Professional Documents
Culture Documents
PROJECT REPORT
ON
DIRECT TAX
CAPITAL GAINS
BY
PROJECT GUIDE
MUMBAI - 400057.
1
DECLARATION
MCOM (PART II) (Roll no. 64) (Semester III) hereby declare that I have
knowledge.
(Signature of student)
2
ACKNOWLEDGEMENT
To list who all helped me is difficult because they are so numerous and the depth is so
enormous.
I would like to acknowledge the following as being idealistic channels and fresh
dimensions in the completion of this project.
I would firstly thank the University of Mumbai for giving me chance to do this project.
I would like to thank my principal, Dr. Madhavi Pethe for providing the necessary
facilities required for completion of this project.
I even will like to thank our coordinator, for the moral support that we received.
I would like to thank our college library, for providing various books and magazines
related to my project.
Finally, I proudly thank my parents and friends for their support throughout the project.
3
TABLE OF CONTENTS
2 DIRECT TAX 9
7 ILLUSTRATIONS 35-36
8 CONCLUSION 37
9 BIBLIOGRAPHY 38
4
TAX
A tax (from the Latin taxo) is a financial charge or other levy imposed upon a taxpayer (an
individual or legal entity) by astate or the functional equivalent of a state to fund various public
expenditures. A failure to pay, or evasion of or resistance to taxation, is usually punishable by
law. Taxes consist of direct or indirect taxes and may be paid in money or as its labour
equivalent. Some countries impose almost no taxation at all, or a very low tax rate for a certain
area of taxation.
Every one of us, have heard about the tax, it is a compulsory financia l obligation, payable to the
government. But this definition is not sufficient to understand the complete tax system. It has
been mainly divided into two broad categories Direct Tax and Indirect Tax, comprising of the
different nature of taxes. Let’s understand the meaning and the difference between Direct Tax
and Indirect Tax.
A direct tax is referred to as a tax levied on person’s income and wealth and is paid directly to
the government, the burden of such tax cannot be shifted. The tax is progressive in nature i.e. it
increases with an increase in the income or wealth and vice versa. It levies according to the
paying capacity of the person, i.e. the tax is collected more from the rich and less from the poor
5
people. The tax is levied and collected either by the Central government or State government or
the local bodies.
The plans and policies of the Direct Taxes are being recommended by the Central Board of
Direct Taxes (CBDT) which is under the Ministry of Finance, Government of India.
Income Tax
Wealth Tax
Property Tax
Corporate Tax
Import and Export Duties
Indirect Tax is referred to as a tax charged on a person who consumes the goods and services and
is paid indirectly to the government. The burden of tax can be easily shifted to the another
person. The tax is regressive in nature, i.e. as the amount of tax increases the demand for the
goods and services decreases and vice versa. It levies on every person equally whether he is rich
or poor. The administration of tax is done either by the Central Government or the State
government.
6
Comparison Chart
levied on person's income and wealth levied on a person who consumes the
and is paid directly to the goods and services and is paid indirectly
Burden The person on whom it is levied The burden of tax can be shifted to
Types Wealth Tax, Income Tax, Property Central Sales tax, VAT (Value Added
Tax, Corporate Tax, Import and Tax), Service Tax, STT (Security
Duty.
services.
Inflation Direct tax helps in reducing the Indirect taxes promote the inflation.
inflation.
Levied on Persons, i.e. Individual, HUF (Hindu Consumers of goods and services.
etc.
7
Key Differences between Direct and Indirect Taxes
1. The tax, which is paid by the person on whom it is levied, is known as the Direct tax while the
tax, which is paid by the taxpayer indirectly, is known as the Indirect tax. The direct tax is levied
on person’s income and wealth whereas the indirect tax is levied on a person who consumes the
goods and services.
2. The main difference between the direct and indirect tax is that the burden of direct tax cannot be
shifted whereas the burden of indirect tax can be shifted.
3. The evasion of tax is possible in case of a direct tax if the proper administration of the collection
is not done, but in the case of indirect tax, the evasion of tax is not possible since the amount of
tax is charged on the goods and services.
4. The direct tax is levied on Persons, i.e. Individual, HUF (Hindu Undivided Family), Company,
Firm, etc. On the other hand, the indirect tax is levied on the consumer of goods and services.
