Capital Gains

UNIT12 CAPITAL GAINS

Structure
12.0 Objectives
12.1 Introduction
12.2 Meaning of Capital Gains
12.2.1 Concept of Capital Asset
12.2.2 Transfer of Capital Asset
12.3 Computation of Capital Gains
12.4 Cost of Acquisition
12.4.1 Deemed Cost of Acquisition
12.4.2 Cost of Acquisition of Share or Security
12.4.3 Cost of Acquisition of Bonus Shares
12.4.4 Cost of Acquisition of Goodwill etc.
12.4.5 Cost of Acquisition of Right Issue
12.5 Cost of Improvement
12.6 Indexed Cost of Acquisition and Improvement
12.7 Capital Gains Exempt from Tax
12.8 Tax on Short term capital gain on Transfer of Equity Shares in a
Company or Units of an Equity-oriented Fund
12.9 Tax on Long Term Capital Gain on Transfer of Listed Securities or
Units of Unit Trust of India (UTI) or a Mutual Fund
12.10 Computation of Taxable Income from Capital Gains
12.11 Let Us Sum Up
12.12 Key Words
12.13 Answers to Check Your Progress
12.14 Terminal Questions/Exercises

12.0 OBJECTIVES
After studying this unit, you should be able to:
• explain the meaning of the term capital gains;
• list the capital gains exempt from tax;
• discuss the deductions allowed from long-term capital gains; and
• compute the income chargeable under the head capital gains.

12.1 INTRODUCTION
You know ‘Capital Gains’ is a separate head of income and any income
arising out of sale or transfer of a capital asset is charged to tax under this
head. In this unit, you will study the meaning of capital gains, items included
5
Income from Capital in capital gains, capital gains exempt from tax and the deductions allowed
Gains & Other
Sources
from capital gains. You will also studyhow the taxable income from capital
gains is computed.

12.2 MEANING OF 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’ and shall be deemed to be the income of the previous year in which
the transfer of capital asset is made.
The above definition can be split up into three parts:
a) Capital Asset
b) Transfer of Capital Asset
c) Profits or Gains
Let us now discuss each one of them in detail:

12.2.1 Concept of Capital Asset

According to Section 2 (14), Capital Asset Means (a) property of any kind
held by an assessee whether or not connected with his business or profession.
(b) Any securities held by a foreign institutional investor who has invested in
such securities in accordance with the regulations made under the Securities
and Exchange Board of India Act, 1992. The asset may be movable,
immovable, tangible or intangible. But, the term capital asset does not
include:
i) any stock-in-trade (Other than the securities referred to in sub-clause (b)
above) consumable stores or raw materials held for the purposes of his
business or profession;
ii) personal effects, that is to say, movable property (including wearing
apparel and furniture but excluding jewellery, archeological collections,
drawings, paintings, sculptures, any work of art) held for personal use by
the assessee or any member of his family dependent on him;
iii) agricultural land in India (situated in rural areas) not being land situated
within the limits of any municipality or a cantonment board having a
population of 10,000 or more or situated in area lying within a distance
not exceeding 2 kms (if population is more than 10,000 but upto
1,00,000), 6 kms. (if population is more than 1,00,000 but upto
10,00,000) and 8 kms (if the population is morethan 10,00,000) from the
local limits of such municipalities or cantonment boards (i.e., agricultural
land situated within municipal or cantonment board limits or within a
distance at 2km/6km/8kmfrom the local limits of a municipality or
cantonment board is included in the term 'Capital Asset' and it is only the
agricultural land which is situated outside such limits that is excluded
from the term 'Capital Assets').For this purpose, distance should be
measured aerially and population shall be taken of last proceeding census
published before first day of previous year.
6
 Capital Gains
Table 12.1:Distance and Population of Area for considering
Agricultural Land as Capital Asset
S.No. Distance Population of areas
i. Within 2km 10,000 to 1,00,000
ii. Within 6km 1,00,001 to 10,00,000
iii. Within 8 km More than 10,00,000

iv) Gold Deposit Bonds, 1999 issued under the Gold Deposit Scheme, 1999
or Deposit Certificates issued under Gold Monetization Scheme, 2015
notified by central government are not covered under capital asset.
Note:
1) Capital assets include leasehold rights, a partner's right to share in the
profits of a firm and manufacturing license notified by central
government, land, building, plant, machinery, goodwill, investments
shares, permits and jewellery which includes:
a) Ornaments made of gold, silver, platinum or any other precious metal,
whether or not worked or sewn into any wearing apparel.
b) Precious or semi-precious stones, whether or not set in any furniture,
utensil or other article or worked or sewn into any wearing apparel.
2) Securities held by Foreign Institutional Investors (FII) shall always be
treated as capital asset; these cannot be treated as Stock-in trade.
3) Securities includes-
i) Shares, scrips, stocks, bonds, debentures, debenture stock or other
marketable securities of a like nature in or of any incorporated
company or other body corporate;
ii) Derivatives;
iii) Units or any other instrument issued by any collective investment
scheme to the investors in such schemes;
iv) Security receipts as defined in clause (zg) of Section 2 of the
securitization and reconstruction of financial assets and enforcement
of security interest act, 2002;
v) Units or any other such instrument issued to the investors under any
mutual fund scheme;
vi) Any certificate or instrument (by whatever name called), issued to
an investor by any issuer being a special purpose distinct entity
which possess any debt or receivable, including mortgage debt,
assigned to such entity, and acknowledgment beneficial interest of
such investor in such debt or receivable, including mortgage debt, as
the case may be;
vii) Government securities;
viii) Such other instruments as may be declared by the central
government to be securities; and 7
Income from Capital ix) Rights or interest in securities.
Gains & Other
Sources Self-generated Assets
Goodwill, tenancy rights, route permits and loom hours are self-generated
assets. Capital gain did not arise on these assets upto assessment year 1987-
88, due to non-determination of cost of acquisition of these assets. Presently,
on account of amendment in Income tax Act, with effect from assessment
year 2003-04, the cost of acquisition of self-generated assets shall be Nil and
whole amount of sale proceed shall be treated as capital gain.
Self-generated assets are taxable with effect from the following dates:
1) Sale of goodwill of business (taxable W.e.f AY 1988-89)
2) Tenancy rights (taxable W.e.f AY 1995-96)
3) Route permits (taxable W.e.f AY 1995-96)
4) Loom hours (taxable W.e.f AY 1995-96)
5) Right to manufacture, produce or process of any article (taxable W.e.f
AY 1998-99)
Kinds of Capital Assets: Interestingly, the classification of capital assets
does not depend on their durability but the period for which they have been
held. Capital assets are divided into two categories:
i) Short-term Capital Asset, and
ii) Long-term Capital Asset.
Short-term Capital Asset[Section 2(42A)]: The asset which is not covered
under the category of long term capital asset is known as short term capital
asset. If an assessee holds with him any asset, e.g., Gold, Ornaments and
some other assets (Except any Financial Assets like Shares, Securities, Units
of Unit Trust of India, any Mutual Fund and Zero Coupon Bonds), for 36
months or less than36 months from the date of its acquisition (12 months or
less than 12 months in case of shares, securities, units of UTI, mutual fund
and zero coupon bonds), such asset is known as short term asset.
Long term Capital Assets[Section 2(29A)]: Long-term Capital Asset means
a capital asset held by an assessee for more than 36 months from the date of
its transfer (more than 12 months in case of shares, securities, units of UTI,
mutual fund and zero coupon bonds such asset is known as Long term Asset.
Short-term and Long-term Capital Gains: Capital gains arising from the
transfer of short-term Capital Assets are called Short-Term Capital Gains.
(S.T.C.G).
Capital gains arising from the transfer of long-term Capital Assets are called
Long-term Capital Gains. (L.T.C.G).

8
 Capital Gains

Table 12.2: Difference between Short Term Gains and Long Term
Capital Gains

S.No. Basis Short term capital Long term capital

gains gains
1. Time Period of The asset held by the The asset held by the
asset assessee for a assessee for a period of
maximum period of more than of 36
36 months or less months (more than 12
than 36 months(12 or 24 months in case of
months or 24 months specified items)
or less than 12 or 24
months in case of
specified item)
2. Income tax Short capital gain Income tax at
which is covered u/s concessional flat rate
111 (if STT is not 20% (+SC+ HEC) (is
applicable) shall be STT is not applicable)
taxable at general is charged on long
rates like other term capital gains, if
incomes and a short LTCG is covered u/s
term capital gain 112A (if STT is
which is covered u/s applicable), then long
111A (is STT is term capital shall be
applicable) shall be taxable. Under this
taxable @15% flat Section, long term
rate (+SC+HEC). capital gain on sale of
listed equity shares or
units of equity oriented
mutual funds shall be
taxable if amount of
capital gain exceeds
Rs. 1,00,000 under
certain conditions.
LTCG exceeding
Rs. 1,00,000 shall be
taxable @ 10%
(+SC+HEC). In case,
the certain conditions
are not satisfied,
LTCG gain shall be
taxable u/s 112 @ 20%
(+SC+HEC).
3. Cost of The actual cost of The indexed cost of
acquisition and acquisition and acquisition and
improvement improvement both improvement is
are deducted. deducted. No
indexation in case of
112A
4. Exempted Exemptions u/s 54B, Exemptions u/s 54,
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Income from Capital capital gains 54D, 54G and 54GA 54B, 54D, 54EC,
Gains & Other are allowed. 54EE, 54F, 54G,
under various
Sources
Sections 54GA and 54GB are
allowed.

