As per Wikipedia A capital gain is a profit that results from a disposition of a capital asset, such as stock, bond or real estate, where the amount realized on the disposition exceeds the purchase price. The gain is the difference between a higher selling price and a lower purchase price. Conversely, a capital loss arises if the proceeds from the sale of a capital asset are less than the purchase price. Capital gains may refer to “investment income” that arises in relation to real assets, such as property; financial assets, such as shares/stocks or bonds; and intangible assets.

Frequently Asked Questions on Taxation of Capital Gains in India

What incomes are charged to tax under the head “Capital Gains”?

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

What is the meaning of capital asset?

Capital asset is defined to include:

  1. a) Any kind of property held by an assesse, whether or not connected with business or profession of the assesse.
  2. 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.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.

    The term jewellery has been given a wider meaning and includes ornaments made up of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stones, and whether or not worked or sewn into any wearing apparel. It also includes precious or semi-precious stones, whether or not set in any furniture, utensil, or other article or worked or sewn into any wearing apparel.

Agricultural Land in India, not being a land situated:

  1. Within jurisdiction of municipality, notified area committee, town area committee, cantonment board and which has a population of not less than 10,000;
  2. Within range of following distance measured aerially from the local limits of any municipality or cantonment board:
  3. not being more than 2 KMs, if population of such area is more than 10,000 but not exceeding 1 lakh;
  4. not being more than 6 KMs , if population of such area is more than 1 lakh but not exceeding 10 lakhs; or
  5. not being more than 8 KMs , if population of such area is more than 10 lakhs.

Population is to be considered according to the figures of last preceding census of which relevant figures have been published before the first day of the year.

  • 6½% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government.
  • Special Bearer Bonds, 1991, issued by the Central Government
  • Gold Deposit Bonds issued under Gold Deposit Scheme, 1999.
  • Deposit certificates issued under the Gold Monetisation Scheme, 2015.

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 securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 will always be treated as capital asset, hence, such securities cannot be treated as stock-in-trade.

What is the meaning of the term ‘long-term 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, in respect of certain assets like shares, units of specified mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months.

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

Illustration for better understanding

Illustration

Mr. Kumar is a salaried employee. On 8th April, 2009, he purchased a piece of land and sold the same on 29th June, 2016. In this case, land is a capital asset for Mr. Kumar. He purchased the land on 8th April, 2009 and sold it on 29th June, 2016, i.e., after holding for a period of more than 36 months. Hence, the land will be a long-term capital asset.

Illustration

Mr. Raj is a salaried employee. On 8th April, 2015 he purchased shares of SBI Ltd. (listed in BSE) and sold the same on 29th June, 2016. In this case, shares are capital assets for Mr. Raj. He purchased shares on 8th April, 2015 and sold them on 29th June, 2016, i.e., after holding them for a period of more than 12 months. Hence, shares are long-term capital assets.

What is the meaning of the term ‘short-term capital asset’?

Any capital asset held by a person for a period of not more than 36 months immediately preceding the date of its transfer will be a short-term capital asset.

However, in respect of certain assets like shares, units of specified mutual fund, listed securities like debentures and Government securities, Units of UTI and Zero Coupon Bonds the period of holding to be considered is 12 months instead of 36 months.

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

Illustration for better understanding

Mr. Raj is a salaried employee. On 8th April, 2014, he purchased a piece of land and sold the same on 29th June, 2016. In this case, land is a capital asset for Mr. Raj. He purchased the land on 8th April, 2014 and sold it on 29th June, 2016, i.e., after holding it for a period of less than 36 months. Hence, land will be a short-term capital asset.

Illustration

Mr. Kumar is a salaried employee. On 8th July, 2015, he purchased shares of SBI Ltd. (listed in BSE) and sold the same on 29th June, 2016. In this case, shares are capital assets for Mr. Kumar. He purchased shares on 8th July, 2015 and sold them on 29th June, 2016, i.e., after holding them for a period of less than 12 months. Hence, shares are short-term capital assets.