5. The nature of a direct tax is progressive, but the nature of the indirect tax is regressive.
6. Direct tax helps in reducing the inflation, but the indirect tax sometimes helps in promoting the
inflation.
Similarities
Conclusion
Both the direct and indirect tax has its own merits and demerits. If we talk about the direct taxes
they are equitable because they are charged on person, according to their paying ability. The
direct tax is economical because its cost of collection is less but however, it doesn’t cover every
section of the society.
On the other hand, if we talk about the indirect tax, they are easy to realize as they are included
in the price of the product and services, and along with that, it has an excellent coverage of every
section of the society. One of the best advantages of the indirect tax is, the rate of tax is high for
harmful products as compared to the other goods which are necessary for life.
8
DIRECT TAX
INCOME TAX
An income tax is a tax that governments impose on financial income generated by all entities
within their jurisdiction. By law, businesses and individuals must file an income tax return every
year to determine whether they owe any taxes or are eligible for a tax refund. Income tax is a key
source of funds that the government uses to fund its activities and serve the public.
HEADS OF INCOME
Under chapter 4 of Income Tax Act, 1961 (Section 14), income of a person is calculated under
various defined heads of income. The total income is first assessed under heads of income and
then it is charged for Income Tax as under rules of Income Tax Act. According to Section 14 of
Income Tax Act, 1961 there are following heads of income under which total income of a person
is calculated:
9
CAPITAL GAINS
A capital gain is a profit that results from a sale of a capital asset, such as stock, bond or real
estate, where the sale price exceeds the purchase price. The gain is the difference between a
higher selling price and a lower purchase price. Conversely, a capital loss arises if the proceeds
from the sale of a capital asset are less than the purchase price.
Capital gains may refer to "investment income" that arises in relation to real assets, such
as property; financial assets, such as shares/stocks or bonds; and intangible assets.
When we buy any kind of property for a lower price and then subsequently sell it at a higher
price, we make a gain. The gain on sale of a capital asset is called capital gain. This gain is not a
regular income like salary, or house rent. It is a one-time gain; in other words the capital gain is
not recurring, i.e., not occur again and again periodically.
Opposite of gain is called loss; therefore, there can be a loss under the head capital gain. We are
not using the term capital loss, as it is incorrect. Capital Loss means the loss on account of
destruction or damage of capital asset. Thus, whenever there is a loss on sale of any capital asset
it will be termed as loss under the head capital gain.
10
OBJECTIVE
After going through this lesson you will be able to understand the meaning of capital asset, types
of capital asset, what is not capital asset, computation of capital gain, types of capital gains etc.
You will also be learning how to calculate the capital gain of simple problems. The capital gain
is also an income and it is taxable too, at the end of the chapter you will also learn the tax
BASIS OF CHARGE
The capital gain is chargeable to income tax if the following conditions are satisfied:
3. Transfer of capital assets should take place during the previous year.
As per S.2 (14) of the Income Tax Act, 1961, unless the context otherwise requires, the term
“capital asset” means:
(a) Property of any kind held by an assessee, whether or not connected with his business or
profession;
(b) Any securities held by a Foreign Institutional Investor which has invested in such securities
in accordance with the regulations made under the Securities and Exchange Board of India Act,
1992; but does not include:
(i) Any stock- in-trade, other than the securities referred to in sub-clause (b), consumable stores
or raw materials held for the purposes of his business or profession;
(ii) Personal effects, that is to say, movable property (including wearing apparel and furniture)
held for personal use by the assessee or any member of his family dependent on him, but
excludes:
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(a) jewellery;
(c) drawings;
(d) paintings;
(e) sculptures; or
Explanations:
(a) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing
one or more of such precious metals, whether or not containing any precious or semi-precious
stone, and whether or not worked or sewn into any wearing apparel;
(b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article
or worked or sewn into any wearing apparel.
(a) the expression “Foreign Institutional Investor” shall have the meaning assigned to it in clause
(a) of the Explanation to section 115AD;
(b) the expression “securities” shall have the meaning assigned to it in clause (h) of section 2 of
the Securities Contracts (Regulation) Act, 1956;
(a) 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
12
committee, or by any other name) or a cantonment board and which has a population of not less
than ten thousand; or
(I) not being more than two kilometres, from the local limits of any municipality or cantonment
board referred to in item (a) and which has a population of more than ten thousand but not
exceeding one lakh; or
(II) not being more than six kilometres, from the local limits of any municipality or cantonment
board referred to in item (a) and which has a population of more than one lakh but not exceeding
ten lakh; or
(III) not being more than eight kilometres, from the local limits of any municipality or
cantonment board referred to in item (a) and which has a population of more than ten lakh.
