Capital gains

By
Augustin
Amaladas.Lourduswamy
M.Com.,AICWA.,B.Ed.,PGD
FM
 Capital Assets
• Any stock-in-trade, consumable stores or raw materials held for the
purpose of his business or profession;
• Personal effects, i.e., movable property (including wearing apparel
and furniture, excluding jewellery), held for personal use by the
assessee or any member of his family dependent on him.
• Agricultural land in India, not being land situated in the following:-
• In any area which is comprised within the jurisdiction of a
municipality (whether known as a municipality, municipal
corporation, notified area committee, town area committee, town
committee, or by any other name) or a cantonment board and,
which has a population of not less than ten thousand according to
the last preceding census.
• In any area within such distance, not being more than eight
kilometers, from the local limits of any municipality or cantonment
board referred to in item
 Capital assets
• 6.5 per cent Gold Bonds 1977, or 7 per
cent Gold Bonds 1980, National,
Defence Gold Bonds, 1980, issued by
the Central Government;
• Special Bearer Bonds, 1991, issued by
the Central Government;
• Gold Deposit Bonds issued under the
Gold Deposit Scheme, 1999 notified by
the Central Government.
 transfer of house property
• Under S 54, exempt from tax provided
• The following conditions are satisfied
• The house is a residential house is taxable under the
head "income form house property"
• The house property, which may be self-occupied or
let out, is a long term capital asset (i.e. held for a
period of more than 36 months before sale or
transfer.)
• 1+2 or 3
• Invest upto capital gain in the same nature of asset
• The house property, so purchased or constructed,
has not been transferred within a period of 3 years
from the date of purchase or construction.
 consequences if a new house is
transferred within 3 years?

• the amount of capital gain that arise,

together with the amount of capital gains
exempted earlier, will be chargeable to tax
in the year of the sale of the new house
property.
 If new house transferred?
• The gain along with exempted gain is
taxed as short term
 Short term capital gain

Computation of Short-term capital gain

1. Find out the full value of consideration

2. Deduct the following:

a. Expenditure incurred
wholly and exclusively
in connection with such
transfer.

b. Cost of acquisition.
c. Cost of improvement

3. From the resulting sum

deduct the exemption provided
by section 54B, 54D and 54G.

4. The balancing amount is the short-term capital gain.

 Computation of Long-term
capital gain
• 1. Find out the full value of consideration
2. Deduct the following:
a. Expenditure incurred wholly and exclusively in
connection with such transfer
b. Indexed Cost of acquisition
c. Indexed Cost of improvement.

3. From the resulting sum deduct the exemption

provided by section 54, 54B, 54D, 54EC,, 54F and 54G,
and 54GA.

4. The balancing amount is the long-term capital gain.

 How IS long term capital gain
taxed?
• Flat rate-20%+Surcharge+Educational cess+ Secondary and higher
education cess.
• Surcharge-10% if net income exceed Rs.10,00,000 for
individual,HUF,AOP,BOI

• Educational cess-3% on tax

• Companies -10% if net income does not exceed 1 crore rupees. 3% educational
cess

• For Assesment year 2008-09 secondary and higer education cess-1%

on( tax+surcharge)
 Indexed cost of acquisition
• Formula
• Cost *Index of the year of sale/index of the
year of acquisition of the present owner

