Income under the head Capital Gains

 Charging Section:

Profits or gains arising on transfer of a capital asset shall be chargeable under the head “Capital
Gains”.

Following are the essential conditions to be satisfied to charge any income under the head
“Capital Gains”:
a. There must be a capital asset.
b. The Assessee transfers such capital asset.
c. There must be profit or gain (including negative profit or gain) on such transfer.
The transferred asset should be capital asset at the time of transfer.
Capital gain shall be taxable in the previous year in which the asset is transferred.

 Capital asset means –

• any kind of property held by an Assessee, whether or not in connection with his business or
profession;
• 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
Note: Capital asset may be movable or immovable or tangible/corporeal (furniture, jewelry, etc.)
or intangible/ incorporeal (goodwill, tenancy right, copy right, etc.)
But does not include the following:
1.Stock in Trade:
Stock in trade, consumable stores or raw materials held for business or profession.
2. Personal effect
Personal effect means any movable property held for personal use of the Assessee or for any
dependent member of his family but excludes the followings:
a. jewelry b. archaeological collections c. drawings d. paintings e. sculptures; or f. any work of
art
Important Points:
_ An immovable property and aforesaid assets held for personal use are not personal effect and
hence are capital assets. E.g. a house property even though used for personal purpose cannot be
treated as personal effect and shall fall within the definition of capital assets.
_ Securities are not personal effect.
_ Personal effect includes wearing apparel, furniture, car, cycle, scooter used by the Assessee for
personal purpose.

3.Agricultural land in rural area

4. Gold Bonds
Following gold bonds issued by the Central Government are not capital asset:
● 6.5% Gold Bond, 1977 ● 7% Gold Bonds, 1980; and ● National Defence Gold Bond, 1980
5. Special Bearer Bond
Special Bearer Bond, 1991 issued by the Central Government are not capital asset.
6. Gold Deposit Bonds
Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued
under the Gold Monetization Scheme, 2015 notified by the Central Government are not capital
asset.

 Types of Capital Assets:

Decide the following transactions for PY.2019-2020.
1.Sam sold Jewelry on 12.12. 2019.He had acquired the same on 4th April 2014.Will this
Capital Asset be Short term or Long term?
2.Raghav had acquired shares of Infosys Ltd on 15.09. 2018.He sold the shares on
2.05.2019. Will this Capital Asset be Short term or Long term
3.Monica had acquired shares of RIL ltd on 12.04. 2018.She sold the same on 15.04.2019.
Will this Capital Asset be Short term or Long term?
4.Sai purchased shares of Unicorn Ltd, a private company, on 12.04. 2018.She sold the
same on 15.04.2019. Will this Capital Asset be Short term or Long term?
5.Prasad had acquired a house property on 25.11. 2017.He sold the same on 25.01.
2020.Will this be short term asset or long-term asset ? Long term Capital Asset
Computation of Capital Gain
Short-term Capital Gain means the gain arising on transfer of short-term capital asset
Long-term Capital Gain means the gain arising on transfer of long-term capital asset

 Computation of Short-Term Capital Gain (STCG):

Particulars Amount Amount
Sale Consideration XXXX
Less: Expenses on transfer (XXXX)
Net Sale consideration XXXX
Less: i) Cost of acquisition (XXXX)
ii)Cost of improvement (XXXX) (XXXX)
Short term Capital Gain XXXX
Less: Exemption u/s 54B,54D etc.
Taxable STCG XXXX
 Sale consideration (full value of consideration)
It refers to sale value of the asset (in form of money or money’s worth).
 Expenses on transfer
It means any expenditure incurred wholly and exclusively in connection with such transfer such as,
brokerage or commission incurred for securing buyer, cost of stamp and registration fee by the vendor,
traveling expenses, etc. It is reduced from sale consideration to get net sale consideration.

 Cost of Acquisition
Cost of acquisition includes expenditure incurred for acquiring the asset or completing the title of
the asset
 Cost of Improvement
Cost of improvement means an expenditure incurred to increase the productive quality of the
asset. It includes all expenditures of a capital nature incurred in making any additions or
alterations to the capital asset.
Illustration
1.Mr. Devesh had purchased a golden ring as on 17/8/2018 for Rs.20,000. On 1/05/2019, he has
sewn a diamond on it costing Rs. 25,000. On 1/08/2019, he sold such ring for Rs.80,000 and
incurred brokerage for arranging customer Rs.5,000. Compute capital gain.
2.Ram had acquired a house property on 1.12.2017 for Rs.45,00, 000.He added a room to it on
1.05.2018 at a construction cost of Rs.2,00, 000.On 1.05.2019 he sold the property at a cost of
Rs.60,00, 000.He paid 2% of sale consideration as brokerage to the broker.Compute Capital gain
Tax.