Explanation: For the purposes of this sub-clause, “population” means the population according to
the last preceding census of which the relevant figures have been p ublished before the first day
of the previous year.
(iv) 6½ per cent Gold Bonds, 1977, or 7 per cent Gold Bonds, 1980, or National Defence Gold
Bonds, 1980, issued by the Central Government;
(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central
Government.
Explanation:
“Property” includes and shall be deemed to have always included any rights in or in relation to
an Indian company, including rights of management or control or any other rights whatsoever.
Definitions of capital asset mainly distinguish the business assets from other assets for the
purpose of taxation under the head Capital Gains.
13
TRANSFER
Capital gain arises on transfer of capital asset; so it becomes important to understand what is the
meaning of word transfer. The word transfer occupy a very important place in capital gain,
because if the transaction involving movement of capital asset from one person to another person
is not covered under the definition of transfer there will be no capital gain chargeable to income
tax. Even if there is a capital asset and there is a capital gain.
The word transfer under income tax act is defined under section 2(47). As per section 2 (47)
Transfer, in relation to a capital asset, includes sale, exchange or relinquishment of the asset or
extinguishments of any right therein or the compulsory acquisition thereof under any law.
In simple words Transfer includes:
a) Sale, exchange or relinquishment of asset
Transfer includes:
14
ii) Extinguishment of any rights in a capital asset
This covers every possible transaction which results in destruction, annihilation, extinction,
termination, cessation or cancellation of all or any bundle of rights in a capital asset. For
example, termination of a lease or of a mortgagee interest in a property.
15
vi) Transfer of rights in immovable properties through the medium of co-operative
societies, companies etc.
Usually flats in multi-storeyed building and other dwelling units in group housing schemes are
registered in the name of a co-operative society formed by the individual allottees.
Sometimes companies are floated for this purpose and allottees take shares in such companies. In
such cases transfer of right to use and enjoy the flat is effected by changing the membership of
co-operative society or by transferring the shares in the company. Possession and enjoyment of
immovable property is also made by what is commonly known as ‘Power of Attorney’ transfers.
All these transactions are regarded as transfer.
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x) The maturity or redemption of a zero coupon bond
Here, a zero coupon bond means a bond issued by any infrastructure capital company or
infrastructure firm or public sector company on or after 1st June, 2005 in respect of which no
payment or benefit is received or receivable before maturity or redemption and which has been
deemed as short-term capital asset. However, following assets held for not more than 12 months
a) Equity or preference shares in a company which are listed in any recognized stock exchange in
India;
c) Units of UTI;
Note: Unlisted shares held for not more than 24 months immediately prior to the date of transfer
17
PERIOD OF HOLDING
18
prior to such demutualization/corporatization
shall be included.
Flat in a co-operative society The period of holding shall be computed from
the date of allotment of shares in the society.
Sweat equity shares allotted by employer The period of holding shall be reckoned from
the date of allotment or transfer of such equity
shares (applicable from the assessment year
2008-09)
Unit of a business trust [allotted pursuant to The period of holding shall include the period
transfer of shares as referred to in section for which shares were held by the assessee.
47(xvii)]
Units allotted to an assessee pursuant to The period of holding of such units shall
consolidation of two or more scheme of a include the period for which the unit or units in
mutual fund as referred to in Section 47(xviii) the consolidating scheme of the mutual fund
were held by the assessee.
Shares in a company acquired by the non- The period of holding of such shares shall be
resident assessee on redemption of Global reckoned from the date on which a request for
Depository Receipts referred to in Section such redemption was made.
115AC(1)(b)
Transactions in shares and securities not given
above:
1) Date of purchase (through stock exchanges) a) Date of purchase by broker on behalf of
of shares and Securities investor.
2) Date of transfer (through stock exchanges) b) Date of broker’s note provided such
of shares and securities transactions are followed up by delivery of
shares and also the transfer deeds.
3) Date of purchase/transfer of shares and
securities (transaction taken place directly c) Date of contract of sale as declared by
between parties and not through stock parties provided it is followed up by actual
exchanges) delivery of shares and the transfer deeds.
