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CAPITAL GAINS
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Rizvi Management Institute

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Group Members:-
Asrar Hamidani – 11
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Bhavin Shah – 13
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Binita Babu – 15
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Chetan Sapariya – 17

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Deven Prajapati – 19

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 CAPITAL GAINS
A capital gain is income derived from the sale of an
investment. A capital investment can be a home, a farm, a
ranch, a family business, or a work of art, for instance. In
most years slightly less than half of taxable capital gains are
realized on the sale of corporate stock. The capital gain is
the difference between the money received from selling the
asset and the price paid for it.

"Capital gains" tax is really a misnomer. It would be more

appropriate to call it the "capital formation" tax. It is a tax
penalty imposed on productivity, investment, and capital
accumulation.

The capital gains tax is different from almost all other forms
of taxation in that it is a voluntary tax. Since the tax is paid
only when an asset is sold, taxpayers can legally avoid
payment by holding on to their assets--a phenomenon
known as the "lock-in effect."

There are many unfairness’s imbedded in the current tax

treatment of capital gains. One is that capital gains are not
indexed for inflation: the seller pays tax not only on the real
gain in purchasing power but also on the illusory gain
attributable to inflation. The inflation penalty is one reason
that, historically, capital gains have been taxed at lower
rates than ordinary income. In fact, "most capital gains were
not gains of real purchasing power at all, but simply
represented the maintenance of principal in an inflationary
world."

Another unfairness of the tax is that individuals are

permitted to deduct only a portion of the capital losses that
they incur, whereas they must pay taxes on all of the gains.
That introduces an unfriendly bias in the tax code against
risk taking. When taxpayers undertake risky investments,
the government taxes fully any gain that they realize if the
Rizvi Management Intitute Page 2
investment has a positive return. But the government allows
only partial tax deduction if the venture goes sour and
results in a loss.

There is one other large inequity of the capital gains tax. It

represents a form of double taxation on capital formation.
This is how economists Victor Canto and Harvey Hirschorn
explain the situation:

A government can choose to tax either the value of an asset

or its yield, but it should not tax both. Capital gains are
literally the appreciation in the value of an existing asset.
Any appreciation reflects merely an increase in the after-tax
rate of return on the asset. The taxes implicit in the asset's
after-tax earnings are already fully reflected in the asset's
price or change in price. Any additional tax is strictly double
taxation.

Take, for example, the capital gains tax paid on a

pharmaceutical stock. The value of that stock is based on
the discounted present value of all of the future proceeds of
the company. If the company is expected to earn Rs.100,000
a year for the next 20 years, the sales price of the stock will
reflect those returns. The "gain" that the seller realizes from
the sale of the stock will reflect those future returns and thus
the seller will pay capital gains tax on the future stream of
income. But the company's future Rs.100,000 annual returns
will also be taxed when they are earned. So the Rs.100,000
in profits is taxed twice--when the owners sell their shares of
stock and when the company actually earns the income.
That is why many tax analysts argue that the most equitable
rate of tax on capital gains is zero.

Capital Gain In Indian Tax system

Section 45 to 55A of the Income-tax act, 1961 deal with the

capital gains. Section 45 of the Act, provides that any profits
or gains arising from the transfer of a capital asset effected
in the previous year shall, save otherwise provided in section
54, 54B, 54D, 54EA, 54EB, 54F 54G and 54H [with effect
Rizvi Management Intitute Page 3
from 1-4-1991] be chargeable to income-tax under the head
''Capital Gains'' and shall be deemed to be the income of the
previous year in which the transfer took place.

Doubts may arise as to whether 'Capital Gains' being capital

receipt cab be brought to tax as income. It may be noted
that the ordinary accounting canons of distinctions between
a capital receipt and a revenue receipt are not always
followed under the Income-tax Act. Section 2(24) of the
Income-tax Act specifically provides that ''income'' includes
'any capital gains chargeable under section 45'.

The requisites of a charge to income tax, of capital gains

under section 45 are :-

1. There must be a capital asset.

2. The capital asset must have been transferred.
3. The transfer must have been effected in the previous
year.
4. There must be a gain arising on such transfer of a
capital asset.

Short-term and long-term capital gains:

Gains on sale of capital assets held for more than three
years (one year for listed securities or mutual fund units) are
treated as long-term capital gains and are taxed at
concessional rates compared short-term capital gains.

