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 1] Stock, consumables, spares, raw materials etc. held for business or profession (because it gets reflected in Business Income) 2] Personal Effects i. e. movable property held for personal use of assessee or any family member dependent on him. Exceptions Jewellery, Archaelogical collections, Drawings, paintings, sculptures or any work of Art. Case Law silver utensils consisting of thalis, Katoris and tumblers meant for personal use constituted personal effects & the gains arising on sale of such utensils cannot be taxed as Capital Gains Case Law of CIT vs. Benarashilal katarkula 185 ITR 493 (Calcutta) It may be noted that all personal effects need to be used on a daily basis. So long as they are meant & used for personal purposes, they qualify as Personal Effects 2. Gold, silver coins used for pooja are Capital Assets Maharaja Rana Hemant Singhji vs. CIT 103 ITR 61 (SC) 3] Rural agricultural Land (at the time of sale it should rural agricultural land) i. e. i) not situated within municipality / central boards jurisdiction having .of 10,000 or more ii) not situated in certain areas notified by the government 4] Gold bonds, National Defense Gold Bonds, Special Bearer Bonds, Gold Deposit Bonds Transfer Sale, Exchange, extinguishment of right etc. However in spite of this 1. There 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 2. There 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 (subject to exceptions) Capital Gains Long term capital Gains Short Term Capital Gains On sale of long term capital assets On sale of long term capital assets Capital Assets Non depreciable Land (whether used in business or not) or other assets not used in business e. g. building, Jewellery, securities, goodwill etc. of a business Can be short term or long term Depreciable Assets Assets used in Business / Profession on which depreciation is claimed e.g. Plant / machinery, furniture, intangible assets (patents, copy rights etc.) Always short term

Non depreciable assets In case of assets other than shares, listed If Period of Holding < 3 years it is short debentures, listed government securities, units term capital asset of UTI & specified Mutual Funds, Zero Coupon If Period of Holding > 3 years it is long Bonds (e. g. Land, Building, Jewellery ) term capital asset For shares, Listed debentures, Shares, Listed If Period of Holding < 1 years it is short government securities, units of UTI / MF, Zero term capital asset Coupon Bonds If Period of Holding > 1 years it is long term capital asset Period of Holdings (POH) is period from date of purchase to date of sale. But in certain situations POH includes POH of previous owner & Cost of Acquisition is cost to previous owner. 1. Acquisition of property on any distribution of assets on the total or partial partition of a Hindu Undivided family. 2. Acquisition of property under gift or will 3. i) Acquisition of property on succession, inheritance etc. ii) On any distribution of assets on the liquidation of co. iii) under a transfer to a revocable or an irrevocable trust iv) on any transfer by a wholly owned Indian subsidiary co. from its Holding co. & vice versa v) On any transfer under the scheme of amalgamation 4. Acquisition of property by HUF where one of its members has converted his self acquired property into joint family property after Dec. 31, 1969. Calculation of Capital Gain Short Term Capital Gain Sale Consideration (-) Expenses of transfer Net Sale Consideration (-) Cost of Assets (-) Cost of Improvements Short Term Capital Gain Long Term Capital Gain Sale Consideration (-) Expenses of transfer Net Sale Consideration (-) Indexed Cost of Assets (-) Indexed Cost of Improvements Long Term Capital Gain

XX (XX) XX (XX) (XX) xx

XX (XX) XX (XX) (XX) XX

Benefits of Indexation are not available in certain cases. 1) Bonds or debenture other than Capital Indexed Bonds issued by the government 2) Shares or Debentures of an Indian Co. acquired by NRI using convertible foreign exchange 3) Depreciable Assets 4) Undertaking transferred by way of slump sale 5) Units purchased in foreign currency by offshore fund 6) Securities and GDR purchased in foreign currency

