EASY TO UNDERSTAND INCOME FROM CAPITAL GAIN

Let's understand what is capital gain in simple words.

A capital gain is an increase in the value of an investment. It is the difference between the purchase price (the basis) and the sale price of an assets.

Let's assume you purchase 100 shares of Reliance Industries LTD for Rs.1 per share. After three months, the share price increases to Rs.5. This means the value of the investment has increased from Rs.100 to Rs.500, for a capital gain of Rs. 400.

Now Let us try to understand as per Income Tax Act & Also for reference download(click here) the handwrittens note.

Income From Capital Gains

Capital Asset as per Section 2(14) is defined to include:

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

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

The following do not come under the category of capital asset:

1. Any stock, consumables or raw material, held for the purpose of business or profession

2. Personal goods such as clothes and furniture held for personal use

3. Agricultural land in rural India

4. 6½% gold bonds (1977) or 7% gold bonds (1980) or national defense gold bonds (1980) issued by the central government

5. Special bearer bonds (1991)

6. Gold deposit bond issued under the gold deposit scheme (1999) or deposit certificates issued under the Gold Monetisation Scheme, 2015

Type of Capital Assets

Short-term capital gain tax – Capital asset held for not more than 36 months immediately prior to the date of transfer shall be deemed as a short-term capital asset. However, the following assets held for not more than 12 months shall be treated as short-term capital assets:

a) Equity or preference shares in a company which are listed in any recognized stock exchange in India;

b) Other listed securities;

c) Units of UTI;

d) Units of equity-oriented funds; or

e) Zero-Coupon Bonds.

Note: Unlisted shares and immovable property (being land or building or both) held for not more than 24 months immediately prior to the date of transfer shall be treated as a short-term capital assets.

Long-term capital gain tax – Capital Asset that held for more than 36 months or 24 months or 12 months, as the case may be, immediately preceding the date of transfer is treated as long-term capital asset.

How to calculate the Period of Holding?

There are few points to be noted in regards to the period of holding of a Capital Asset:-

(i) In the case of a share held in a company in liquidation, the period subsequent to the date of liquidation should be excluded.

(ii) The period for which the asset was held by the previous owner should be taken into account. For example, the distribution of assets on the partition of HUF, in case of a gift, succession, inheritance, etc.

(iii) In the case of shares held in an amalgamated company in lieu of shares in the amalgamating company, the period will be counted from the date of acquisition of shares in the amalgamating company.

(iv) In the case of a capital asset being a share or any other security or a right to subscribe to any share or security where such right is renounced in favor of any other person, the period shall be calculated from the date of allotment of such share or security or from the date of the offer of such right by the company or institution concerned.

(v) In the case of a capital asset, being a financial asset, allotted without any payment and based on holding of any other financial asset the period shall be reckoned from the date of the allotment of such financial asset.

(vi) In the case of a capital asset being shared in an Indian company, which becomes the property of the assessee in consideration of a demerger, the period of holding shall include the period for which the shares were held in the demerged company by the assessee.

(vii) In the case of a capital asset, being a unit or units, which becomes the property of the assessee in consideration of a transfer referred to in section 47(xviii), there shall be included the period for which the unit or units in the consolidating scheme of the mutual fund were held by the assessee.

Meaning of Transfer [Section 2(47)]

“Transfer”, in relation to a capital asset, includes:

(i) Sale, exchange or relinquishment of the asset;

(ii) Extinguishment of any rights in relation to a capital asset;

(iii) Compulsory acquisition of an asset;

(iv) Conversion of capital asset into stock-in-trade;

(v) Maturity or redemption of a zero coupon bond;

(vi) 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.

Scope and Year of Chargeability (Section -45)

(i) Receipts from insurance parties [Section 45(1A)]:- Where any person receives any money or other assets under any insurance from an insurer, then, any profits or gains arising from receipt of such money or other assets shall be treated as “Capital gains” and shall be deemed to be the income of such person in the year of receipt.

(ii) Conversion or treatment of a capital asset as stock-in-trade [Section 45(2)]:- Such a transaction is a transfer. The profits or gains arising from such conversion or treatment will be chargeable to income tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him.

(iii) Transfer of a beneficial interest in securities [Section 45(2A)]:- Where any person has had at any time during the previous year any beneficial interest in any securities, then, any profits or gains arising from the transfer made by the Depository or participant of such beneficial interest in respect of securities shall be chargeable to tax as the income of the beneficial owner of the previous year in which such transfer took place and shall not be regarded as income of the depository who is deemed to be the registered owner of the securities by virtue of section 10(1) of the Depositories Act, 1996.

(iv) Introduction of the capital asset as a capital contribution [Section 45(3)]:- With the transfer of a capital asset to a firm, AOP or BOI as a capital contribution or otherwise, the profits or gains arising from such transfer will be chargeable to tax as income of the previous year in which such transfer takes place.