While calculating taxable long-term capital gains, the cost of

acquisition and the cost of improvement are linked to a cost
inflation index. As a result, the indexed cost of acquisition is
deducted from the sale consideration received, to arrive at
the capital gain.

Long-term capital gains are taxed at a flat rate of 20 per

cent for individuals and foreign companies, and 30 per cent
for domestic companies. Long-term capital gains on the
transfer of shares/bonds issued in a foreign currency under a
scheme notified by the Indian Government are taxed at 10
per cent.

Rizvi Management Intitute Page 4

Capital Gain

An income that is derived from the sale of an investment is

known as Capital gain. Capital investment can be in the form
of a home, a farm, a ranch, a family business, or a work of
art. When any kind of property is purchased at a lower price
& then sold at a higher price, the seller makes a gain. Then
this sale of a capital asset is known as capital gain.

This type of gain is a one-time gain and not a regular income

such as salary or house rent. Hence we can say that capital
gain is is not recurring.

Capital Gain Tax/ Tax Liability of Capital Gain

Tax liability of capital gains arises when all of the following

conditions are satisfied:

• There is a capital asset

• The assessee must have transferred the capital asset
during the previous year
• There is a profit or gain arising as a result of transfer
known as capital gain
• Such capital gain should not be exempt u/s 54, 54B,
54D, 54EC, 54 ED, 54F, 54G or 54GA.

What is a Capital Asset?

Any kind of property (movable, immovable, tangible,

intangible) held by an assessee, whether or not connected
with his business or profession, is nothing but a "Capital
Asset".

The following assets are excluded from the definition of

capital Asset:-

• Stock-in-trade, consumable stores, raw materials held

for the purpose of business/profession
• Items of personal effects, that is, personal use
excluding jewellery, costly stones, silver, and gold
• Agricultural land in India
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 • Specified Gold Bonds and special Bearer Bonds
• Gold Deposit Bonds

Types of Capital Assets:

Two types of Capital Assets are present as follows:

Short Term Capital Assets [STCA]: An asset which is held

by an assessee for less than 36 months, immediately before
its transfer, is called Short Term Capital Asset. In other
words, an asset, which is transferred within 36 months of its
acquisition by assessee, is called Short Term Capital Asset.
However, if the investment is in the form of mutual
funds/company shares, the allowed time duration is one year
1.Short Term Capital Gains : If any taxpayer has sold a
Capital asset within 36 months and Shares or securities
within 12 months of its purchase then the gain arising out of
its sales after deducting there from the expenses of
sale(Commission etc) and the cost of acquisition and
improvement is treated as short term capital gain and is
included in the income of the taxpayer.

The deduction u/s 80C to 80U can be taken from the income
from short term capital gain apart from the short term
capital gain u/s111A

Taxability of short term capital gains: Section 111A of

the Income tax Act provides that those equity shares or
equity oriented funds which have been sold in a stock
exchange and securities transaction tax is chargeable on
such transaction of sale then the short term capital gain
arising from such transaction will be chargeable to tax
@10% upto assessment year 2008-09 and 15% from
assessment year 2009-10 onwards.

The short term capital gains other than those u/s 111A shall
be added to the income of the assessee and no such benefit
is available on short term capital gains arising in other cases
and they will be taxed normally at slab rates applicable to
the assessee.

Rizvi Management Intitute Page 6

If an assessee does the business of selling and purchasing
shares he cannot take advantage of section 111A or section
10(38). In this case income will be treated as business
income.

Capital gains in case of depreciable assets : According

to section 50 of Income tax act if an assessee has sold a
capital asset forming part of block of assets (building,
machinery etc) on which the depreciation has been allowed
under Income Tax Act, the income arising from such capital
asset is treated as short term capital gain.

Where some assets are left in block of assets: If a part

of such capital asset forming part of a block of asset has
been sold and after deducting the net consideration received
from sale of such asset from the written down value of the
block of such asset the written down value comes to NIL
then the gain arising shall be treated as short term capital
gain and in such case where written down value has become
NIL no depreciation shall be available on such block of asset
even if some assets are physically left in the block of assets.

When no assets are left in block of assets: If the whole

of the capital assets forming part of a block of assets have
been sold during a year and the assessee has suffered a loss
after deducting the net sale consideration from the written
down value of the block of assets then such loss shall be
treated as short term capital loss and no depreciation shall
be allowed from such block of assets.

