) - Any amount received by an individual under a scheme of reverse mortgage, either in lump sum or in installment, in a transaction of reverse mortgage referred to in section 47(xvi).

TRANSFER EXPENSES

These expenses are deductible in calculation of NSC. For e.g. Brokerage, commission, cost of stamp, registration fees on sales etc.

Cost of Acquisition (coa)

It includes brokerage, fees, stamp duty paid at the time of purchase of capital asset.

PROVISIONS OF SEC.49(1)

Cost to the previous owner will be deemed to be the cost of acquisition in the following cases :-

 Distribution of HUF`s capital asset.

 Capital asset acquired under will or gift.

 Distribution of assets on liquidation of companies.

 If the cost to previous owner is not identified then the Market value as on the date of assets acquired by previous owner will be deemed as cost of acquisition.

 For calculation of Short term/Long term capital gain – the holding period of previous owner also included.

Acquisition before 1st April, 1981

MV or the cost of acquisition (improvement cost incurred before Apr.1981 - ignored) whichever is higher on 1st April, 1981 will be deemed as cost of acquisition. This rule is not applicable on depreciable assets.

Amount forfeited paid as advance to vendor due to non-fulfillment of terms and condition, such forfeited amount will be deducted from the cost of acquisition before indexation.

Bonus Shares

 Acquired on or after 1 Apr.1981 – NIL

 Acquired before 1 Apr.1981 – Fair Market Value.

Right shares

 Amount paid to the company for such shares.

 For transfer of right entitlement - NIL.

Conversion of debentures

 Conversion of debentures, debenture stock, deposit certificate into equity shares or debentures of a company will not generate capital gain.

 On transfer of these converted equity shares or debentures , cost of acquisition will be equal to the cost of old debentures converted into shares etc.


Cost of Improvement


· Any improvement cost incurred after 1st April, 1981 will be considered for computation income under the head capital gain otherwise not.

· Cost of improvement in respect of :

1. Good will of business.

2. Right to manufacture, produce or process any article or thing.

3. Right to carry on any business.

 Shall be taken as NIL.

Indexed Cost of Acquisition

 If the asset purchased by the owner/ assessee

 = Cost of acquisition X 582

 Indexed for the year of purchase

 If asset received under will or gift :

 = Cost of previous owner X 582

 Index for the year of actual acquisition

 For the following asset indexation will not be applied –

a.  Depreciable asset - always STCG.

b.  Bonds, debentures other than issued by you.

c.  Shares and debentures purchased by non- resident in foreign currency.

CONVERSION OF CAPITAL ASSET INTO STOCK

(a) Any asset converted after 31st March 1984 into stock is taxable in the year of actual sale.

(b) Capital gain tax liability arises in the year of actual sales on the bases of market value of the assets as on the date of conversion as sales consideration.

(c) In case of partnership firm or AOP or BOI the sales consideration will be deemed at which such converted assets recorded at book value. The transferred assets must be capital asset.

(d) In case of compulsory acquisition of asset, converted into stock, by the govt. the liability to pay tax arises in the year of and on the basis of 1st receipt of installment.

(e) In that case indexed COA will be computed as –

 COA X Indexed of the year of transfer

 Indexed of the year of purchase

WHEN THE TRANSFER OF ASSET IS NOT CHARGEABLE TO TAX IN THE YEAR OF SALE ?

1. When the capital asset acquired as compulsory acquisition under any law.

2. When the sales consideration approved by the

Central Government or by RBI.

Computation of capital gain

1. In the abovementioned case computation of capital gain will be made in the year of ACTUAL RECEIPT of compensation whether wholly or partly. Such receipt will be treated as sales consideration.

2. Capital Gain computed on the basis of sales consideration received actually.

3. In the subsequent years, on receipt of remaining amount capital gain tax fully charged on the same.

4. The whole amount of ENHANCED COMPENSATION is taxable in the year of receipt. Litigation expenses incurred will be allowed as transfer expenses from the same.

5. In case where the amount of compensation reduced then revised computation will be made and accordingly capital gain charged.


First Proviso of Sec.48


1. Applicable only on Non-resident.(not comes into the purview of sec.115AC/115AC)

2. He acquired shares or debentures in Indian company by means of foreign currency.

3. On transfer - LTCG/STCG.


COMPUTATION OF CAPITAL GAIN


a. Benefit of indexation is not allowed.

b. Capital gain computed in the same foreign currency used for acquisition.

c. After computing above converted into Indian currency.

d. For the abovementioned purpose average exchange rate used on the date of sale and purchase but capital gain converted at selling rate of foreign currency.

