Capital Gains

Any profit or gain arising on transfer of Capital Asset is chargeable to tax as Capital Gains in the Previous Year in which transfer takes place. (sub. to exceptions and exemptions Capital Assets [Sec. 2(14)] Any property movable or immovable! tangible or intangible except "# $tock! consumables! spares! raw materials etc. held for business or profession (because it gets reflected in %usiness &ncome '# Personal (ffects i. e. movable property held for personal use of assessee or any family member dependent on him. (xceptions )ewellery! Archaelogical collections! *rawings! paintings! sculptures or any work of Art. Case +aw silver utensils consisting of thalis! ,atoris and tumblers meant for personal use constituted personal effects - the gains arising on sale of such utensils cannot be taxed as Capital Gains Case +aw of C&. vs. %enarashilal katarkula "/0 &.1 234 (Calcutta &t may be noted that all personal effects need to be used on a daily basis. $o long as they are meant - used for personal purposes! they 5ualify as 6Personal (ffects7 '. Gold! silver coins used for poo8a are 6Capital Assets7 9ahara8a 1ana :emant $ingh8i vs. C&. ";4 &.1 <" ($C 4# 1ural agricultural +and (at the time of sale it should rural agricultural land i. e. i not situated within municipality = central boards 8urisdiction having >>>>.of ";!;;; or more ii not situated in certain areas notified by the government 2# Gold bonds! ?ational *efense Gold %onds! $pecial %earer %onds! Gold *eposit %onds Transfer $ale! (xchange! extinguishment of right etc. :owever in spite of this ". .here are some transactions where there may be a sale or extinguishment of right but it is specifically not considered as transfer for the purpose of Capital Gains '. .here are some transactions where there may not be any sale or exchange still it is considered and taxed as transfer for the purpose of Capital Gains Capital Gain is taxed in the Previous Year in which transfer takes place even though consideration may be received at a later stage (sub8ect to exceptions Capital Gains +ong term capital Gains $hort .erm Capital Gains @n sale of long term capital assets @n sale of long term capital assets Capital Assets ?on depreciable +and (whether used in business or not or other assets not used in business e. g. building! )ewellery! securities! goodwill etc. of a business Can be short term or long term *epreciable Assets Assets used in %usiness = Profession on which depreciation is claimed e.g. Plant = machinery! furniture! intangible assets (patents! copy rights etc. Always short term

?on depreciable assets &n case of assets other than shares! listed &f Period of :olding D 4 years it is short debentures! listed government securities! units term capital asset of A.& - specified 9utual Bunds! Cero Coupon &f Period of :olding E 4 years it is long %onds (e. g. +and! %uilding! )ewellery term capital asset Bor shares! +isted debentures! $hares! +isted &f Period of :olding D " years it is short government securities! units of A.& = 9B! Cero term capital asset Coupon %onds &f Period of :olding E " years it is long term capital asset Period of :oldings (P@: is period from date of purchase to date of sale. %ut in certain situations P@: includes P@: of previous owner - Cost of Ac5uisition is cost to previous owner. ". Ac5uisition of property on any distribution of assets on the total or partial partition of a :indu Andivided family. '. Ac5uisition of property under gift or will 4. i Ac5uisition of property on succession! inheritance etc. ii @n any distribution of assets on the li5uidation of co. iii under a transfer to a revocable or an irrevocable trust iv on any transfer by a wholly owned &ndian subsidiary co. from its :olding co. - vice versa v @n any transfer under the scheme of amalgamation 2. Ac5uisition of property by :AB where one of its members has converted his self ac5uired property into 8oint family property after *ec. 4"! "3<3. Calculation of Capital Gain $hort .erm Capital Gain $ale Consideration (G (xpenses of transfer ?et $ale Consideration (G Cost of Assets (G Cost of &mprovements $hort .erm Capital Gain +ong .erm Capital Gain $ale Consideration (G (xpenses of transfer ?et $ale Consideration (G &ndexed Cost of Assets (G &ndexed Cost of &mprovements +ong .erm Capital Gain

