INCOME UNDER THE HEAD CAPITAL GAINS AND ITS COMPUTATION Basis of Charge Any profit or gains arising

g from transfer of a capital asset is chargeable to tax under the head Capital Gains. Essential elements of capital gains are: 1. Capital Asset 2. Transfer of Capital Asset 3. Computation of Capital Gains 1. Capital Asset Capital asset means property of any kind held by an assessee whether or not connected to his business, but does not include: i) ii) iii) iv) Stock in trade, raw materials etc held for the purpose of business Personal effects of movable nature like furniture, vehicles held for personal use etc. i. Exception - Jewellary is a Capital Asset Agricultural land in India which is situated outside specified area Special Bearer Bonds or Gold Bonds

Note: Specified area means rural area 2. Transfer of Capital Asset Transfer includes a) Sale, exchange, or relinquishment of a capital asset b) Extinguishment c) Compulsory acquisition of capital asset under any law d) Conversion of capital asset into stock (AY 1985-86 and onwards) e) Part Performance Contract under Section 53A of Transfer of Property Act. f) Transactions having effect of transfer by acquiring shares or becoming a member of a company g) Redemption or maturity of Zero Coupon Bonds Note: Exchange includes conversion of preference shares into equity shares Transactions not regarded as Transfer 1. Transfer of capital asset by way of gift, will, inheritance 2. Transfer of capital asset in total or partial partition of HUF 3. Distribution of assets by company to shareholders on liquidation 4. Transfer of capital asset by holding company to subsidiary company or viceversa, provided it is fully owned subsidiary and transferee company is an Indian company 5. Transfer in a scheme of amalgamation provided amalgamated company is an Indian company 6. Transfer of capital asset being work of art, scientific collection, archaeological collection, books, painting, etc to Government or notified museum, art galleries, etc

7. Conversion of bonds and debentures or deposits into shares of company 8. Transfer of land under a scheme provided for sick industries 9. Conversion of Partnership Firm into a Company or Proprietary Concern into Company

3. Computation of Capital Gains 1) The computation of capital gains depends upon whether the capital asset which is transferred is Short Term Capital Asset or Long Term Capital Asset 2) Transfer of Short Term Capital Asset results in Short Term Capital Gain/Loss and Transfer of Long Term Capital Asset results in Long Term Capital Gain/Loss 3) Meaning of term Short Term Capital Asset If a Capital Asset is held for not more than 36 months prior to the date of transfer. 4) However in following cases, it is considered as Short Term Capital Asset if held for not more than 12 months prior to the date of transfer a) Equity or Preference Shares (Quoted or not) b) Units of UTI or MF (Quoted or not) c) Other listed securities like debentures, government securities etc d) Any Zero Coupon Bonds (Quoted or not) 5) Meaning of term Long Term Capital Asset Capital Assets held for more than 36 months or 12 months, as the case may be. 6) Statement showing Computation of Short Term Capital Gain/Loss Particulars Sale consideration less: Expenses on transfer Net Consideration less: Cost of Acquisition and Cost of Improvement Gross Short Term Capital Gain/Loss less: Exemption under Section 54B, 54D and 54G Taxable Short Term Capital Gain Amount xxx xxx xxx xxx xxx xxx xxx

7) Statement showing Computation of Long Term Capital Gain/Loss Particulars Sale consideration less: Expenses on transfer Net consideration less: Indexed cost of acquisition and Indexed cost of improvement Gross Long Term Capital Gain less: Exemption under Section 54, 54B, 54D, 54EC, 54ED, 54F and 54G Taxable Long Term Capital Gain Amount xxx xxx xxx xxx xxx xxx xxx

8) Expenses on transfer includes commission, brokerage, registration fees, stamp duty etc in connection with transfer etc Note: 1. Indexed Cost of Acquisition For Long Term Capital Asset calculations, purchasing power of money is considered by using the Cost Inflation Index (CII). Therefore, Indexed Cost of Acquisition is calculated as under: Indexed Cost of Acquisition = Cost of Acquisition x CII for year of transfer CII for first year I which asset was held by assessee 2. If the asset was held by assessee prior to Apr 1, 1981 then, Indexed Cost of Acquisition is calculated as under: Indexed Cost of Acquisition = Cost of Acquisition or Fair Market Value on 1-4-1981, higher of two x CII for year of transfer CII for base year 1981-82(100) 3. Indexed Cost of Improvement = Cost of Improvement x CII for year of transfer CII for year of improvement Cost of improvement incurred on and after 1-4-1981 is considered. Hence, any cost of improvement before 1-4-1981 is not considered