Computation of capital gain on transfer of self-generated assets

1. Cost of acquisition – NIL

2. Transfer expenses – allowed.

3. Improvement cost – considered for tenancy right, route permit, loom hours but NIL in case of goodwill of business and right used for mfg. or processing or for running business.

4. Transfer of self- generated assets like goodwill of profession, patent of technique etc. are not taxable.


PROVISIONS OF SEC. 45(1A)


Conditions :

1. Compensation received on damage to or destruction of any capital asset.

2. Such damage or destruction may be as a result of :

(a) Flood, typhoon, hurricane, cyclone, earthquake or otherwise convulsion of nature,

(b) Riot or civil disturbance, or

(c) Accidental fire or explosion, or

(d) Action by an enemy or action taken in combating an enemy.

Capital Gain Tax :

1. Previous year in which money or other asset is received from the insurance company.

2. Sales Consideration: the value of money or the fair market value of other assets on the date of such receipt.

Non-Applicability of Sec. 45(1A)

If the conditions of sec. 45(1A) not satisfied then any

amount received from the insurance co. will be treated

as revenue receipt and assessable under the head

Income from Business or Profession u/s 28 or 56.


PROVISIONS FOR NON-RESIDENT INDIANS/INDIAN CITIZEN:


1. The assessee acquired specified assets through

 convertible foreign currency.

2. Specified assets includes shares of Indian company,

 debentures of public ltd. Co., Govt. securities.

3. Transfer of specified capital asset and LTCG arises.

4. Within six months from the date of transfer of such

 assets, NSC or part of the NSC has been invested in

 the specified capital assets.

5. On fulfillment of abovementioned conditions, he can

 claim deduction u/s 115F as :

 LTCG * AMOUNT INVESTED / NSC

6. Such newly acquired assets cannot be transferred

 within a period of three years from the date of

 acquisition.


CAPITAL GAIN ON TRANSFER OF LAND AND BUILDING - SEC.50C.


Condition:

1. Sec.50C provides for deeming the guideline value for

stamp duty as the full value of consideration if the actual consideration is less than such value.

2. Transfer of land or building or both in the P.Y.

3. There may be LTCG or STCG.


Capital Gain Tax


1. Sales consideration will be actual sales consideration

 Or the stamp duty value whichever is higher.

Exemption from capital gain income 

Under Section. 54

1. LTCG arises on transfer Of Residential House

2. Allowed only to Individual or HUF.

3. Assessee should

- purchase a house one year before or within two

year of transfer, or

- Either he may construct a house within a period of

three years from the date of transfer, or

- He may deposit a specified amount in Capital Gain

Account (CGA) for the purchase or construction of

house before the due date of filing return.

Utilization of CGA

4. The amount deposited in CGA account must be utilized for the specified purpose, and on the expiry of such period it is taxable as Capital Gain.


Stipulated Time Period for holding New Asset


5. House could not be sold within three years from the Date of purchase or construction completed.


What if the new asset transferred within 3 yrs.


6. If sold within three yrs. then exemption allowed u/s 54 will be deducted from the cost of acquisition of new residential house on behalf of which exemption allowed earlier and STCG shall be computed after deducting such reduced cost of acquisition.


 Amount exempted -


- 100% of the amount invested as specified in sec.54

- LTCG

(whichever is lower)

The total amount of exemption shall not exceed the amount of capital Gain.


Under section 54B


1. Only an individual can claim exemption under this section.

2. Capital Gain On Transfer Of Agricultural Land.

3. Such land used for at least for two years from the date of transfer by the assessee or by his parents.

4. A new agriculture land purchased within a period of two year, or

He may also deposit whole or part of the amount in CGA for the aforesaid purpose before the due date of filing return.

From the date of transfer of agriculture land and in case of compulsory acquisition from the date of receipt

5. Other provisions regarding transfer of new asset, utilization of CGA, taxability and amount exempted is same as specified in Sec.54.


Under Section 54D


1. Capital gain on compulsory acquisition of Land and Building which is the part of industrial undertaking.

2. Such land or building used for industrial purpose for at least 02 yrs. from the date of transfer.

3. LTCG/STCG.

4. Amount invested

 In the construction or purchase of building or land within three years from the date of actual receipt of compensation (wholly/partly).Such New land or building used for industrial purpose, or

 He may deposit into the capital gain account scheme before the due date of filing return.