(v) Distribution of capital assets on a firm’s dissolution [Section 45(4)]:- With the transfer of capital assets by way of the distribution of capital assets on the dissolution of a firm or AOP or BOI or otherwise shall be chargeable to tax as the income of the firm etc. of the previous year in which such transfer takes place. For this purpose, the fair market value of the asset on the date of such transfer shall be the full value of consideration.

(vi) Compensation on compulsory acquisition [Section 45(5)]:- When the Central Government pays compensation for compulsory acquisition of a building or some other capital asset belonging to a person, capital gains may arise. Such capital gains are chargeable as income of the previous year in which such compensation is received. Enhanced Compensation: If the court awards compensation, which is higher than the original compensation, the difference thereof will be chargeable to capital gains in the year in which the same is received from the government.

What are the Transactions, which are not regarded as Transfer?

For the whole list of Transactions, Click here.

Full Value Consideration

Full value means the whole price without any deduction and consideration in which the transferor receives in lieu of the asset he parts with.

Expenditure On Transfer

Expenditure incurred wholly and exclusively in connection with the transfer of the capital asset is deductible from the full value of consideration. This means expenditure incurred which is necessary to effect the transfer like brokerage commission, cost of the stamp, registration fees, and all.

Cost of Acquisition/ Improvement

Cost of acquisition of an asset is the value for which it is acquired by the Assessee, expenses of capital nature for acquiring the title are included in the cost of acquisition.

Cost of Improvements means all expenses of capital nature incurred in making any addition/ alteration to the capital asset by the assessee.

Slump sale

Slump Sales means the transfer of one or more undertakings as a result of the sale for lump sum consideration without values being assigned to individual assets and liabilities in such sales –Section 2(42C).

Full value of consideration				xxx
(-) Expenses in relation to   transfer		        xxx
Net consideration					xxx
(-) Cost of acquisition/ Net worth		        xxx
Capital Gain or (Loss)				        XXX

Net worth:

In computing the net worth of the entity, the following points need to be considered:

The value of net worth should not take into account any change in the value of the asset or liability resulting from the revaluation of such assets or liability.
In case of depreciable assets under the Income Tax Act, the Written Down Value of such assets as per the Act shall be considered.
In case of assets on which 100% deduction has been allowed u/s 35AD (specified business), the value of such assets will not be considered.
In case of any other asset, value as appearing in the books of accounts shall be considered.
After considering the above points, if the resulting net worth is negative, then the cost of acquisition shall be taken as nil for the purpose of computation of capital gains.

How is Indexation Applied for Long-Term Capital Assets?

Indexation is applied to the cost of asset acquisition to adjust the price of assets in accordance with inflation. Following is the formula to calculate indexed cost of asset acquisition –

Indexed cost of asset acquisition =
CII for year of sale or transfer x Cost of asset acquisition)/ CII for first year in the holding period of asset or year 2001-02, whichever is later.

Following is the formula to calculate the indexed cost of asset improvement –

Indexed cost of asset improvement =
CII for year of sale or transfer x Cost of asset improvement)/ CII for year during which the asset improvement took place.

Example of Taxation On Long-Term Capital Gains (Real Estate)

Using Indexation:

Mr. Krishna bought a plot of land for Rs.10,00,000 in the year 2009. After 10 years had elapsed, in January 2019, he sold off his land for Rs.30,00,000.

Cost Inflation Index, CII= Index for financial year 2019-20/Index for financial year 2009-2010 = 1024/480 = 2.13

Indexed cost of purchase = CII x Purchase Price = 2.13 x 10,00,000 = 21,30,000

Long-term capital gain = Selling Price – Indexed cost = 30,00,000 – 21,30,000 = Rs.8,70,000

Tax on capital gain = 20% of 8,70,000 = 1,74,000

EXEMPTIONS

EXEMPTION under section 54

Conditions :

1. Gains are from Transfer of Residential House Property

2. Applicable only to Individual / HUF

3. Asset Sold is a Long Term Capital Asset

4. Assessee should invest in another Residential House Property within the specified time limit.

5. New asset should not be sold within 3 years of acquisition, otherwise will be treated as a short term capital gain.

6. Exemption = Amount Invested OR Capital Gains whichever is Less.

EXEMPTION under section 54B

Available if agricultural land transferred. The said land should be used by the individual or his parents for agricultural purposes during at least 2 years immediately prior to transfer.

1. Available only to an individual.

2. Asset Sold should be Short term / Long term Capital Asset.

3. Investment in agricultural land (rural or urban) within 2 years.

4. New Asset should not be sold within 3 years of acquisition, otherwise will be treated as a short term capital gain.

5. Exemption = Amount Invested OR Capital Gains whichever is Less.

EXEMPTION under section 54D

Available if land or building forming part of an industrial undertaking is compulsorily acquired by the govt and which is used for 2 years for industrial purposes prior to acquisition.

1. Available to any person.

2. Asset Sold should be Short term / Long term Capital Asset.

3. Investment in land or building for industrial purposes within 3 years.

4. New Asset should not be sold within 3 years of acquisition, otherwise will be treated as a short term capital gain.

5. Exemption = Amount Invested OR Capital Gains whichever is Less.

EXEMPTION under section 54EC

Available if any long term capital asset is transferred after 31.3.2000.