What is long-term capital gain and short-term capital gain?

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.

Why capital gains are classified as short-term and long-term?

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. In other words, the tax rates for long-term capital gain and short-term capital gain are different. Similarly, computation provisions are different for long-term capital gains and short-term capital gains.

How to compute long-term capital gain?

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

ParticularsRs.
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, advertisement expenses, etc.)(XXXXX)
Net sale considerationXXXXX
Less: Indexed cost of acquisition (*)(XXXXX)
Less: Indexed cost of improvement, if any (*)(XXXXX)
Long-Term Capital GainXXXXX

(*) Cost of acquisition is the purchase price of the capital asset and cost of improvement is the cost incurred on post purchase capital expenses incurred on additions/improvement to the capital asset. Indexation is a process by which the cost of acquisition/improvement is adjusted against inflationary rise in the value of asset. For this purpose, Central Government has notified cost inflation index for different years. The benefit of indexation is available only to long-term capital assets. For computation of indexed cost of acquisition/indexed cost of improvement, following factors are to be considered:

  • Year of acquisition/improvement
  • Year of transfer
  • Cost inflation index of the year of acquisition/improvement
  • Cost inflation index of the year of transfer

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

The Central Government has notified the following Cost Inflation Index’s.

Fin. YearIndexFin. YearIndex
1981-821001999-00389
1982-831092000-01406
1983-841162001-02426
1984-851252002-03447
1985-861332003-04463
1986-871402004-05480
1987-881502005-06497
1988-891612006-07519
1989-901722007-08551
1990-911822008-09582
1991-921992009-10632
1992-932232010-11711
1993-942442011-12785
1994-952592012-13852
1995-962812013-14939
1996-973052014-151024
1997-983312015-161081
1998-993512016-171125

Illustration for better understanding

Mr. Raja is a salaried employee. On 2nd May, 2000 he purchased a residential house consisting two floors for Rs. 8,40,000. In December, 2005 he constructed third floor at a cost of Rs. 1,00,000. The house is sold on 1st August, 2015. What will be the indexed cost of acquisition and indexed cost of improvement?

**

On the basis of formula discussed above, indexed cost of acquisition will be computed as follows :

Rs. 8,40,000 × 1081  ÷ 406 = Rs. 22,36,552

 *) Cost inflation index as notified by the Government for financial year 2015-16 is 1081 and for financial year 2000-01 is 406.

On the basis of formula discussed above, indexed cost of improvement will be computed as follows :

Rs. 1,00,000 × 1081 ÷ 497  =  Rs. 2,17,505

Cost inflation index as notified by the Government for financial year 2013-14 is 939 and for financial year 2005-06 is 497.

How to compute short-term capital gain?

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

ParticularsRs.
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, advertisement expenses, etc.)(XXXXX)
Net Sale ConsiderationXXXXX
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 GainXXXXX

Is the benefit of indexation available while computing capital gain arising on transfer of short-term capital asset?

Indexation is a process by which the cost of acquisition/improvement of a capital asset is adjusted against inflationary rise in the value of asset (as discussed in earlier FAQ). 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, 1981 is there any special method to compute cost of acquisition?

Generally, cost of acquisition of a capital asset is the cost incurred in acquiring the capital asset. It includes the purchase consideration plus any expenditure incurred exclusively for acquiring the capital asset. However, in respect of capital asset acquired before 1st April, 1981, 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, 1981. This option is not available in the case of  a depreciable assets.

If any undisclosed income [in the form of investment in capital asset] is declared under Income Declaration Scheme, 2016, then what should be the cost of acquisition of such capital asset?

The fair market value of the asset as on 1st June, 2016 [which has been taken into account for the purpose of said declaration Scheme, 2016] shall be deemed as cost of acquisition of the asset. [This provision is applicable w.e.f. 1-4-2017]

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;

iii. Compulsory acquisition of an asset;

  1. Conversion of capital asset into stock-in-trade;
  2. Maturity or redemption of a zero coupon bond;
  3. Allowing possession of immovable properties to the buyer in part performance of the contract;

vii. Any transaction which has the effect of transferring an (or enabling the enjoyment of) immovable property; or

viii. Disposing of or parting with an asset or any interest therein or creating any interest in any asset in any manner whatsoever.

