Unit 4 – INCOME FROM CAPITAL GAINS

Introduction - "Capital Gain"

Any gain arising on the transfer [except such transfers as are given in sections 46 and 47] of a capital asset [sec.
2(14)] is chargeable to tax under section 45, if it is not eligible for exemption under sections 54, 54B, 54D,
54EC, 54EE, 54F, 54G, 54GA, 54GB and 54H. Incidence of tax on capital gains, however, depends upon
whether capital gain is a short-term capital gain or a long-term capital gain [sec. 2(42A)].

In other words, capital gains tax liability arises only when the following conditions are satisfied:

Condition-1 There should be a capital asset.

Condition-2 The capital asset is transferred by the assessee
Condition-3 Such transfer takes place during the previous year. AY 2020-21 , PY 2019-20
Condition-4 Any profit or gains arises as a result of transfer.
Condition-5 Such profit or gains is not exempt from tax under sections 54, 54B, 54D, 54EC, 54EE,
54F, 54G, 54GA and 54GB.
If the aforesaid conditions are satisfied, then capital gain is taxable in the assessment year relevant to the
previous year in which the capital asset is transferred.

1. What Is Included In and Excluded From Capital Asset

“Capital asset” is defined by section 2(14).
“Capital asset” means property of any kind, whether fixed or circulating, movable or immovable, tangible or
intangible. Besides, it includes the following –
1. Any rights in or in relation to an Indian company, including rights of management or control or any
other rights whatsoever.
2. Property of any kind held by an assessee (whether or not connected with his business or profession).
3. Any securities held by a Foreign Institutional Investor which has invested in such securities in
accordance with the regulations made under the SEBI Act.

The following assets are excluded from the definition of “capital assets” –

1. Stock-in-trade (other than securities referred to in point 3 above).

2. Personal effects (movable assets).

3. Agricultural land in a rural area in India.

4. 6 ½ % gold bonds or 7% gold bonds 1980, national defence gold bonds 1980, issued by the central
government.

5. Special bearer bonds, 1991

6. Gold deposit bonds issued under gold deposit scheme, 1999.

Types of Capital assets

Capital assets Nature of capital assets
1. Financial Assets 1. If CA is held for < or = 1 year = it is a
Shares, listed debentures/ government STCA
securities, units of UTI/ mutual funds, 2. If CA is held for > 1 year = it is a LTCA
and zero coupon bonds
2.Depreciable Assets Always treated as STCA
3. Other Assets 1. If CA is held for < or = 3 years = it is a
 STCA
2. IF CA is held for > 3 years = it is a LTCA
NOTE: 1. STCA = Short Term Capital Assets

2.LTCA = Long Term Capital Assets

3. CA = Capital Assets

Types of Capital Gains

The capital gain will be taxable based on the following:

i. Short term capital gain(STCG)

ii. Long term capital gain (LTCG)
1. Short term capital gain – any profit or gain arising from the sale or transfer of short term
capital asset is known as Short term Capital gain.
2. Long term capital gain – any profit or gain arising from sale or transfer of long term capital
asset is known as long term capital gain.

Format for computing Taxable Income from Capital Gains

Nature of capital asset Short term Capital Long term capital

asset asset
Gross sale consideration xxx xxx
-: Realization expenses xx xx
Net sale Consideration (1-2) xxx xxx
-: Actual cost of acquisition of capital assets xx -
-: Indexed cost of acquisition of capital assets - xx
-: Actual cost of improvement of capital assets xx -
-: Indexed cost of improvement of capital assets - xx
Gross capital gain/loss xxx xxx
-: Exemption from capital gain u/s - 54B, u/s – 54D u/s – 54, u/s –
u/s –54G, u/s – 54B, u/s – 54D,
54GA u/s – 54 EC, u/s –
54F, u/s – 54G, u/s
– 54GA

Net capital gain xxx xxx

What Is Transfer Of Capital Asset 94.

Transfer, in relation to a capital asset, includes sale, exchange or relinquishment of the asset or the
extinguishment of any rights therein or the compulsory acquisition thereof under any law [sec. 2(47)].

1. Realisation expenses
Brokerage or commission, stamp duty, registration fee and any travelling expenses incurred
in connection with transfer are deductible from gross sale consideration.
2. Actual cost of Acquisition
It refers to the value at which the capital asset is acquired by the assessee.
3. Actual cost of improvement
 Cost of improvement means expenditure of capital nature incurred in making any addition
or alteration to the capital asset.
4. Indexed cost of acquisition and Indexed cost of improvement
ICOA and ICOI are computed as under:

ICOA = cost of acquisition * CII for the year in which the asset is transferred
CII for the year in which the asset was first held or 2001-02,
Whichever is late

ICOI = cost of improvement * CII for the year in which the asset is transferred
CII for the year in which improvement took place

Cost Inflation Index is a measure of inflation, used to calculate long-term capital gains from sale of
capital assets. A capital gain is the profit that you make from selling an asset, which can be real estate,
jewellery, stock, etc.

