CAPITAL GAINS

Capital gains means gains arising to an assessee on transfer of a capital asset. This
clearly implies that to bring income taxable under the head capital gains, both the
elements namely “Capital asset” & “transfer” has to be present in the given transaction.

As such, we should seek absolute clarity with respect to these two terms. Sec. 2(14) of
the I. Tax Act deals with the definition of the term “Capital Asset”. It is an inclusive
definition. Capital asset includes property of any kind whether movable or immovable,
fixed or circulating, tangible or intangible however it does not include :

a) any stock-in-trade, consumable stores or raw material held for the purpose of
business or profession.
b) “Personal effects” of the assessee i.e. things or articles held by the assessee for
his or his family member’s personal use which popularly includes wearing
apparel, furniture, utensils, motor car etc. However, jewellery & archaeological
treasures & collections, paintings, sculptures are excluded from the scope of
personal effects – meaning thereby they are to be held as capital assets for the
purpose of capital gains.
c) Agricultural land situated in area other than (i) any area within the jurisdiction of a
municipality or cantonment board having population of 10,000 or more or (ii) in
any notified area
d) 6 ½ % Gold Bonds -1977, 7% Gold Bonds – 1980, National Defence Gold Bonds
–1980 issued by Central Govt.
e) Special bearer bonds-1991
f) Gold Deposit Bonds issued under Gold Deposit Scheme –1999.

Sec. 2(47) deals with the term “Transfer”. The meaning of the term transfer is to be
ascertained from the view-point of “Transfer of capital asset” & not as understood in
general sense. It is also an inclusive definition. Transfer, in relation to capital asset
includes sale, exchange, relinquishment of the asset, extinguishments of any right in the
asset or compulsory acquisition of any asset by operation of any law.

Further, transfer includes specific transactions like a) conversion of any asset by the
Owner in to stock-in-trade for the purpose of business (to do away the decision of
Supreme court in the case of CIT Vs. Bai Shirinbai K. Kooka 1962 46 ITR 86), b)
becoming member of a co-op. society which entails right to enjoy any immovable
property, c) holding possession of immovable property by virtue of Sec. 53A of Transfer
of Property Act.

However, it is interesting to note that Sec. 47 gives out a list of the situations where the
transactions are not construed/considered as Transfer for the purpose of computing
Capital Gains ( though actually the transactions or situations are understood as transfer
in general sense).

Such instances include :- distribution of assets in kind by a company to it’s share

holders upon it’s liquidation, transfer of assets by way of Will / inheritance, Gift,
distribution of assets by HUF to it’s members at the time of total or partial partition of the
said HUF, transfer of assets by wholly owned Indian subsidiary company to it’s Indian
holding company or vice-versa, transfer of capital asset by way of reverse mortgage

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under the scheme notified by the central Govt. etc. – pl. refer list as per Sec. 47 of
Income Tax Act.

Types of Capital assets:- Capital assets envisaged under I.Tax Act are of two types :-

A) Short term capital asset – means capital asset held by the assessee for not more
than 36 months immediately prior to the date of transfer.
B) Any asset other than short term asset is considered as Long term capital asset.

However, in respect of financial asssets (i.e. Equity or preference shares, debentures,

Units issued by UTI or a Mutual Fund and zero coupon bonds) the period considered is
for 12 months instead of 36 months.

Computation of Capital Gains:-

Full value of Sales Consideration (as per Sec. 48) XXXXXX

Less :
a) Cost of acquisition XXXXXX
b) Cost of Improvement XXXXX
c) Any expenses incurred wholly & XXXX XXXXX
exclusively in connection with
transfer of capital asset

( + ve / -ve) Long Term Capital Gains / Loss XXXXX #

# Note :- While working out the Long Term Capital gains one needs to take in to
account the enabling provisions that assessee can take maximum advantage
of for bringing in correction to the cost of acquisition & cost of improvement due to
inflationary factors.

Enabling provisions:-

A) Substitution of Fare market Value (FMV) as of 01.04.81:- In case of an asset

other than depreciable asset, an assessee at his option can treat actual cost of
the asset or substitute fare market value as on 01.04.1981 as “Cost of
acquisition” provided the asset is acquired by the assessee prior to 01.04.1981
or assessee has become owner of the asset due to circumstances mentioned u/s
49(1).