FF (FF FF (FF (FF xx FF (FF FF (FF (FF FF

%enefits of &ndexation are not available in certain cases. " %onds or debenture other than Capital &ndexed %onds issued by the government ' $hares or *ebentures of an &ndian Co. ac5uired by ?1& using convertible foreign exchange 4 *epreciable Assets 2 Andertaking transferred by way of slump sale 0 Anits purchased in foreign currency by offshore fund < $ecurities and G*1 purchased in foreign currency

Calculation of Capital Gains in case of Depreciable Assets " $ec. 0;(" H Ihere $elling Price E (@pening balance J Actual Cost difference is $hort .erm Capital Gain. &n this case there may be assets in the block! but block value is nil hence depreciation is nil. ' $ec. 0;(' H Ihen all the assets in a block are sold! difference is $hort .erm Capital Gain or $hort .erm Capital +oss. Case +aw &n the case of common wealth trust ($C it is decided that Bair 9arket Kalue on ".;2./" cannot be substituted for any assets which forms part of block of assets. &n a block the I*K of various assets cannot be identified .ransaction specifically transferred as sale $ec. 20 (&A $ec. 20 (' $ec. 20 (4 $ec. 20 (2 $ec. 20 (0 $ec. 20 (&A (w. e. f. A. Y. ';;;G ;" H Capital Gain arises when any insurance compensation is received if a Capital Asset gets destroyed on account of any of the following factorL ". Bloods .yphoon! :urricane! Cyclone! (arth5uake or any other convulsion of nature '. 1iots or civil disturbance 4. (nemy action or war 2. Accidental fire explosion (&f asset is destroyed by any factor other than the above ones! Capital Gain not taxable M$C decision in case of Kania $ilk 9ills Pvt. +td. vs. C&.# $ale Consideration N &nsurance money received = B9K or asset received :owever this Capital Gain is taxable in the Previous Year in which compensation is received. ((xception to the general rule! Capital Gain is taxed in the year of .ransfer $ec. 20(' (w. e. f. A. Y. "3/0 G/< H Conversion of Capital Asset into stock in trade and subse5uent sale of stock Conversion of Capital Gain into stock is considered as capital Gain. :owever it is taxed in the year when stock is sold. . ((xception to the general rule! Capital Gain is taxed in the year of .ransfer $ale Consideration N Bair 9arket Kalue on date of conversion Year of sale N Year when conversion takes place :owever taxed in the year when stock is sold $ec. 20(' is applicable from A.Y. "3/0G/<O conversion of Capital Asset into stock was not treated as Capital Gain (as per $C decision in case of %ai $hirinbai ,ooka &f stock is sold in parts in different years! tax on Capital Gain will arise in different parts accordinglyG C&. vs. Crest :otels +td. (';;" $ec. 20(' would apply when there is loss too H C&. vs. Claridges &nvestment - Binance +td. (';;P

$ec. 20(4 H &ntroduction of a Capital asset by a partner=member into a Birm =A@P=%@& $ale Consideration H amount recorded in books (irrespective of any other value given Capital Gain is taxable in the hands of partner $ec. 20(2 H *istribution of assets by firm=A@P=%@& to partners=members on dissolution or otherwise taxed in the hands of a firm $ale Consideration N Bair 9arket Kalue on date of transfer (irrespective of agreed consideration or amount recorded in books i &n the event of dissolution of firm and distribution of assets there is no need for registration unless it is mandatory in certain states. Case law of ?. ,hadervali vs. Gudusaheb (';;4 ($C ii Year of chargeability is the year in which distribution takes place and not the year of dissolutionG C&. vs. Ki8aylakshmi 9etal &ndustries (';;" (9adras $ec. 20(0 H " &f asset is ac5uired compulsorily under law or ' &n asset is transferred - consideration is approved by Central Government or 1%& Capital Gain is chargeable in the year in which compensation or part is received $ale consideration N Compensation received Year of sale N Year when asset is ac5uired &f any extra compensation is received later on (i. e. if compensation is enhanced because assessee files a suit for increase in compensation ! capital gain is chargeable in the year when extra compensation is received. C@A=C@& H nil (xpenses of transfer if any i. e. litigation expenses can be deducted (Any interest on delayed compensation will be taxed under the head 6&ncome from other sources7 $ec. ";(4P H &f a land is owned by individual = :AB - used for agricultural purposes for minimum ' years prior to transfer! any Capital Gain on compulsory ac5uisition of urban agricultural land is exempt u=s ";(4P