CII :

Sl. No. Financial Year Cost Inflation Index

(1) (2) (3)
1 2001-02 100
2 2002-03 105
3 2003-04 109
4 2004-05 113
5 2005-06 117
6 2006-07 122
7 2007-08 129
8 2008-09 137
9 2009-10 148
10 2010-11 167
11 2011-12 184
12 2012-13 200
13 2013-14 220
14 2014-15 240
15 2015-16 254
16 2016-17 264
17 2017-18 272
18 2018-19 280
19 2019-20 289
20 2020-21 301

1. A building has been acquired by Mr. Vivek on 01/06/2000 for Rs. 1,00,000. The
assessee converts the building into stock in trade of his property dealing business on
01/01/2002 when the fair market value of the building is Rs. 10,00,000. The stock in
trade is sold by the assessee 01/01/2019 of Rs. 15,00,000. (FMV as on 01/04/2001
was Rs. 1,80,000). Compute his capital gain and business profit taxable for the AY
2020-21.

Particulars Amount
Gross sale consideration 15,00,000
-: Indexed cost of Acquisition (1,00,000 or 1,80,000[w.e.g]) 5,20,200
(180000 * 289/100)
 -: indexed cost of improvement -
Taxable income from capital gains 9,79,800

2. Mr. Srikanth purchase jewellery on 01/01/1982 for Rs. 2,00,000 (FMV as on

01/04/2001 was Rs. 3,00,000). Mr. Srikanth starts a jewellery business and bring
jewellery as stock in trade in the jewellery business on 01/01/2004 when the fair
market value of the jewellery is Rs. 15,00,000. The jewellery is sold on 31/12/2020 of
Rs. 18,00,000. Compute his capital gain and Business profit taxable for the AY 2020-
21.

Period held by the assessee = 1/1/1982 – 31/12/2020 = more than 3 years so it is

LTCA

Particulars Amount
Gross sale consideration 18,00,000
-: Indexed cost of Acquisition 8,67,000
(300000 * 289 / 100)
-:Indexed cost of improvement -
Taxable income from Capital gain 9,33,000

3. Mr. Anand transfer unlisted shares of a company on 01/01/2020 as his capital

contribution to the firm. The fair market value of the unlisted share Rs. 35,00,000 but
the firm record the value of unlisted shares as Rs. 28,00,000. The unlisted shares were
acquired by Mr. Anand 01/01/2002 of Rs. 10,00,000. Compute his tax liability.

Sol: Financial asset

Period held by the assessee (1/1/2002 – 1/1/2020 ) more than 1 year so it is LTCA

Particulars Amount
Gross sale consideration 28,00,000
-: Indexed cost of Acquisition 28,90,000
(10,00,000 * 289 / 100)
-:Indexed cost of improvement -
Taxable loss from Capital gain (90,000)

4. From the particulars given by Sriramanath (resident) compute the taxable capital gain
for the Assessment year 2019-20.

Name of Asset Date of Cost Date of Sale Expenses

purchase sale price on sale
1. Government 1/10/2018 10,000 30/6/2019 15,000 200
securities
2. Furniture 15/2/2002 5,000 20/2/2019 3,000 -
(WDV on
1/4/2019 Rs.
 4,000)
1. Government securities
Financial asset
Period held by the assessee (1/10/2018 -30/6/2019) less than 1 year so
it is STCA

Particulars Amount
Gross sale consideration 15,000
-: Realisation expenses 200
Net sale consideration 14,800
-: Actual cost of Acquisition 10,000
-: Actual cost of improvement -
Taxable income from capital asset 4,800

2. Furniture – STCA

Particulars Amount
Gross sale consideration 3,000
-: Realisation expenses -
Net sale consideration 3,000
-: Actual cost of Acquisition (WDV) 4,000
-: Actual cost of improvement
Taxable loss from capital asset (1,000)

Exemption U/s 54
Conditions for exemptions:
1. Only individual or HUF can claim the exemption
2. The capital asset which is sold should be a residential house(self occupied or let
out)
3. Such residential house property should be a long term capital asset
4. New residential house should be purchased within one year prior or two year after
the date of transfer or construct a residential house within three year after the date
of transfer or deposit in bank under the capital gain scheme on or before the due
date.