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4) Date of purchase/sale of shares and d) The FIFO method shall be adopted to
securities purchased in several lots at different reckon the period of the holding of the
points of time but delivery taken subsequently security, in cases where the dates of purchase
and sold in parts and sale cannot be correlated through specific
number of scrips.
5) Transfer of a security by a depository (i.e.,
demat account) e) The period of holding shall be determined
on the basis of the first-in- first-out method.
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COMPUTATION OF CAPITAL GAIN:
Computation of capital gain depends upon the nature of the capital asset transferred during the
previous year, vis-à-vis, short-term capital asset, long-term capital asset or depreciable asset.
Capital gain arising on transfer of short-term capital asset or depreciable asset is considered as
short-term capital gain, whereas transfer of long-term capital asset gives rise to long-term capital
gain.
The capital gains on transfer of capital asset shall be computed in the following manner: - See
more at:
* Short-term capital gain or loss from sale of depreciable asset will arise only in the following
two situations:
a) When on last day of the previous year, WDV of the block of asset is nil; or
b) When on last day of the previous year, block ceases to exist.
21
Note 1: Indexed Cost of Acquisition and Improvement [Second Proviso to Section 48]
a) In case of transfer of long-term capital assets, indexed cost of acquisition and indexed cost of
improvement shall be deducted from the full value of consideration;
b) Indexed cost of acquisition and Indexed cost of improvement shall be computed with
reference to Cost Inflation Index (‘CII’) in the following manner:
However, there are some cases where benefit of indexation is not available, which are as under:
22
115AC Global depository receipts (GDR) purchased in foreign Non-resident
currency as given in section 115AC
115ACA Global depository receipts (GDR) purchased in foreign Resident
currency as given in section 115ACA individual –
employee
115AD Securities as given in section 115AD Foreign
Institutional
Investors
CII in relation to a previous year means such index, as Central Government notifies on year to
year basis.
The Central Government has notified the following Cost Inflation Indexes:
23
Computation of capital gain in case of sale of shares or debentures of an Indian company
purchased by a non-resident in foreign currency [first provision to section 48]
In such a case, capital gain shall be determined as under:-
Full Value of Find out sale consideration in Indian currency and convert it into same foreign
Consideration currency, which was used to acquire the capital asset, at average exchange
Cost of Find out the cost of acquisition in Indian currency and convert it into foreign
Expenditure on Find out the expenditure on transfer in Indian currency and convert it into same
sale (Z) foreign currency at average exchange rate on the date of transfer (not on the
Capital gain The capital gains as computed in after reducing the cost of acquisition and
(X-Y-Z) expenditure from the full value of consideration shall be reconverted into
* Average exchange rate means the average of the telegraphic transfer buying rate and
telegraphic transfer selling rate of the foreign currency initially utilized in the purchase of capital
asset.
** Buying rate is the telegraphic transfer buying rate of such currency.
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S. Nature of transaction Section Full Value of Consideration
No.
1 Money or other asset received 45(1A) Value of money or the FMV of the asset (on
under any insurance from an the date of receipt)
insurer due to damage or
destruction of a capital asset
2 Conversion of capital asset into 45(2) FMV of the capital asset on the date of
stock-in-trade conversion
3 Transfer of capital asset by a 45(3) Amount recorded in the books of accounts of
partner or member to firm or the firm or AOP/BOI as the value of the
AOP/BOI, as the case may be, capital asset received as capital contribution
as his capital contribution
4 Distribution of capital asset by 45(4) FMV of such asset on the date of transfer
Firm or AOP/BOI to its partners
or members, as the case may be,
on its dissolution
5 Money or other assets received 46(2) Total money plus FMV of assets received on
by share- holders at the time of the date of distribution less amount assessed
liquidation of the company as deemed dividend under section 2(22)(c)
6 Buy-back of shares and other 46A Consideration paid by company on buyback
specified securities by a of shares or other securities would be deemed
company as full value of consideration. The difference
between the cost of acquisition and buy-back
price (full value of consideration) would be
taxed as capital gain in the hands of the
shareholder.