It was decided by Chandigarh tribunal in (2004) 3 S.O.T. 521/

83 T.T.J. 1057 if the whole of capital assets in a block have
been sold in a year and some gain arises after the sale such
gain shall not be treated as short term capital gain if some
new asset has been purchased within the same year in the
same block of assets and the total value of new and old
capital assets in the same block is more than the sale
consideration of the assets sold, since the block of asset
does not cease to exist in such case as is required u/s 50(2).
This can be explained with an example as below:
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Written down value of 5 Machinery
as on 01-04-2008 500000
5 machinery sold on 01-05-2008 600000
New Machinery purchased on 01-06-2008 250000

now in above cases the difference between the w.d.v and

sale value i.e. Rs 100000 cannot be treated as short term
capital gain in the year 2008-09 since new machinery has
been purchased in the same block of asset afterwards in the
same year and the total of new and old machinery is more
than the sale value of the machineries sold as a result the
block of asset continue to exist.

1) Short term capital gain where land & building are

sold together: Sometimes it happens that in a block of
assets namely land & building, the whole of land & building
is sold together. In such cases the capital gain on land and
building should be calculated separately.

The Supreme Court has held in (1967) 65ITR 377 that

depreciation is available on the value of building and not on
the value of plot. Considering the above decision of Supreme
Court, the Rajasthan High court in (1993)201 ITR 442 has
held that Plot and building are different assets. If the
assessee has purchased plot more than 3 years back and
constructed building on it less than 3 years back then the
gain arising on sale of plot shall be long term capital gain
and the benefit of indexation shall be given on it whereas
the gain arising on sale of building shall be short term capital
gain and will be added to the income of the assessee.
Therefore both should be calculated separately.

Where the plot has been purchased more than three years
back and the building has been constructed on it less than 3
years back, it is advisable that in the sale deed the sale
value of plot and building should be shown separately for
more clarity and if the consolidated sale value of the Plot
and building has been written in the sale deed then the
valuation of plot and building should be done separately
from a registered valuer.
Rizvi Management Intitute Page 8
Capital asset transferred by the partner to the
partnership firm: As per section 45(3) of the Income Tax
Act 1961 if any partner in a firm transfers his asset to the
firm then the capital gain on such asset as arising to the
partner shall be calculated by presuming the sale value of
such asset as is shown in the books of accounts of the firm
and not the market value of the asset.

whether such gain is treated as long term or short term will

be decided as below:

a) If the depreciation has been claimed on the asset

transferred to the firm then in view of section 50(2) the gain
arising there from will be treated as short term capital gain.

b) If the partner has been the owner of the asset for more
than 36 months and no depreciation has been claimed on it
then the gain arising from such asset shall be treated as long
term capital gain.

Capital gain in case of Dissolution of a Firm: As per

section 45(4) of the Income Tax Act where any partnership
firm or AOP or BOI is dissolved and the Capital assets of the
such firm or AOP or BOI are transferred by way of
distribution of assets to the partners at the time of
Dissolution in such case the gain arising from such transfer
to the partners will be treated as capital gain and the firm
will be liable for paying tax on it in the year of distribution of
the assets.

For the purpose of section 48 the fair market value of the

asset on the date of such transfer shall be deemed to be the
full value of the consideration received or accruing as a
result of the transfer.

2) Long Term Capital Assets [LTCA]: An asset, which is

held by an assessee for 36 months or more, immediately
before its transfer, is called Long Term Capital Asset. In other
words, an asset which is transferred on or after 36 months of

Rizvi Management Intitute Page 9

its acquisition by assessee, is Long Term Capital Asset.
Selling mutual funds and company shares after one year also
constitutes a long-term capital gain. A Capital Asset held for
more than 36 months and 12 months in case of shares or
securities is a long term capital asset and the gain arising
therefrom is a long term capital gain. Long term capital
gains are arrived at after deducting from the net sale
consideration of the long term capital asset the indexed cost
of acquisition and the indexed cost of improvement
of the asset.

The Central government notifies cost inflation index for

every year. The indexed cost of acquisition is calculated by
multiplying the actual cost of acquisition with C.I.I of the year
in which the capital asset is sold and divided by C.I.I of the
year of purchase of capital asset. Similarly the indexed cost
of improvement can be calculated by using the C.I.I of the
year in which the capital asset is improved. Where the
capital asset was acquired before the year 1981 then the
cost of acquisition shall be the fair market value or the
actual cost of its acquisition which ever is higher. The Fair
market value of a capital asset can be known by the
valuation of the registered valuer.

