A PROJECT TITLED

“A STUDY OF INCOME FROM CAPITAL GAIN ”

A PROJECT SUBMITTED TO MUMBAI UNIVERSITY

FOR PARTIAL COMPLITION OF THE DEGREE OF MASTER IN COMMERCE

UNDER THE FACULTY OF COMMERCE

SUBMITED BY

SANKET PAWAR,

ROLL NO. 39

UNDER THE GUIDANCE OF

Your text here 1

PROF. PRASHANT RAJAN

V. K. KRISHNA MENON COLLEGE OF COMMERCE ECONOMICS SHARAD

SHANKAR DIGHE COLLEGE OF SCIENCE

BHANDUP (WEST)

ACADEMIC YEAR: 2021-2022

1
 V.K. KRISHNA MENON COLLEGE OF COMMERCE &
ECONOMICS ANDSHARAD SHANKAR DIGHE COLLEGE OF
SCIENCE BHANDUP (EAST) .

MUMBAI – 400042

CERTIFICATE

This is to certify that Mr.SANKET PAWAR has worked and duly

completed her project work for the degree of Master of Commerce
(Accountancy) under the faculty of commerce and her project is entitled
“A STUDY OF INCOME FROM CAPITAL GAIN “ under my supervision

INTERNAL EXAMINER EXTERNAL EXAMINER

PRINCIPAL

DATE OF SUBMISSION:

2
DECLARATION

I undersigned MR. SANKET PAWAR here by, declare that the work
embodied in this project work titled "A Study of INCOME FROM
CAPITAL GAIN ", forms my own contribution to the research work
carried out under the guidance of Mr. Prasanth Rajan is a result of
my own research work and has not been previously submitted to any
other University for any other Degree to this or any other University.
Wherever reference has been made to previous work of others, it has
been clearly indicated as such and included in the bibliography.
I, here by further declare that all information of this document has
been obtained and presented in accordance with academic rules and
ethical conduct.

Name and Signature of the learner

Certified by
Name and Signature of the Guiding Teacher

3
Acknowledgement

To list who all have 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 take this opportunity to thank the University of Mumbai for giving me chance
to do this project.

I would like to thank my principal SAROJ.V.PHADNIS for providing the

necessary facilities required the completion of this project.

I take this opportunity to thank our Co-Ordinator PROF. ANJANAASHOKAN

for his moral support and guidance.

I would also like to express my sincere gratitude towards my project guide

PROF. PRASANT RAJAN whose guidance and care made the project successful.

I would like to thank my College Library, for having provided various reference
books and magazines related to my project. Lastly

I would like to thank each and every person who directly or indirectly helped
me in the completion of the project especially my Parents and Peers who
supported me throughout my project.

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INDEX
SR.NO PARTICULARS PAGE NO

CHAPTER 1 Introduction to PROJECT 7-17

CHAPTER 2 Research Methodology 18-24

Objectives
Limitations & scope
Method of collecting data
CHAPTER 3 Literature review 25-51
CHAPTER 4 Data analysis &interpretation 52-71
&presentation

CHAPTER 5 Conclusion 72-76

CHAPTER 6 Bibliography 80

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 CHAPTER 1:

INTRODUCTION

OF

PROJECT

6
 INTRODUCTION

Definition:

Capital gain is the profit one earns on the sale of an asset like
stocks, bonds or real estate. It results in capital gain when the
selling price of an asset exceeds its purchase price. It is the
difference between the selling price (higher) and cost price
(lower) of the asset. Capital loss arises when the cost price is
higher than the selling price.

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Classifications of Capital Gain

Capital gain can be realized or unrealized.

The realized gain is the gain from the final sale of an
asset or investment. Conversely, an unrealized gain
arises when the current price of an asset or investment
exceeds its purchase price, but the asset or investment
is still unsold. Note that only realized capital gains are
taxed, while unrealized (capital) gains are merely paper
gains that are usually subject to accounting reporting
but do not trigger a taxable event.

Additionally, realized capital gains are usually classified

as short-term gains or long-term gains. Short-term
(capital) gains occur if an asset or investment was held
for less than a year. Long-term (capital) gains are gains
from an asset or investment that was held for more than
one year.

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Description:

When the selling price of an asset exceeds its cost price or purchase
price, it will result in a capital gain. Capital gains can be of two types:
realized and unrealized.

1) Realized capital gain can be described as the gain made on an

investment that has been sold for a profit.

2) Unrealized capital gain can be described as the gain on an

investment that has not been sold yet but can make profit if sold
later.
3) In financial parleys, capital gain generally refers to realized
capital gain. Capital loss is the reverse of capital gain, i.e. it results
in a loss when the investment is sold. In simple terms, the
difference between the selling price and cost/purchase price of
an investment can be described as capital gain/loss.
4) If the selling price is higher than cost price, it results in a capital
gain and when the selling price is lower than the cost price, it leads
to capital loss. Example: Suppose a person purchased 100 shares
of Rs 100 each at a total cost of Rs 10,000. (Case 1: Capital Gain)
After some time, say one year, if he sells those shares for Rs 130
each with the total selling price of those 100 shares being Rs
13,000, it would result in a profit of Rs 3,000. This amount is
called capital gain. (Case 2: Capital Loss) But if after one year, the
person sells those shares for Rs 80 each, thus realizing Rs 8,000
on those 100 shares, he will suffer a loss of Rs 2,000. This amount
would be called capital loss.

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Capital Gains and Taxation

Realized capital gains are considered taxable events. Most countries impose special
taxes for realized gains, levied on both individuals and corporations Corporation A
corporation is a legal entity created by individuals, stockholders, or shareholders,
with the purpose of operating for profit. Corporations are allowed to enter into
contracts, sue and be sued, own assets, remit federal and state taxes, and borrow
money from financial institutions.