Illustration 1
State in the following cases whether these assets are short term or long
term, give reasons too:
1) Mr. Arun purchases listed shares in an Indian company on March 16,
2019 and transfer it on June 12, 2020.
2) Mr. Zia purchases units of equity oriented mutual fund on July 7, 2019
and transfer these units on July 10, 2020.
3) Mr. Balkishan purchased gold on September 12, 2017 and gifts the same
to his friend, Mr. Charanjeet on December 30, 2018. Mr Charanjeet
transfers the gold on October 20, 2020.
4) Mrs. Sangeeta acquires a house property on March 16, 2019 and
transfers it on June 12, 2020.
Solution:

Tax-Payer Asset Minimum Period of Short term

period to holding or Long
become term
LTCA
Arun Listed Shares More than 12 March 16, Long term
months 2019 to June
12, 2020
(14 months,
27 days)
Zia Units of More than 12 12 months 3 Long term
equity months days
oriented MF
Charanjeet Gold More than 36 12thSept, Long term
months 2017 to
October 20,
2020
Sangeeta House More than 12 March 16, Short term
property months 2019 to June
12, 2020
(14 months
27 days)

12.2.2 Transfer of Capital Assets [(Section 2 (47)]

Transfer in relation to capital assets includes:
i) Sale, exchange or relinquishment of the assets, or
ii) The extinguishment of any rights therein, or

10 iii) The compulsory acquisition by the Government under any law, or

 Capital Gains
iv) Where the asset is converted by the owner thereof into stock-in-trade of a
business carried on by him, such conversion. Further, where a business is
converted into a limited company, there is a transfer of capital assets, or
v) The maturity or redemption of zero coupon bonds or
vi) Any transaction involving the allowing of the possession of any
immoveable property to be taken or retained in part performance of a
contract of the nature referred to in the Transfer of Property Act, 1882, or
vii) Any transaction which has the effect of transferring or enabling the
enjoyment of any immovable property.
Examples of transfer
i) Redemption of preference shares by a company is a transfer in the hands
of shareholders and they will be liable to capital gain for the same.
[Anarkali Sarabai v CIT (1997) 90 Taxman 509 (SC)].
ii) Conversion of preference share into ordinary shares amounts to transfer
in hands of the shareholder. [CIT v Motors and General Stores P. Ltd.
(1967) 66 ITR 692 (SC)].
iii) Distribution of capital assets in case of liquidation of a company is not a
transfer in the hands of the company but a transfer in the hands of the
shareholders.
iv) Proprietary business taken over by a firm. [CIT v Ramakrishnan (1969)
73 ITR 356 (Ker)(FB)].
v) Slump sale of an undertaking of a business (Section 50 B).
vi) Grant of mining lease at a premium [A.R. Krishnamurthy and Another v
CIT(1989) 176 ITR 416 (SC)].
vii) Salami or premium received for lease of plots for 99 years [R.K.
Palshikar HUF v CIT (1988) 172 ITR 310 (SC)].
Transactions not regarded as transfer [Sections 46 and 47]: The meaning
of transfer is given in Section 2(47), whereas transactions not regarded as
transfer are covered u/s 46 and 47. In many transactions although there is a
transfer, but these are not considered to be transfer for purposes of capital
gains. Some of the relevant transactions which are not regarded as transfer
are:
1) where the assets of a company are distributed to its shareholders on
liquidation of a company, such distribution shall not be regarded as
transfer in the hands of company [Section 46 (1)],
2) any distribution of capital assets on the total or partial partition of Hindu
Undivided Family [Section 47 (i)];
3) any transfer of a capital asset under a gift or will or an irrevocable trust
[Section 47 (iii)];

11
Income from Capital 4) any transfer of a capital asset by a company to its 100% subsidiary
Gains & Other
Sources
company provided the subsidiary company is an Indian company
[Section 47 (iv)];
Note: The transfer of the asset shall not be in form of stock-in-trade.
5) any transfer of a capital asset by a 100% subsidiary company to its
holding company, if the holding company is an Indian Company [Section
47 (v)].
6) any transfer in a scheme of amalgamation of a capital asset by the
amalgamating company to the amalgamated company, if the
amalgamated company is an Indian company [Section 47 (vi)];
7) any transfer in a scheme of amalgamation of shares held in an Indian
company by the amalgamating foreign company to the amalgamated
foreign company, if certain conditions are satisfied.
8) any transfer, in a demerger, of a capital asset by the demerged company
to the resulting company, if the resulting company is an Indian company
[Section 47 (vib)];
9) any transfer in a demerger, of a capital asset, being a share or shares held
in an Indian company, by the demerged foreign company to the resulting
foreign company, if certain conditions are satisfied.
10) any transfer or issue of shares by the resulting company, in a scheme of
demerger to the shareholders of the demerged company if the transfer or
issue is made in consideration of demerger of the undertaking [Section
47 (vid)];
11) any transfer by a shareholder, in a scheme of amalgamation, of shares
held by him in the amalgamating company if certain conditions are
satisfied.
12) any transfer of Sovereign Gold Bond issued by the Reserve Bank of
India under the Sovereign Gold Bond Scheme, 2015, by way of
redemption, by an assessee being an individual.
13) any transfer of a capital asset, being -
a) bond or Global Depository Receipt referred to in Section 115 AC
(1); or
b) rupee denominated bond of an Indian company; or
c) derivative, made by a non-resident on a recognized stock exchange
located in any International Financial Services Centre and where the
consideration for such transaction is paid or payable in foreign
currency [Section 47 (viiab)]; [Inserted by the Finance Act, 2018,
W.e.f. A.Y. 2019-20].
14) any transfer of a capital asset, being any work of art, archaeological,
scientific art collection, book, manuscript, drawing, painting, photograph
or print, to the Government or a University or the National Museum,
12 National Art Gallery, National Archives or any such other public
 Capital Gains
museum or institution, as may be notified by the Central Government in
the Official Gazette to be of national importance, or to be of renown
throughout any State or States [Section 47(ix)];
15) any transfer by way of conversion of bonds or debentures, debenture-
stock or deposit certificates in any form, of a company into shares or
debentures of that company [Section 47 (x)];
16) any transfer by way of conversion of preference shares of a company
into equity shares of that company [Section 47(xb) inserted by the
Finance Act, 2017, W.e.f. A.Y. 2018-19];
17) any transfer of a capital asset or intangible asset by a firm to a company
as a result of succession of the firm by a company in the business carried
on by the firm provided the following conditions are satisfied:
a) all the assets and liabilities of the firm, relating to the business
immediately before the succession become the assets and liabilities
of the company;
b) all the partners of the firm immediately before the succession
become the shareholders of the company in the same proportion in
which their capital accounts stood in the books of the firm on the
date of the succession;
c) the partners of the firm do not receive any consideration or benefit,
directly or indirectly, in any form or manner, other than byway of
allotment of shares in the company;
d) the aggregate of the shareholding in the company of the partners of
the firm is not less than 50% of the total voting power in the
company and their shareholding continues to be as such for a period
of 5 years from the date of the succession [Section 47 (xiii)]; and
18) any transfer of a capital asset or intangible asset by a private company or
unlisted public company (hereafter in this clause referred to as the
company) to a limited liability partnership or any transfer of a share or
shares held in the company by a shareholder as a result of conversion of
the company into a Limited Liability Partnership in accordance with the
provisions of Section 56 or Section 57 of the Limited Liability
Partnership Act, 2008 provided following conditions are satisfied:
a) all the assets and liabilities of the company immediately before the
conversion become the assets and liabilities of the limited liability
partnership;
b) all the shareholders of the company immediately before the
conversion become the partners of the limited liability partnership
and their capital contribution and profit sharing ratio in the limited
liability partnership are in the same proportion as their shareholding
in the company on the date of conversion;
c) the shareholders of the company do not receive any consideration or
benefit, directly or indirectly, in any form or manner, other than by
13
Income from Capital way of share in profit and capital contribution in the limited liability
Gains & Other
Sources
partnership;
d) the aggregate of the profit sharing ratio of the shareholders of the
company in the limited liability partnership shall not be less than
fifty per cent at any time during the period of five years from the
date of conversion;
e) the total sales, turnover or gross receipts in business of the company
in any of the three previous years preceding the previous year in
which the conversion takes place does not exceed sixty lakh rupees;
and
f) the total value of the assets as appearing in the books of account of
the company in any of the three previous years preceding the
previous year in which the conversion takes place does not exceed
5 crore; and
g) no amount is paid, either directly or indirectly, to any partner out of
balance of accumulated profit standing in the accounts of the
company on the date of conversion for a period of three years from
the date of conversion. [Section 47(xiiib)];
Note: For the purpose of this clause, the expressions “Private Company”
and “Unlisted Public Company” shall have the meanings respectively
assigned to them in the Limited Liability Partnership Act, 2008
[Explanation to Section 47 (xiiib)]
19) where a sole proprietary concern is succeeded by a company in the
business carried on by it as a result of which the sole proprietary concern
sells or otherwise transfers any capital asset or intangible asset to the
company provided the following conditions are satisfied:
a) all the assets and liabilities of the sole proprietary concern relating to
the business immediately before the succession become the assets
and liabilities of the company;
b) the shareholding of the sole proprietor in the company is not less
than 50%, of the total voting power in the company and his
shareholding continues to remain as such for a period of 5 years
from the date of the succession; and
c) the sole proprietor does not receive any consideration or benefit,
directly or indirectly, in any form or manner, other than by way of
allotment of shares in the company [Section 47 (xiv)].
20) any transfer of a capital asset in a transaction of reverse mortgage under
a scheme made and notified by the Central Government [Section
47(xvi)];
21) any transfer by a unit holder of a capital asset, being a unit or units, held
by him in the consolidating scheme of a mutual fund, made in
consideration of the allotment to him of a capital asset, being a unit or
units, in the consolidated scheme of the mutual fund shall not be
regarded as transfer.
14
 Capital Gains
Provided that the consolidation is of two or more schemes of equity
oriented fund or of two or more schemes of a fund other than equity
oriented fund [Section 47 (xviii)];
22) any transfer by a unit holder of a capital asset, being a unit or units, held
by him in the consolidating plan of a mutual fund scheme, made
inconsideration of the allotment to him of a capital asset, being a unit or
units, in the consolidated plan of that scheme of the mutual fund.
[Section 47(xix)].
It may be observed that the above transactions are not treated as transfer for
purposes of capital gains.
Capital gain should arise in the previous year in which transfer took
place
Normally, capital gain arises in the previous year in which the transfer of the
asset takes place even if the consideration for the transfer is received or
realized in a later year. There are, however, 4 exceptional cases where capital
gain is taxable not in the year of transfer of the asset, but in some other year.
These exceptions are:
i) Damage or destruction of any capital asset by fire or other calamities.
ii) Conversion of capital asset into stock-in-trade.
iii) Compulsory acquisition of an asset.
iv) Transfer of capital asset, being land or building or both by an individual
HUF under a specified agreement with the developer [Section 45(5A)].