Short-term Long-term
Capital gains capital gains
tax tax
Sale transactions of 10% NIL
securities which
attracts STT:-
Sale transaction of
securities not
attracting STT:-
Individuals (resident Progressive slab 20% with
and non-residents) rates indexation;
Partnerships (resident 30%
10% without
and non-resident)

Rizvi Management Intitute Page 10

Individuals (resident 30%
and non-residents)
indexation (for
units/ zero
Overseas financial 40% (corporate) 10%
organizations specified 30% (non-
in section 115AB corporate)
FIIs 30% 10%
Other Foreign 40% 20% with
companies indexation;
Local authority 30%
10% without
Co-operative society Progressive slab indexation (for
rates units/ zero
coupon bonds)

Transfer of capital assets

• Transfer of capital assets includes the following:-

• Sale of asset
• Exchange of asset
• Relinquishment of asset (that is surrender of asset)
• Extinguishments of any right on asset
• Compulsory acquisition of asset

Capital gain tax rates

Incase of short-term capital gains, you will be taxed

depending on the tax slab relevant to you after you have
added the capital gain to your annual income. However if the
transaction was levied with Securities Transaction Tax (STT),
your gain will be taxed 10%.

Incase of long term capital gains, you will be taxed 20%.

When the transaction is levied with STT, you don't need to
pay any tax on your gain. In this case, you can either
calculate your capital gain using an indexed acquisition cost,
or choose not to opt for indexing.

Rizvi Management Intitute Page 11

Income From Capital Gain
Section 2(47) of the Income Tax Act, defines transfer in
relation to a capital asset, and it includes

• The sale, exchange or relinquishment of the asset.

• The extinguishment of any rights therein.
• In a case where the asset is converted by the owner
thereof into, or is treated by him as, stock-in-trade of a
business carried on by him, such conversion or
treatment.
• Any transaction involving the allowing of the possession
of any immovable property to be taken or retained in
part performance of a contract of the nature referred to
in section 53A of the Transfer of Property Act, 1882(4 of
1882).
• Any transaction (whether by way of becoming a
member of, or acquiring shares in, a co-operative
society, company or other association of persons or by
way of any agreement or any arrangement or in any
other manner whatsoever) which has the effect of
transferring, or enabling the enjoyment of, any
immovable property.
• Explanation - For the purposes of sub-clauses (v) and
(vi), ''immovable property'' shall have the same
meaning as in clause (d) of section 269UA]

Transactions which are not deemed to be transfer for

the purposes of capital gains
The Income Tax Act also exempts certain transactions from
being covered under the definition of transfer. These are
more specifically contained in section 46 & 47 of the Income
Tax Act. In brief the transactions not regarded as transfer
are as under :-

a. Where the assets of a company are distributed to its

share holders upon its liquidation, the distribution is not
regarded as transfer. However where a share holder
receives any money or other assets on the date of

Rizvi Management Intitute Page 12

 distribution which exceeds the amount of dividend
within the meaning of section 2(22)(c), the excess is
chargeable under the head capital gains.
b. Any distribution of capital assets on the total or partial
partition of a huf is not regarded as transfer
c. Where a capital asset is transferred under the gift or
will or an irrevocable trust, the transaction is not of the
nature of transfer as per the Income Tax Act.
d. The transfer of a capital asset to an Indian subsidiary
company by a parent company or its nominees who
hold the entire share capital of the Indian subsidiary
company is not regarded as transfer.
e. Any transfer of a capital asset by a wholly owned
subsidiary company to its Indian holding company is
also not regarded as transfer for the purposes of capital
gains. Top However in respect of (d) & (e) above the
transfer of a capital asset as stock in trade is covered
by the provisions of capital gains.
f. Any transfer in a scheme of amalgamation of a capital
asset by the amalgamating company to an Indian
amalgamated company is also not a transfer for the
purposes of capital gains.
g. In the case where the amalgamating and the
amalgamated companies are both foreign companies,
the transfer of shares held in the Indian company by
the foreign amalgamating company to the foreign
amalgamated company is not regarded as a transfer for
the purposes of capital gains if at least 25% of the
share holders of the amalgamating foreign company
continue to remain share holders of the amalgamated
foreign company and if such transfer does not attract
tax on capital gains in the country in which the
amalgamating company is incorporated..
h. Any transfer by a share holder, in a scheme of
amalgamation, of share or shares held by him in the
amalgamating company in consideration of the
allotment of any share or shares in the amalgamated
Indian company is not regarded as a transfer for the
purposes of capital gains.