However, for the gains of investment funds such as a mutual fund Mutual Funds A
mutual fund is a pool of money collected from many investors for the purpose of
investing in stocks, bonds, or other securities. Mutual funds are owned by a group
of investors and managed by professionals. Learn about the various types of fund,
how they work, and benefits and tradeoffs of investing in them, the tax on the
gains is imposed upon the fund’s investors.

Generally, the holding time of an asset or investment affects the tax

rate applicable to a capital gain. For example, if the gain is short-term (as defined
above), it is taxed at the ordinary income tax rate. On the other hand, long-term
(capital) gains are usually taxed at a lower tax rate. For example, if the ordinary
tax rate is 35%, the capital gain can be taxed at a 20% rate.

Short term Capital

Type of Capital Gain Long term Capital Gain
Gain

Immovable assets (e.g. real

Less than 2 years More than 2 years
estate)

Moveable property(e.g. Gold) Less than 3 years More than 3 years

Listed Shares Less than 1 year More than 1 year

Equity Oriented Mutual Funds Less than 1 year More than 1 year

Debt Oriented Mutual Funds Less than 3 years More than 3 years

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Capital Gains:

Any profits or gains arising from the

transfer of a capital asset effected in the
previous year shall be chargeable to income-
tax under the head capital gains. Examples of
assets are a flat or apartments, land, shares,
mutual funds, gold among many others.

There are two types of capital gains:

Short-term capital gain:

capital gain arising on transfer of short-term capital asset.

Long-term capital gain:

capital gain arising on transfer of long-term capital asset.

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Indexation in Capital Gains
This concept takes into account the effect of inflation
to reduce your tax liability. It is calculated using CII,
an index maintained by the Income Tax Department.
You can get the CII details here. Currently the cost
inflation index for the running financial year 2018-19
is 280. For example, assume that you buy a debt
fund in 2013 for Rs 100 and sell it in 2018 for Rs
150. Since you have sold it after three years, the
gain is long term and a tax of 20% with
indexation will apply. The Cost Inflation Index (CII)
in FY 13 was 200 and the CII in FY 18 was 272. As
a result your purchase price for tax purposes will rise
to (272/200)*100 = 136 and your taxable gain will be
150 – 136 = 14. The tax payable will be 20% of 14 =
Rs 2.8. Hence even though you have made a gain of
Rs 50, your actual tax is not 20% of Rs 50 or Rs 10
but rather only Rs 2.8 after applying indexation

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Capital gain concept
is an economic concept defined as the profit earned on the sale of an asset which
has increased in value over the holding period. An asset may include tangible
property, a car, a business, or intangible property such as shares.

A capital gain is only possible when the selling price of the asset is greater than the
original purchase price. In the event that the purchase price exceeds the sale price,
a capital loss occurs. Capital gains are often subject to taxation, of which rates
and exemptions may differ between countries. The history of capital gain originates
at the birth of the modern economic system and its evolution has been described as
complex and multidimensional by a variety of economic thinkers. The concept of
capital gain may be considered comparable with other key economic concepts such
as profit and rate of return, however its distinguishing feature is that individuals,
not just businesses, can accrue capital gains through everyday acquisition and
disposal of assets.

Capital gain is generally calculated through taking the sale price of an asset and
subtracting its base cost and any incurred expenses. The resulting value will be the
capital gain, or capital loss if negative. In reality, many governments provide
supplementary methods of calculating capital gains for both individuals and
businesses. These methods can provide taxation relief through lowering the
calculated capital gain value.

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 Concept of Indexation

Capital Gain

The value of a rupee today is not same as will be its value

tomorrow because of inflation. Likewise, to be fair when paying
capital gain tax, the effect of inflation on the purchase is
included. For instance, if you bought a flat in January 2002 for
Rs 20 lakh and sold it in January 2020 for Rs 65 lakh; you don't
pay tax on the Rs 45 lakh gain. The tax authorities allow the
concept of indexation so that you can show a higher purchase
cost, lowering the overall profit and reducing the tax you pay
on the gain. Using the inflation index, one needs to increase the
purchase price of the asset to reflect inflation-adjusted true
price in the year of sale. However, the benefit of indexation is
available only in case of long-term capital gains.

Distributional Issues

Three questions can be asked about distributional issues related to

capital gains:

(1) Who owns the assets that can generate capital gains?

(2) Who realizes capital gains? and

(3) Who pays capital gains taxes?

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How do you calculate capital gains indexation?

Indexed cost of improvement = cost of improvement x

cost inflation index of the year of transfer/cost
inflation index of the year of improvement. The rate at
which capital gains is calculated varies from year to year.
In the case of long-term capital gains, individuals are
taxed at 20.6% (including education cess)

15
 CHAPTER-II
RESEARCH
METHODOLOGY

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 Objectives of study
1) To study about the different components of
capital gains.

2) To study about the cost inflation index for

calculating capital

3) To study the difference between cont. of

improvement & cont. of acquisition.

4) To identify which capital amets are regarded

as transfer & which assets are not regarded as
transfer.

5) To identify the different tax provisions on

long term & short term capital gain: on Equity
shares, real estate, stocks bonds, mutual funds.

6) To know the holding period of short & long

term capital amets.

7) To Know the deductions & exceptions on capital

gains.

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 Scope of study
The scope of study is related to
income tax provisions with respect
to capital gains and survey was
done to check whether they have
knowledge regarding capital gains
for long term & short term and how
many respondents are aware about
capital gains accounts scheme of
1988. And the various exceptions
of it & how we calculate long term
& short term capital gains.