12.3 COMPUTATION OF CAPITAL GAINS

A) Short term capital gain
It shall be computed by deducting from the full value of the
consideration received or accruing as a result of the transfer of the capital
asset the following amounts:
a) Expenditure incurred wholly and exclusively in connection with
such transfer, and
b) The cost of acquisition of the capital asset and cost of any
improvement thereof.
This may be explained in the form of equation as under:
Short term Capital Gain = Full value of consideration - (Cost of acquisition +
Cost of improvement + Selling Expenses)

Table 12.3: Computation of Short-Term Capital Gains

Full consideration or sales proceeds of asset -
Less: Selling Expenses -
Net Consideration -
15
Income from Capital Less:
Gains & Other
Sources i. Cost of acquisition -
ii. Cost of improvement
Gross short term capital gains -
Less: Exemption u/s 54B, 54D,54G,54GA (if any) -
Taxable Capital Gains -

Illustration 2
Mr. Arjun sold a house property on 30th January, 2021 for Rs. 3,25,000. He
had purchased this property from Mr. Mayank on 01-06-2019 for
Rs. 1,70,000 and spent Rs. 27,500 on its improvement in November 2019.
Compute ‘Capital Gain’ for the assessment year 2021-22.
Solution:
Computation of capital gains of Mr. Arjun for the assessment year
2021-22
Sale proceeds of property Rs. 3, 25,000
Less:
i. Cost of Acquisition Rs. 1,70,000
ii. Cost of Improvement Rs. 27,500 Rs. 1,97,500
Short term capital Gains Rs. 1,27,500

B) Long Term capital gain

It shall be computed by deducting from the full value of the
consideration received the following amounts:
a) Expenditure incurred exclusively in connection with such transfer
b) The indexed cost of acquisition of the capital asset and indexed cost
of

Cost of Acquisition × Cost of Inflation Index of the

Indexed cost of year in which asset is to be transferred
acquisition =
Cost of Inflation index of the year of acquisition or
1/04/2001 year index, whichever is later

Cost of improvement × Cost of Inflation Index of the

Indexed cost of year of transfer
improvement =
Cost of Inflation index of the year in which
improvement took place

Table 12.4: Computation of Long-Term Capital Gains

Full consideration or sales proceeds of asset -

Less: Selling Expenses or transfer expenses -
Net Consideration -
16
 Capital Gains
Less:
i. Indexed Cost of acquisition -
ii. Indexed Cost of improvement
Gross Long term capital gains -
Less: Exemption u/s 54, 54B, 54D,54EC, 54EE, -
54F, 54G,54GA,54GB (if any)
Taxable Capital Gains -

Note:
i) If improvement is made before 1st April, 2001, then cost of improvement
will be ignored.
ii) Full value of consideration refers to what the transferor received or
entitled to receive as consideration for the capital asset transferred. It is
not necessarily always the market value of the asset on the date of
transfer should be the full value of consideration.
iii) Transfer of capital asset includes not only sale but also other methods of
transfer such as exchange, relinquishment of the asset, extinguishment of
the rights in the capital asset etc.
iv) Expression full value means the whole price without any deduction and
has nothing to do with the adequacy or in adequacy of the price bargain
similarly market value is also not concerned with the full value.
v) Where the consideration is to be received in installments, the entire value
of the consideration is to be taken into account while computing capital
gains which becomes chargeable in year of transfer.
vi) In case of exchange, market value of the property shall be the full value
of consideration.
vii) In some cases, instead of actual consideration the full value of
consideration shall be the deemed value. Such cases are explained u/s 45
(IA), 45 (2), 45 (3), 45 (4), 45 (5 A), 46 (2), 50 (C), and 50 (D).
viii) Both direct and indirect expenses incurred shall be considered as
expenses on transfer. Expenses of transfer for the purpose of transfer of
capital assets include expenses such as advertisement expenses,
brokerage, stamp duty, registration fees and legal expenses etc.
ix) Cost of acquisition and cost of improvement is discussed in the ensuing
pages of this unit.
x) Similarly, indexed cost of acquisition and indexed cost of improvement
is also discussed in the ensuing pages of this unit.
xi) From the capital gains available exemptions are deducted to arrive at
taxable capital gains.

17
Income from Capital
Gains & Other 12.4 COST OF ACQUISITION
Sources
Cost of acquisition is the price which the assessee has paid or the amount
which the assessee has incurred for acquisition of the asset. It includes the
expenses incurred in acquiring the asset or completing the title. Cost of
acquisition has to be ascertained with reference to the date of acquisition and
not with reference to the date on which it became a taxable capital asset.
Interest on loan taken for acquiring a capital asset, litigation expenses
incurred by the assessee by filing suit to get articles amended and expenses
incurred for compelling the company to register the shares in the name of
assessee are part of cost of acquisition.
Cost of acquisition of assets acquired before 01.04.2001 [Section 55(2) (b)]
Following are the options assessee has either to take the actual cost of
acquisition or the fair market value of the asset as on 01.04.2001 to be the
cost of acquisition for computation of capital gain. Take the higher figure
1) Where the asset has been acquired by the assessee himself before
01.04.2001.
2) Where the asset has been acquired by the assessee through a mode given
as deemed assessee and the previous owner have acquired that asset
before 01.04.2001.
In the above both cases, following formula shall be used in computing cost of
acquisition

Actual cost to previous owner or actual price of assets on

1-04-2001 (whichever is more) × Cost Index of
Indexed Cost =
transferred year
100

Fair market value means: [Section 2(22B)]

i) The price which the capital asset would ordinarily get if sold in the open
market on the relevant date, and
ii) When the price given in (i) above is not ascertainable, such price as may
be determined in accordance with the rules made under income tax Act.
According to Section 55 A in case other than covered by (i) above the
assessing officer can make a reference to the valuation officer in any of
the following cases (a) If the value of the asset as claimed by the
assessee and the fair market value as per the assessing officer opinion
differ by more than 15% of the value of asset or more than Rs. 25,000, as
the case may be, or (b) If having regard to the nature of the asset and
other relevant circumstances, it is necessary to do so.