Calculation of Capital Gains in case of Depreciable Assets 1) Sec. 50(1) Where Selling Price > (Opening balance + Actual Cost) difference is Short Term Capital Gain. In this case there may be assets in the block, but block value is nil hence depreciation is nil. 2) Sec. 50(2) When all the assets in a block are sold, difference is Short Term Capital Gain or Short Term Capital Loss. Case Law In the case of common wealth trust (SC) it is decided that Fair Market Value on 1.04.81 cannot be substituted for any assets which forms part of block of assets. In a block the WDV of various assets cannot be identified Transaction specifically transferred as sale Sec. 45 (IA) Sec. 45 (2) Sec. 45 (3) Sec. 45 (4) Sec. 45 (5) Sec. 45 (IA) (w. e. f. A. Y. 2000- 01) Capital Gain arises when any insurance compensation is received if a Capital Asset gets destroyed on account of any of the following factor: 1. Floods Typhoon, Hurricane, Cyclone, Earthquake or any other convulsion of nature 2. Riots or civil disturbance 3. Enemy action or war 4. Accidental fire explosion (If asset is destroyed by any factor other than the above ones, Capital Gain not taxable [SC decision in case of Vania Silk Mills Pvt. Ltd. vs. CIT]) Sale Consideration = Insurance money received / FMV or asset received However this Capital Gain is taxable in the Previous Year in which compensation is received. (Exception to the general rule, Capital Gain is taxed in the year of Transfer) Sec. 45(2) (w. e. f. A. Y. 1985 -86) Conversion of Capital Asset into stock in trade and subsequent sale of stock Conversion of Capital Gain into stock is considered as capital Gain. However it is taxed in the year when stock is sold. . (Exception to the general rule, Capital Gain is taxed in the year of Transfer) Sale Consideration = Fair Market Value on date of conversion Year of sale = Year when conversion takes place However taxed in the year when stock is sold Sec. 45(2) is applicable from A.Y. 1985-86; conversion of Capital Asset into stock was not treated as Capital Gain (as per SC decision in case of Bai Shirinbai Kooka) If stock is sold in parts in different years, tax on Capital Gain will arise in different parts accordingly- CIT vs. Crest Hotels Ltd. (2001) Sec. 45(2) would apply when there is loss too CIT vs. Claridges Investment & Finance Ltd. (2007)

Sec. 45(3) Introduction of a Capital asset by a partner/member into a Firm /AOP/BOI Sale Consideration amount recorded in books (irrespective of any other value given) Capital Gain is taxable in the hands of partner Sec. 45(4) Distribution of assets by firm/AOP/BOI to partners/members on dissolution or otherwise taxed in the hands of a firm Sale Consideration = Fair Market Value on date of transfer (irrespective of agreed consideration or amount recorded in books) i) In 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 N. Khadervali vs. Gudusaheb (2003)(SC) ii) Year of chargeability is the year in which distribution takes place and not the year of dissolution- CIT vs. Vijaylakshmi Metal Industries (2001) (Madras) Sec. 45(5) 1) If asset is acquired compulsorily under law or 2) In asset is transferred & consideration is approved by Central Government or RBI Capital Gain is chargeable in the year in which compensation or part is received Sale consideration = Compensation received Year of sale = Year when asset is acquired If 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. COA/COI nil Expenses of transfer if any i. e. litigation expenses can be deducted (Any interest on delayed compensation will be taxed under the head Income from other sources) Sec. 10(37) If a land is owned by individual / HUF & used for agricultural purposes for minimum 2 years prior to transfer, any Capital Gain on compulsory acquisition of urban agricultural land is exempt u/s 10(37)

i)

Special Points (related to capital gains on securities) See 10 (38) If any listed shares or units of EOMF are sold on a Recog. Stk. Exc. & Securities Transaction Tax is payable, then LTCG is exempt U/s 10 C 38) Any STCG is taxable at a concessional rate of 15% [Sec. 111A] No Indexation for bands/debenture unless they are capital indexed bonds. Cost of Bonus share acquired on or after 1.4.81 COA is NIL If acquired prior to 1.4.81 COA is Fair Market Value as on 1.4.81 Right Entitlement & Right Shares Right to subscribe to additional shares of the Co.

ii) iii)

iv)