Note: if shares are not listed on a recognized
stock exchange, domestic companies would
liable to pay additional tax at 20% under
section 115QA on the distributed income (i.e.
buy-back price as reduced by the amount
25
received by the company for issue of such
shares)
7 Shares, debentures, warrants Fourth Fair Market value of securities at the time of
(‘securities’) allotted by an Proviso gift
employer to an employee under to
notified Employees Stock Section
Option Scheme and such 48
securities are gifted by the
concerned employee to any
person
8 In case of transfer of land or 50C The value adopted or assessed or assessable
building, if sale consideration by the Stamp Valuation Authority shall be
declared in the conveyance deed deemed to be the full value of consideration
is less than the stamp duty value Note: Where the date of agreement (fixing the
amount of consideration) and the date of
registration for the transfer of property are not
the same, the value adopted or assessed or
assessable by Stamp Valuation Authority on
the date of agreement may be taken as full
value of consideration.
9 If consideration received or 50D FMV of asset on the date of transfer
accruing as a result of transfer (applicable from the assessment year 2013-
of a capital asset is not 14)
ascertainable or cannot be
determined
26
Cost of Acquisition
Cost of acquisition of an asset is the amount for which it was originally acquired by the assessee.
It includes expenses of capital nature incurred in connection with such purchase or for
completing the title of the property.
However, in cases given below, cost of acquisition shall be computed on notional basis:
S. Particulars Notional Cost of Acquisition
No.
1 Additional compensation in the case of Nil
compulsory acquisition of capital assets
2 Assets received by a shareholder on liquidation of FMV of such asset on the date of
the company distribution of assets to the
shareholders
3 Stock or shares becomes property of taxpayer on Cost of acquisition of such stock or
consolidation, conversion, etc. shares from which such asset is
derived
4 Allotment of shares in an amalgamated Indian co. Cost of acquisition of shares in the
to the shareholders of amalgamating co. in a amalgamating co.
scheme of amalgamation
5 Conversion of debentures into shares That part of the cost of debentures in
relation to which such asset is acquired
by the assessee
6 Allotment of shares/securities by a co. to its a) If shares are allotted during 1999-
employees under ESOP Scheme approved by the 2000 or on or after April 1, 2009,
Central Government FMV of securities on the date of
exercise of option
b) If shares are allotted before April 1,
2007 (not being during 1999-2000),
the amount actually paid to acquire the
securities
c) If shares are allotted on or after
April 1, 2007 but before April 1, 2009,
27
FMV of securities on the date of
vesting of option (purchase price paid
to the employer or FBT paid to
employer shall not be considered)
7 Property covered by section 56(2)(vii) or (viia) The value which has been considered
for the purpose of Section 56(2)(vii) or
(viia)
8 Allotment of shares in Indian resulting company Cost of acquisition of shares in
to the existing shareholders of the demerger demerged company ? Net book value
company in a scheme of demerger of assets transferred in demerger ? Net
worth of the demerged company
immediately before demerger
9 Cost of acquisition of original shares in demerged Cost of acquisition of such shares
company after demerger minus amount calculated above in
point 8.
10 Cost of acquisition of assets acquired by Cost of acquisition of the assets to the
successor LLP from predecessor private company predecessor private company or
or unlisted public company at the time of unlisted public company
conversion of the company into LLP in
compliance with conditions of Section 47(xiiib)
11 Cost of acquisition of rights of a partner in a LLP Cost of acquisition of the shares in the
which became the property of the taxpayer due to co. immediately before conversion
conversion of a private company or unlisted
public company into the LLP
12 Depreciable assets covered under Section 50 Opening WDV of block of assets on
the first day of the previous year plus
actual cost of assets acquired during
the year which fall within the same
block of assets
13 Depreciable assets of a power generating unit as WDV of the asset minus terminal
covered under Section 50A* depreciation plus balancing charge
28
14 Undertaking/division acquired by way of slump Net worth of such undertaking
sale as covered under section 50B
15 New asset acquired for claiming exemptions Actual cost of acquisition minus
under sections 54, 54B, 54D, 54G or 54GA if it is exemption claimed under these
transferred within three years sections
16 Goodwill of business or trade mark or brand a) If these assets were acquired by gift,
name associated with business or right to will, etc., under section 49(1) and the
manufacture, produce or process any article or previous owner had purchased these
thing or right to carry on any business or assets: Cost of acquisition to the
profession, tenancy right, stage permits or loom previous owner
hours b) If the owner has purchased these
assets: Actual cost of acquisition
c) If these assets are self-generated:
Nil
17 Right shares Amount actually paid by assessee
18 Right to subscribe to shares (i.e., right Nil
entitlement)
19 Bonus shares a) If allotted to the assessee before
April 1, 1981: Fair market value on
that date
b) In any other case: Nil
20 Allotment of equity shares and right to trade in a) Cost of acquisition of shares: Cost
stock exchange, allotted to members of stock of acquisition of original membership
exchange under a scheme of demutualization or of the stock exchange
corporatization of stock exchanges as approved b) Cost of acquisition of trading or
by SEBI clearing rights of the stock exchange:
Nil
21 Capital asset, being a unit of business trust, Cost of acquisition of shares as
acquired in consideration of transfer as referred to referred to in section 47(xvii)
in section 47(xvii) [applicable from AY 2015-16]
22 Units allotted to an assessee pursuant to Cost of acquisition of such units shall
29
consolidation of two or more scheme of a mutual be the cost of acquisition of units in
fund as referred to in Section 47(xviii) the consolidating scheme of the
mutual fund
23 Shares in a company acquired by the non-resident Cost of acquisition of such shares shall
assessee on redemption of Global Depository be calculated on the basis of the price
Receipts referred to in Section 115AC(1)(b) prevailing on any recognized stock
exchange on the date on which a
request for such redemption was made.