12.4.1 Deemed Cost of Acquisition

18
 Capital Gains
Circumstances when cost incurred by the previous owner is taken as the cost
of acquisition of capital asset for the current owner.
a) Acquisition of asset under gift or will; or
b) Acquisition of asset on the distribution of asset at the time of partition of
a HUF; or
c) Acquisition of asset on the distribution of asset at the time of liquidation
of a company; or
d) Acquisition of asset under a transfer to a revocable or an irrevocable
trust; or
e) Acquisition of asset by inheritance or succession; or
f) Acquisition of asset on the transfer of capital asset by the amalgamating
company to the amalgamated company if the amalgamated company is
an Indian Company.
g) Acquisition on a transfer by a wholly owned Indian subsidiary company
to its holding company or vice versa.
h) Acquisition on any transfer in a demerger of a capital asset by the
demerged company to the resulting company u/s 47 (vib)
i) On conversion of self-acquired property of a member of H.U.F. to the
joint family property.
j) On transfer of asset by a sole proprietary concern to a company as on
result of succession u/s 47 (xiv) subject to certain conditions.
k) Acquisition on any transfer by a private company or unlisted public
company to a limited liability partnership firm as a result of conversion
of the company into limited liability partnership.
Illustration 3
Mr. Amit purchased a residential property for Rs. 4,00,000 in 2004-05. He
gifted the property to Miss Deepali in 2008-09. The fair market value of the
house on the date of gift was Rs. 5,00,000. Pankaj filed a suit on Deepali
claiming the title to the gifted property. Deepali paid Rs. 60,000 to Pankaj for
compromising the suit. Deepali sold the property on 15th October, 2020 for
Rs. 20,00,000. Compute the capital gain chargeable to tax for Amit and
Deepali. The cost inflation index in 2004-05, 2008-09 and 2020 were 113,
137 and 289 respectively.
Solution:
Computation of capital gain of Mr. Amit and Miss Deepali for AY 2021-22
Amit has transferred the property to Deepali as a gift. The transaction is not
regarded as a transfer. Hence, there is no capital gain in the hands of Amit.
Deepali has sold the property, the capital gain would be determined as under:
Rs.
19
Income from Capital Sale proceeds 20,00,000
Gains & Other
Sources Less: Indexed cost of acquisition to Mr. Amit
�,��,������
( ) 10,65,487
���
Long term Capital Gain 9,34,513

Illustration 4
Mukesh purchased a property for Rs. 40,000 on 10th February, 1972. He got
the first floor of property constructed in 1975-76 by spending Rs. 60,000. He
died on 10th November, 2003. The property is transferred to Mukesh's wife
by his Will. Mrs. Mukesh spends Rs. 53,200 during 2004-05 for renewals of
the property. Mrs. Mukesh sold the property for Rs. 20,00,000 on 20th
January, 2021 (brokerage paid Rs. 20,000). The fair market value of the
property on 1stApril 2001 was Rs. 1,50,000. Compute the taxable capital gain
for the A.Y. 2021-22.The cost inflation index in 2001-02, 2004-05and 2020-
21 were 100, 113, and 301 respectively.
Solution:
Computation of Capital Gain of Mr. Mukesh for the A.Y. 2021-22
Rs. Rs.
Sale proceeds 20,00,000
Less: Expenditure on transfer 20,000
Net Sales Proceeds 19,80,000
Less: Indexed cost of acquisition
�,��,������
( ���
) 4,51,500
Indexed cost of improvement 5,93,210
��,������
( ��� ) 1,41,710
Long term Capital Gain 13,86,790

12.4.2 Cost of Acquisition of Bonus Shares

Cost of Bonus Shares shall be the following:
i) If the bonus shares are received prior to 01.04.2001, the fair market value
on 01.04.2001 will be taken as the cost of acquisition.
ii) If bonus shares are received after 01.04.2001, cost of acquisition shall be
taken as nil.
Note: If bonus shares are issued to preference shareholders, the amount equal
to deemed dividend on which he was liable to pay tax would be the cost of
bonus shares.

12.4.3 Cost of Acquisition of Goodwill, etc.

The cost of acquisition of goodwill, a trademark or brand name associated
with business or right to manufacture, produce or process any article or things
or right to carry on any business or profession, tenancy rights, stage carriage
permit or loom hours shall be determined as under:
20
 Capital Gains
i) If the asset is purchased from previous owner – the amount of purchase
price shall be the cost of acquisition.
ii) In any other case – nil.
iii) If is acquired in any mode under clause (i) to (iv) to Section 49 (i), cost
of previous owner, if paid by him shall be cost of acquisition, but, if it
was self-generated by the previous owner the cost of acquisition shall be
nil.

12.4.4 Cost of Acquisition of Right shares [Section 55(2) (aa)]

Where an assessee, by virtue of holding certain shares, becomes entitled to
subscribe to any additional shares, then:
a) the cost of acquisition of the original shares shall remain unchanged i.e.,
it shall be the amount actually paid for acquiring the original shares;
b) the cost of acquisition of the right shares, when assessee subscribes to the
shares on the basis of the said entitlement, shall be the amount actually
paid for acquiring the right shares;
c) the cost of acquisition of the right to acquire such shares, when such a
right is renounced in favor of any other person, shall be taken to be nil;
d) As regards, the person in whose favor the right to subscribe to the shares
has been renounced; the cost of acquisition of such right share shall be
the amount paid by him to the company for acquiring the shares plus the
amount paid to the person renouncing the right.
12.4.5 Cost of Acquisition for Purpose of Computing Long
Term Capital Gain under Section 112A
The cost of acquisition for the purposes of computing capital gains in relation
to a long term capital asset, being:
a) an equity share in a company, or
b) a unit of an equity oriented fund; or
c) a unit of a business trust
Referred to in Section 112A;
As per [Section 55(2) (ac)], Cost of acquisition for the assets acquired by the
assessee before 1/02/2018, shall be higher of –
i) the actual cost of acquisition of such asset; such
ii) the lower of-
a) the fair market value of such asset on 31/1/2018, and
b) the full value of consideration received or accruing as a result of the
transfer of the capital asset.

21
Income from Capital 12.4.6 Cost of Acquisition of Depreciable Assets (Section 50)
Gains & Other
Sources As already discussed under the unit ‘Profits and gains of business and
profession’, all depreciable assets except in case of electricity companies are
part of block of assets.
Where the full value of the consideration as a result of the transfer of any part
or entire block of asset exceeds the cost of acquisition of that block of
depreciable assets, there will be a capital gain, which will always be a short
term capital gain. The cost of acquisition of a block of depreciable assets is
the written down value of the block at the beginning of the year plus actual
cost of any asset falling within the same block, acquired during the year.
In other words, the excess of the sale consideration over the aggregate of the
following three amounts shall be the short- term capital gain:
a) Expenditure in connection with the transfer;
b) Cost of acquisition and
c) Cost of improvement, thereto.
In case of depreciable assets, cost of acquisition and cost of improvement is
taken as the aggregate of the following:
i) The written down value of the block of assets in the beginning of the
year; and
ii) The actual cost of any asset falling within the block of asset acquired
during the previous year.
Such an excess shall be deemed to be the capital gain arising from the
transfer of short term capital assets.
Illustration 5
Naresh Mittal purchases 500 equity shares of Rs. 10 each for Rs. 40 per share
in 1987-88 and incurs an expenditure of Rs. 500 on brokerage. In June 2003-
04, he got 100 bonus shares. In September 2020, he got 100 rights shares for
Rs. 30 each. Naresh Mittal sold 100 bonus shares in December, 2020 at Rs.
100 per share and 100 right shares @ 40 per share in January 2021. Calculate
the Capital Gains for the A.Y. 2021-22. The cost of inflation index for 2003-
04 is 109 and for 2020-21, it is301.
Solution:
Computation of Capital Gain of Naresh Mittal for the A.Y. 2021-22
Rs.
Sale value realized from 100 Bonus Shares 10,000
Less: Cost of acquisition of Bonus Shares Nil
Long Term Capital Gain 10,000

Sale value realized from 100 Rights Shares 4,000

Less: Cost of acquisition of Right Shares 3,000
22
 Capital Gains
Short Term Capital Gain 1,000
Note:
1) Total capital gain Rs. 10,000+Rs. 1000= Rs. 11,000
2) As per Section 55(2) (aa), if the assessee subscribes shares or securities
under rights, the actual amount paid for such asset is cost of acquisition.