Rizvi Management Intitute Page 13

 i. Where a non resident transfers any bond or shares of
an Indian company which were issued in accordance
with any scheme notified by the Central Government
for the purposes of section 115AC or where the non
resident transfer any bonds or shares of a public sector
company sold by the government and purchased by the
non resident in foreign currency is not regarded as a
transfer for the purposes of capital gains . However this
is so only when the transfer of the capital asset is made
outside India by the non resident to another non
resident.
j. Where any assessee transfers any work of art,
archaeological or art collection, book, manuscript,
drawing , painting, photograph or print to a University,
the National Museum, the National Art Gallery, the
National Archives, to the Government or any other
notified institution of national importance is not
considered as transfer for the purposes of capital gains.
k. Any transfer by way of conversion of a company's
bonds or debentures, debenture-stock or deposit
certificates in any form into shares and debentures of
that company is not regarded as transfer for the
purpose of capital gains.
l. Where a non corporate person transfers its membership
of a recognized stock exchange Top in India to a
company in exchange of shares allotted by that
company is not regarded as a transfer for the purposes
of capital gains provided that such transfer was made
on or before 31st day of December, 1998.
m. Any transfer of a land of a sick industrial company
which is being managed by it s Worker's Cooperative is
not regarded as transfer for the purposes of capital gain
if the transfer is made under a scheme prepared and
sanctioned under section 18 of the Sick Industrial
Companies (Special Provisions) Act, 1985. This
exemption is operative only in the period commencing
from the previous year in which the said company
became a sick industrial company under section 17(1)
of that act and ending with the previous year during

Rizvi Management Intitute Page 14

 which the entire net worth of such company becomes
equal to or exceeds the accumulated losses. The net
worth is defined in the Sick Industrial Companies Act.
n. With effect from 1-4-99 the process of sale or transfer
of any capital or intangible asset of a firm is not
regarded as a transfer for the purposes of capital gains
where it is on account of the succession of the firm by a
company in the business carried on by it. This
exemption is dependent on the following conditions :-
i. all the assets and liabilities of the firm before the
succession and relating to the business should
become the assets and liabilities of the company.
ii. All the partners of the firm before the succession
should become share holders of the company in
the same proportion in which their capital
accounts stood in the books of the firm on the
date of succession.
iii. The partners of the firm should not receive any
consideration or benefit, directly or indirectly, in
any form or manner, other than by allotment of
shares in the company.
iv. The aggregate share holding in the company by
the partners should be more than 50% of the total
voting power for a period of 5 years from the date
of succession.
o. With effect from 1-4-99 where a sole proprietary
concern is succeeded by a company in the business
carried on by it and as a result of which the sole
proprietary concern sells or transfers any capital asset
or intangible asset to the company, such transfer shall
not be regarded as transfer for the purposes of capital
gains. This exemption is available only if the following
conditions are fulfilled:-
i. All the assets and liabilities of the business of the
sole proprietary concern should become the assets
and liabilities of the company.
ii. The share holding of the sole proprietor should be
more than 50% of the total voting power in the

Rizvi Management Intitute Page 15

 company for a period of 5 years from the date of
succession.
iii. The sole proprietor should not receive any
consideration or benefit, directly or Top indirectly,
in any form or manner, other than by way of
allotment of shares in the company.
p. With effect from 1-4-99 any transfer in a scheme for
lending of any securities under an agreement or
arrangement which the assesses enters into with the
borrower of such securities subject to the guidelines
issued by the Securities and Exchange Board of India is
not regarded as a transfer for the purposes of capital
gains.

where in the transaction of lending shares of some

distinctive numbers and receiving back shares of some
other numbers is the result, the same would not be
considered as exchange of asset within the definition of
capital asset since the meaning of the word exchange
necessarily involves exchange of two different assets.
Thus where the asset received back is not different
from what was lent in the above scheme of lending, no
transfer is there for the purposes of capital gain as long
as the assets received back represent the same fraction
of the ownership of the company

Calculation/Computation of Capital Gains

Capital gain can be calculated as follows:

Full Value of Consideration

Less:

• Cost of Acquisition
• Cost of Improvement
• Expenditure of Transfer

Capital gains

Rizvi Management Intitute Page 16

Less:

• Exemption u/s 54

Taxable Capital Gains

Exemptions of Capital Gains

Exemption is nothing but a reduction from the capital gain

which is taxable, on which tax will not be levied and paid.