24 Any other capital asset a) If it became property of taxpayer
before April 1, 1981 by gift, will, etc.,
in modes specified in section 49(1):
Cost of acquisition to the previous
owner or FMV as on April 1,1981,
whichever is higher
b) If it became property of taxpayer
before April 1, 1981: Cost of
acquisition or FMV as on April 1,
1981, whichever is more
c) If it became property of taxpayer
after April 1, 1981 by gift, will, etc., in
modes specified in section 49(1): Cost
of acquisition to the previous owner
d) If it became property of taxpayer
after April 1, 1981: Actual cost of
acquisition
30
deductible from sale consideration while computing capital gains, or balancing charge is taxable
in the relevant year, as the case may be.
Cost to the previous owner shall be deemed to be the cost of acquisition in the hands of the
taxpayer in cases where a capital asset becomes the property of the assessee under any of the
d) On any distribution of assets on dissolution of a firm, BOI or AOP (where such dissolution
g) On any transfer by a holding company to its wholly owned Indian subsidiary company;
h) On any transfer by a wholly owned subsidiary company to its Indian holding company;
47(viab) of a foreign company which derives, directly or indirectly, its value substantially from
the share or shares of an Indian company held by amalgamating foreign company to the
31
l) Consequent to transfer of capital asset by the demerged company to the resulting Indian
foreign company which derives, directly or indirectly, its value substantially from the share or
shares of an Indian company held by a demerged foreign company to resulting foreign company.
p) On any transfer in a scheme of conversion of private company or unlisted company into LLP;
q) On any transfer in case of conversion of Firm or Sole proprietary concern into Company;
r) By HUF where one of its members has converted his self-acquired property into joint family
property.
Note:
Where previous owner has also acquired the property in the aforesaid manner the ‘previous
owner’ of the property shall be construed as the last previous owner who acquired the property
32
Cost of Improvement [Sec. 55(1)(b)]
Cost of improvement, in relation to the capital assets shall include all capital expenditure
incurred in making addition or alteration to the capital assets by the assessee or the previous
owner. However, cost of improvement does not include any expenditure incurred prior to 01-04-
1981.
Cost of improvement shall be computed in the following manner:
4 In relation to capital asset which becomes property of the Any expenditure of capital
assessee or previous owner on or after 01.04.1981 nature incurred by the assessee
or the previous owner
5 In relation to capital asset which becomes property of the Any expenditure of capital
assessee or previous owner on or after 01-04-1981 by nature incurred by the assessee
way of any mode specified under Section 49(1) or the previous owner
33
RATES OF TAX ON CAPITAL GAINS:
1. Short Term Capital Gains
a) Short-term capital gains shall be included in the gross total income of the taxpayer and will be
taxed at the normal rates;
b) Short-term capital gains arising from transfer of Equity Shares, Units of an Equity Oriented
Funds or a unit of a business trust which is chargeable to securities transaction tax shall be taxed
at 15% under Section 111A;
Note:-
Now benefit of reduced rate of tax (i.e., 15%) shall be available w.e.f. 1-4-2016 even in respect
of income arising from transfer of units of a business trust which were acquired by assessee in
lieu of shares of special purpose vehicle as referred to in section 47(xvii).