Amount of exemption

Gross capital gain or cost of new residential house + amount deposited in capital gains
scheme (W.E.L)

Forfeiture of exemption

In case of transfer of new asset within 3 years

- If the new residential house is sold within three years from the date of its
purchase, the earlier exempted amount of capital gain becomes chargeable to tax
as short term capital gain in the previous year in which the new house is sold.

In case of non utilization of bank deposit within the specified time limit.

- If the bank deposit amount is not withdrawn for the purchase or construction of
new residential house, within three years from the date of sale of original asset,
the amount not withdrawn shall be taxable as long term capital in the previous
year in which the specified period expires.

5. Mr. Prasanna sold his residential house on 1/6/2019 for Rs. 35,06,000 which he
had purchased in 2001-02 for Rs. 2,00,000. He spent Rs.6,000 for sale of the
house. He also spent Rs. 1,50,000 on the construction of new house and deposited
Rs. 1,00,000 under capital gains account scheme on 28/3/2020. Compute taxable
capital gains for the assessment year 2020-21.

Particulars Amount
Gross sale consideration 35,06,000
-: realisation expenses 6,000
Net sale consideration 35,00,000
-: indexed cost of acquisition 5,78,000
(2,00,000 * 289 / 100)
-: indexed cost of improvement -
Gross long term capital gain 29,22,000
-: exemption U/s 54
construction of new house 1,50,000
Deposited into capital gains account scheme 1,00,000
Taxable long term capital gain 26,72,000

6. Mr. Barathadari (resident) purchased a residential house in Delhi on 1/4/2000 for

Rs. 1,50,000. On 1st may 2000, he gifted the house to his son Mr. Sukumar. Mr.
Barathadari constructed the first floor of the house in December 2000 at a cost of
Rs. 50,000 and Mr. Sukumar made improvement in the house and added two bath
rooms at a cost of Rs. 40,000 in June 2005.
Mr. Barathadari died in Dec 2009 and Mr. Sukumar sold the house on 1 st Aug
2019 for Rs. 30,00,000 (brokerage paid 25,000). Find out capital gain or loss if the
fair market value of the house on 1/4/2001 was Rs. 2,50,000.

Particulars Amount
Gross sale consideration 30,00,000
-: realisation expenses 25,000
Net sale consideration 29,75,000
-: indexed cost of acquisition 7,22,500
(2,50,000 * 289/100)
-: indexed cost of improvement (40,000 * 289 /117) 98,803
 Taxable long term capital gain 21,53,697

Exemption for Capital gains:

Sec 54 – Residential house property

Sec 54B – sale of Agriculture land and assessee should purchase another agricultural land

Sec 54 D – Land/Building compulsorily acquired by the Government

Sec 54EC – Capital asset sold should be any long term capital asset. From the sale amount
the assessee should purchase any bonds with in 3 years.

Sec 54F – Capital asset sold could be any long term capital asset other than residential house
property but the assessee should have purchase new residential house property only

Sec 54G – land or building, plant and machinery is sold on account of shifting industrial
undertaking from urban area to rural area.

Sec 54GB – Capital assets sold should be a long term residential HP or land (purchase of
equity shares)

7. Agricultural land purchased by Mr.X (resident) in 1983-1984 for Rs. 90,000. Sold for Rs.
15,00,000 on 1/6/2019. The assessee purchased another piece of agricultural land on 1/9/2019 for
Rs. 98,000 and deposited Rs. 60,000 on 1/7/2019 in capital gains account scheme 1988. Find out
the capital gain chargeable to tax for the AY 2020-21.
Sol: it is a long term capital asset

Particulars Amount
Gross sale consideration 15,00,000
-: Realisation expenses -
Net sale consideration 15,00,000
-: Indexed cost of acquisition 2,60,100
(90,000 * 289/100)
-: indexed cost of improvement -
Gross long term capital gain 12,39,900
-:Exemption U/S 54B
Purchase of new agricultural land 98,000
Invested in capital gains account scheme 60,000
Taxable Long term capital gain 10,81,900

8. Mr. Manik purchased a plot in 2006-07 for Rs. 2,00,000. It was sold on 15/1/19 for Rs. 20,00,000
and he paid Rs. 3,00,000 as brokerage charges. He invested Rs. 1,00,000 in NHAI bonds and Rs.
2,10,000 in bonds issued by Rural Development corporation ltd.
Compute his taxable capital gain.