12.5 COST OF IMPROVEMENT

As per [Section 55 (1) (b)], the provisions for cost of improvement are as
follows:
a) Cost of improvement in relation to a capital asset being goodwill of a
business or a right to manufacture, produce or process any article or
thing or right to carry on any business, shall be taken as nil. It makes no
difference whether goodwill or such right was self-generated or acquired
for price.
b) Cost of improvement in relation to any other asset -
i) Where the capital asset became the property of the previous owner
or the assessee before 1-4-2001, it will be all capital expenditure
incurred in 01.04.2001by the previous owner of the assessee.
Expenditure incurred by the assessee or the previous owner before
01.04.2001 is to be completely ignored, whether the assessee opts
for the market value as on 01.04.2001 or not.
ii) In other cases, where assets have been acquired after 1-4-2001, all
capital expenditure incurred in making any additions or alterations to
the capital asset by the assessee after it became his property and
where the capital asset became the property of the assessee by any
method given in Section 49 (i), capital expenditure incurred by the
previous owner also be treated as cost of improvement.
Note: Any expenditure which is deductible in computing the income
chargeable under the head income from house property, income from other
sources and profits and gains of business or profession is not included in the
cost of improvement.

12.6 INDEXED COST OF ACQUISITION AND

IMPROVEMENT
As you know for computation of capital gain, in case of short-term capital
gain, cost of acquisition and cost of improvement are deducted from the full
value of consideration, whereas in the case of long-term capital gain, indexed
cost of improvement and indexed cost of acquisition are deducted.
Now let us know what is indexed cost of acquisition and indexed cost of
improvement.
Indexed Cost of Acquisition: It means an amount which bears to the cost of
acquisition the same proportion as cost of inflation index for the year in
23
Income from Capital which the asset is transferred bears to the cost inflation index for the first year
Gains & Other
Sources
in which the asset was held by the assessee or for the year beginning on
01.04.2001, whichever is later.
The indexed cost of acquisition is calculated with the following formula:

Cost of Acquisition × Cost inflation Index of the year in

which asset is to be transferred or sold
Indexed Cost of
Acquisition = Cost Inflation Index of the year of acquisition of the
asset by the assessee or the year of acquisition of the
asset by the assessee or the year beginning on 1/04/2001
(whichever is later)

Cost Inflation Index: An index as the Central Government may by

notification in the official Gazette specify in this behalf.
Table 12.5: Cost Inflation Index

Year Cost Inflation Index (CII)

2001-02 100
2002-03 105
2003-04 109
2004-05 113
2005-06 117
2006-07 122
2007-08 129
2008-09 137
2009-2010 148
2010-2011 167
2011-2012 184
2012-2013 200
2013-2014 220
2014-2015 240
2015-2016 254
2016-2017 264
2017-2018 272
2018-2019 280
2019-2020 289
2020-2021 301

Illustration 6
Mr. Arun has a house which is let out for residential purpose. He had
purchased this house for Rs 65,000 in 2008-09. He sold this house on
24
 Capital Gains
15thJune, 2020 for Rs. 6,00,000. He had purchased some jewellery in 2008-09
for Rs. 75,500. On 22nd February, 2021, he sold this jewellery for
Rs. 7,20,800. You have to determine the taxable capital gains of Mr. Arun for
the assessment year 2021-22.Cost inflation index are 2008-09-137, 2020-21-
301.
Solution:
Computation of taxable capital gains of Mr. Arun for the assessment
year 2021-22
House: Rs. Rs.
Sale consideration 6, 00,000
Less: Indexed cost of acquisition 1,42,810
(65,000 × 301)
137
Long term capital gains 4,57,190
Jewellery:
Sale consideration 7, 20,800
Less: Indexed Cost of acquisition
(75,500×301) 1,65,880
137
Long term capital gains 5,54,920
Total long term capital gains 10,12,110

Indexed Cost of Improvement: Indexed cost of improvement means an

amount which bears to the cost of improvement the same proportion as cost
inflation index for the year in which the asset is transferred bears to the cost
inflation index for the year in which improvement to asset took place.
The indexed cost of Improvement shall be determined by the following
Formula:

Indexed Cost of Cost of Improvement × Cost of Inflation Index of the

Improvement = year in which the asset is to be transferred
Cost Inflation Index of the year in which improvement
took place

Illustration 7
Mr. Ajit purchased a house for Rs. 80,000 on 30thJune, 1990. He paid
following expenses for making additions and alterations of the house:
Rs
a) Cost of construction of first floor in 1993-94 25,000
b) Cost of construction of second floor in 2002-03 70,400
c) Alteration/reconstruction of the house in 2011-12 42,800

25
Income from Capital Compute the capital gain for the assessment year 2021-22 on the basis of
Gains & Other following additional information:
Sources
Rs.
st
Fair market value of house on 1 April, 2001-02 93,000
Sold this house on 15th June, 2020 20,60,000
Expenses of transfer in connection with the house 1, 95,000
Value, valued by stamp valuation officer 22, 30,000
Cost inflation Index is given below:
2001-02-100, 2002-03- 105, 2011-12-184, 2020-21-301
Solution:
Computation of capital gains of Mr. Ajit for assessment year 2021-22
Rs. Rs.
Full Sale consideration 22,30,000
(value by valuation officer)
Less: Expenses of transfer 1, 95,000 20, 35,000
Less:
i) Indexed cost of acquisition
93,000 301
=
100
2,79,930
ii) Indexed cost of Improvement
70, 400 301
= 2,01,813
105
iii) Indexed cost of Improvement
42,800 301
= 70,015 5,51,758
184
Long term capital gains 14,83,242
Note:
1) In case of asset acquired before 1/04/2001, the market price on 1st April,
2001 or its actual cost, whichever is more, shall be taken for cost index.
It will be cost of acquisition.
2) The cost of improvement made before 1st April, 2001, will not be
considered. Hence, construction cost of 1st floor in 1993-94 has not been
deducted.
3) Value, valued by stamp valuation officer shall be treated as full
consideration of the asset.

26
 Capital Gains
12.7 CAPITAL GAINS EXEMPT FROM TAX
As discussed earlier any profits or gains arising from transfer of any capital
asset are chargeable under the head capital gains. But any profits or gains
arising out of transfer of certain capital assets are exempt from tax i.e., such
profits or gains are not included in the taxable income of the assessee.
There are certain transfers of capital asset but still the capital gain arising on
account of such transaction is exempt from income tax:
These exemptions are of two types:
a) Exemption of capital gains under Section 54,54B,54D,54EC,54EE,
54F,54G,54GA, and 54GB
b) Exemption of capital gains under various sub-clauses of Section 10.
A. The capital gains exempt from tax are:
i) Capital gains arising out of the transfer/distribution of asset of the
company to its registered shareholders at the time of its liquidation will
not be regarded as transfer.
ii) Capital gains arising on the transfer of property used for residence and
the land appurtenant thereto subject to the conditions laid down in
Section 54.
iii) Capital gains arising from the transfer of agricultural land situated in an
urban area are exempt subject to the provisions contained in Section
54B.
iv) Capital gains arising out of compulsory acquisition of land and building
of industrial enterprise (Section 54D).
v) Capital gains arising from the transfer of long capital asset invested in
long term specified asset (Section 54EC).
vi) Capital gain arising from transfer of long-term listed securities invested
in specified equity shares (Section 54 ED)
vii) Capital gain on transfer of other long term assets except residential
house, if consideration received is invested in new residential house.
(Section 54F)
viii) Capital gains on shifting of industrial undertaking from urban areas
(Section 54G).
ix) Capital gain on transfer of assets of shifting of industrial undertaking
from urban area to any special economic Zone (Section 54GA)
x) Exemption of long term capital gains on transfer of residential property
on investment in Equity shares of an approved company under certain
conditions (Section 54GB) (with effect from AY 2013-14)
xi) Extension of time limit in purchasing new assets or investing the amount
of capital gains in case of compulsory acquisition of assets (Section 54H)