The exemptions of capital gains are provided in the following

cases under sec 10, 54, 54B, 54D, 54EC, 54ED, 54EF, 54F &
54G as follows:

• Exemption of capital gains on compulsory acquisition of

agricultural land
• Exemption of LTCG arising from sale of shares and units
• Exemption of capital gain on transfer of an asset of an
undertaking engaged in the business of generation,
transmission, distribution of power
• If house property that is transferred is used for
residential purpose
• House property was a long term capital asset
• If agricultural land used by an assessee to purchase
another agricultural land within a period of 2 years after
the date of transfer
• Any capital gain arising to an individual undertaking
from the compulsory acquisition under any law, shall be
exempt to the extent such capital gain is invested in
the purchase of another land/building within a period of
2 years after the date of transfer
• Any LTCG shall be exempt to the extent such capital
gain is invested within a period of 6 months after the
date of transfer in the specified long term asset
• Capital gain arising from the transfer of LTCA being
listed securities or Unit of a mutual fund or the UTI shall
be exempt to the extent such capital gain is invested in

Rizvi Management Intitute Page 17

 equity shares forming part of an eligible capital within a
period of 6 months after the date of such transfer
• The Capital gain that arises to an individual/HUF from
the transfer of any capital asset other than residential
house property shall be exempt in full if the entire net
sales consideration is invested in purchase of one
residential house 1 year before or two years after the
date of transfer

Income Tax In India

A tax that is applicable on income that has been generated

from any source is termed as Income tax. The central board
of direct tax (CBDT) is the governing body that takes care of
the Indian Income tax. Income tax is imposed by the
government on an individual, company, business, Hindu
undivided families (HUFs), co-operative organization and
trusts. The tax structure is different on different commodities
and products. Indian income tax is regularized under income
tax act 1961.

History of Income tax

In India Income tax comes into existence in the year 1860.

Initially at the time when it was imposed it had taken almost
five years to regularize and implement the income tax
however income tax act lapsed in the year 1865. Again after
a gap of so many years it again comes into force. Act of
1886 was again came into force it defines the full fledged
law of income tax it includes the exemption in various
agricultural professions, income tax rules on industries and
corporation. In the year Act VII of 1918 was launched that
reforms the income tax law in a new way. This new act
scrutinized the new industries that come under income tax
bracket. This new act tries to expand the horizon to generate
large revenue for the country.

In the year 1922 another income tax act came into existence
as a result of recommendation by the all India income tax
committee. With this act a new clause was introduced under

Rizvi Management Intitute Page 18

which unlike earlier where the collection of income tax in the
current assessment year depends on the estimated
collection of income tax of previous year. After the income
tax act of 1922 there will be no important provision came
however the income tax later on comes under the provision
of finance act. Every assessment year the new tax structure
is decided by the finance department of the country that is
released with the union budget. The income tax act of 1922
existed till 1961 however government had handed over the
income tax clause to the law commission to review and
recast it in a logical way so that the tax amended in an
easies way without changing the basic tax structure.

The income tax laws hold many industries and it has

diversified clauses for different industries. There are various
industries where government offers wavers in subsidies time
to time. The present income tax act is same as of 1961
income tax act of India. As per the constitution of India every
individual is bound to pay income tax for the progress of the
nation. Any individual or an organization if earning any
income in the country has to pay income tax. Although in the
present day tax structure there is a different slab for man
and women. As per Indian income tax law senior citizens are
exempted from the regular income tax slab, similarly income
generated through the agriculture is not subjected to the
income tax. Any state that is affected by the natural
calamity is also subjected to the income tax waver.

Tax Rates:

In this budget, the senior citizens are divided into two

categories as senior citizen from 60 - 80 years of age and
very senior citizens years of the age 80 and above.
The new tax slabs applicable from April 1, 2011 are as
follows:

• On all incomes up to Rs. 1,80,000 per year. (For women

- Rs. 1,90,000, for senior citizens - Rs. 2,50,000 and for
very senior citizens - Rs. 5,00,000 ), no Income Tax is
applicable.

