INTRODUCTION

Only when the capital assets is sold off/transferred, capital gain arises. As per section 2(14) of Income Tax Act, 1961, any kind of property held by the assessee, or any kind of securities held by a foreign Institutional Investor who has invested in such securities as per SEBI Guidelines.

WHAT ARE NOT INCLUDED IN CAPITAL ASSETS

  • Stock in Trade
  • Personal Effect (wearable apparel, furniture, etc), exception, jewellery, drawing, paintings, archaeological structure, etc.
  • Rural Agricultural Land
  • Specified Gold Bonds
  • Special bearer Bonds, 1991
  • Gold Deposit Bonds

Many piles of coins against blue sky and mini blackboard with text capital gain

TRANSFER

As per Section 2(47), capital gain occurs only when there is  a transfer of capital assets. Transfer basically means:

  • sale/exchange/relinquishment of the asset
  • extinguishment of Right on the asset
  • compulsory acquisition of the asset
  • conversion of the asset to stock in trade of the business
  • maturity/redemption of zero-coupon bond
  • part performance of the contract
  • any kind of transaction which involves transfer of rights over any immovable property.

CHARGE ABILITY OF CAPITAL GAINS

As per Section 45 of the Income Tax Act, 1961, any income/revenue earned from the transfer of capital asset in the previous year, shall be taxable in that previous year only.

TRANSACTIONS WHICH ARE NOT TRANSFER

Section 47 of the Income Tax Act, 1961, talks about those transaction which cannot be regarded as transfer of Capital Assets, these includes:

  • Total/partial partition of HUF – since no explicit sell takes place, it’s a division/transfer within the family, where the person wants to move out of HUF
  • Gift/Will/Irrevocable Trust
  • Transfer of shares by the parent company or its nominee to it wholly owned Indian subsidiary company – in this case the parent company or its nominee must hold whole of the shares of the subsidiary company
  • Transfer of shares by the subsidiary company to its 100% holding Indian company – in this case the holding company must hold whole of the shares of the subsidiary company
  • Transfer of assets by an amalgamated company to the Indian Amalgamated Company
  • Transfer of capital assets by the demerged company to the resulting Indian Company
  • Transfer of shares by the company resulting from the demerger
  • Transfer of share by the company under the amalgamated scheme
  • Transfer between two non residents outside India of a Rupee denominated bond – if transfer was between two residents, then this would be considered under Income from Capital Assets
  • Transfer between two non residents outside India of Government Securities – if transfer was between two residents, then this would be considered under Income from Capital Assets
  • Redemption of Sovereign bond by an individual
  • Transfer of capital asset to the government – however if the transfer was for any private institution, then this would be considered under Income from Capital Assets
  • Transfer on conversion of bonds/debentures into shares/debentures
  • Conversion from preference to equity shares
  • Transfer of capital asset under reverse mortgage

EXEMPTIONS UNDER CAPITAL GAINS

Section 54 to 54F of the Income Tax Act, 1961, talks about the exemptions under the head income from capital assets. The rationale behind such exemption is to encourage people into buying house properties, etc.

As per Section 54 of the said act, any individual/HUF, if the asset they transfer is a residential house property and that too it is a Long term capital Gain asset, i.e more than 36 months, and the income from such property if any are changed under the Head Income from house property, then they fall under this rule. However, the purchase should be of atleast one/two residential property, where the capital gain does not exceed Rs 2 Crore, and the purchase should take place within 1 year before/2 years after the date of transfer, or constructed within 3 years from the date of transfer. The cost of the house(one or two) or capital gains, which ever is lower is exempted.

As per Section 54 B of the said act, any individual/HUF, if the asset they transferred  is a urban Agriculture land, will have the benefit of exemption under this section.

As per Section 54D of the said act, any asseesee, if the asset they transferred  is land and building forming part of Industrial undertaking, will have the benefit of exemption under this section.

As per Section 54EC of the said act, any asseesee, if the asset they transferred  is land or building or both, and that too it is a Long term capital Gain asset, i.e more than 36 months, then it will have the benefit of exemption under this section.

As per Section 54FB of the said act, any individual/HUF, if the asset they transferred  any long term capital gain asset other than residential house will have the benefit of exemption under this section.

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