B) Indexation:- As defined under Sec 48, in case of Long term capital asset,
assessee can take benefit of Indexation while computing cost of acquisition as
well as cost of improvement i.e. if the asset is acquired prior to 01.04.1981 then
the formula will work out to :-

FMV of asset as on 01.04.81 x Inflation Index for the year of transfer of the asset
 Inflation Index for the base year i.e. 1981-82 i.e. 100

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 In other cases i.e assets acquired after 01.04.81 but held for more than 3 years
(i.e. LTCG) the formula will be cost of the asset x Inflation Index for the year of
transfer of the asset  Inflation Index for the year of the transfer

For “Cost Inflation Index” following Table may be referred to:-

Financial Year Cost Inflation Financial Year Cost Inflation Financial Year Cost Inflation
Index Index Index
1981 - 82 100 1991 - 92 199 2001 - 02 426
1982 - 83 109 1992 - 93 223 2002 - 03 447
1983 - 84 116 1993 - 94 244 2003 - 04 463
1984 - 85 125 1994 - 95 259 2004 - 05 480
1985 - 86 133 1995 - 96 281 2005 - 06 497
1986 - 87 140 1996 - 97 305 2006 - 07 519
1987 - 88 150 1997 - 98 331 2007 - 08 551
1988 - 89 161 1998 - 99 351 2008 - 09 582
1989 -90 172 1999 - 2000 389 2009 -10 632
1990 - 91 182 2000 - 01 406 2010 -11 711
2011 -12 785 2012 -13 852 2013 -14 939
2014 -15 1024 2015 -16 1081 2016 -17 1125
# However, for Assessment Year 2018-19 the base year will be considered as 2001-02

Exemption available to Long Term Capital gains:-

Sec. 54 - Exemption w.r.t. LTCG arising from transfer of Residential House:

Conditions to be satisfied by the Asseessee before he is eligible to claim exemption.

1. The house property is a Residential House Property (may be self occupied or let-
out or deemed let-out), which is assessed to income tax under the head income
from House Property i.e. it is reflected / declared by the assessee in his return of
Income under the head House Property.
2. The house property must be a long-term asset i.e. held by the assessee for a
period of more than 36 months.
3. The assessee has purchased a residential house within a period of one year
before the transfer of old house property is effected OR has purchased a
residential house within two years from the date of transfer of old house property
OR within a period of three years has constructed a residential house.
4. The assessee shall not transfer the newly acquired house property for a period of
three years from the date of it’s acquisition/construction.

Exemption: If all the aforesaid conditions are satisfied, then the capital gain arising to
the assessee w.r.t. sale of (old) residential house property will be exempt provided the
amount of capital gains is less than the cost of the newly acquired residential house
property. However if the capital gains is more than the cost of newly acquired house
property the difference is taxable as long-term capital gains in the hands of the
assessee.

Consequences in case of not utilizing the capital gains amount before due date of
Return: If the amount of capital gains is not utilized by the assessee for the purpose of

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acquiring / construction of new residential house property before the due date of
furnishing return of income, then the same shall be deposited by the assessee in a
Deposit account with any branch of nationalized bank (other than rural branch) before
due date for furnishing the return of Income. The amount if utilsed partly for the purpose
of acquisition/construction together with the amount deposited in the Depoist account
with a Nationalised Bank will be termed as utilized for the purpose of granting
exemption under Sec.54. Any amount remained un-utilsed in the said Deposit account
beyond the stipulated period of two/three years will be treated as LTCG in the hands of
assessee for the previous year in which such period expires.

Consequences in case of transfer of newly acquired residential house within three years
of it’s purchase / Construction : If the newly acquired residential house is sold or
otherwise transferred by the assessee before the elapse of stipulated time of three
years from the date of it’s purchase / construction, then the capital gains arising on the
transfer of new residential house along with the earlier exempted capital gains in
respect of the old house property will be subjected to tax in the year of sale of the new
house property.

The methodology adopted for bringing the earlier exempted amount to tax is, the
exempted amount u/s 54 will be reduced from the cost of acquisition of the new house
property while calculating the capital gains w.r.t. transfer of new house property.

Sec. 54B - Exemption w.r.t. LTCG arising from transfer of Land used for
Agricultural purpose :-

LTCG arising to assessee from transfer of Land used by the Assessee or his family
members for agricultural purpose for a period of two years immediately preceding the
date of transfer is Exempt from tax provided the assessee purchases, within a period of
two years another land for agricultural purpose.

There is no stipulation as that of the area or size of the land to be acquired within the
period of two years (i.e. the size of land to be acquired should be more than the size of
the land sold/transferred or within the same area/state etc.)

Exemption: If the amount of LTCG is less than the cost of the acquisition of the newly
acquired land then the whole of Capital Gains is exempt. If the capital gains is more
than the cost of land newly acquired then the difference between the excess of capital
gains over the cost of acquisition of new land is assessed to Tax.