Special Points (related to capital ains on securities) $ee "; (4/ &f any listed shares or units of (@9B are sold on a 1ecog. $tk. (xc. - $ecurities .ransaction .ax is payable! then +.CG is exempt A=s "; C 4/ Any $.CG is taxable at a concessional rate of "0Q M$ec. """A# ?o &ndexation for bands=debenture unless they are capital indexed bonds. Cost of %onus share ac5uired on or after ".2./" H C@A is ?&+ &f ac5uired prior to ".2./" H C@A is Bair 9arket Kalue as on ".2./" 1ight (ntitlement - 1ight $hares H1ight to subscribe to additional shares of the Co.

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&f the right is not fully exercised - renounced to some other person there will be $.CG on sale of 1ight (ntitlement $C N Amt. recd. from renouncee C@A N ?&+ &f right shares are purchased - later on sold by the renouncee C@A N Purchase Price of shares J Amount paid to renouncer to purchase 1ight (ntitlement. v Conversion of debentures into shares - subse5uent sale of those shares. Conversion of debentures into shares is not considered as transfer. :owever if the shares are sold! Capital Gain may arise Mif shares are unlisted or if they are listed but sold outside the $tock (xchange or in case of $.CG#. C@A of shares N Proportionate cost of debentures &ndexation begins from date of conversion. MPeriod of holding to decide whether +.=$. is from the time shares are allotted = converted#. B&B@ method in case of *emat A=c. H .he C%*. again in circular no. P</dated '2 H ;< H "33/ ('4' &.1 0st. has been clarified that in respect of transaction in securities held in dematerialiRed form u=s 20('A for determination of Sdate of transferT - Speriod of holdingT as detailed below. (a .he B&B@ method will be applied only in respect of the dematerialiRed holdings because in the case of sale of dematerialiRed securities! the securities held in a physical form canTt be construed to have been sold as they continue to remain in the possession of investor and are identified separately. (b &n the depository system! the investor can open and hold multiple accounts. &n such a case where an investor has more than one security account! the B&B@ method will be applied account wise. .his is because in case where a particular account of an investor is debited for sale of securities! the securities lying in his other account canTt be construed to remain in that account. (c &n an existing account of dematerialiRed stock old physical stock is dematerialiRed and entered at a later date under a B&B@ method! the basis for dematerialiRing the movement out of the account is the date of entry into the account.

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%uyback of shares. $ale Consideration N Amt. received from the Co. $ince this transaction takes place outside a stock (xchange! +.CG always taxable! $.CG taxed at usual rate. ($@P = ($($ shares gifted Any gift is not considered as transfer. :owever if ($@P shares are gifted they are specifically considered as transfer. $ale Consideration N Bair 9arket Kalue of shares on date of gift. C@A N Kalue at which they were taxed as a per5uisite .his +.CG is always taxable since it takes place outside the stock exchange $.CG N usual rate

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Amalgamation &f a shareholder gets shares of Amalgamated Co. against shares of Amalgamating Co.! even though there is an exchange of assets! it is not considered as transfer. u=s 2P. :owever when shares of Amalgamated Co. are sold! while calculating Capital Gain C@A of shares in Amalgamated Co. N C@A of shares in Amalgamating Co. Period of :olding to decide +.CG = $.CG begins from date of ac5uisition of shares in Amalgamating Co. &ndexation is from date of ac5uisition of shares in Amalgamated Co.