Particulars Amount
 Gross sale consideration 20,00,000
-: Realisation expenses 3,00,000
Net sale consideration 17,00,000
-: Indexed cost of acquisition 4,59,016
(2,00,000 * 280/122)
-: indexed cost of improvement -
Gross long term capital gain 12,40,984
-:Exemption U/S 54EC
Purchase of NHAI bonds 1,00,000
Purchase of Rural Development corporation ltd bonds 2,10,000
Taxable Long term capital gain 9,30,984

9. Mr. Mohan (resident) had two houses. The first house was occupied by himself for his residence.
He got this house from his uncle as a gift on 15 July 2001. His uncle purchased this house in 1989
for Rs. 56,000. Its fair market value as on 1 st April 2001 was Rs. 70,000, Mohan spent Rs.5,000 on
its improvement on 10/9/2004 and sold it on 30 Nov 2019 for Rs. 10,00,000. He purchased another
house for his residence on 25th feb 2020 for Rs. 2,00,000.
He had purchased the second house for Rs. 60,000 in 2007-08 and had let out for residential
purpose. He sold this house on 15 th June 2019 for Rs. 5,20,000. He had purchased some jewellery
in 2000-01 for Rs. 75,000. On 22 nd feb 2020 he sold this jewellery for Rs. 5,50,000 and purchased
on 15th March 2020 new jewellery for Rs. 75,000. Compute the taxable capital gains of Mr. Mohan
for the AY 2020-21.
Sol:
House 1

Gross sale consideration 10,00,000

-: Realisation expenses -
Net sale consideration 10,00,000
-: Indexed cost of Acquisition 2,02,300
(70,000 *289/100)
-: indexed cost of improvement 5,650
(5,000 * 113/100)
Gross long term capital gain 7,92,050
-: Exemption U/S 54
Purchase of another residence 2,00,000
Taxable long term capital gain 5,92,050

House 2

Gross sale consideration 5,20,000

-: Realisation expenses -
Net sale consideration 5,20,000
-: Indexed cost of Acquisition 1,34,419
 (60,000 * 289/129)
-: indexed cost of improvement -
Taxable long term capital gain 3,85,581
Jewellery

Gross sale consideration 5,50,000

-: Realisation expenses -
Net sale consideration 5,50,000
-: Indexed cost of Acquisition(75,000 * 289/100) 2,16,750
-: indexed cost of improvement -
Taxable long term capital gain 3,33,250

10. From the following particulars, compute taxable capital gains of Mr. Shankar (resident) for AY
2020-21.

Asset Date of Cost (Rs. FMV on Date of sale Sale price Selling
purchase ) 1/4/2001 expenses
House 1/12/87 75,000 - 1/10/2019 15,00,000 20,000
property
Personal 1/12/78 12,000 20,000 1/11/2019 3,00,000 4,500
jewellery
Listed 1/12/06 50,000 - 1/02/2020 2,00,000 1,000
debentures
Personal car 1/12/02 30,000 - 1/01/2020 12,000 -
Urban 1/12/75 48,000 45,000 1/3/2020 8,50,000 30,000
agriculture
land
He purchased a new agricultural land on 31/3/2020 for Rs.1,00,000.
Sol:
Note: Personal jewellery and personal are not treated as capital assets.

1. House property

Particulars Amount
Gross sale consideration 15,00,000
-: Realisation expenses 20,000
Net sale considertion 14,80,000
-: indexed cost of acquisition( 75,000 * 289/100) 2,16,750
-: indexed cost of improvement -
Taxable long term capital gain 12,63,250

2. Listed debentures

Particulars Amount
Gross sale consideration 2,00,000
-: Realisation expenses 1,000
Net sale considertion 1,99,000
-: indexed cost of acquisition( 50,000*289/122) 1,18,443
-: indexed cost of improvement -
Taxable long term capital gain 80,557

3. Urban agriculture land

Particulars Amount
Gross sale consideration 8,50,000
-: Realisation expenses 30,000
 Net sale considertion 8,20,000
-: indexed cost of acquisition (48,000 *289/100) 1,38,720
-: indexed cost of improvement -
Gross long term capital gain 6,81,280
-: exemption u/s 54 B
Purchase of agricultural land 1,00,000
Taxable long term capital gain 5,81,280

11. During the year ended 31/03/2020 Mr. John (resident) sold the following assets:

Particulars Amount
1. Agricultural land in Mysore (urban city) purchased in 2000-01 for 5,60,000
Rs. 20,000 (FMV on 1/4/01 being Rs. 30,000
2. Machinery purchased on 1/5/2019 Rs. 25,000 30,000
3. Furniture purchased on 1/5/2019 Rs. 2,500 3,800
4. Machinery purchased on 2003-04 for Rs. 50,000 60,000
(WDV on 1/4/2019 Rs. 35,000)
5. Shop purchased in 2006-07 for Rs. 50,000 4,50,000
6. One Residential house purchased in 2008-09 costing Rs. 60,000 5,80,000

During the year he bought another house for his residence for Rs. 2,00,000. Find the total amount
of capital gain.