The scheme of depositing capital gains in Special Deposit A/c with branch of
nationalized bank and the consequences for not acquiring new agricultural land within
stipulated time of two years post transfer of the old land and consequences of disposing
of the newly acquired agricultural land within period of three years from the date of it’ s
acquisition are same as that of Sec.54 explained here in above.

Sec. 54D - Exemption w.r.t. LTCG arising from compulsory acquistion of land &
building forming part of Industrial Undertaking:-

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LTCG arising to asseessee upon compulsory acquisition of land or building forming part
of an Industrial undertaking will be specifically exempt from I.Tax provided following
conditions are satisfied:

Conditions to be satisfied by the Asseessee before he is eligible to claim exemption:

1. The land or building which is compulsorily acquired by the Authority was used by
the assessee for the purpose of Industrial undertaking for a period of two years
or more preceding the date of such compulsory acquistion.
2. Within a period of three years from the date of receipt of compensation for such
acquisition, assessee has purchased any other land or building or have
constructed any building for industrial purpose
3. Such newly acquired land or building should be used by the assessee for shifting
or re-establishing the displaced industrial undertaking or setting-up another
industrial undertaking.

Exemption: If the amount of LTCG is less than the cost of the acquisition of the newly
acquired land or building for industrial purpose then the whole of Capital Gains is
exempt. If the capital gains is more than the cost of newly acquired land or building for
industrial purpose, then the difference between the excess of capital gains over the cost
of such acquisition of new land or industrial building is assessed to Tax as LTCG.

The scheme of depositing capital gains in Special Deposit A/c with branch of
nationalized bank and the consequences for not acquiring new land or industrial
building within stipulated time of three years post disposal of the old land or industrial
building and consequences of disposing of the newly acquired land or industrial building
within period of three years from the date of it’ s acquisition are same as that of Sec.54
explained here in above.

Sec. 54EC – LTCG will be exempt provided it is invested in certain Bonds:-

To avail exemption from tax w.r.t. LTCG assessee must fulfill following conditions:-

1. The asset transferred by the assessee during the previous year must be a long-
term capital asset.
2. Within Six Months from the date of transfer, the assessee should invest the
whole (or any part) of the Capital gains in “ Long-term Specified Asset ”.
3. “ Long-term Specified Asset ”, for this section means any Bond issued by a)
NHAI (i.e. National Highways Authority of India or b) REC (Rural Electrification
Corporation of India) issued on or after 01.04.2006 and Redeemable after 3
years.
4. After 01.04.2007 there is restriction on the maximum amount that can be
invested in the Bonds under this Section i.e. Rs. 50 Lakhs.

Exemption:- The amount of Capital Gains in the hands if the assessee or the amount
invested by the assessee in the “Long-term Specified Asset” under this Section
whichever is less.

Consequences in case of transfer of “Long-term Specified Asset” within three years of

it’s purchase :- If the “Long-term Specified Asset” is transferred within three years from
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the date of Investment or If converted in to money or any loan or advance is sought
against these Bonds then the amount of LTCG arising on transfer of Original asset
which was not charged to Tax, will be deemed to be the income in the hands of the
assessee by way of LTCG in respect of the previous year in which such transfer takes
place or such advance /loan is availed.

Sec. 54F – LTCG arising on transfer of any Long-term Capital Asset (Other than a
residential House):-

Conditions to be satisfied by the Assessee:-

1. The assessee is an Individual or HUF

2. The asset transferred should be any Long-term capital asset other than a
residential house.
3. The assessee has purchased within one year before the date of transfer or within
2 years from the date of transfer a residential house or has constructed within 3
years a residential house.
4. The assessee must not own more than one house on the date of transfer of the
old Long-term capital asset.
5. The assessee should not sell / transfer the newly acquired residential house
within three years from it’s date of acquisition or construction.

Exemption:- If the cost of acquisition of new residential house is more than the net
consideration received by the assessee in respect of the sale of the Long-term asset,
the entire capital gains is exempt. However, if the cost of newly acquired residential
house is less than the net sales consideration then proportionate capital gains would be
exempt. I.e. Cost of New residential House x LTCG in the hands of the assessee  Net
consideration received by the assessee from the sale of the old Long-term capital asset.

The scheme of depositing capital gains in Special Deposit A/c with branch of
nationalized bank and the consequences for not acquiring/constructing new residential
house within stipulated time of two/three years post disposal of any old long-term capital
asset and consequences of disposing of the newly acquired residential house within
period of three years from the date of it’ s acquisition are same as that of Sec.54
explained here in above.

Income Tax Rates for Capital gains :

For Long term Capital Gains 10% without Indexation OR

For Long term Capital Gains 20% with Indexation
For Short term Capital Gains 15%