*emerger A unit or division is separated from the original co. M*emerged Co.# to form a separate Co. M1esulting Co.# All properties - liabilities of the division are transferred at net book values. .he 1esulting Co. issues shares to the existing shareholders of the *emerged Co. &n this transaction! even though assets are transferred. this transaction is specifically not considered as transfer. :owever when shares of 1esulting Co. are sold C@A N ?et worth of *emerged Co. 8ust before demerger H ?et %ook Kalue of Assets transferred. C@A of shares in *emerged Co. GGU C@A of shares in 1esulting Co. N
C!A of sh res in D Co. x N.B.V. of Assets told Net worth of D Co. just before demerger

C@A of shares in *emerged Co. N @riginal cost of shares in *emerged Co. H C@A of shares in 1esulting Co. - .o decide whether shares in 1esulting Co. are +ong .erm or $hort .erm! P@: begins from date of ac5uisition of shares in *emerged Co. - &ndexation beings from date of allotment of shares in 1esulting Co. xi &n case of demutualiRation or corporatisation of a recogniRed stock exchange where trading rights are sold the period for which such person was member of the stock exchange prior to such demutualiRation will be included in the period of holding. :owever cost of assets of trading right is nil. $imilarly if (5uity $hares of such a co. are sold the period of holding will include the period for which such a person was member C@A of share N C@A of original membership of stock exchange.

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!t"er Special Points " $lump $aleG $ale of a unit or division for a lump sum consideration without attaching individual sale values to its assets and liabilities. Cost of ac5uisition N ?et Iorth (book value= I*K of assets G book value=I*K of liabilities ?o indexation even if it is +.CG &f undertaking which is sold is owned for less than 4 years H $hort .erm Capital Gain (lse H +ong .erm Capital Gain ' +i5uidation of a co. u=s 2<(" Any distribution pf assets by the co. to its shareholders on li5uidation is not considered as transfer and taxed in the hands of the co. :owever it is taxed in the hands of the shareholders u=s 2<(' . $ale Consideration N Cash J Bair 9arket Kalue of assets received +ess deemed dividend u=s '('' (e Advance 9oney Any advance money received by the assessee (- forfeited is deducted from the cost of assets before indexing it. :owever any advance received and forfeited by previous owner is ignored.

2 i $ec. 0;C provide for deeming deeming the guideline value for the stamp duty as the full value of consideration if the actual consideration is less than such value. $ec. 0;C applies to G a consideration received or accruing as a result of transfer of land = building or both b every transfer of land = building or both whether registered with stamp duty valuation authority or expected through agreement to sell or buy way of power of attorney .he value to be adopted for 0;C is as follows Kalue to be adopted for 0;C .he assessed value adopted for stamp duty valuation shall be the full value of consideration u=s 0;C .he assessable adopted for stamp duty valuation shall be the full value of consideration u=s 0;C

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iii $r. ?o. " $ituation

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&n a case where property is registered for stamp duty value upon transfer &n a case where transfer is made through agreement of sale or power of attorney without registration

1eference to Kaluation officer H &f the assessee claims that the stamp duty value exceed the B9K of the property as on the date of transfer the assessing officer may refer the valuation of the Capital Asset to valuation officer &f the value ascertained as per the valuation report exceeds the stamp duty value! then the stamp duty value shall be taken as the value of the consideration for computation of Capital Gain

Cost of self generated assetsG Goodwill of business! patents! copyrights! trademark! brand name tenancy rights! 1oute permits! loom hours GGGG Cost of Ac5uisition N nil &f purchased cost of ac5uisition N purchase price &n case of above assets! option to take B9K as on ".;2./" is not available. &n a case where cost of asset is indeterminate! transfer of Capital Asset and the resultant Capital Gain is not chargeable to tax under the head Capital Gain. .he Apex court in C&. vs. %C $rinivasa $hetty ("3/" "'/ &. 1'32 ($C has held that the charging section i.e. $ec.20 and the provision dealing with computation of capital Gain constitute an integrated code. Accordingly! where computation provision canTt apply it shall be understood that the law is not intended to tax such transactions where cost of asset is not determinable. .ransfer of such asset and gain there from shall be sub8ect to Capital Gain.

