Income Tax on Capital Gain in India: FAQs

 

Any profit or gain arising from transfer of a capital asset during the year is charged to tax under the head “Capital Gains”.​

​​Capital asset is defined to include:

a) Any kind of property held by an assesse, whether or not connected with business or profession of the assesse.

b) Any securities held by a FII which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992.

However, the following items are excluded from the definition of “capital asset”:

    • Any stock-in-trade, consumable stores, or raw materials held by a person for the purpose of his business or profession.E.g., Motor car for a motor car dealer or gold for a jewellery merchant, are their stock-in-trade and, hence, they are not capital assets for them.
    • Personal effects of a person, that is to say, movable property including wearing apparels (*) and furniture held for use, by a person or for use by any member of his family dependent on him.(*) However, jewellery, archeological collections, drawings, paintings, sculptures, or any work of art are not treated as personal effects and, hence, are included in the definition of capital assets.

Following points should be kept in mind:

  • The property being capital asset may or may not be connected with the business or profession of the taxpayer. g. Bus used to carry passenger by a person engaged in the business of passenger transport will be his Capital asset.

 

Any capital asset held by a person for a period of more than 36 months immediately preceding the date of its transfer will be treated as long-term capital asset.

However, the period of holding to be considered is 12 months instead of 36 months in respect of following assets

  1. Shares (equity or preference) which are listed in a recognised stock exchange in India,
  2. Units of equity oriented mutual funds,
  3. listed securities like debentures and Government securities,
  4. Units of UTI and
  5. Zero Coupon Bonds,

In case of unlisted shares in a company, the period of holding to be considered is 24 months instead of 36 months.

With effect from Assessment Year 2018-19, the period of holding of immovable property (being land or building or both), shall be considered to be 24 months instead of 36 months.

Gain arising on transfer of long-term capital asset is termed as long-term capital gain and gain arising on transfer of short-term capital asset is termed as short-term capital gain. However, there are a few exceptions to this rule, like gain on depreciable asset is always taxed as short-term capital gain.​

The taxability of capital gain depends on the nature of gain, i.e. whether short-term or long-term. Hence to determine the taxability, capital gains are classified into short-term capital gain and long-term capital gain. ​

Long term capital gain arising on account of transfer of long-term capital asset will be computed as follows:

Particulars Rs.
Full value of consideration (i.e., Sales consideration of asset) XXXXX
Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (E.g., brokerage, commission,  etc.)  

(XXXXX)

Net sale consideration XXXXX
Less: Indexed cost of acquisition (*) (XXXXX)
Less: Indexed cost of improvement, if any (*) (XXXXX)
Long-Term Capital Gain XXXXX

 

Indexed cost of acquisition is computed with the help of following formula :

 

Cost of acquisition × Cost inflation index of the year of transfer of capital asset

Cost inflation index of the year of acquisition

Indexed cost of improvement is computed with the help of following formula :

 

Cost of improvement × Cost inflation index of the year of transfer of capital asset

Cost inflation index of the year of improvement

Short-term capital gain arising on account of transfer of short-term capital asset is computed as follows:

Particulars Rs.
Full value of consideration (i.e., Sales value of the asset) XXXXX
Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (E.g., brokerage, commission, etc.)  

(XXXXX)

Net Sale Consideration XXXXX
Less: Cost of acquisition (i.e., the purchase price of the capital asset) (XXXXX)
Less: Cost of improvement (i.e., post purchase capital expenses incurred  on  addition/improvement to the capital asset)  

(XXXXX)

Short-Term Capital Gain XXXXX

 

​​The benefit of indexation is available only in case of long-term capital assets and is not available in case of short-term capital assets.​​

  • In respect of capital asset acquired before 1st April, 2001 is there any special method to compute cost of acquisition?

​​In respect of capital asset acquired before 1st April, 2001, the cost of acquisition will be higher of the actual cost of acquisition of the asset or fair market value of the asset as on 1st April, 2001. This option is not available in the case of a depreciable asset.​

  • As per the Income-tax Law, gain arising on transfer of capital asset is charged to tax under the head “Capital gains”. What constitutes ‘transfer’ as per Income-tax Law?

Generally, transfer means sale, however, for the purpose of Income-tax Law “Transfer”, in relation to a capital asset, includes:

  1. Sale, exchange or relinquishment of the asset;
  2. Extinguishment of any rights in relation to a capital asset;
  3. Compulsory acquisition of an asset;
  4. Conversion of capital asset into stock-in-trade;
  5. Maturity or redemption of a zero coupon bond;
  6. Allowing possession of immovable properties to the buyer in part performance of the contract;
  7. Any transaction which has the effect of transferring an (or enabling the enjoyment of) immovable property; or
  8. Disposing of or parting with an asset or any interest therein or creating any interest in any asset in any manner whatsoever.

If a person gifts his capital asset to any other person, then no capital gain will arise in the hands of the person making the gift.