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 • From Rs. 1,80,001 - Rs. 5,00,000 : 10% of amount ( For
women - Rs. 1,90,001 to Rs. 5,00,000 and for senior
citizens - Rs. 2,50,001 to Rs. 5,00,000)
• From Rs. 5,00,001 to Rs. 8,00,000 : 20% of amount
( Same for women, senior citizens and very senior
citizens)
• Above Rs. 8,00,000 : 30% of amount ( Same for women,
senior citizens and very senior citizens)

Income from Capital Gains

Under section 2(14) of the I.T. Act, 1961, Capital asset is

defined as property of any kind held by an assessee such as
real estate, equity shares, bonds, jewellery, paintings, art
etc. but does not consist of items like stock-in-trade for
businesses or for personal effects. Capital gains arise by
transfer of such capital assets.

Long term and short term capital assets are considered for
tax purposes. Long term assets are those assets which are
held by a person for three years except in case of shares or
mutual funds which becomes long term just after one year of
holding. Sale of long term assets give rise to long term
capital gains which are taxable as below:

• As per Section 10(38) of Income Tax Act, 1961 long

term capital gains on shares/securities/ mutual funds on
which Securities Transaction Tax (STT) has been
deducted and paid, no tax is payable. Higher capital
gains taxes will apply only on those transactions where
STT is not paid.
• For other shares & securities, person has an option to
either index costs to inflation and pay 20% of indexed
gains, or pay 10% of non indexed gains.
• For all other long term capital gains, indexation benefit
is available and tax rate is 20% .

Any Income derived from a Capital asset movable or

immovable is taxable under the head Capital Gains under
Income Tax Act 1961. The Capital Gains have been divided

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in two parts under Income Tax Act 1961. One is short term
capital gain and other is long term.

The cost inflation index table as notified is here

below:

Cost Inflation Index Notified by the GOVT

Financial
Financial Year (CII) (CII)
Year

1981-82 100 1995-96 281

1982-83 109 1996-97 305

1983-84 116 1997-98 331

1984-85 125 1998-99 351

1985-86 133 1999-2000 389

1986-87 140 2000-2001 406

1987-88 150 2001-2002 426

1988-89 161 2002-2003 447

1989-90 172 2003-2004 463

1990-91 182 2004-2005 480

1991-92 199 2005-2006 497

1992-93 223 2006-2007 519

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1993-94 244 2007-2008 551

1994-95 259 2008-2009 582

2009-10
632

If a capital asset has been subjected to depreciation then no

indexation benefit is allowed on sale of such capital asset in
view of section 50(2) as discussed above.

Capital gain from Plot and building should be

separately calculated: As discussed above plot and
building are separate assets and the capital gain on above
should be calculated separately. If the plot is purchased
more than 3 years back and building has been constructed
within 3 years the capital gain on plot will be considered as
long term and the capital gain on building will be treated as
short term capital gain.

Taxation of Long term capital gains: The long term

capital gains are taxed @ 20% after the benefit of indexation
as discussed above. No deduction is allowed from the long
term capital gains from section 80C to 80U. But in case of
individual and HUF where the income is below the basic
exempted limit the shortage in basic exemption limit is
adjusted against the long term capital gains.

Section 112(1) provides that any capital gain arising from a

long term capital asset being the listed securities which are
sold outside the stock exchange the long term capital gain
shall be calculated on such securities as below:

a) Tax arrived at @ 20% on such long term capital gain after

indexation u/s 48 or
b) Tax arrived at @ 10 % on such long term capital gain
without indexation
Whichever is less.

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The long term capital gain on equity shares or units of equity
oriented mutual fund which are sold in the stock exchange
and on which securities transaction tax is paid, is exempt u/s
10(38).

Section 50C: Section 50C has been introduced with effect

from 01-04-2003 and is a very important section while
calculating capital gain on land & building. Section 50C
provides that Where the consideration received or accruing
as a result of the transfer by an assessee of a capital asset,
being land or building or both, is less than the value adopted
or assessed or assessable by stamp valuation authority) for
the purpose of payment of stamp duty in respect of such
transfer, the value so adopted or assessed or assessable
shall, for the purposes of section 48, be deemed to be the
full value of the consideration received or accruing as a
result of such transfer.

It means that the capital gain will be calculated by

considering the sale value of the capital asset as equal to
the value adopted or assessed by the stamp valuation
authority for that capital asset if the actual sale value is less
than the value assessed by stamp valuation authority.