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Methodology for computing Capital
Gains
1. Short-term capital gain tax = A- (B+C+D)

A= Sale value of the asset

B= cost of acquisition

C= cost of improvement

D= the cost of expenditure incurred totally and solely in the connection with a transfer

2. Long-term capital gain = A-(B+C+D), whereas,

A=Full value of consideration received or accruing

B=indexed cost of acquisition*

C= indexed cost of improvement**

D= cost of expenditure incurred wholly and exclusively in connection with such a transfer

*Indexed cost of acquisition = A X (B / C), wherein

A= Cost of acquisition

B=CII of the year of transfer

C= CII of the year of acquisition

**Indexed cost of improvement = A X (B / C), wherein,

A=cost of improvement

B=CII of the year of transfer

C= CII of year of year of improvement Cost of transfer is the brokerage paid for managing the
deal, cost of advertising plus legal expenses incurred etc.

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Capital Gains Tax Exemptions

These exemptions mentioned below can be claimed either

fully or partially.
For .example, if purchase price is Rs 80 lakh and your
sale proceeds are Rs 1 crore (hence gains of Rs 20 lakh)
and you deposit Rs 50 lakh as per the below mentioned
exemptions, half your capital gains (Rs 10 lakh) will be
exempt. The other half (Rs 10 lakh) will be taxable.
• Section 54: If the sale proceeds of a residential
property are further utilized to buy another residential
property, the capital gains on the sale proceeds are
exempt. This is however subject to the following
conditions
a) The purchase of property should be done either 1 year
prior to selling the property or within two years of the sale.
b) In case of under construction property, the same should
be done within maximum three years from the transfer
date of the earlier property.
c)The newly acquired property cannot be further sold
within 3 years of purchase or construction.
d) The newly acquired property should be located in India.

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• Method of Data collection:

1) Primary data: primary data are those which are collected

first hand by doing research on it personally.
2) Primary data has been used in this study. Primary data was
collected by preparing a detailed questionnaire and by also
conducting in depth a personal interview.
3) Secondary data: secondary information are those which
are available to us readymade egg. Books, TV, internet,
etc.
4) Secondary data was collected from books, magazines,
journals, and internet.
5) Survey was done using Google forms and questionnaire
among women investors and recorded their responses for
analysis. Questionnaire was given to evaluate which
factors are considered the most while making investment
avenues and which investment they have invested in and
reason to know their financial goals in life.

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 • Limitations of study:
1) The purpose of the study ideally, was to know that how much
investor are investing in different kind of investment available
and which type of investment avenues, investors prefer to
invest; such an analysis is really a very difficult task as the
official data on investment is not easily available in India.
2) During this survey I found that people are not ready to share
their personal information regarding investment and saving
and it was felt that the respondent were uncomfortable to share
their information.
3) Thus response biases can also be considered as one the
limitation of the study.
4) Research was limited to selective investments only.
5) As the survey was to done by collecting 50 respondents I
found difficulty in collecting the respondents and the study is
based on the assumption that the respondents have given the
correct information.
6) It takes time to collect the information as it was first-hand
information.

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Chapter III

Literature

Review

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Capital Gain: It is any property held by the income tax
assesse excluding

• Any item held for a person's business or profession

(stock, ready goods, raw material) will be taxed under the
head profits and gains of business or profession
• Agricultural land means any land from which agricultural
income is derived. Land which is not urban and is outside
of 8 kilometers of a municipality, where population is less
• than 10,000 qualifies to be agricultural land

Capital Gain are of two types: Short- and long-term capital

Gain.

Short-term capital Gain:

This is an asset that is held for not more than 36 months

immediately preceding the date of its transfer. This period of
36 months is substituted to 12 months in case of certain
assets like equity or preference shares held in a company, any
other security listed on a recognized stock exchange of India,
Units of specific equity mutual funds and Zero coupon bonds.
In case of immovable property, the period of 36 months is
substituted by 24 months.

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Long term capital Gain:

This is an asset that is held for more than 36 months, 12

months or 24 months, as the case may be. Transfer is defined
as the sale of the asset, giving up of rights on the asset,
forceful takeover by law or maturity of the asset. Many
transactions are not considered as transfer, for example,
transfer of a capital asset under a will.

Stocks and units of equity diversified mutual funds qualify for

long term capital gains if held for more than a year. In case of
real estate, it qualifies for long term capital gains if it is held
for more than two years. Earlier to the Finance Act 2017, real
estate was considered as a long term capital asset only if it
was held for more than three years.

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Capital gains can be taxed subject to the following
conditions:

• The assesse must have owned a capital asset

• The assesse must have transferred the capital asset in
the previous year.
• There must have been profit or gains as a result of such
transfer

How Capital Gains Are Taxed Proposals to deal with how capital
gains are taxed depend on how capital gains are defined. Under
the Haig-Simons approach, income is defined as consumption
plus the change in wealth.1 Wealth can increase because of
active saving or because the value of assets has increased;
capital gains are the increase in the value of capital assets.
Under this income definition, real or inflation adjusted capital
gains would be taxed each year as they accrue and real capital
losses would be deducted. It has long been recognized,
however, that taxing real capital gains as they accrue may be
impractical especially for capital assets that are not actively
traded. Given the difficulties of taxing capital gains as they
accrue, capital gains are taxed as they are realized (that is,
when the capital asset is sold or exchanged). Capital assets are
property, but there are exceptions such as business inventory,
accounts receivable acquired in the ordinary course of business,
copyrights, and literary compositions.2 Capital gains are
calculated by subtracting the asset’s basis from the sales price.