1. Available to any person.

2. The asset should be a Long term capital asset.

3. Investment within 6 months in bonds of NHAI or RECL which are redeemable after 3 years.

4. New Asset should not be sold within 3 years of acquisition, otherwise will be treated as a short term capital gain.

5. Exemption = Amount Invested OR Capital Gains whichever is Less.

EXEMPTION under section 54F

Available if any long term capital asset( other than a residential house property) is transferred,

1. Available to an individual / HUF.

2. Investment should be made in a residential house property within time Limit . 3. New Asset should not be sold within 3 years of acquisition, otherwise will be treated as a short term capital gain.

4. Exemption = Amount Invested * Capital gains Net sale consideration

EXEMPTION under section 54G

Available if any land, building, plant or machinery is transferred in order to shift an industrial undertaking from urban to a rural area.

1. Available to any person.

2. An asset may be a short term / long term.

3. Investment should be made in land, building or plant and machinery to shift the undertaking in a rural area.

4. New Asset should not be sold within 3 years of acquisition,

5. Exemption = Amount Invested OR Capital Gains whichever is Less

EXEMPTION under section 54GA

Available if any land, building, plant or machinery is transferred in order to shift an industrial undertaking from any area to SEZ.

1. Available to any person.

2. An asset may be a short term / long term.

3. Investment should be made in land, building, or plant and machinery to shift the undertaking to the SEZ area.

4. New Asset should not be sold within 3 years of acquisition,

5. Exemption = Amount Invested OR Capital Gains whichever is Less

CAPITAL GAIN ON DEPRECIABLE ASSETS

In Income Tax Act depreciation is provided on only four types of assets:

1. Buildings

2. Furniture

3. Machinery and plant

4. Intangible Assets

For calculating depreciation different blocks are made based on the name of asset and then the rate of depreciation, thus a block will contain only that asset which will have the same name and same depreciation.

• Depreciation = (WDV of the block as on 1st April of PY + Addition to the block – Selling price of the assets sold) * Depreciation rate.

• If an asset is used for less than 180 days during a P.Y. then only ½ of the depreciation will be provided on that asset.

FORMATS / COMPUTATION

Capital Gain Tax Rate on Sale of Property

ParticularsTax Rate:

Short Term Capital Gain Tax Rate -    As per normal Income Tax Slabs 
Long Term Capital Gain Tax Rate	 -    20%

Computation of Short Term Capital Gains on Sale of Property

Gains arising at the time of sale of Short Term Capital Asset shall be computed in the following manner:-

Full Value of Consideration                                         xxx 
(Less) Expenditure incurred wholly and exclusively 
in connection with such Transfer/Sale                               xxx 
(Less) Cost of Acquisition                                          xxx 
(Less) Cost of Improvement                                          xxx 
                    Gross Short Term Capital Gain                   xxx 
(Less) Exemption (if any) available u/s 54B/54D/54G/54GA            xxx 
Net Short Term Capital Gain on Sale of Property                     xxx

Tax as per the Income Tax Slab Rates shall be payable on the Short Term Capital Gain computed above.

Computation of Long Term Capital Gain

Gains at the time of sale of Long Term Capital Asset shall be computed in the following manner:-

Full Value of Consideration                                        xxx     
(Less) Expenditure incurred wholly and exclusively 
in connection with such Transfer/Sale                              xxx                                                        
(Less) Indexed Cost of Acquisition                                 xxx          
(Less) Indexed Cost of Improvement                                 xxx                         
                                             Gross LTCG            xxx 
(Less) Exemption (if any) 
available u/s 54/54B/54D/54EC/54ED/54F/54G                         xxx 
Net Long Term Capital Gain on Sale of Property                     xxx

Taxation of Gains from Equity Shares

A. Tax on short-term capital gains

What if your tax slab rate is 10% or 20% or 30%?

Special rate of tax of 15% is applicable to short term capital gains, irrespective of your tax slab.

Also, if your total taxable income excluding short term gains is below taxable income i.e Rs 2.5 lakh – you can adjust this shortfall against your short term gains. Remaining short term gains shall be then taxed at 15% + 4% cess on it.

B. Tax on long-term capital gains

Long term capital gain on equity shares listed on a stock exchange are not taxable up to the limit of Rs 1 lakh.

As per the amendments in budget 2018, the long term capital gain of more than Rs 1 lakh on the sale of equity shares or equity-oriented units of the mutual fund will attract a capital gains tax of 10% and the benefit of indexation will not be available to the seller. These provisions apply to transfers made on or after 1 April 2018.

DOWNLOAD HANDWRITTEN NOTES FOR CA-INTERMEDIATE STUDENTS WITH EXAMPLES.

gain pdf

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DISCLAIMER :
The information contained herein is generic in nature and is meant for basic educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product/Examnination purpose. Subject to Amendments. Yogesh Suthar is not liable for any decision arising out of the use of this information.