4. In case of gift, will, inheritance partition, amalgamation Cost of Acquisition = Cost to Previous Owner Period of Holding = Period of holding shall include period of holding of previous owner Indexation Benefit = Indexation Benefit is available only for period held by assessee Cost of Improvement = For Indexation, the Cost of Improvement of Previous Owner shall be considered from that year itself. 5. Capital expenditure incurred on improvement of the Capital Asset and which was not allowed as deduction under any other head, can be claimed as Cost of Improvement. 6. If any advance money is received and forfeited by assessee due to transfer not taking place and subsequently, the asset is sold, then such forfeited amount shall be reduced from the Cost of Acquisition or Fair Market Value, as the case may be. Amount forfeited by previous owner shall not be considered If the amount forfeited exceeds the Cost of Acquisition, then the Cost of Acquisition shall be Nil. 7. Transfer of Goodwill Cost of Acquisition = Cost of Purchase, in case of Purchased Goodwill and Cost of Acquisition is Nil, in case of Self generated Goodwill. Cost of Improvement = Nil, in all cases 8. Notional Transfer of Goodwill In case of admission of partner, goodwill brought in shall be treated as notional transfer and hence, shall not be chargeable to Capital Gains. 9. Tenancy rights, Route Permit etc If any tenancy right, route permit etc is acquired without any cost and is transferred then, Cost of Acquisition = Nil 10. Sale of Bonus Shares Cost of Acquisition = Nil, if acquired after 1-4-1981 Capital gains shall be computed separately. Cost of Acquisition = Fair Market Value is considered and indexed, if bonus shares are acquired before 1-4-1981

11. Transfer of Right to renounce shares Cost of Acquisition = Nil 12. If Right Shares are purchased from renouncing person and subsequently sold, then, Cost of Acquisition = Cost paid to renouncing person + Amount paid to Company for allotment 13. Indexation benefit is not available for transfer of a Long Term Capital Asset being, Debentures or Bonds (other than Capital Indexed Bonds issued by Government and Zero Coupon Bonds) 14. Conversion of Debentures into Shares - Not a Transfer - Subsequently, if Shares are sold, then Period of Holding = From the Conversion Date upto Date of Transfer Indexation Benefit = From the Conversion Date and not for period held as Debentures 15. Conversion of Capital Asset into Stock - Is a Transfer - Computation is postponed to year of sale - Sale Consideration = Fair Market Value on date of Conversion - Indexation Benefit = From Date of Acquisition till Date of Conversion 16. If Conversion of Capital Asset into Stock has taken place before AY 1985-86, then there is no Capital Gain since it does not amount to Transfer. 17. Compulsory Acquisition of Capital Asset under any law - Computation is postponed to year of first receipt of compensation, in full or in part - Indexation Benefit = Only upto the year of Transfer ie Compulsory Acquisition 18. In case of Enhanced Compensation - Taxable in the year of receipt of Compensation - Expenses on Transfer = Legal expenses incurred can be claimed as Expenses on Transfer - Cost of Acquisition = Nil - Taxable in year of receipt of Compensation in hands of recipient - If Compensation is reduced by the Court, then revise and recompute Capital Gains 19. Redemption of Preference Shares - Results in a Transfer

20. Buy Back Of Shares - Results in a Transfer 21. In case of DEMAT Shares with Depository, FIFO Method is followed as entered in DEMAT Account, to determine Cost of Acquisition. 22. Transfer of Capital Asset by a Partner to Partnership Firm or by a Member to Association of Persons Sale Consideration = Value of Asset as recorded in the Books of Partnership Firm or Association of Persons 23. Transfer of Capital Asset by way of Distribution on dissolution or otherwise, by Partnership Firm or Association of Persons Sale Consideration = Fair Market Value of date of Transfer 24. Transfer of Depreciable Assets under Section 50 As long as Depreciation can be claimed for a block, Capital Gains will not arise. In case of computing Capital Gains, Net result of computation is always considered as Short Term Capital Gain. No Indexation Benefit can be given for a Depreciable Asset because Asset would have got the Benefit of Depreciation

Computation of Short Term Capital Gain of Depreciable Asset Particulars Amount Amount Sale Consideration xxx less: a. Expenses on Transfer xxx b. Opening WDV of Block xxx c. Additions to Block during yr xxx xxx Short Term Capital Gain xxx