27
Income from Capital Capital Gains Account Scheme, 1988
Gains & Other
Sources Capital Gains Account Scheme was introduced in 1988 by the Central
Government. This scheme is applicable for exemption of tax on capital gain
u/s 54, 54B, 54D, 54F, 54G and 54GA of the Act. The government, in order
to encourage reinvestment of the capital gains made on the sale of capital
assets by the seller, has provided relief from capital gains tax if such capital
gain is re-invested in certain specified assets within a specified time limit. In
many cases, the time limit available is much longer and even exceeds the due
date of filing return. To address this, in order to enable the taxpayer park his
funds till they are invested for the prescribed purpose, the concept of Capital
Gains Account Scheme (CGAS) was introduced. Any capital gain invested in
Capital Gains Account Scheme will be eligible for capital gain exemption as
it would in case of re-investment.
Capital gains account can be opened in any of the authorized bank branches
excluding rural branches of such authorized banks. Two types of deposits can
be made under capital gains account scheme, Savings deposit, this account is
similar to regular savings bank account of any bank where interest at the rate
similar to saving bank account interest will be credited periodically and also
passbook is issued to the deposit holder. Just like savings deposit, this
account offers better liquidity and withdrawals can be made at any time and
second is, Term deposit, it is similar to a fixed deposit account of a bank
which offers interest at the rate applicable to term deposit and has restrictions
similar to a term deposit. Maximum term allowed for a Term deposit account
is 3 years. The depositor is required to choose the term based on his plan for
specified investment such as 2 years for the purchase of new house property
or 3 years for construction. Just like fixed deposits, the depositor would
receive deposit certificate containing all the details of deposit and is required
to be submitted at the time of withdrawal. Further, auto-renewal of term
deposit is not possible like a regular fixed deposit.
Term deposit can either be cumulative or non-cumulative i.e., interest is
either cumulated and re-invested along with principal or paid at regular
intervals respectively. The interest rate for both deposits is fixed by RBI from
time to time.
I) Capital gains arising out of the transfer/distribution of asset of the
company to its registered shareholders at the time of its liquidation
will not be regarded as transfer. (Not to be discussed as it is not
considered as transfer)
II) Capital gains arising on the transfer-of property used for residence
(Section 54)
Any capital gain arising-from the transfer of a house or land appurtenant
thereto is exempt subject to the following conditions:
a) The building is owned by an individual or H.U.F
b) Such property was being used as residential house and the income of
such property is chargeable under the head income from house property.
28
 Capital Gains
c) On the date of transfer of house property, the assessee should get long
term capital gain from that property.
d) The exemption will be available only in, relation to a house property
which had been held by the tax-payer for a period exceeding 36 months
before transfer. However, W.e.f. financial year 2017-18 (A.Y. 2018-19),
the criteria of 36 months have been reduced to 24 months for immovable
properties such as land, building and house property.
e) The assessee has, within a period of one year before or two years after
the date of transfer purchased a residential house and/or he has within a
period of three years after the date of transfer constructed a residential
house.
f) The capital gains arising from the transfer of such residential house is
exempt to the extent of the cost of the new residential house purchased or
constructed within the specified period. It means that, if the whole capital
gain is re-invested in the cost of the new house, it is fully exempt from
tax. If only a part of it is re-invested, the balance of it is chargeable to
tax.
g) Where the amount of capital gain is not utilized by the assesse for
acquisition of new house before the date of furnishing the return of
income, it shall be deposited by him on or before the due date of
furnishing the return of income u/s 139, in an account opened under the
Capital Gains Accounts Scheme, 1988, with State Bank of India or any-
of its subsidiaries or with any nationalized bank authorized by the
Central Government. The amount already utilized for reinvestment
together with the amount deposits shall be deemed to be the cost of the
new house. After such deposit he must utilize the deposit for
acquiring/constructing the new house within the specified period.
h) The new house should not be transferred within a period of three years of
its purchase/construction. If it is transferred within three years, the
exemption granted earlier will be withdrawn and the old exempted
capital gain (if any) arising due to transfer of the new residential house,
will be liable to be taxed in that year in which such residential
accommodation is sold. And, if there is a loss on transfer of new house, it
will be deducted from the exempted capital gain of the old house and the
balance shall be taxed in that year in which new house is transferred.
i) If the amount deposited is not utilized fully for acquiring the new house
within the stipulated period, the amount not so utilized shall be treated as
long-term capital gain of the previous year in which the specified period
expires.
Limit of Exempted amount: Under this Section, the amount of exempted
capital gain is restricted to the amount of new purchase or to the cost of
construction of new house. If the purchase price of new house or the cost of
construction of new house is more than the capital gains, the whole capital
gain is exempted. If the cost of new house is less than the amount of capital
gain, the capital gain upto the cost of house is exempted and the balance
29
Income from Capital amount is taxable. For example, Rs. 2,40,000 is long term capital gain on the
Gains & Other
Sources
transfer of a house and if the assessee purchases a new house for
Rs.2,70,000, the whole amount of Rs.2,40,000 will be exempted. Taxable
amount of capital gain is nil. If a new house is purchased for Rs. 2,00,000, in
place of Rs. 2,70,000, the capital gain is exempted upto Rs. 2,00,000 and
balance Rs. 40,000 capital gain is taxable.
Illustration 8
Mohit sells his only residential house in Bangalore on 26th September,
2020for Rs. 26, 00,000 and incurs an expenditure of Rs. 30,000 in connection
with the transfer. Cost of this house for Mohit in 1979 was Rs. 2,00,000 and
on 1stApril, 2001 the fair market value was Rs. 3,00,000. On 15thJanuary
2021, he purchased a residential flat in Bangalore for Rs. 4,00,000 and
deposited Rs. 2,00,000 in Capital Gain Account Scheme. Calculate the
capital gain chargeable to tax for assessment year 2021-22. The cost inflation
index for 2001-02 was 100 and for 2020-21 it is 301.
Solution:
Computation of Taxable Capital Gain of Mr. Mohit for the A.Y. 2020-21.
Rs. Rs.
Sale Value 26,00,000
Less: expenses incurred 30,000
Less: Indexed cost of acquisition 25,70,000
�,��,������
���
9,03,000

Long Term Capital Gain 16,67,000

Less: Exemption u/s 54
Cost of new house 4,00,000
Deposit in Capital
Gain Account Scheme 2,00,000 6,00,000
Taxable Capital Gain 10,67,000

III) Capital gain arising from the transfer of agricultural land (Section
54B)
Any capital gain arising on the transfer of agricultural land situated in an
urban area is exempt subject to the following conditions:
a) The agricultural land is owned by an individual.
b) The agricultural land was, in the two years immediately preceding the
date of transfer, being used either by the assessee or his parent for
agricultural purposes.
c) The assessee has purchased within a period of two years, from the date
of transfer, any other land (rural or urban) for being used for agricultural
purposes.
30
 Capital Gains
d) The capital gain arising from the transfer of such agricultural land is
exempt to the extent of the cost of the new agricultural land purchased
within the specified period mentioned in (c) above. It means that if the
whole capital gain is re-invested, it is fully exempt from tax. If only a
part of it is re-invested, the balance of it is chargeable to tax.
e) If the amount of capital gain is not utilized by the assessee for acquisition
of new agricultural land before the due date for furnishing the return of
income, it shall be deposited by him on or before the due date of
furnishing the return of income in an account opened under the Capital
Gains Account Scheme, 1988. The amount already utilized for re-
investment together with the amount of deposits shall be deemed to be
the cost of the new agricultural land. If the amount deposited is not fully
utilized for acquiring the new agricultural land within two years, the
amount not so utilized shall be treated as the long-term/short term capital
gain depending on the original gain.
f) If the new land is transferred within three years of its purchase; the
exemption granted earlier will be withdrawn and the capital gain arising
on account of transfer of new land together with exempted capital gain of
old land shall be liable to be taxed in that year in which new land is sold.
Limit of exempted amount: If the cost of new agricultural land is more than
the capital profit earned on the transfer of agricultural land, the whole amount
of capital gain will be exempted. If the cost of new agricultural land is less
than the capital gain, then exemption will be equal to the cost of new
agricultural land.
Illustration 9
Agricultural land situated at Pune is purchased in 2004-05 for Rs. 32,200 and
sold for Rs. 4,00,000 on 02.09.2020. The assessee purchased another piece of
agricultural land on 21.10.2020 for Rs. 60,000 and deposited Rs. 40,000 on
15.02.2021 in Capital Gain Account Scheme, 1988. Calculate the amount of
capital gain taxable for the A.Y. 2021-22. The cost inflation index in 2004-05
was 113 and in 2020-21 it was 301.
Solution:
Computation of Capital Gain to be taxable for the A.Y. 2020-21
Rs.
Sale Value 4,00,000
��,������ 85,772
Less: indexed cost of acquisition ���
L.T.C.G. 3,14,228
Less: Cost of new agricultural land 60,000
Amount deposited in Capital Gain Account Scheme40,000 1,00,000
Taxable Capital Gain 2,14,228