5. Other provisions regarding transfer of new asset, utilization of CGA, taxability and amount exempted is same as specified in Sec.54.


Under Section 54EC


1. LTCG arises on transfer of any capital asset.

2. Amount invested in the specified capital assets:

· Bonds of RECL redeemable after three years.

· Bonds of NHAI redeemable after three years.

3. Such amount is required to be invested within six months from the date of transfer.

4. Maximum amount of exemption permissible is Rs.50 lac.

5. If such bonds transferred within three years then the whole amount, exempted earlier, taxable in the year of transfer of bonds.


Under Section 54F


1. LTCG from transfer of any capital asset other than Residential House Property.

2. Only HUF or an Individual can claim exemption under this section.

3. The assesee should

 purchase a residential house one year before or within three years from the date of transfer, or

 Construct a residential house within a period of three years from the date of transfer.

4. Other provisions regarding utilization of CGA, stipulation time period of holding new asset are same as specified in Sec.54.


What if the new asset transferred within 03 yrs.


5. In case where the asset has been transferred within three years then exemption allowed earlier will be taxable as LTCG in the year of transfer of new asset.

6. In the following conditions such assesee cannot claim exemption u/s 54F :

§ If he owns more than one residential house property on the date of purchase other than this new asset, or

§ If he purchase any other residential house property other than new house within 2 years, or

§ If he construct any other residential house property other than new house property within 03 years

From the date of transfer of original asset.

 Amount exempted

 Long term Capital gain X Amt. invested

 Net sales consideration

Under Section 54G

1. Capital gain on transfer of capital assets- Machine, plant, building or land used for the business of an industrial undertaking situated in an urban area.

2. Transfer Due to shifting of industrial undertaking to any area other than urban area.

3. Within a period of one year before or three years after the date of transfer purchased Machinery, plant, or acquired building or land or constructed building and completed shifting to the new area.

4. The expenses incurred on shifting also allowed.

5. Other provisions regarding transfer of new asset, utilization of CGA, taxability and amount exempted is same as specified in Sec.54.


Under Section 54GA


1. Shifting of industrial undertaking to SEZ area.

2. Other conditions are same as stated in Sec.54G.


Tax on short term capital gain Sec. 111A


Any STCG arising from the transfer of an equity share in a company or a unit of an equity oriented fund shall be liable to tax @15% if the following conditions are satisfied:

1. The transaction of sale should take place through a recognized stock exchange.

2. Such transaction is chargeable to STT.

3. Assessee is not entitled to claim any deductions provided under chapter VI-A in respect of STCG u/s 111A.

4. In the case of resident an Individual or a HUF, if the basic exemption not exhausted by any other income then STCG u/s 111A shall be reduced by the unexhausted basic exemption limit and only the balance STCG shall be chargeable to tax @15%.


Tax on Long Term Capital Gain sec.112


1. Where the transferred long term asset is in the nature of listed securities or units of UTI or mutual fund or zero coupon bonds.

2. The gain arising from the transfer of such securities or units shall be liable to tax -

 @10% on such LTCG computed without the benefit of indexation, OR

 @ 20% on such LTCG computed availing the benefit of indexation

Whichever is more beneficial to the assessee.

3. In the case of resident an Individual or a HUF, if the basic exemption not exhausted by any other income then LTCG shall be reduced by the unexhausted basic exemption limit and only the balance LTCG shall be chargeable to tax.

4. Assessee is not entitled to claim any deductions provided under chapter VI-A in respect of LTCG.


Students may note that the possibility of applying 10% or 20% tax rate shall arise only in a case where the listed shares are not traded through a recognized stock exchange and not chargeable to STT. Otherwise, the transfer of listed shares is covered by the exemption provided u/s 10(38).

Special provisions for computation of capital gains in case of slump sale - Sec.50B


1. Slump sale – Meaning

The transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.

2. If assets transferred under the slump sale is owned and held for more than 36 months, the capital gain shall be treated as LTCG.

3. The net worth of the undertaking or division so transferred shall be deemed to be the cost of acquisition and the cost of improvement in computing the capital gain.

4. The benefit of indexation not allowed on slump sale.

5. Net worth shall be the aggregate of value of total assets of the undertaking or division as reduced by the value of such liabilities of such undertaking or division as appearing in its books of account

6. Any change in the value of assets on account of revaluation of assets shall be ignored for the purpose of Net worth.




Category Income Tax
Other Articles by - CA Puneet Jethliya 




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