If the assessee claims that the value adopted by the stamp

valuation authority exceeds the fair market value then the
assessing officer may refer to the valuation officer for
valuation of the fair market value of the asset. If the fair
market value declared by the valuer is more than the value
adopted or assessed or assessable by the stamp valuation
authority, the value so adopted assessed or assessable by
the stamp valuation authority will be taken as full value of
consideration of the capital asset.

CBDT vide its circular No 8/2002 dt 27-08-2002 has declared

that if the valuation officer has declared the fair market
value of the capital asset less than the value adopted,
assessed or assessable by the stamp valuation authority
then the capital gain shall be calculated on the value so
declared by the valuer.

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After the adding of word assessable u/s 50C in 2009 now it
has become clear that even those immovable properties in
which no sale deed is entered into and which have been sold
on a full and final agreement will be within the ambit of
section 50C.

Exemptions from long term capital gain:

Secti Asset Assess Holding Whether Other Quantum

on ed Period Reinvestm Conditio
of ent ns/
Original Necessary
Assets —Time Incidents
Limit
54 Residenti Individu 3 years Yes — In The amount
al House al HUF Residential of gains, or
Property House, the cost of
within 1 new asset,
year before, whichever
or 2 years is lower
after the
date of
transfer (if
purchased)
or 3 years
after the
date of
transfer (if
constructed)
.**
54B Agricultu Individu Use for 2 Yes — In Must have As above
ral Land al years Agricultural been used
Land, within by
2 years after assessee
the date of or his
transfer. parents
for
agricultur
al
purposes
See Notes
1, 2 and
10

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54D Industrial Any Use for 2 Yes — In Must have As above
Land or Assesse years Industrial been
Building e Land, compulsor
or any Building, or ily
right any right acquired
therein there in
within 3
years after
the date of
transfer.
54EC Any Any Shares, Yes — Whole The amount
Long- Assesse Listed or any part of gain or
term e Securitie of capital the cost of
Capital s, Units gain in new asset
Asset of bonds whichever
(LTCA) UTI/Mutu redeemable is lower
al Fund after 3 years subject to
covered and issued Rs.
u/s. on or after 50,00,000
10(23D) : 1-4-2006 by per
1 year NHAI or REC assessee
Others : and notified during any
3 years by the Govt. financial
– within 6 year for
months from investment
the date of s made on
transfer. or after 1-4-
2007. Also
investment
in bonds
notified
before 1-4-
2007 would
be
subject to
conditions
laid down in
notification
including
limiting
condi-
tions (i.e.,
Rs. 50 lakhs
per
assessee)

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54ED LTCA — do — Listed Yes — exemptio — do —
being Securitie Within six n is
listed s or units months from available
securities of the date of only in
or units UTI/Mutu transfer in respect of
al Fund acquiring the assets
covered eligible issue transferre
u/s. of capital d before
10(23D) : 1-4-2006
1 year
54F Any Individu Shares, Yes — In If the cost
Capital al HUF Listed, Residential of the
Asset Securitie House, specified
(not s, Units within 1 asset is not
being a of year before, less than
residenti UTI/Mutu or 2 years Net
al house) al Fund after the Considerati
covered date of on of the
u/s. transfer (if original
10(23D) : purchased), asset, the
1 year or 3 years whole of
Others : after the the gains. If
3 years date of the cost of
transfer (if the
constructed) specified
.** asset is less
than the
Net
Consider-
ation, the
proportiona
te amount
of
the gains.
54G Industrial Any — Yes— In The amount
land or Assesse similar of gains, or
building e assets and the
or expenses on aggregate
plant or shifting of cost of new
machiner original asset and
y asset, within shifting
1 year expenses,
before, or 3 whichever
years after is lower.
the date of

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 transfer.
54GA Industrial Any — Yes — In The amount
land or Assesse similar of gains, or
building e assets and the
or expenses on aggregate
plant or shifting of cost of new
machiner original asset and
y assets to a shifting
Special expenses,
Economic whichever
Zone – is lower
within 1
year before
or 3 years
after the
date of
transfer
115F ‘Foreign Non- Shares, Yes— In
Exchang Residen Listed ‘Specified
e t Indian Securitie Assets’ (See
Asset’ s, Units Note 9) or
(See of Specified
Note UTI/Mutu Savings
al Fund Certificates
covered of Central
u/s. Government
10(23D) : , within 6
1 year months after
Others : the date of
3 years transfer

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