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An asset’s basis is the original purchase price adjusted for
certain additions and deductions; it is not adjusted for
inflation. If the basis is greater than the sales price then it is
a capital loss. Capital gains are taxed at various rates. For the
2008 tax year, short-term capital gains (gains on capital assets
held for less than one year) are taxed as ordinary income. Long-
term capital gains are taxed at a 0% tax rate for taxpayers in
the two lowest tax brackets (the 10% and 15% tax brackets)
and at 15% for other taxpayers. Capital gains and capital losses
are treated asymmetrically. Capital losses are subtracted from
capital gains before calculating tax liability. If capital losses
exceed capital gains, then up to $3,000 of capital losses can be
deducted from

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Capital Gains Tax Rates and Tax Revenues

Both capital gains tax rates and tax revenues have constantly changed
since the establishment of the income tax. Tax revenues depend on the
tax rate and capital gains realizations. Capital gains realizations, in
turn, depend on tax rates as well as other factors.

Tax Rates

Throughout most of the history of the income tax, the maximum capital
gains tax rate has been lower than the maximum tax rate on ordinary
income. Figure 1 displays the capital gains and ordinary income tax rates
for the past 50 years. With the exception of a three-year period (1988-
1990), the capital gains tax rate was considerably below the tax rate for
ordinary income. After 2010, the capital gains tax rate is scheduled to
revert back to 20%. The 15% maximum capital gains tax rate between
2003 and 2010 is the lowest rate on long-term capital gains since the
Second World War. Each question is examined. Two data sources are
used for the analysis: The Federal Reserve Board’s 2007 Survey of
Consumer Finances (SCF) and the IRS’s 2004 Statistics of Income Public
Use File (SOI PUF). See the Appendix for a description of each data
source. Assets and Accrued Capital Gains Most assets owned by
households would not be subject to capital gains taxes when sold. Figure
4 reports the various assets that households owned in 2007. Over half
of the total is accounted for by retirement accounts (e.g., 401(k)s and
IRAs) and principal residences. Retirement accounts generally are not
taxed until the funds are withdrawn at retirement. At that time, the
withdrawals are taxed as ordinary income. Up to $500,000 of the gain
from the sale of a principal residence can be excluded from income
taxes. Farm and business assets and other real estate (e.g., rental
property, and vacation homes) account for 33% of household assets. The
final 13% of household assets are financial assets (i.e., stocks, bonds,
and mutual funds).
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 How capital gains are calculated

• Capital gains taxes can apply on investments, such as stocks or bonds, real estate (though
usually not your home), cars, boats and other tangible items.
• The money you make on the sale of any of these items is your capital gain. Money you lose is
a capital loss. Our capital gains tax calculator can help you estimate your gains.
• You can use investment capital losses to offset gains. For example, if you sold a stock for a
$10,000 profit this year and sold another at a $4,000 loss, you’ll be taxed on capital gains
of $6,000.
• The difference between your capital gains and your capital losses is called your “net capital
gain.” If your losses exceed your gains, you can deduct the difference on your tax return,
up to $3,000 per year ($1,500 for those married filing separately).
• Capital gains taxes are progressive, similar to income taxes.

Watch out for two things

1. Rule exceptions. The capital gains tax rates in the tables above apply to
most assets, but there are some noteworthy exceptions. Long-term capital
gains on so-called “collectible assets” can be taxed at a maximum of 28%;
these are things like coins, precious metals, antiques and fine art. Short-
term gains on such assets are taxed at the ordinary income tax rate.

2. The net investment income tax. Some investors may owe an additional
3.8% that applies to whichever is smaller: Your net investment income or
the amount by which your modified adjusted gross income exceeds the
amounts listed below.
Here are the income thresholds that might make investors subject to this
additional tax:
• Single or head of household: $200,000
• Married, filing jointly: $250,000
• Married, filing separately: $125,000
• Qualifying widow(er) with dependent child: $250,00
How to minimize capital gains taxes
29
Whenever possible, hold an asset for a year or longer so you can qualify for
the long-term capital gains tax rate, since it's significantly lower than the
short-term capital gains rate for most assets. Our capital gains tax
calculator shows how much that could save.
Exclude home sales
To qualify, you must have owned your home and used it as your main
residence for at least two years in the five-year period before you sell it.
You also must not have excluded another home from capital gains in the
two-year period before the home sale. If you meet those rules, you can
exclude up to $250,000 in gains from a home sale if you’re single and up to
$500,000 if you’re married filing jointly. (Learn more here about how
capital gains on home sales work.)
Rebalance with dividends
Rather than reinvest dividends in the investment that paid
them, rebalance by putting that money into your underperforming
investments. Typically, you'd rebalance by selling securities that are doing
well and putting that money into those that are underperforming. But using
dividends to invest in underperforming assets will allow you avoid selling
strong performers — and thus avoid capital gains that would come from
that sale. (Learn more about how taxes on dividends work.)
Use tax-advantaged accounts
These include 401(k) plans, individual retirement accounts and 529 college
savings accounts, in which the investments grow tax-free or tax-deferred.
That means you don’t have to pay capital gains tax if you sell investments
within these accounts. Roth IRAs and 529s in particular have big tax
advantages. Qualified distributions from those are tax-free; in other
words, you don’t pay any taxes on investment earnings. With traditional
IRAs and 401(k)s, you’ll pay taxes when you take distributions from the
accounts in retirement. (Learn more here about taxes on your retirement
accounts.)

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Carry losses over
If your net capital loss exceeds the limit you can deduct for the year, the
IRS allows you to carry the excess into the next year, deducting it on that
year’s return.
Consider a robo-advisor
Robo-advisors manage your investments for you automatically, and they
often employ smart tax strategies, including tax-loss harvesting, which
involves selling losing investments to offset the gains from winners.

31
 Special capital gains tax rules

The tax rates in the tables above apply to most assets, including
most investments. But you should be aware of a few rules and
exceptions.