If the right is not fully exercised & renounced to some other person there will be STCG on sale of Right Entitlement SC = Amt. recd. from renouncee COA = NIL If right shares are purchased & later on sold by the renouncee COA = Purchase Price of shares + Amount paid to renouncer to purchase Right Entitlement. v) Conversion of debentures into shares & subsequent sale of those shares. Conversion of debentures into shares is not considered as transfer. However if the shares are sold, Capital Gain may arise [if shares are unlisted or if they are listed but sold outside the Stock Exchange or in case of STCG]. COA of shares = Proportionate cost of debentures Indexation begins from date of conversion. [Period of holding to decide whether LT/ST is from the time shares are allotted / converted]. FIFO method in case of Demat A/c. The CBDT again in circular no. 768dated 24 06 1998 (232 ITR 5st.) has been clarified that in respect of transaction in securities held in dematerialized form u/s 45(2A) for determination of date of transfer & period of holding as detailed below. (a) The FIFO method will be applied only in respect of the dematerialized holdings because in the case of sale of dematerialized securities, the securities held in a physical form cant be construed to have been sold as they continue to remain in the possession of investor and are identified separately. (b) In the depository system, the investor can open and hold multiple accounts. In such a case where an investor has more than one security account, the FIFO method will be applied account wise. This is because in case where a particular account of an investor is debited for sale of securities, the securities lying in his other account cant be construed to remain in that account. (c) In an existing account of dematerialized stock old physical stock is dematerialized and entered at a later date under a FIFO method, the basis for dematerializing the movement out of the account is the date of entry into the account.

vi)

vii)

Buyback of shares. Sale Consideration = Amt. received from the Co. Since this transaction takes place outside a stock Exchange, LTCG always taxable, STCG taxed at usual rate. ESOP / ESES shares gifted Any gift is not considered as transfer. However if ESOP shares are gifted they are specifically considered as transfer. Sale Consideration = Fair Market Value of shares on date of gift. COA = Value at which they were taxed as a perquisite This LTCG is always taxable since it takes place outside the stock exchange STCG = usual rate

viii)

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Amalgamation If 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 47. However when shares of Amalgamated Co. are sold, while calculating Capital Gain COA of shares in Amalgamated Co. = COA of shares in Amalgamating Co. Period of Holding to decide LTCG / STCG begins from date of acquisition of shares in Amalgamating Co. Indexation is from date of acquisition of shares in Amalgamated Co.

x)

Demerger A unit or division is separated from the original co. [Demerged Co.] to form a separate Co. [Resulting Co.] All properties & liabilities of the division are transferred at net book values. The Resulting Co. issues shares to the existing shareholders of the Demerged Co. In this transaction, even though assets are transferred. this transaction is specifically not considered as transfer. However when shares of Resulting Co. are sold COA = Net worth of Demerged Co. just before demerger Net Book Value of Assets transferred. COA of shares in Demerged Co. --? COA of shares in Resulting Co. =
COA of shares in D Co. Net worth of D Co. just before demerger x N.B.V. of Assets told

COA of shares in Demerged Co. = Original cost of shares in Demerged Co. COA of shares in Resulting Co. - To decide whether shares in Resulting Co. are Long Term or Short Term, POH begins from date of acquisition of shares in Demerged Co. - Indexation beings from date of allotment of shares in Resulting Co. xi) In case of demutualization or corporatisation of a recognized stock exchange where trading rights are sold the period for which such person was member of the stock exchange prior to such demutualization will be included in the period of holding. However cost of assets of trading right is nil. Similarly if Equity Shares of such a co. are sold the period of holding will include the period for which such a person was member & COA of share = COA of original membership of stock exchange.

