Fourth Head of Income under Income Tax Act, 1961: Capital Gains

Under the Income Tax Act, 1961, the computation of income is categorized into five heads, with Capital Gains being one of them. Capital Gains entail profits or gains derived from the transfer of capital assets. This article aims to provide a detailed understanding of Capital Gains, including the types of income falling under this head and the computation methods involved.

Five different heads of Gross Total Income are as follows:

1. Salary Income

2. Income from House Property

3. Profits and gains of Business or Profession

4. Capital Gains

5. Income from other sources (i.e. residuary income which does not fall under any of preceding heads.)

Brief details about which type of income will fall under which head.

01. Salaries: This head will cover Sections 15, 16 and 17 of the Act. Under this head, remuneration in any form (including perquisites) due for personal service under an express or implied contract of employment or service. That means any amount received on the relationship of employer and employee will fall under this head.

02. Income from House Property: This head will cover Sections 22 to 27 of the Act. Under this head any income received from the ownership of any house will fall.

03. Profit and Gains of Business or Profession: This head will cover Sections 28 to 44DB of the Act. Under this head any income earn from business or profession will fall.

04. Capital Gains: This head will cover Sections 45 to 55A of the Act. Under this head any profits or gains arising from the transfer of a capital asset will fall.

05. Income from other sources: This head will cover Sections 56, 68 and 69 of the Act.

Income under the head Capital Gains:

Capital gains means any profits or gains arising from the transfer of a capital asset. Hear the most important, word is Capital Assets.

Capital asset is defined under section 2(14) of the Income Tax Act, 1961.

The term “capital asset” means property of any kind held by an assesse, whether or not connected with business or profession, but does not include inter alia:

(1) any stock in trade (other than securities);

(2) personal effects such as wearing apparel, furniture, motor car, air conditioner, refrigerator, etc.; held for personal use by assesse or by any member of his family dependent on him.

However, definition of the term capital asset shall include jewelry which will include   jewelry held for personal use which will include, ornaments made 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 stone, and whether or not worked or sewn in to any wearing apparel; and precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn in to any wearing apparel.

(3) 6.5% Gold Bonds, 1977; 7% Gold Bonds, 1980; National Defiance Gold Bonds, 1980; Special Berar Bonds, 1991; Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999;

Deposit Certificate issued under the Gold Monetization Scheme, 2015 notified by the Central Government; and

(4) Agricultural Land in India with certain conditions.

Transfer: Section 2(47)

“Transfer” in relation to a capital asset, includes the sale, exchange, or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law or in a case where the asset is converted by the owner thereof in to, or is treated by him as stock in trade of a business carried on by him, such conversion or treatment; or the maturity or a redemption of a zero coupon bonds.

Transfer includes possession of immovable property given without registration of conveyance deed and also transections in agreement to buy or sell any immovable property or any rights therein.

Transfer of movable property is complete when delivery or possession is complete. Transfer of immovable property, normally, is complete only when the conveyance deed is registered. However for the purpose of capital gains, the transfer is treated as complete with delivery of possession and when an agreement to sell/buy immovable property is entered in to when such agreement is itself a subject matter of transection.

Two types of Capital Asset, Short Term and Long Term. 

Capital asset is divided as short term and long term with reference to the period of holding of the asset by the assesse or by the previous owner and the assesse under certain circumstances. The period of holding of the assets computed from the date of acquisition to the date immediately preceding its transfer.

Short Term Capital Asset:

For assets being a security (other than unit) listed in a recognized stock exchange in India or a unit of Unit Trust of India/ Administrator of the specified undertaking/Specified Company/ or a unit of an equity oriented fund as defined in the Explanation to Section 112A or a zero coupon bond held for not more than 12 months.

For assets other than assets specified above, held for not more than 36 months

Long Term Capital assets:

Assets which are not Short Term Capital assets are considered as Long term Capital assets.

Mode of Computation and deductions:

Section 48 of the Act, provides that, from the full value of consideration received, the following amounts should be deducted to arrive at the amount of capital gains.

(a) the cost of acquisition of the capital asset;

(b) the expenditure incurred on any improvement to the capital assets;

(c) expenditure incurred in connection with the transfer of the capital asset, such as stamp duty, registration charges, legal fees, brokerage etc.

Second proviso of Section 48, the cost of acquisition of long term assets and cost of any improvement there on is to be calculated as under:

(a) Cost of acquisition X Cost Inflation Index of the year in which the asset is transferred divided by Cost Inflation Index of the year of acquisition or cost of 1^st April, 2001.

In the case of shares and securities purchased before 1^st February, 2018, the cost as on 31^st January, 2018 is to be considered as cost of acquisition.

Conclusion: Understanding Capital Gains is essential for taxpayers engaged in the sale or transfer of capital assets. By comprehending the intricacies of this tax regime, individuals can optimize their tax liabilities and ensure compliance with regulatory requirements. With detailed knowledge of the types of income falling under Capital Gains, the methods of computation, and the deductions allowed, taxpayers can navigate this aspect of taxation more effectively.