• Long-term capital gains on collectibles (such as antiques, coins,

stamps, or artwork) are taxed at a rate of 28%.
• Capital losses from the sale of personal property aren't
deductible. So if you sell your home or vehicle for less than
you paid for it, you cannot claim a deduction.
• While they pay 20% in capital gains tax, high-income investors
may also owe the Net Investment Income Tax. A separate
tariff, it applies an additional 3.8% tax on all investment
income, including capital gains. NIIT affects single taxpayers
with modified adjusted gross income over $200,000 or married
couples filing jointly with modified adjusted gross income over
$250,000.
• If you inherited a capital asset, your holding period is
automatically long-term, no matter when the person who left it
to you purchased it.
• When you sell your home, you don't have to pay tax on the first
$250,000 of gain from the sale. That exclusion is doubled to
$500,000 for married couples filing a joint return. To qualify,
you must have owned and used the home as your primary
residence for at least two of the last five years.

32
Calculating capital gains: an example

The capital gains tax rate doesn't apply on an item-by-item

basis but to your overall net capital gains.

Say you are a single taxpayer with the following stock

transactions in 2020:

Calculation of Capital Gains

The calculations of capital gains are dependent on the type of

assets and their holding period. A few terms that an individual
must know before calculating gains against their capital
investments are here as follows –

▪ Full value consideration –

It is the consideration that is received by a seller in return
for a capital asset.

▪ Cost of acquisition –
The cost of acquisition is the value of an asset when a seller
acquires it.

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▪ Cost of improvement –
The cost of improvement is the amount of expenses incurred
by a seller in making any additions or alterations to a capital
asset.
To calculate the value of short term capital gain, the full
amount of consideration is required to be determined at first.
From the obtained value, cost of acquisition, cost of
improvement and the total expenditure incurred concerning
the transfer of ownership has to be deducted. This resultant
value will be the capital gain on investments.

Indexed Cost of Acquisition

The cost of acquisition is calculated on the present terms by

applying the CII (Cost Inflation Index).
It is done to adjust the values by taking into account the
inflation that takes place over the years while holding the
asset.
The indexed cost of acquisition can be estimated as the ratio
of the Cost Inflation Index (CII) of the year when an asset
was sold by a seller and that of the year when the property
was acquired or the financial year 2001-2002,
whichever is later multiplied by the Cost of acquisition.

34
Suppose, a person acquired an asset at Rs. 50 Lakh in the
financial year 2004-2005 and she decided to transfer the
property in the fiscal year 2018-19. The CII of the financial
year 2004-05 and 2018-19 were 113 and 280 respectively.
Therefore, the indexed cost of acquisition will be 50 X 280 /
113 = Rs. 123.89 Lakh.

Indexed Cost of Improvement

The indexed cost of the improvement is calculated by

multiplying the associated cost of improvement that was
required to the CII of the year divided by the CII of the year
in which the improvement took place.

35
 How to Calculate Capital Gains
Capital Gains

Depending on the amount of time that the asset has been held,
the calculation of Capital Gains will vary. Some of the
important points that individuals should know when calculating
capital gains are mentioned below:
• Cost of improvement: If there are any expenses that have
been incurred by the seller because of any alterations or
additions that have been made to the property. However,
any improvements made before 1 April 2001 cannot be
considered.

• Acquisition cost: The amount of money that the seller paid

in order to acquire the property.

• Full value consideration: The amount of money that the

seller will receive because of the property transfer. Capital
gains are charged from the year the transaction was made
even if the money was not received in that particular year.
In certain cases where the capital asset is also the property
of the taxpayer, the acquisition cost and the improvement
cost of the previous owner will also be included.

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Tax Exemptions on Capital Gains

Tax exemptions can be claimed under the following sections

on the profit earned against assets –

1. Section 54 –
If an amount earned by selling a residential property is
invested to purchase another property, then the
capital gains
earned by transferring the ownership of a property is tax
exempted. However, deductions can be claimed only if the
following conditions are met –
▪ Individuals are required to purchase a second property
within 2 years of sale or 1 year before transferring the
ownership.
▪ In the case of an under-construction property, the
purchase of a second property should be completed within
3 years of transferring the ownership of the first
property.
▪ Newly acquired property cannot be sold within 3 years of
purchase.
▪ The newly acquired property is required to be located in
India.

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2. Section 54F –
Exemptions under Section 54F can be claimed when there
are capital gains earned from a long-term asset other than a
residential property. However, the exemption stands invalid if
you sell the new asset within 3 years after purchasing or
construction.
The purchase of a new property should be made within 2 years
of earning the capital. Also, in the case of construction, it has
to be completed within 3 years from the date of sale.

3. Section 54EC –
Individuals can claim tax exemptions under Section 54EC if
the capital gains statements are submitted for investments
into specific bonds with the amount earned by selling a
property.
The invested amount can be redeemed after 3 years from the
date of sale, but the bonds cannot be sold within the period.
This period has been increased to 5 years with effect from
the financial year 2018-19. Individuals are required to invest
in these special bonds within 6 months of a property sale.
Earing capital gains is much convenient with various beneficial
investment options in the market. Also, if reinvested
correctly, tax incurred on capital gains can be reduced
ensuring higher savings

38
▪ Capital gain on Mutual Funds
▪

▪ that are equity-oriented, whether they are quoted or not.

▪ Zero-coupon bonds.
▪

All the assets mentioned above are considered as long-term

capital assets if they are held for 12 months or more.
In case of any asset acquired by inheritance or gift, then the
period for which an asset is owned by a previous owner is
considered.