Other Special Points 1) Slump SaleSale of a unit or division for a lump sum consideration without attaching individual sale values to its assets and liabilities. Cost of acquisition = Net Worth (book value/ WDV of assets - book value/WDV of liabilities) No indexation even if it is LTCG If undertaking which is sold is owned for less than 3 years Short Term Capital Gain Else Long Term Capital Gain 2) Liquidation of a co. u/s 46(1) Any distribution pf assets by the co. to its shareholders on liquidation is not considered as transfer and taxed in the hands of the co. However it is taxed in the hands of the shareholders u/s 46(2). Sale Consideration = Cash + Fair Market Value of assets received Less deemed dividend u/s 2(22) (e) 3) Advance Money Any advance money received by the assessee (& forfeited) is deducted from the cost of assets before indexing it. However any advance received and forfeited by previous owner is ignored. 4) i) Sec. 50C 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. Sec. 50C applies to 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 The value to be adopted for 50C is as follows Value to be adopted for 50C The assessed value adopted for stamp duty valuation shall be the full value of consideration u/s 50C The assessable adopted for stamp duty valuation shall be the full value of consideration u/s 50C

ii)

iii) Sr. No. 1 Situation

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

Reference to Valuation officer If the assessee claims that the stamp duty value exceed the FMV of the property as on the date of transfer the assessing officer may refer the valuation of the Capital Asset to valuation officer If 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

5) Cost of self generated assetsGoodwill of business, patents, copyrights, trademark, brand name tenancy rights, Route permits, loom hours ---- Cost of Acquisition = nil If purchased cost of acquisition = purchase price In case of above assets, option to take FMV as on 1.04.81 is not available. In 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. The Apex court in CIT vs. BC Srinivasa Shetty (1981) 128 IT R294 (SC) has held that the charging section i.e. Sec.45 and the provision dealing with computation of capital Gain constitute an integrated code. Accordingly, where computation provision cant apply it shall be understood that the law is not intended to tax such transactions where cost of asset is not determinable. Transfer of such asset and gain there from shall be subject to Capital Gain.

6) Sec. 49(4) where immovable property taxed by way of gift is sold Wherever in case of a gift of immovable property an individual has been taxed under the head Income from other sources, if this property is subsequently 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 49(14) of the Income Tax Act. Transaction specifically not considered as transfer theory Please see the list of these transaction from

Special provision of NRI

In the case of an assessee who is NRI Capital Gain arising from transfer of Capital Asset being the shares and the debentures of an Indian co. shall be computed by converting Cost of Acquisition, expenses incurred for the transfer & sale consideration into the same foreign currency as was utilized for the purchase of share or debentures as indicated below. The Capital Gain so computed in the foreign currency shall be reconverted into Indian currency for the purpose of further computation 1st proviso to Sec. 48 and Rule 115A Items converted / reconverted Rate of conversion / reconversion 1 Cost of acquisition The average of telegraphic transfer selling rate and buying rate as on the date of acquisition 2 Expenses incurred for transfer The average of telegraphic transfer selling rate and buying rate as on the date of transfer 3 Sale Consideration The average of telegraphic transfer selling rate and buying rate as on the date of transfer 4 Capital Gains (Reconversion) The buying rate for telegraphic transfer as on the date of transfer The conversion or reconversion shall be made on the basis of rate of Exchange adopted by State Bank of India. The 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 Indian co. on the sale of such assets. In this case indexation will not be available in the computation of Capital Gain.

EXEMPTIONS Sec. 54 - On sale of Residential House Property-

Available to individual or HUF On LTCG from sale of Residential House Property To avail exemption, purchase Residential House Property 1 year prior to date of sale or within 2 years from date of sale or complete construction within 3 years from date of sale Exemption = lower of 1. LTCG or 2. Amount invested in one or more Residential House Property Do not sell the new Residential House Property for minimum 3 years from the date of purchase, else while calculating Short Term Capital Gain, Cost of Acquisition = original cost exemption claimed earlier If new Residential House Property has not been purchased on or before the due date of furnishing the return of income, invest in Capital Gain Account Scheme. Exemption = lower of 1. LTCG or 2. Investment in Capital Gain Account Scheme The Capital Gain Account Scheme amount must be utilized within the specified time limit; else the unutilized amount will be taxed in the 3rd year from date of sale

Sec. 54B - On sale of Agricultural land (in urban area because in rural area it is not a capital asset)

Available to individual On sale of Urban Agricultural land STCG or LTCG but the land should be used for agricultural purposes by the assessee or his parents for minimum 2 years prior to the date of transfer To avail exemption, purchase new agricultural land within 2 year from the date of sale. The new agricultural land may be situated in rural area or urban area Exemption = lower of 1. Cost of land or 2. Capital Gain

Do not sell the new land purchased for minimum 3 years from the date of purchase, else while calculating Short Term Capital Gain, Cost of Acquisition = original cost exemption claimed earlier If new Agricultural land has not been purchased on or before the due date of furnishing the return of income, invest in Capital Gain Account Scheme.