• cost= cost of acquisition of the present

owner or
• Cost of acquisition of the previous owner
in case of will or gift
 indexed cost of acquisition?
• S 48 defines "indexed cost of acquisition" as the amount, which
bears to the cost of acquisition the same proportion as Cost Inflation
Index for the year, in which the asset is transferred, bears to the
Cost Inflation Index for the first year in which the asset was held by
the assessee or for the year beginning on the 1st day of April, 1981,
whichever is later.
The Cost Inflation Index, in relation to a previous year, means such
Index as the Central Government may, having regard to 75% of
average rise in the Consumer Price Index for urban non-manual
employees for the immediately preceding previous year to such
previous year, by notification in the Official Gazette.
 tax shelter for avoiding capital
gains tax?
• The Income Tax Act grants total/partial
exemption of capital gains under Sec.- 54,
54B, 54D, 54EC, 54F, 54G and 54H.
 Under S 54
• Under S 54, exempt from tax provided
• The following conditions are satisfied
• The house is a residential house is taxable under the
head "income form house property"
• The house property, which may be self-occupied or let
out, is a long term capital asset (i.e. held for a period of
more than 36 months before sale or transfer.)
• 1+2 or 3
• Invest upto capital gain in the same nature of asset
• The house property, so purchased or constructed, has
not been transferred within a period of 3 years from the
date of purchase or construction.
 Under S 54B
• Individuals
• agricultural land used for atleast for 2 years
before transfer
a. provided the assessee has purchased another
land for agricultural purpose within a period of 2
years from the date of such transfer.
b. In the case of compulsory acquisition, It is
exempted from tax as per section 10(37) with
effect from assessment year 2005-06 onwards.
 ***Capital gains exemted U/S 10
para 95.2
• 1. Capital gain on transfer of US 64[Section 10(36)]- both
long term and short term
• 2. Long term capital gain on transfer of BSE-500 Equity
Shares[10(36)]-long term
• 3.Compulsory acquisition of urban agriculture
land[10(37)]-longterm and short term.-individual and
HUF.
• 4. Securities not chargeable to tax if covered under
transaction tax-such as mutual fund equity linked issued
by domestic companies.
• 5. Capital gain arising in the reconstruction or revival of
power generation business [10(41)]
 Under S 54D,
a. capital gains, arising on compulsory acquisition of any
land or building forming part of an industrial
undertaking, is exempt from tax, provided such land or
building was used by the assessee for the purpose of
the industrial undertaking for at least 2 years preceding
the date of compulsory acquisition and, the assessee
has, within a period of 3 years after that date,
purchased any other land or building or right in any
other land/ building or constructed any other building
for the purpose of shifting or reestablishing the said
undertaking or setting up another industrial
undertaking.
 Under S 54EC
• where the capital gain arises from the
transfer of a long-term capital asset before
the 1st day of April, 2000, and the
assessee has, at any time within a period
of six months after the date of such
transfer invested the whole or any part of
capital gains, in any of the assets,
• Bonds in NHAI, Rural Electrification
 Under S 54 F
• where, in the case of an assessee being an
individual or a Hindu undivided family,
• the capital gain arises from the transfer of any
long-term capital asset,
• not being a residential house,
• within a period of one year before
• or two years after the date on which the
transfer took place purchased, or has within
a period of three years after that date
constructed, a residential house.
 S 54 G Voluntary transfer of
industry
• The shifting of such industrial undertaking
to any area other than an urban area, and
• the assessee has, within a period of 1
year ,before
• or 3 years after the date on which the
transfer took place, purchased a new
machinery or plant for the purposes of
business of the industrial undertaking
 Sec.54GA Shifting from urban to
Special Economic Zone
• Industry
• 1year before or 3 years after transfer
• New asset can not be transferred with in 3
years.
 Special Cases
• 1.a capital asset is converted by the owner
thereof into (or is treated by him as) stock-
in-trade of a business that is carried on by
him, such conversion (or treatment) of the
capital asset shall also be treated as
"transfer of the asset" and hence
chargeable to income tax
 How is it computed?
• Sec.45(2) Conversion amount to transfer in the
year of conversion.
• But taxed in the year such stock is sold.
• Capital gain=FMV on the date of conversion
into stock in trade –cost(Index) of acquisition.
• Business gain=sale-FMV
 Transfer of personal asset to
partnership firm
• Sec.45(3),(4):
• It amounts to transfer in the year of
transfer to partnership firm.
• Capital Gain=Amount entered in the books
of the firm-cost (Index).
• If retransferred to partners:
• Capital gain=FMV-Book value in the
partnership firm
 Capital gain on self generated
assets(Sec.115F)
• Like goodwill, tenancy right, route permit
• Cost of acquisition is NIL
• Cost of improvement is considered

• Fair market value on 1stApril 1981 is

irrelevant
 Bonus Shares
• If alloted before 1981 –cost of acquisition
is FMV on 1st April 1981.
• If aquired after 1st April 1981 cost of
acquisition is NIL
 Right shares
• Cost of acquiring right shares =cost of
acquisition like any other assets
 S 54H relaxation of time due to
delay in compensation
• , the period of acquiring the new asset
under S 54, 54B, 54D, 54EC and 54F by
the assessee or the period for depositing
or investing the amount of capital gain
shall be extended in relation to such
amount of compensation as is not
received on the date of transfer. The
extended period shall be reckoned
from the date of receipt of the amount
of compensation.
 Inherited by the assessee or
gifted to the assessee
• the cost of acquisition of the asset for
which the previous owner acquired it, shall
be deemed to be the cost of acquisition of
the asset as increased by the cost of
improvement of the assets if any, incurred
or borne by the previous owner or the
assessee as the case may be.
 Amalgamation
• cost of acquisition of the asset shall be
deemed to be the cost of acquisition to
him of the shares(s) in the amalgamating
company.(old company )
conversion of bonds or debentures,
debenture-stock
• the cost of acquisition of the asset to the
assessee shall be deemed to be that part
of the cost of debenture, debenture- stock
or deposit certificates in relation to which
such asset is acquired by the assessee.
 Demerger
• The cost of acquisition of the shares in the
resulting company shall be the amount
which bears to the cost of acquisition of
shares, held by the assessee in the
demerged company
 Compensation for loss of capital
asset(Insurance claim)
• It amounts to extinguishment of right
• Sec.45(1A)

• Taxable in the year of compensation

 Compensation for revenue asset-
stock in trade
• It amounts to revenue receipt u/s-28 from
business
• Or income from other sources u/s 56
 Buy back of shares
• Sec.46A
• Transfer in the year of buy back
• Capital gain=consideration received minus
cost of acquisition(Index if long term)
 Slump sale[50B]
• Assets are not sold individually but
collectively
• Capital gain=Sale- Net worth
• Net worth= Assets—liabilities appearing in
the books of accounts
• No index
 Advanced money received and
forfeited
• Negotiation failed advance money forfeited by
the current owner
• Deduct from the original cost of acquisition
before calculating index cost of acquisition
• Amount forfeited by the
previous owner is not
deductible
Computation of capital gain on land
and Building[50C]
• Both for depreciable and non depreciable
asset
• Sale=The stamp duty valuation all
purposes
• If disputed – FMV if it is lower than Stamp
duty value.
 No Index please!!!
• Depreciated asset

• Bonds[Debentures]

• Short term assets

 Personal effect

• Only Movable assets used

by the assessee or by the family members

• Not a capital asset-No

capital gain and will not be
taxed under any other
heads