Furthermore, in the case of bonus shares or right shares, the

period of holding is considered from the date of allotment.
Here is a duration chart on an income generated against the
sale of assets –

39
Type of Capital Gain

Short term Capital Long term Capital

Type of Capital Gain
gain Gain

Immovable assets (e.g. real

Less than 2 years More than 2 years
estate)

Moveable property(e.g. Gold) Less than 3 years More than 3 years

Listed Shares Less than 1 year More than 1 year

Equity Oriented Mutual

Less than 1 year More than 1 year
Funds

Debt Oriented Mutual Funds Less than 3 years More than 3 years

40
 Income Earned from Selling Shares
We all know that Income from salary, rental income and
business income is taxable But what about income from sale or
purchase of shares? Many homemakers, retired people, spend
their time gainfully buying and selling shares but are unsure of
how this income is taxed. Income/Loss from sale of equity
shares is covered under the head ‘Capital Gains’.

Long-term capital gains and losses

If equity shares listed on a stock exchange are sold after 12

months of purchase, the seller may make long-term capital gain
or incur long-term capital loss. Before the introduction of
budget 2018, long-term capital gain made on sale of equity
shares or equity-oriented units of mutual fund was exempt
from tax under Section 10(38)

As per the provisions of the Financial Budget of 2018, if a seller

makes long term capital gain of more than Rs. 1 lakh on sale of
equity shares or equity-oriented units of mutual fund, the gain
made will attract a capital gains tax of 10% long-term capital
gains tax. Also, the benefit of indexation will not be available
to the seller. These provisions apply to transfers made on or
after 1 April 2018.

41
Example: Atul purchased shares for Rs.100 on 30th
September 2017 and sold them for Rs.120 on 31st December
2018. The Value of the Stock was Rs. 110 as on 31st January
2018. Out of the capital gains of Rs. 20 (i.e 120-100), Rs. 10 (i.e
110-100) is not taxable. Rest Rs. 10 is taxable as Capital gains
@ 10% without indexation.

42
Gains from Equity Shares

Tax on short-term capital gains

Short term capital gains are taxable at 15%. What if your tax
slab rate is 10% or 20% or 30%? Special rate of tax of 15% is
applicable to short term capital gains, irrespective of your tax
slab. Also, if your total taxable income excluding short term
gains is below taxable income i.e Rs 2.5 lakh – you can adjust
this shortfall against your short term gains. Remaining short
term gains shall be then taxed at 15% + 4% cess on it.

Tax on long-term capital gains

Long term capital gain on equity shares listed on a stock

exchange are not taxable up to the limit of Rs 1 lakh. As per
the amendments in budget 2018, the long term capital gain of
more than Rs 1 lakh on the sale of equity shares or equity-
oriented units of the mutual fund will attract a capital gains tax
of 10% and the benefit of indexation will not be available to the
seller. These provisions apply to transfers made on or after 1
April 2018.

Loss from Equity Shares

43
Short-term capital loss

Any short term capital loss from sale of equity shares can be
set off against short term or long term capital gain from any
capital asset. If the loss is not set off entirely, it can be
carried forward for a period of 8 years and adjusted against
any short term or long term capital gains made during these 8
years.

It is worthy to note that a taxpayer will only be allowed to carry

forward losses if he has filed his income tax return within the
due date. Therefore, even if the total income earned in a year
is less than the minimum taxable income, filing an Income Tax
Return is a must for carrying forward these losses.

Long-term capital loss

Long-term capital loss from equity shares until Budget 2018

was considered to be a dead loss – It can neither be adjusted
nor carried forward. This is because long-Term Capital gains
from listed equity shares were exempt. Similarly, losses from
them were neither allowed to be set off nor carried forward.

After the Budget 2018 has amended the law to tax such gains
made in excess of Rs 1 lakh @ 10%, the government has also
notified that any losses arising from such listed equity shares,
mutual funds etc. would be allowed to be carried forward.

44
The income tax department has vide its FAQs issued dated 4
February 2018, inter alia clarified that long-term capital loss
from a transfer made on or after 1 April 2018 will be allowed
to be set-off and carried forward in accordance with existing
provisions of the Act. Therefore, the long-term capital loss can
be set-off against any other long-term capital gain and
unabsorbed long-term capital loss can be carried forward to
subsequent eight years for set-off against long-term gains.

Securities Transaction Tax (STT)

STT is applicable on all equity shares which are sold or bought

on a stock exchange. The above tax implications are only
applicable for shares which are listed on a stock exchange. Any
sale/purchase which happens on a stock exchange is subject to
STT. Therefore, these tax implications discussed above are
only for shares on which STT is paid.

Guidance for treating share sale as business income

Certain taxpayers treat gains or losses from the sale of shares

as ‘income from business’, while certain others treat it as
‘Capital gains’. Whether your gains/losses from sale of shares
should be treated as business income or be taxed under capital
gains, has been a matter of much debate.

45
In case of significant share trading activity (e.g. if you are a
day trader with lots of activity or if you trade regularly
in Futures and Options), usually your income is classified as
income from business. In such a case you are required to file
an ITR-3 and your income from share trading is shown under
‘income from business & profession’.

Calculation of income from business v. capital gains

When you treat the sale of shares as business income, you are
allowed to reduce expenses incurred in earning such business
income. In such cases, the profits would be added to your total
income for the financial year, and consequently be charged at
tax slab rates.

If you treat your income as capital gains, expenses incurred on

such transfer are allowed for deduction. Also, long-term gains
from equity above Rs 1 lakh annually are taxable, while short
term gains are taxed at 15%.

What should be classified as significant share trading activity

though has lead to uncertainty and a lot of litigation?
Taxpayers receive notices from the tax department and end up
spending a lot of time and energy explaining why they chose a
particular tax treatment for the sale of shares.

46
 New clarification from CBDT

Taxpayers have now been offered a choice of how they want to treat
such income. Once they choose, they must however continue the same
method in subsequent years too, unless there is a major change in
circumstances of the case. Do note that the choice has been made
applicable only to listed shares or securities.