Exemption = lower of 1. LTCG 2. Investment in Capital Gain Account Scheme The Capital Gain Account Scheme amount must be utilized within the specified time limit; else the unutilized amount will be taxed in the 2nd year from date of sale

Sec. 54D Available to any assessee On compulsory acquisition of Land & Building forming part of industrial undertaking STCG or LTCG but the land or / building should have been used for industry for minimum 2 years prior to the date of transfer To avail exemption, purchase new land / building within 3 years from the date of receipt of compensation. The new asset is used for reestablishing the industrial undertaking or setting up a new one Exemption = lower of 1. Amount invested in new land/ building or 2. Capital Gain Do not sell the new land/building purchased for minimum 3 years from the date of purchase, else while calculating Short Term Capital Gain, Cost of Acquisition = original cost exemption claimed earlier If new land / building have not been purchased on or before the due date of furnishing the return of income, invest in Capital Gain Account Scheme. Exemption = lower of 1. LTCG 2. Investment in capital gain account scheme The Capital Gain Account Scheme amount must be utilized within the specified time limit; else the unutilized amount will be taxed in the 3rd year from date of sale

Sec. 54G Available to all (any assessee) STCG or LTCG On account of sale of plant/machinery/building/land while shifting industrial undertaking from urban area To avail exemption, purchase new plant/machinery/building/land 1 year prior to the date of transfer or within 3 years from the date of transfer Exemption = lower of 1. Amount invested in new land/ building or 2. Capital Gain Do not sell the new plant/machinery/building/land for minimum 3 years from the date of purchase, else while calculating Short Term Capital Gain, Cost of Acquisition = original cost exemption claimed earlier

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If 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 Scheme. Exemption = lower of 1. LTCG 2. Investment in capital gain account scheme The Capital Gain Account Scheme amount must be utilized within the specified time limit; else the unutilized amount will be taxed in the 3rd year from date of sale

Sec. 54GA (similar to Sec. 54G) While shifting from urban area to Special Economic Zone

Sec. 54EC Available to all (any assessee) Any LTCG To avail exemption purchase within 6 months from date of transfer bonds of National Highway Authority of India / Rural Electrification Corporation Exemption = lower of 1. Capital Gain or 2. Amount invested (subject to maximum limit of Rs. 50Lacs p.a.) Do not sell the bonds or avail any loan on it as a security for minimum 3 years, else the LTCG which was exempt will be taxed. No Capital Gain Account Scheme

Sec. 54F

Available to individual or HUF On LTCG from sale of any asset (except Residential House Property) To avail exemption, invest in 1 Residential House Property 1 year prior to date of sale or within 2 years from date of sale or complete construction within 3 years from date of sale Exemption = Amount invested * LTCG / Net sale consideration If amount is invested in CGAS, then unutilized amount will be taxed in the 3rd year as Unutilized amount * LTCG / Net sale consideration Do not sell the new Residential House Property for minimum 3 years from the date of purchase, else LTCG which was exempt will be taxed in the year of sale (besides calculating STCG on sale of new house) This exemption is not available if on the date of transfer of original asset, if assessee owns more than one Residential House Property (other than the one purchased to claim exemption) The assessee should also not purchase within 2 years or complete construction within 3 years any other Residential House Property other than the one purchased to claim the exemption.

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Specific Exemptions Sec. 54 Sec. 54B Sec. 54D Sec. 54G Sec. 54GA General ExemptionsSec. 54EC Sec. 54F If there are many assets eligible for Sec. 54EC, order of priority is not important. However it is important if exemption u/s 54F is to be given. Find (LTCG * 100 / Net sale consideration) for each asset, rank them and accordingly allot Sec. 54F ******

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