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$ec. 23(2 where immovable property taxed by way of gift is sold H Iherever in case of a gift of immovable property an individual has been taxed under the head S&ncome from other sourcesT! if this property is subse5uently transferred for the purpose of calculation of capital gain Cost of Asset shall be deemed to be the stamp duty value as provided u=s 23("2 of the &ncome .ax Act. Please see the list of these transaction from

.ransaction specifically not considered as transfer G theory

Special pro#ision of $%&

&n the case of an assessee who is ?1& Capital Gain arising from transfer of Capital Asset being the shares and the debentures of an &ndian co. shall be computed by converting Cost of Ac5uisition! expenses incurred for the transfer - sale consideration into the same foreign currency as was utiliRed for the purchase of share or debentures as indicated below. .he Capital Gain so computed in the foreign currency shall be reconverted into &ndian currency for the purpose of further computation H "st proviso to $ec. 2/ and 1ule ""0A &tems converted = reconverted 1ate of conversion = reconversion " Cost of ac5uisition .he average of telegraphic transfer selling rate and buying rate as on the date of ac5uisition ' (xpenses incurred for transfer .he average of telegraphic transfer selling rate and buying rate as on the date of transfer 4 $ale Consideration .he average of telegraphic transfer selling rate and buying rate as on the date of transfer 2 Capital Gains (1econversion .he buying rate for telegraphic transfer as on the date of transfer .he conversion or reconversion shall be made on the basis of rate of (xchange adopted by $tate %ank of &ndia. .he aforesaid manner of computation of capital Gain shall be applicable in respect

of capital Gain arising from every reinvestment thereafter in the shares and debenture of an &ndian co. on the sale of such assets. &n this case indexation will not be available in the computation of Capital Gain.

'(')PT&!$S $ec. 02 G @n sale of 1esidential :ouse PropertyG Available to individual or :AB @n +.CG from sale of 1esidential :ouse Property .o avail exemption! purchase 1esidential :ouse Property " year prior to date of sale or within ' years from date of sale or complete construction within 4 years from date of sale (xemption N lower of ". +.CG or '. Amount invested in one or more 1esidential :ouse Property *o not sell the new 1esidential :ouse Property for minimum 4 years from the date of purchase! else while calculating $hort .erm Capital Gain! Cost of Ac5uisition N original cost H exemption claimed earlier &f new 1esidential :ouse Property has not been purchased on or before the due date of furnishing the return of income! invest in Capital Gain Account $cheme. (xemption N lower of ". +.CG or '. &nvestment in Capital Gain Account $cheme .he Capital Gain Account $cheme amount must be utiliRed within the specified time limitO else the unutiliRed amount will be taxed in the 4rd year from date of sale

$ec. 02% G @n sale of Agricultural land (in urban area because in rural area it is not a capital asset G Available to individual @n sale of Arban Agricultural land $.CG or +.CG but the land should be used for agricultural purposes by the assessee or his parents for minimum ' years prior to the date of transfer .o avail exemption! purchase new agricultural land within ' year from the date of sale. .he new agricultural land may be situated in rural area or urban area (xemption N lower of ". Cost of land or '. Capital Gain

*o not sell the new land purchased for minimum 4 years from the date of purchase! else while calculating $hort .erm Capital Gain! Cost of Ac5uisition N original cost H exemption claimed earlier &f new Agricultural land has not been purchased on or before the due date of furnishing the return of income! invest in Capital Gain Account $cheme.