With a view to reducing litigation in such matters, CBDT has issued the
following instructions (CBDT circular no 6/2016 dated 29th February
2016)–If the taxpayer himself opts to treat his listed shares as stock-
in-trade, the income shall be treated as business income Irrespective of
the period of holding of listed shares. The AO shall accept this stand
chosen by the taxpayer.

If the taxpayer opts to treat the income as capital gains, the AO shall
not put it to dispute. This is applicable for listed shares held for a period
of more than 12 months. However, this stand once taken by a taxpayer
in a particular assessment year shall be applicable in subsequent
assessment years also. And the taxpayer will not be allowed to take a
different stand in subsequent years.

47
48
capital gains or business income
In all other cases, the nature of transaction (whether capital
gains or business income) shall continue to be decided basis the
concept of ‘significant trading activity’ and the intention of the
taxpayer to hold shares as ‘stock’ or as ‘investment’. The above
guidance would prevent unnecessary questioning from
Assessing Officers regarding the classification of income.

49
Defining Capital Assets
Land, building, house property, vehicles, patents, trademarks,
leasehold rights, machinery, and jewellery are a few examples
of capital assets. This includes having rights in or in relation
to an Indian company. It also includes the rights of
management or control or any other legal right. The following
do not come under the category of capital asset:

a. Any stock, consumables or raw material, held for the

purpose of business or profession

b. Personal goods such as clothes and furniture held for

personal use

c. Agricultural land in rural India

d. 6½% gold bonds (1977) or 7% gold bonds (1980) or national

defense gold bonds (1980) issued by the central government

e. Special bearer bonds (1991)

f. Gold deposit bond issued under the gold deposit scheme

(1999) or deposit certificates issued under the Gold
Monetization Scheme, 2015

50
Related Articles

Speculative Income – Meaning, Taxability, Exceptions

Security Transaction Tax (STT)

Long-Term Capital Gain on Sale of Stocks

Short-Term Capital Gain on Shares Section 111A

https://www.gov.uk/capital-gains-tax/what-you-pay-it-on.

https://www.gov.uk/capital-gains-tax/work-out-need-to-pay.

https://www.ato.gov.au/Forms/You-and-your-shares-
2020/?page=24)

See also

• Capital gains tax

• Cash flow
• Investment
• Passive income
• Property income
• Profit
• Unearned incom

51
 • Chapter IV
•

• Data analysis
&interpretation
• &presentation

52
.1 PERSONAL INFORMATION

1. AGE WISE CLASSIFICATION.

The age is the deciding personal factor that influences the clients towards the investment
decisions. Hence the classification of the respondents are made on the basis of their age
and presented in the table.

AGE NO OF RESPONDENTS PERCENTAGE%

20-30 20 29%
30-40 20 36%
40-50 5 29%
ABOVE 50 5 7%

53
Are you aware about capital gains account
scheme of 1988

54
The meaning of Cost of acquisition in context of
Income from Capital gain is

55
Are you aware about any deductions on
basis charge of capital gain

The Above Table Shows That All of

Knows About Deductions on Basis Change
of Capital Gain.

56
Do you know there is difference between
cost of acquisition and cost of
improvement?

57
Are you aware about the capital asset
holding period for short term

58
Do you know the difference between long
term capital gains and short-term capital
gains?

59
Are you aware about the capital asset
holding period for long term

60
What Is Capital Gains Tax on Real Estate?
Capital gains tax applies to the difference between your “cost basis” in a piece of real estate
and the sale price you receive for that property. Cost basis is what you paid for the property
plus any money you’ve spent to improve it. If you had a cost basis of $100,000 for a property,
for example, and then sold it for $125,000, you would have a capital gain of $25,000.

Exception for Homes

You don’t have to pay capital gains taxes on the first $250,000 in profit from a
home sale – or the first $500,000 if you’re married filing jointly – if you meet
certain criteria. To qualify for this “exclusion,” you must have owned and lived in
the property for at least two years total out of the five years preceding the sale.
You can take this exclusion once every five years.

Short- and Long-Term Gains

If you own a piece of property for a year or less before selling it, any taxable gain
you make from the sale is classified as a short-term capital gain. If you own the
property for more than a year, it’s a long-term gain. Long-term gains are taxed at
significantly lower rates than short-term gains.

Short-Term Rates
As of the time of publication, the capital gains rate for short-term gains is the same as your tax
bracket rate – that is, the highest tax rate charged on your ordinary income. If you were in the
24 percent bracket, for example, you’d pay 24 percent on short-term gains. The tax brackets
(and short-term rates) for tax year 2018 are: 10 percent, 12 percent, 22 percent, 24 percent, 32
percent, 35 percent and 37 percent. Tax rates can be changed by Congress, so check with the
Internal Revenue Service for updated rates.

61
Long-Term Rates
In the 2018 tax year, long-term capital gains rates are divided into three brackets, those being
0%, 15% and 20%. Individual making up to $38,600 will not pay any tax on long-term capital
gains, while those making more than $425,801 and up will pay 20% long-term capital gains
tax.

Net Investment Income Tax

An additional tax applies to certain higher-income taxpayers that may tack an additional 3.8
percent onto their capital gains tax rate. The Net Investment Income Tax applies to single
taxpayers with a modified adjusted gross income of $200,000 and married couples with income
above $250,000. If a taxpayer were in the top tax bracket, for example, this tax would increase
the long-term capital gains rate from 20 percent to 23.8 percent and the short-term rate from
39.6 percent to 43.4 percent.

62
 what are the current
capital gains tax rates in
the India

The capital gains tax in India,

under Union Budget 2018,
10% tax is applicable on the
LTCG on sale of listed
securities above Rs. 1lakh
and the STCG are taxed at
15%. Besides this, the both
long term and short-term
capital gains are taxable in
case of debt mutual funds.