Note: Short Term Capital Gains is computed for each Block and not for each Asset sold. 25. Transfer of Depreciable Assets which are depreciated under Straight Line Method Under Straight Line Method, Depreciation is available for each Individual Asset Excess of Sale Price over Original Cost is Short Term Capital Gain Depreciation charged now recovered (included in Sale Price) is treated as Deemed Profit Where the Sale Price does not exceed Original Cost, there is no Capital Gains Where Sale Price does not exceed Original Cost, but exceeds Book Value, then, excess of Sale Price over Book Value is treated as Deemed Profits

Where Sale Price is lower than Book Value, there is no Capital Gains and no Deemed Profit

26. Slump Sale a. Sale of Undertaking for a lumpsum consideration without assigning individual values is known as Slump Sale b. Capital Asset = Undertaking c. If the Undertaking is held for more than 36 months, then it becomes Long Term Capital Asset, leading to Long Term Capital Gain or vice-versa d. No Indexation Benefit is given e. Cost = Networth on date of Transfer as per Book Values only f. Revaluation of Assets shall not be considered. g. Assigning values for sole purpose of Stamp Duty and Registration shall not be considered. 27. Deemed Consideration a. If Actual Sale Consideration is less than the Value adopted for purpose of Stamp Duty, then such higher value shall be Deemed Consideration b. It is applicable only in case of Transfer of Land, Building or Both 28. Computation of Capital Gains in case of Non-Residents in case of Transfer of Shares/Debentures of Indian Companies Particulars Amount Conversion Rate Amount (Foreign Currency)

Sale Consideration less: Expenses of Transfer Net Consideration less: Cost of Acquisition Capital Gain Notes: Particulars a. Sale Consideration b. Expenses on Transfer c. Cost of Acquisition d. Capital Gains (Conversion)

xxx

Amount (Rate of Conversion) Average of Telegraphic Transfer Buying and Selling rate on date of Transfer Average of Telegraphic Transfer Buying and Selling rate on date of Transfer Average of Telegraphic Transfer Buying and Selling rate on date of Acquisition Buying Rate of Telegraphic Transfer on date of Transfer

29. In case of damage or destruction of Capital Asset, Sale Consideration = Value of New Asset or Compensation received, as the case may be. 30. In case of Employee Stock Options or Sweat Equity Shares a. If it was already taxed as Perquisite for difference between Fair Market Value and Cost of Acquisition, then, on such Shares, Capital Gain is computed, wherein Fair Market Value on date of allotment is Deemed Cost of Acquisition b. If not taxed as Perquisite, then, in computing Capital Gains, Cost of acquisition shall be the amount paid to employer. 31. Zero Coupon Bonds a. Zero Coupon Bonds means - Issued by any Infrastructure Capital Company or Infrastructure Capital Fund or Public Sector Company on or after 1-6-2005 - In respect of which, no payment and benefit is received/receivable before maturity or redemption - Which Central Government, may, by notification, specify in this behalf. b. On maturity/redemption, it is treated as Transfer ad therefore taxable under the head Capital Gains c. If held for not more than 12 months, then it is Short Term Capital Asset and attracts Short Term Capital Gain and if is held for more than 12 months, then it is Long Term Capital Asset and attracts Long Term Capital Gain d. In case of Company issuing Zero Coupon Bond, discount is deductible under Section 36(1) on a pro-rata basis based on life of bond. 32. Tax on Long Term Capital Gain a. Long Term Capital Gain shall be taxed separately at a flat rate of 20%, in general. b. However, in case of Listed Shares and Securities, as well as Units, it shall be exempt if covered under Section 10(38). According to Section 10(38), Long Term Capital Gain is exempt on Transfer of Listed Equity Shares/Securities or Units of Equity Oriented Fund, provided it is chargeable to Securities Transaction Tax, in a Recognized Stock Exchange and the Transfer took place on or after 1-10-2004. c. If Section 10(38) is not satisfied, then, it shall be taxed at 20% after Indexation Benefit or 10% without Indexation Benefit, whichever is less.

e. Basic Exemption Limit can be claimed if Taxable Income minus Long Term Capital Gain is less than the Basic Exemption Limit. ie. Difference of

unexhausted Basic Exemption Limit can be claimed in computing Tax on Long Term Capital Gain. f. In case of Loss from any Source or Head of Income, which is eligible for Set Off, then it shall be Set Off with Long Term Capital Gain, reduce unexhausted Basic Exemption Limit and then Calculate Tax. g. Deductions under Chapter VI A ie Section 80C to 80U is not available for Long Term Capital Gain. 33. Tax on Short Term Capital Gain a. Short Term Capital Gain on Transfer of Listed Equity Shares/Securities or Units of Equity Oriented Fund, provided it is chargeable to Securities Transaction Tax in a Recognized Stock Exchange on or after 1-10-2004, it shall be Taxed at 10% b. Other Provisions regarding Basic Exemption Limit, Deduction and Set off are same as applicable in case of Long Term Capital Gain, given above. 34. Exemptions (continued in Next Page)