What are the provisions relating to computation of capital gain in case of transfer of asset by way of gift, will, etc.?

Capital gain arises if a person transfers a capital asset. Section 47 excludes various transactions from the definition of ‘transfer’. Thus, transactions covered under section 47 are excluded from the definition of ‘transfer’ and, hence, these transactions will not give rise to any capital gain.  Transfer of capital asset by way of gift, will, etc., are few major transactions covered in section 47. Thus, 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.

(*) As regards the taxability of gift in the hands of person receiving the gift, separate provisions are designed under section 56.

I have sold a house which had been purchased by me 5 years ago. Am I required to pay any tax on the profit earned by me on account of such sale?

House sold by you is a capital asset. Any gain arising on transfer of capital asset is charged to tax under the head “Capital Gains”. Income-tax Law has prescribed the method of computing capital gain arising on account of sale of capital assets. Thus, to check the taxability in your case, you have to compute capital gain by following the rules laid down in this regard, and if the result is gain, then the same will be liable to tax.

Are any capital gains exempt under section 10?

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 (*), 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.
  • The transaction should be liable to securities transaction tax at the time of transfer.
  • Such asset should be a long-term capital asset.
  • Transfer should take place on or after October 1, 2004.

Note: Any long-term capital gain arising from a transaction undertaken in recognized stock exchange located in an International Financial Service Center shall be exempt from tax. Such exemption is available if such transaction is undertaken in foreign current and even if no STT is paid on such transaction. [Inserted by the Finance Act w.e.f. 1-4-2017]

(*) Equity oriented mutual fund means a mutual fund specified under section 10(23D) and 65% of its investible funds, out of total proceeds of such fund are invested in equity shares of domestic companies.

At what rates capital gains are charged to tax?

For provisions in this regard check tutorials on “Tax on Short-Term Capital Gains and Tax on Long-Term Capital Gains”.

Is there any benefit available in respect of re-investment of capital gain in any other capital asset?

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 benefit is availableGain eligible for claiming exemptionAsset 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 residential house property.

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 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 residential house property.

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

In order to claim the exemption on account of re-investment in various situations as discussed above, other conditions specified in the respective sections should be satisfied and the re-investment should be made within the period specified in the respective sections.

Are there any bonds in which I can invest my capital gains to claim tax relief?

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.

What is the meaning of stamp duty value and what is its relevance while computing capital gain in case of transfer of capital asset, being land or building or both?

Stamp duty value means the value adopted or assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty.

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.

Illustration for better understanding

Mr. Raja sold his bungalow for Rs. 80,00,000. The value adopted by the Stamp Valuation Authority of the bungalow for the purpose of payment of stamp duty is Rs. 84,00,000. In this situation, while computing taxable capital gain arising on transfer of bungalow, Rs. 84,00,000 will be taken as full value of consideration (i.e., sale value of the bungalow). Thus, actual selling price of Rs. 80,00,000 (being less than stamp duty value) will not be taken into account while computing taxable capital gain.

Illustration for better understanding

Mr. Karan sold his land for Rs. 25,20,000. The value adopted by the Stamp Valuation Authority of the bungalow for the purpose of payment of stamp duty is Rs. 20,00,000. In this situation, while computing taxable capital gain arising on transfer of land, Rs. 25,20,000 (being actual sale value) will be taken as full value of consideration. Thus, stamp duty value (being less than actual selling price) will not be taken into account while computing taxable capital gain.

What is the tax treatment of Advance money forfeited under a un-materialized contract for transfer of capital Asset?

Any advance received on transfer of capital asset shall be chargeable to tax under the head ‘Income from other sources’, if such sum is forfeited and the negotiations do not result in transfer of capital Asset.

(Source- Income Tax India Website , Republished with amendments)

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