63
KEY TAKEAWAYS

• Capital gains tax is due only after the

investment is sold.
• Capital gains taxes apply only to “capital
assets,” which include stocks, bonds, jewelry,
coin collections, and real estate.
• For most taxpayers, long-term gains are taxed
at a lower rate than short-term gains.
• Capital gains can be offset by capital losses.
Some investors sell losing investments to lower
the capital gains taxes they owe.

64
Tax Rate Chart for Income
on Sale of Assets &
Income from capital gain

65
Asset Duration of the Asset Tax Rate

Short-Term Long-Term Short-Term Long-Term

Immovable Less than 2 More than 2 Income tax 20.8% with indexation
Property, e.g. years years slab rate
House property

Movable Property, Less than 3 More than 3 Income tax 20.8% with indexation
e.g. Gold/Jewelers years years slab rate

Listed Shares* Less than 1 More than 1 15.60% LTCG up to Rs 1 lakh- non-taxable,
year year
More than Rs 1 lakhs -10% without

Equity-Oriented Less than 1 More than 1 15.60% LTCG up to Rs 1 lakh- non-taxable,

Mutual Funds year year
More than Rs 1 lakhs -10% without

Debt-Oriented Less than 3 More than Income 20.8% with indexation

Mutual Funds years 3 years tax slab
rate

66
Calculation of Tax on Short term
and long-term gain from sale of
assets
Short term Gain/Loss

Short-term capital gains are taxed as per the income tax slab rates applicable
to the individual. For instance, if the short-term capital gain is Rs 6 lakh and
the person falls in the 30% tax bracket, then he/she has to pay 31.20% on Rs
6 lakh, i.e. Rs 1,87,200. Gain/loss from the sale of the asset is calculated by
deducting the cost of purchase, cost incurred for improvement of the asset
and expenses incurred exclusively in connection with the sale from the sale
proceeds of the asset

Short Term Capital Gain = Sale Consideration – Cost of acquisition-

Cost of improvement (if any) – Expenses incurred exclusively for the
sale of the Asset.

67
Exception

In the case of a short-term capital gain on listed shares/equity-oriented mutual

funds (if sold within a period of one year), it will be taxable at the rate of
15.60% (including health and education cess @4%). But in case of sale of
unlisted shares, i.e. sale not made through Indian stock exchange, will be
subject to tax as per the income tax slab rate applicable to the individual.

Long Term Capital gain/Loss

Long-term capital gains are taxed at the rate of 20.8% (rate including health
and education cess @ 4%) with indexation. Indexation is basically a technique
to adjust the cost of the asset according to the inflation index. It will increase
your cost and reduce your gains and thereby, tax liability. So under long-term
capital asset, the benefit of indexation is available plus the person who falls in
the tax bracket of 30% also get the advantage of paying the lower tax rate of
20%. Long-term capital gains are calculated in the same way as short-term
capital gains, but the purchase cost and cost of improvement are replaced
with the indexed cost of acquisition and indexed cost of the improvement.

Long Term Capital Gain = Sale consideration –Indexed cost of

acquisition- Indexed cost of improvement (if any)-Expenses incurred
exclusively for the sale of the Asset-Exemption u/s 54, 54F, 54EC if
any availed.

68
CHAPTER 5

CONCLUSION AND
SUGGESTION

69
 Conclusion

The international tax system is a complex system of interlocking

principles deriving its sustenance from both domestic tax law
and a patchwork of bilateral DTAAs. The domestic-international
hybrid of rules presents taxpayers with a complex and
occasionally impossible challenge of compliance but also
provides taxpayers with an opportunity to arrange their
commercial affairs in such a way that they can exploit the
chinks in the complex armors of international tax rules.
Taxpayers, particularly multinational companies took
advantage of the inherent flexibility afforded by contractual
relationships (sale, purchase, lease, incorporation,
restructuring) to minimize their taxes worldwide. Tax law might
want to impose a certain taxable status over the commercial
activities of companies but the intricate tax planning developed
through ingenious contracting by taxpayers has outsmarted
frequently the reach of tax legislation
. The history of international tax law has so far been a history of
the trump of contracts over status. In the international tax
arena, the contract v status trope extends to two peculiarities
70
 of the system: much tax planning by companies is meant to
deny states nexus over their activities, and allied nexus denial is
the equally important issue of the manipulation of prices for
services and products exchanged between constituent units of
the same multinational group (transfer pricing)

71
ANNEXURE:

Name *

Your answer
E-mail id *

Your answer
Gender
Male
Female
1.Are you aware about the capital asset holding period for
long term?
Yes
No
2.Are you aware about capital gains account scheme of
1988?
Yes
No

72
3.Are you aware about tax provisions related to capital
gains on sale of property?
Yes
No
Maybe

4.The meaning of Cost of acquisition in context of Income

from Capital gain is

Purchase price of capital asset

Present value of Capital Asset
Future value of Capital Asset
None

5.Are you aware about any deductions on basis charge of

capital gains?
Yes
No

73
6.Do you know there is difference between Cost of
acquisition and Cost of Improvement?
Yes
No

7.Are you aware about the capital asset holding period for
short term?
Yes
No

8.Do you know the difference between long term capital

gains and short term Capital gains?
Yes
No

74
Historical Maximum Capital Gain

75
 CHAPTER 6:

• Bibliography :

76
 Bibliography

➢www.google.com
➢Internet Wikipedia
➢Iapm textbook
➢Google forms
➢Questionnaire
➢WWW.CAPITAL GAIN.COM
➢WWW.SHORTTERM CAPITAL GAIN
➢https://maaw.info/CapitalGains
➢ https://cleartax.in/s/capital-gains-income
➢https://www.incometaxindia.gov.in/tutorials/15-
%20ltcg
➢https://www.investopedia.com

77