(xemption N lower of ". +.CG '. &nvestment in Capital Gain Account $cheme .he Capital Gain Account $cheme amount must be utiliRed within the specified time limitO else the unutiliRed amount will be taxed in the 'nd year from date of sale

$ec. 02* G Available to any assessee @n compulsory ac5uisition of +and - %uilding forming part of industrial undertaking $.CG or +.CG but the land or = building should have been used for industry for minimum ' years prior to the date of transfer .o avail exemption! purchase new land = building within 4 years from the date of receipt of compensation. .he new asset is used for reestablishing the industrial undertaking or setting up a new one (xemption N lower of ". Amount invested in new land= building or '. Capital Gain *o not sell the new land=building purchased for minimum 4 years from the date of purchase! else while calculating $hort .erm Capital Gain! Cost of Ac5uisition N original cost H exemption claimed earlier &f new land = building have not been purchased on or before the due date of furnishing the return of income! invest in Capital Gain Account $cheme. (xemption N lower of ". +.CG '. &nvestment in capital gain account scheme .he Capital Gain Account $cheme amount must be utiliRed within the specified time limitO else the unutiliRed amount will be taxed in the 4rd year from date of sale

$ec. 02G G Available to all (any assessee $.CG or +.CG @n account of sale of plant=machinery=building=land while shifting industrial undertaking from urban area .o avail exemption! purchase new plant=machinery=building=land " year prior to the date of transfer or within 4 years from the date of transfer (xemption N lower of ". Amount invested in new land= building or '. Capital Gain *o not sell the new plant=machinery=building=land for minimum 4 years from the date of purchase! else while calculating $hort .erm Capital Gain! Cost of Ac5uisition N original cost H exemption claimed earlier

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&f new plant=machinery=building=land has not been purchased on or before the due date of furnishing the return of income! invest in Capital Gain Account $cheme. (xemption N lower of ". +.CG '. &nvestment in capital gain account scheme .he Capital Gain Account $cheme amount must be utiliRed within the specified time limitO else the unutiliRed amount will be taxed in the 4rd year from date of sale

$ec. 02GA H (similar to $ec. 02G Ihile shifting from urban area to $pecial (conomic Cone

$ec. 02(C G Available to all (any assessee Any +.CG .o avail exemption purchase within < months from date of transfer bonds of ?ational :ighway Authority of &ndia = 1ural (lectrification Corporation (xemption N lower of ". Capital Gain or '. Amount invested (sub8ect to maximum limit of 1s. 0;+acs p.a. *o not sell the bonds or avail any loan on it as a security for minimum 4 years! else the +.CG which was exempt will be taxed. ?o Capital Gain Account $cheme

$ec. 02B G Available to individual or :AB @n +.CG from sale of any asset (except 1esidential :ouse Property .o avail exemption! invest in " 1esidential :ouse Property " year prior to date of sale or within ' years from date of sale or complete construction within 4 years from date of sale (xemption N Amount invested V +.CG = ?et sale consideration &f amount is invested in CGA$! then unutiliRed amount will be taxed in the 4rd year as AnutiliRed amount V +.CG = ?et sale consideration *o not sell the new 1esidential :ouse Property for minimum 4 years from the date of purchase! else +.CG which was exempt will be taxed in the year of sale (besides calculating $.CG on sale of new house .his exemption is not available if on the date of transfer of original asset! if assessee owns more than one 1esidential :ouse Property (other than the one purchased to claim exemption .he assessee should also not purchase within ' years or complete construction within 4 years any other 1esidential :ouse Property other than the one purchased to claim the exemption.

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$pecific (xemptions H $ec. 02 $ec. 02% $ec. 02* $ec. 02G $ec. 02GA General (xemptionsG $ec. 02(C $ec. 02B &f there are many assets eligible for $ec. 02(C! order of priority is not important. :owever it is important if exemption u=s 02B is to be given. Bind (+.CG V ";; = ?et sale consideration for each asset! rank them and accordingly allot $ec. 02B VVVVVV

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