2. Long Term Capital Gains
a) Long-term capital gains are subject to tax at 20%;
b) Long-term capital gains arising from transfer of listed securities, units or a zero coupon bonds
shall be taxable at lower of following:
i.20% after taking benefit of indexation; or
ii.10% without taking benefit of indexation.
c) Long-term capital gains arising to a non-residents or foreign company from transfer of
unlisted securities shall be taxed at without giving benefit for indexation;
d) Long-term capital gains arising from transfer of listed securities, units of equity oriented or a
unit of business trust which is chargeable to STT shall be exempt from tax under Section 10(38).
Note:
1. Now exemption from capital gains under Section 10(38) shall be available w.e.f. 1-4-2016
even in respect of long-term capital gains arising from transfer of units of a business trust which
were acquired in lieu of shares of special purpose vehicle as referred to in section 47(xvii) and on
which securities transaction tax has been paid.
2. Now exemption from long term capital gains under section 10(38) shall be available w.e.f
April 1, 2017 even where STT is not paid, provided that –
– transaction is undertaken on a recognised stock exchange located in any International
Financial Service Centre, and
– consideration is paid or payable in foreign currency
34
Illustration (Short term capital gains)
Mr. Punit purchased a residential flat on 02-05-2014 for Rs. 1000000. He paid on the same day
the stamp duty and registration charges of Rs. 48750 on purchase of flat. He sold the said flat on
17-03-2016 for Rs. 1200000. The cost inflation index for F.Y. 2013-14 is 939 and for F.Y. 2015-
16 is 1081. Compute his capital gain chargeable to tax for assessment year 2016-17.
Solution:
NOTE:
Since the capital asset is held for less than 36 months, it is short term capital asset hence cost
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Illustration (long term capital gains)
Krishna purchased a vacant site for Rs. 300000 in April 1990. He constructed a residential
building during the year 2004-05 in the said site for Rs. 1500000. He carried out some further
extension of a construction in the year 2007-08 for Rs. 500000. Krishna sold the residential
building for Rs. 6500000 in January 2016. Compute his long term capital gain, for the
assessment year 2016-17 based on the above information. The cost inflation index are as follows:
Financial Year Cost Inflation Index
1990-91 182
2002-03 447
2004-05 480
2007-08 551
2015-16 1081
Solution:
NAME: KRISHNA STATUS: INDIVIDUAL- R & OR
PREVIOUS YEAR: 2015-16 ASSESSMENT YEAR: 2016-17
Particulars Rs. Rs.
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CONCLUSION:
The general misconception is that there is no advantage in earning short-term gain, since it
is taxed at the normal rates. However, what may be lost sight of is that the advantage flows from
the fact that a large portion of withdrawals is capital and, simultaneously, an equal amount from
the income gets converted into capital. In other words, you are consuming capital and investing
income.
Obviously, this principle would work only for the long-term investor. If you have a short-
term view and were to sell your entire holdings at one go, this investing strategy will not work.
Look at it any which way, the only way to make the dividend truly tax-free is to avoid it
A capital gain is the difference between what an individual purchases an item for and
what they sell the item for. For instance, if you buy a stock for 45 dollars a share, but sell that
same stock a few years later for 60 dollars a share, then your capital gain on that stock is 15
dollars.
Capital gains do not apply to all items that an individual purchases. For instance,
disposable goods or food do not accumulate capital gains, even if you are able to sell them for
more than you originally paid for them. Rather, capital gains are limited to capital assets, which
are items that an individual buys for personal or investment purposes. Although stocks are the
most common example, this can also include real estate, jewelry, art, or fine goods.
When an individual inherits a capital asset, or is given a capital asset as a gift, this is also
subject to capital gains, even though the transaction is not precisely one of buyer-seller. In such
instances, the capital gain is the difference between the values of the item when purchased by the
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BIBLIOGRAPHY:
- http://www.investopedia.com/terms/c/capitalgain.asp
- https://en.wikipedia.org/wiki/Capital_gain
- file:///C:/Documents%20and%20Settings/Savarmal/Desktop/Capital%20Gain%20
%E2%80%93%20All%20you%20want%20to%20know.html
- https://www.bankbazaar.com/tax/capital-gains-tax.html
- http://www.charteredclub.com/capital-gain-tax/
- http://taxguru.in/income-tax/taxation-capital-gains- india-frequently-asked-
questions-faqs.html
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