If the person receiving the capital asset by way of gift, will, etc. subsequently transfers such asset, capital gain will arise in his hands. Special provisions are designed to compute capital gains in the hands of the person receiving the asset by way of gift, will, etc. In such a case, the cost of acquisition of the capital asset will be the cost of acquisition to the previous owner and the period of holding of the capital asset will be computed from the date of acquisition of the capital asset by the previous owner.

Section 10 provides list of incomes which are exempt from tax Amongst these the major exemptions relating to capital gains are listed below:

Section 10(33) : Long-term or short-term capital gain arising on transfer of units of Unit Scheme, 1964 (US 64) (transferred on or after 1-4-2002).

Section 10(37) : An individual or Hindu Undivided Family (HUF) can claim exemption in respect of capital gain arising on transfer of agricultural land situated in an urban  area by way of compulsory acquisition. This exemption is available if the land was used by the taxpayer (or by his parents in the case of an individual) for agricultural purpose for a period of 2 years immediately preceding the date of its transfer .

Section 10(38) : Long-term capital gain arising on transfer of equity shares or units of equity oriented mutual fund (*) or a unit of a business trust will be exempt from tax, if the following conditions are satisfied:

  • The asset transferred should be equity shares of a company or units of an equity oriented mutual fund or a unit of a business trust other than a unit allotted by the trust in exchange of shares of a special purpose vehicle as referred to in section 47​.
  • The transaction should be liable to securities transaction tax (STT) at the time of transfer.
  • Such asset should be a long-term capital asset.
  • Transfer should take place on or after October 1, 2004.​

Long term capital gain exemption on transfer of equity share acquired or on after 01-10-2004 shall be available only if the acquisition of share is chargeable to STT. However, the exemption shall continue in genuine cases where the STT could not have been paid like acquisition of share in IPO, FPO, bonus or right issue by a listed company, acquisition by non-resident in accordance with FDI policy, etc. [Inserted by Finance Act 2017]

A taxpayer can claim exemption from certain capital gains by re-investing the capital gain into specified asset. The following table highlights the assets in respect of which the benefit of re-investment is available:

Section under

which bene​​fit

is available

Gain eligible for claiming exemption Asset in which the capital gain is to be re-invested to claim exemption
section 54 Long-term capital gain arising on transfer of residential house property. Gain to be re-invested in purchase or construction of one residential house property in India.
section 54B Long-term or short-term capital gain arising on transfer of agricultural land. Gain to be re-invested in purchase of agricultural land.
section 54EC Long-term capital gain arising on transfer of any capital asset. Gain to be re-invested in bonds issued by National Highway Authority of India or by the Rural Electrification Corporation Limited.
Section 54EE Long-term capital gain arising on transfer of any capital asset. Gain to be re-invested in units of specified fund, as may be notified by Govt. to finance start-ups.
section 54F Long-term capital gain arising on transfer of any capital asset other than residential house property. Net sale consideration to be re-invested in purchase or construction of one residential house property in India.
section 54D Gain arising on transfer of land or building forming part of industrial undertaking which is compulsorily acquired by Government and was used for industrial purpose for a period of 2 years prior to its acquisition. Gain to be re-invested to acquire land or building for industrial purpose.
section 54G Gain arising on transfer of land, building, plant or machinery in order to shift an industrial undertaking from urban area to rural area Gain to be re-invested to acquire land, building, plant or machinery in order to shift the industrial undertaking from an urban area to a rural area
section 54GA Gain arising on transfer of land, building, plant or machinery in order to shift an industrial undertaking from urban area to any Special Economic Zone Gain to be re-invested to acquire land, building, plant or machinery in order to shift the industrial undertaking from urban area to any Special Economic Zone.
section 54GB Long-term capital gain arising on transfer of residential property (a house or a plot of land). The transfer should take place during 1st April, 2012 and 31st March 2017. However, in case of investment in “eligible start-up”, sunset limit of 31st march 2017 is extended to 31st march 2019.​ The net sale consideration should be utilised for subscription in equity shares of an “eligible company”.  ​W.e.f. April 1, 2017, eligible start-up is also included in definition of eligible company​

 

​​​Yes, as per section 54EC​ you can claim tax relief by investing the long-term capital gains in the bonds issued by the National Highway Authority of India or by the Rural Electrification Corporation Limited. The investment should be made within a period of 6 months from the date of transfer of capital asset and bonds should not be redeemed before 3 years. This benefit cannot be availed in respect of short-term capital gain. Maximum amount which qualifies for investment will be Rs. 50,00,000. Thus, deduction under section 54EC​ cannot be claimed for more than Rs. 50,00,000. ​

As per section 50C​​, while computing capital gain arising on transfer of land or building or both, if the actual sale consideration of such land and/or building is less than the stamp duty value, then the stamp duty value will be taken as full value of consideration, i.e., as deemed selling price and capital gain will be computed accordingly.

 

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