34. Exemptions Particulars Section 54 Who can claim Individual/HUF Nature of Capital Long Term Asset Specific Asset for Residential House Exemption Property

Section 54B Individual Short/Long Term Agricultural Land

Asset to be acquired for Exemption

Residential House Property

Timelimit for Acquiring Asset

From which date time limit shall be determined

How much is exempt

Purchase 1 year back ward or 2 yrs fwd Construction 3yrs forward Transfer date or First receipt of Compensation, in case of Compulsory Acquisition Investment in new asset or capital gain, lower of two If new asset is transferred within 3 yrs from acquisition

Is it possible to revoke exemption

Section 54F Section 54G Individual/HUF Any person Long Term Short/Long Term Any LTCA Land (not a Building or residential hp) P&M in order provided to shift taxpayer does industry from not own more Urban to than one Rural residential hp Agricultural Land/Building Residential Land Land for Industrial House Property Building or Purposes P&M in order to shift industry to Rural 2 years forward 3 years Purchase 1 1 year forward year back ward backward or 3 or 2 yrs fwd yrs forward Construction 3yrs forward Transfer date or From the Transfer date or Transfer date First receipt of date of First receipt of Compensation,in Compensation Compensation, case of in case of Compulsory Compulsory Acquisition Acquisition Investment in Investment in Investment in Investment in new asset or new asset or new asset new asset or capital gain, capital gain, Net sale capital gain, lower of two lower of two consideration lower of two x capital gain If new asset is If new asset is If new asset is If new asset is transferred transferred transferred transferred within 3 yrs within 3 yrs within 3 yrs within 3 yrs from acquisition from from from acquisition acquisition, If acquisition new residential hp is purchased within 2 yrs or new residential hp is constructed

Section 54D Any person Short/Long Term Land/Building forming part of Industrial Undertaking and Compulsory Acquired

Status of notional income in case of revoked exemption Whether Scheme of Deposit is available Scheme of Deposit

Short term Capital Gain Yes Refer Note

Short term Capital Gain Yes Refer Note

Short term Capital Gain Yes Refer Note

within 3 yrs Long term Capital Gain Yes Refer Note

Short term Capital Gain Yes Refer Note

Exemptions Continued Particulars Section 54EC Who can claim Any person Nature of Capital Long Term Asset Specific Asset for Any Long term asset Exemption transferred after 31-3-00 Asset to be acquired for Exemption Timelimit for Acquiring Asset From which date time limit shall be determined How much is exempt Is it possible to revoke exemption NABARD or NHAI or NHB or SIDBI bonds 6 mths forward Transfer date or first receipt of compensation in case of compulsory acquisition Investment in new asset or capital gain, lower of two If new asset is trnsfd or converted into money or a loan is taken on security within 3 yrs from date of acquisition Long term capital gain No See Note

Section 54ED Any person Long Term Any long term asset being units, listed shares/securities Specified equity shares 6 mths forward Transfer date

Section 54GA Any person Short term/Long term Land,building,plant,machine in order to shift industry from urban to SEZ area Land,building,plant,machine in order to shift industry to any SEZ 1 yr backward or 3 yrs forward Transfer date

Investment in new asset or capital gain, lower of two If new asset is transferred within 1 yr of its acquisition Long term capital gain No See Note

Investment in new asset or capital gain, lower of two If new asset is transferred within 3 yrs of its acquisition

Status of notional income in case of revoked exemption Whether Scheme of Deposit is available Scheme of Deposit

Short term capital gain Yes See Note

Note Scheme of deposit a. If new asset is not acquired upto the due date of submission of return of income, then the taxpayer will have to deposit the money in Capital Gain Deposit Account Scheme with a Nationalized Bank. b. Proof of Deposit should be submitted along with return of income. c. On the basis of actual investment and amt deposited in Deposit Account, exemption will be given to taxpayer. d. Tax payer can acquire new asset by drawing amount from Deposit Account, but, within specified limit. e. If the Deposit Account is not fully utilized for acquiring the new asset, the unutilized amount will become chargeable to tax in PY in which time limit expires f. Unutilized amount will be taxable as Short Term/Long Term depending upon the Original Capital Gain. g. After the expiry of time limit, Taxpayer can draw the Unutilized amount. h. If Taxpayer dies before the expiry of time limit, then, Unutilized amount paid to Legal Heirs is not taxable in the hands of recipient.