 Computation of Long-Term Capital Gain (LTCG):

Particulars Amount Amount
Sale Consideration XXXX
Less: Expenses on transfer (XXXX)
Net Sale consideration XXXX
Less: i) Indexed Cost of acquisition (XXXX)
ii) Indexed Cost of improvement (XXXX) (XXXX)
Long term Capital Gain XXXX
Less: Exemption u/s 54,54B,54D etc.
Taxable LTCG XXXX

 Indexed cost of acquisition

“Indexed cost of acquisition” means the ‘cost of acquisition’ (as discussed in case of short term
capital gain) adjusted according to the price level of the year of sale.
Indexed cost of acquisition = Cost of acquisition × Index of the year of transfer/Index of the year of acquisition

 Indexed cost of improvement

“Indexed cost of improvement” means the ‘cost of improvement’ (as discussed in case of
short term capital gain) adjusted according to the price level of year of sale

Indexed cost of improvement = Cost of improvement × Index of the year of

transfer/Index of the year of improvement
Illustration:

On 23rd December, 2019, Rajat sold 500 grams of gold, the sale
consideration of which was Rs.13,50,000. He had acquired this gold on
20th August, 2000 for Rs.3,00,000. Find out the amount of capital gain
chargeable to tax for the assessment year 2020-21. Fair market value of
500 grams of gold on 1st April, 2001 was Rs.3,60,000.
Illustration:

Mr. Anand has purchased a house property as on 17/08/2002 for Rs. 5,00,000. On
1/05/2004, he constructed a new floor on the same house at a cost of Rs. 2,50,000.
On 1/10/2019, he sold such house for Rs.18,00,000 and incurred brokerage @ 2%
for arranging customer. Compute capital gain.

Illustration:

Mr. Akash had acquired a house property on 1st May 1995 at a cost of Rs.15,00,
000.He had incurred expenses on cost of improvement amounting to Rs.2,00,000
during PY 1998-99. He further incurred expenses on cost of improvement on 5th
December 2005 amounting to Rs.5,00, 000.He sold the house property at
Rs.60,00,000 and the sale deed was finalized on 5th October 2019.Compute Capital
gains for the PY 2019-2020.Fair Market Value as on 1st April 2001 is
Rs.20,00,000.

Illustration: Challenge

Mr. A had acquired 1000 shares of Infosys Ltd at a Fair Market Value of
Rs.500 per share on 2nd April 1997.On 5th May 2000, Infosys issued
Bonus shares in the proportion of 1:1. On 5th May 2005 Mr. A acquired
500 shares at Rs.1000 per share. On 7th April 2019 he sold all the shares
at Rs.2000 per share. Compute Capital gains in hands of Mr. A for PY
2019-2020.Fair Market Value of the shares on 1st April 2001 is Rs.700.

Exemptions:
Section 54
Applicable to Individual & HUF only
1. Assessee has transferred a long-term residential house,
Conditions income of which is taxable under
the head “Income from house property”.
2. Assessee must acquire one new residential house within
prescribed time limit.
Alternate Option
When Available: Where the amount of the capital gain does
not exceed ` 2 crore.
 Option: The Assessee may, at his option, purchase or
construct two residential houses in
India
Restriction: Where during any assessment year, the Assessee
has exercised this option,
he shall not be subsequently entitled to exercise the option for
the same or any other
assessment year. That means, the option is available once in
lifetime of the Assessee
3. The new residential house should be in India.
For Purchase Within a period of ‘1 year
Time limit for acquisition of before, or 2 years after, the
new property date of transfer’
Example: If a property is
transferred on 17/8/2019,
then the new house
property may be purchased
at any time between
17/08/2018 to
17/8/2021.
For Construction Within a period of 3 years
after the date of transfer.
Construction may start at any
time but must be completed
within
stipulated time
Scheme of Applicable.
deposit
Minimum of the following:
Deduction • Investment in the new asset(s); or
• Capital gain
Revocation of If the newly acquired residential house is transferred within 3
benefit years from the date of acquisition
of new assets, then the benefit availed earlier shall be
revoked. Such revoked income shall
be reduced from cost of acquisition of new asset.
If the amount held in Capital Gains Deposit Account Scheme
(1988) is unutilized, then such
amount shall be taxable as long-term capital gain in the
previous year in which the period
of 3 years from the date of transfer expires.

Deduction under section 54EC

Applicable to All assessee
Conditions 1. Assessee must have transferred any long-term capital asset
being land or
building or both.
2. Assessee acquires ‘long term specified assets’.
Long-term specified asset means any bond redeemable after 5
years, issued by
a) the National Highways Authority of India (NHAI);
b) the Rural Electrification Corporation Ltd.;
c) Power Finance Corporation Limited;
d) Indian Railway Finance Corporation Limited;
e) any other bond being notified by the Central Government
Time limit for acquisition Within 6 months after the date of transfer
of new assets
Amount of Deduction Minimum of the following:
• Investment in the new asset; or
• Capital gain
Revocation of benefit
Treatment of revoked
Income
Scheme of deposit
Earlier benefit shall be revoked if such bond is transferred or
converted into money
within 5 years of its acquisition or a loan is taken on security
of the new asset within
the said period.
Such revoked income shall be treated as long-term capital
gain in the year of transfer of new asset
Not applicable

Mr. Akash had acquired a house property on 1st May 1995 at a cost of
acquisition Rs.15,00, 000.He had incurred expenses on cost of
improvement amounting to Rs.2,00,000 during PY 1998-99. He further
incurred expenses on cost of improvement on 5th December 2005
amounting to Rs.5,00, 000.He sold the house property at Rs.120,00,000
and the sale deed was finalized on 5th October 2019.Compute Capital
gains for the PY 2019-2020.Fair Market Value as on 1st April 2001 is
Rs.20,00,000.