IV) Capital gain on compulsory acquisition of land and building of

industrial enterprise (Section 54 D)
31
Income from Capital Any capital gain arising on account of transfer by way of compulsory
Gains & Other
Sources
acquisition under any law of land or building is exempt subject to the
following conditions:
a) The land or building should be used by the assessee for the purpose of an
industrial undertaking.
b) The assessee must use this land or building for the aforesaid purpose for
atleast two years immediately preceding the date on which the transfer
took place.
c) The assessee has purchased any other land or building or constructed any
other building for the purpose of shifting or re-establishing the industrial
undertaking or setting up another industrial undertaking in that building
within a period of three years after such transfer.
d) The capital gain arising from such transfer of industrial undertaking is
exempt to the extent of the cost of new land or building invested within
the specified period.
e) If the amount of capital gain is not utilized by the assessee for the
purchase or construction of the new land or building before the due date
of furnishing the return of income, this amount shall be deposited by him
in the Capital Gain Account Scheme, 1988, and utilized in accordance
with the Scheme. The amount already utilized for re-investment together
with the amount of deposits shall be exempt from tax.
f) The new land or building should not be transferred within a period of 3
years of its purchase. If it is transferred within 3 years, the exemption
granted earlier shall be withdrawn and old exempted gain and new
capital gain (if any) arising on transfer of new asset shall be chargeable
to tax in that year in which the new asset is transferred.
g) If the amount deposited in Capital Gain Account Scheme is not fully
utilized for the aforesaid purpose within a period of 3 years after the
transfer of original land and building, the amount not so utilized shall be
treated as capital gain of that year in which the period of 3 years expires.
Limit of exemption of capital gain: The amount of capital gain invested in
the purchase of non-industrial enterprise in the form of land and building is
exempted. If the whole amount of capital gain is invested, the whole capital
gain will be exempted.
Illustration 10
Y Company Ltd. has an industrial undertaking in Andhra Pradesh. A
building, which was constructed in August, 2005 and used for the purpose of
the industrial undertaking since very beginning is compulsorily acquired by
A.P. Govt. on 14.08.2020 for Rs. 10,00,000. The written down value of the
building on 01.04.2020 was Rs. 5,00,000. The company constructed another
building for the purpose of shifting the department which was functioning in
the building acquired by the government on 28.10.2020 at a cost of Rs.
4,50,000. Compute the capital gain chargeable to tax for the A.Y. 2021-22.
Solution:
Computation of Capital Gain for the A.Y. 2021-22
Rs.
Compensation received from A.P. Government 10,00,000
32
 Capital Gains
Less: COA being Written Down Value of building 5,00,000
Short term Capital Gain 5,00,000
Less: Cost of another building constructed on 28.10.2020 4,50,000
exempt u/s 54 D
Taxable Capital Gain 50,000

V) Capital gains from transfer of a Long-term capital asset not to be

charged if invested in certain bonds (Section 54 EC)
a) The maximum limit of exemption of capital gain shall be restricted to the
amount of capital gain received. It means if the cost of new purchased
asset is less than the amount of capital gain, this cost of new asset shall
be exempt, if it is more than the capital gain, then whole amount of
capital gain shall be exempt.
b) Long term specified asset means such bonds which will be redeemable
after 5 years and these shall be issued by National Highways Authority
of India (NHAI) and Rural Electrification Corporation Limited (RECL)
or nominated by Central Government for this purpose.
c) Proceeds of capital gain must be invested in certain specified long term
assets within six months from the date of transfer of asset.
d) If the assessee has got exemption u/s 54EC, no rebate u/s 80C shall be
available on the cost of these bonds.
e) If the assessee takes loan or advance on the security of these bonds, it
will be treated as conversion into money.
f) If the above specified bonds are transferred within 3 years from the date
of issue are converted into money, this long term capital gain shall be
taxable in the year in which such transfer took place.
g) The maximum limit of investment in these specified assets bonds of
National Highway Authority of India (NHAI) and Rural Electrification
Corporation Ltd. (RECL) or nominated by Central Government for this
purpose is Rs 50 lakhs during the financial year in which the original
assets or assets are transferred and in the subsequent financial year.
h) If a capital asset is converted into stock-in-trade, the period of 6 months
shall be taken from the date of sale of stock or otherwise transfer.
Illustration 11
Mr. X Purchased a house property on 01.04.2001 for Rs. 5,00,000. He sells
the house on 10.12.2020 for Rs. 1,20,00,000. He purchases bonds of NHAI,
(redeemable after 5 years) for Rs. 70,00,000 on 15.03.2021. Calculate his
Taxable Long term capital gains for assessment year 2021-22.
Solution:
Computation of Capital Gain of Mr. X for the A.Y. 2021-22
Rs.
33
Income from Capital Sale Price of the Asset 1,20,00,000
Gains & Other
Sources Less:
���
Indexed cost of acquisition ���. 5,00,000 × ���� 15,05,000

Long term Capital Gain 1,04,95,000

Less: Deduction u/s 54 EC 50,00,000
Taxable Long Term Capital Gain 54,95,000

Note: Quantum of deduction for investment in bonds is limited to Rs 50 lakh

u/s Section 54EC
VI) Capital gain arising from the transfer of a long term capital asset
invested in units of a specified fund (Section 54EE) ( w.e.f AY 2017-
18)
The provision of this section is same as discussed in Section 54EC except the
asset in which LTCG should be invested
Asset for investment: A unit or units issued before 1-4-2019, of such as
may be notified by the central government in this behalf.
VII) Capital gain on transfer of other long term assets except residential
house, if consideration received is invested in new residential house.
(Section 54F)
Any long-term capital gains arising on investment in residential house is
exempt subject to the following conditions:
a) The assessee should be either an Individual or a Hindu Undivided
Family.
b) The asset transferred by an assessee should not be a residential house.
c) The assessee should not own more than one residential house on the date
of transfer of original asset other than as mentioned in (d) below.
d) The assessee purchases within a year before or within 2 years after the
date on which the transfer took place or constructs within a period 3
years after the date of transfer of a capital asset. (Construction means
completion).
e) The income from newly acquired residential house is chargeable under
the head 'Income from House Property'.
f) He must also not have purchased within a period of one year after the
date of transfer of the original asset or constructed within a period of 3
years after the aforesaid date any residential house other than the house
mentioned in (d)above.
g) If the cost of new house purchased/constructed is not less than the net
consideration in respect of the capital asset transferred, the entire capital
gain will be exempt from tax and if the cost of new house is less than the
net consideration in respect of the asset transferred, the exemption from

34
 Capital Gains
long-term capital gain will be granted proportionately on the basis of
investment of net consideration.
h) If the amount of net consideration is not fully utilized, and if the
unutilized part of net consideration is deposited by the assessee in
Capital Gains Account Scheme, 1988 and utilized in accordance with the
scheme, the aggregate of the cost of new house and the amount so
deposited shall be deemed to be the cost of new residential house and
exemption will be granted accordingly.
i) The assessee should not transfer the new residential house within a
period of 3 years of its purchase and if it is transferred before 3 years,
then the amount of capital gain exempted earlier will be taxed in that
year in which the new asset is transferred.
j) If the amount deposited is not utilized fully either for purchase or for
construction within the specified period, the amount not so utilized shall
be treated as the capital gain of that year in which the period of 3 years
from the date of transfer of original asset expires.
k) The amount of proportionate exemption shall be calculated as under:

Long term capital gain × Amount invested in new house

Net Sale Consideration

Illustration 12
Mr. Anoop is a resident of Mumbai. He did not own any house and lived in a
rented house. He had purchased jewellery for Rs. 1,20,000 on 1st April 2001.
He sold the jewellery on 03.09.2020for Rs. 8,00,000 and invested the sale
proceeds on 01.10.2020 in the purchase of two residential houses – one at
Mumbai for Rs. 6,00,000 and other at Nagpur for Rs. 2,00,000. Is he liable to
pay tax on capital gain for the A.Y. 2021-22? If so, compute the amount of
capital gains liable to tax. Would it make any different, if Anoop–
i) Invests the entire amount of Rs. 8,00,000 in the purchase of only one
residential house at Mumbai?
ii) Invests Rs. 2, 00,000 in the purchase of one residential house at Nagpur
and deposits the balance of Rs. 6,00,000 in a bank?
Cost inflation index in 2001-02 was 100 and in 2020-21, it was 301.
Solution:
In the above case, Anoop is liable to pay tax on capital gains, as he is not
entitled to exemption u/s 54F, being purchaser of two houses.
Computation of Capital Gain of Mr. Anoop for the A.Y. 2021-22

Rs.
Sale proceeds 8,00,000
Less:
���
Indexed cost of acquisition ���. 1,20,000 × ���� 3,61,200

35
Income from Capital Long term Capital Gain 4,38,800
Gains & Other
Sources If the amount invested in one residential house is Rs. 8,00,000; 4,38,800
long term capital gain as determined above
Less: Exemption u/s 54 F 4,38,800
Taxable Capital Gain Nil
If the amount invested in one residential house is Rs. 2,00,000 4,38,800
Long term capital gain
�,��,����,��,��� 1,09,700
Less: Exemption under Section 54 F �,��,���

Taxable capital gain 3,29,100

VIII) Capital gains on shifting of industrial undertaking from urban

areas to rural area (Section 54G)
Capital gain on shifting of industrial undertaking from urban area is exempt
from tax subject to the following conditions:
a) The assessee transfers either long-term or short-term capital assets in the
nature of plant, machinery, building or land but not furniture.
b) Such asset should have been used for the purpose of the business of
industrial undertaking situated in urban area.
c) The asset should have been transferred in connection with the shifting of
the undertaking to a non-urban area.
d) Capital gain should be utilized by the assessee within a period of one
year before or three years after the date of transfer for the following
purposes:
i) Purchased new machinery and plant and or acquiring land or
building or construction building for the purposes of his business in
the area to which the undertaking is shifted.
ii) Shifting the original asset and transfer of the establishment of the
undertaking to such area; and
iii) All the expenses incurred by assessee must be approved by the
Central Government.
e) The newly acquired asset must be held by the assessee for three years
from the date of their acquisition.
Limit of exempted capital gains:
a) If the cost and expenses of new asset purchased is less than the amount
of capital gain in relation to all or any of the purposes mentioned in (i) to
(iii) of clause (d) above, the excess of the capital gain over such cost and
expenses shall be taxable capital gains. If the amount of capital gain is
equal to or less than the cost and expenses mentioned in (i) to (iii) of
clause (d) above, the entire capital gain will be exempt from tax.
b) Where the amount of capital gain is not appropriated or utilized by the
assessee towards the cost and expenses incurred in relation to all or any
36
 Capital Gains
of the purposes mentioned above within one year before the date of
transfer of original capital asset or which is not utilized by the assessee
for all or any of the purposes mentioned above before the due date of
furnishing the return of income u/s 139(1), it is deposited by him on or
before the due date of furnishing the return of income u/s 139 (1), in the
capital gains account scheme, 1988, he will be entitled to exemption.
Illustration 13
Ms. Rekha owns an industrial undertaking, which is situated in the urban area
of Rohtak. Ms. Rekha shifted this industrial undertaking to a rural area near
Rohtak. For shifting purpose she had to sell the following assets of the
undertaking:
Plant & Land & Furniture
Machine Building
Acquired in 2005 2007 2008
Net sale consideration 25,00,000 35,00,000 1,00,000
Date of sale 20.08.2020 24.09.2020 26.10.2020
Cost of Acquisition u/s 50 (2) 9,00,000 10,00,000 40,000
Cost of new assets purchased 5,00,000 7,00,000 60,000
Date of purchase 15.10.2020 16.11.2020 12.12.2020

If the industrial undertaking is shifted to rural area on 25.03.2020, compute

the taxable capital gains in the hands of Ms. Rekha for A.Y. 2021-22.
Solution:
Computation of Capital Gains of Ms. Rekha for the A.Y. 2021-22
Plant & Land & Furniture
Machine Building
Net sale proceeds 25,00,000 35,00,000 1,00,000
Less: Cost of acquisition 9,00,000 10,00,000 40,000
STCG u/s 50 (2) 16,00,000 25,00,000 60,000

Amount qualifying for exemption u/s 41,00,000

54G
(Rs. 16,00,000 P & M + Rs. 25,00,000
L& B)
Less: Amount invested in P & M and L 12,00,000
& B with stipulated period
(Rs.5,00,000 + Rs. 7,00,000) exempt u/s
54G
STCG taxable u/s 50 (2) on P & M and 29,00,000
L&B
Add: STCG taxable u/s 50 (2) on 60,000
furniture (Furniture )
Taxable STCG 29,60,000

37
Income from Capital IX) Capital gain on transfer of assets of shifting of industrial
Gains & Other
Sources
undertaking from urban area to any special economic Zone
(Section 54GA)
If the capital gain arises on transfer of a capital asset being machinery, plant
building, land or any rights in building or land used for the purposes of the
business of an industrial undertaking situated in an urban area, shall be
exempt to the extent. Following points are important in this respect:
a) The exemption is available to all categories of assesses.
b) This exemption shall be available only when the undertaking is shifted
from urban area to special economic zone, which may be developed in
any urban area or any other area.
c) Furniture and fittings are not included in it.
d) Capital gain may be short term or long term. Generally, it will be short
term capital gain as most of the assets will be depreciable assets in
industrial undertakings.
e) Such capital gain is utilized for the specified purpose within one year
before or three years after the date of transfer.
Limit of exemption: The quantum of deduction shall be same as given u/s
54G
Note:
1) Any other area means that area which has not been declared as urban
area.
2) ‘Urban Area’ means any such area within the limits of a municipality
corporation or municipality. The Central Government may declare any
area as urban area by general or special order, keeping some factors, e.g.,
population, concentration of industries, need for proper planning of the
areas and other relevant factors.
3) ‘Special economic Zone’ means each special economic zone notified
under the proviso to sub-Section (4) of Section 3 and sub Section (1) of
Section 4 of the special economic zones Act, 2005. It includes free trade
and warehousing zone and also includes an existing special economic
zone.
X) Exemption of long term capital gains on transfer of residential
property on investment in Equity shares of a new start up Small
and Medium Enterprise (SME)company(Section 54GB)
Following points shall be kept in mind to avail this exemption:
a) This exemption is allowed to an individual and Hindu undivided family.
b) Residential property shall be a house or plot of land.
c) Residential property shall be residential asset and this transfer should be
made during 1st April, 2012 and 31st March, 2017and in case of an
investment in eligible start-up, the residential property can be transferred
upto 31/03/2022.
38
 Capital Gains
d) Exemption shall be allowed if the assessee invests net consideration
received by transfer of long term asset in equity shares of an eligible
company till date of filing return on income. If whole amount of capital
gain is not invested, proportionate exemption shall be allowed for that
amount which is invested.
e) The eligible company will have to purchase new machinery within one
year from the date of subscription in equity shares by the assessee.
f) If the eligible company does not purchase new machinery as mentioned
above in point v, then, it will have to deposit the amount in a notified
scheme of a bank.
g) The eligible company will have to submit the certificate in proof of
depositing the amount in a notified scheme of the bank along with return
of income.
h) If the eligible company does not utilize money deposited in bank in
purchasing new machinery within prescribed period (within one year
from the date of depositing money), in this situation the exemption,
already allowed, shall be treated as cancelled and shall be taxable as long
term capital gain in the hands of individual or HUF in which the period
of one year expires from that on which the money was deposited in the
bank.
i) If the assessee sells the shares received in return of investing capital gain
into shares of the company within five years from the date of acquisition
or transfers than in any other way, then the capital gain arising from the
transfer of equity shares shall be taxable in the previous year in which
the shares are transferred.
j) If the eligible company sells the new machinery within five years from
the date of purchasing it, then the capital gain arising from such transfer
shall be taxable in the hands of the company or Individual or HUF, as the
case may be, in the previous year in which the new machinery is sold or
transferred.
XI) Extension of time limit in purchasing new assets or investing the
amount of capital gains in case of compulsory acquisition of assets
(Section 54H)
If transfer of assets takes place on account of compulsory acquisition and the
accepted amount of compensation is not received by the assessee on the date
of transfer, then the prescribed time limit of purchasing the assets out of
capital gain, mentioned in Sections 54, 54B, 54D, 54EC and 54F, which is
six months, one year, 2 to 3 years or the time period in depositing the amount
in capital gain account scheme, 1988 is extended. The calculation of time
period will be made from the date of getting the amount of compensation and
not from the date of transfer of the asset. If purchase of new asset or
investment in the scheme made by assessee is done during this period, the
assessee will get rebate in taxation.
Following important points are:
39
Income from Capital i) The transfer of asset will be counted in that year when the asset is
Gains & Other
Sources
acquired compulsorily, or the index cost of this year will be taken for
calculating inflation cost of the asset.
ii) Capital gain will arise in the year in which amount of compensation in
full or in part was received.
iii) The calculation of time period for the investment in new asset under
Sections 54, 54B, 54D, 54EC and 54F shall be made from the date of
receiving the amount of compensation.
iv) If compensation is received in installments, the time limit for investment
shall be counted separately for each installment. Although full capital
gain will be counted on receipt of first installment and if amount of
compensation is increased, the time period of investment shall be
counted from the date of receipt of enhanced compensation.
Check Your Progress A
1) Write note on Capital Gain account scheme, 1988.
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
2) Fill in the blanks:
a) Exemption u/s 54 is available to………………………….
b) The income tax rate on long term capital gain for an individual
is……….
c) Money deposited in Capital gain scheme, 1988 is………..
d) ……………..of profession is not deemed to be a capital asset.
e) …………….is done to calculate long term capital gain.
B. Exemption of capital gains under various sub-clauses of Section 10.
I. Exemption from Capital gains arising on transfer of units
[Section 10 (33)]
Any income arising from transfer of a capital asset, being a unit of the
unit scheme, 1964 of UTI, is not chargeable to tax provided such transfer
takes place after 31st March 2002.
II. Long-term capital gains on eligible equity shares [Section 10 (36)]
Any share in a company shall be exempt from tax provided; these shares
are acquired on or after 1st April 2003 but before 1st March 2004 and
held for a period of 12 months or more.
'Eligible Equity Share' means any equity share in a company being a
constituent of BSE-500 Index of the Stock Exchange, Mumbai as on
40
 Capital Gains
March 1, 2003 and transfer of such equity shares has taken place through
a recognized stock exchange in India.
III. Exemption from capital gain on compulsory acquisition of urban
agriculture land [Section 10 (37)]
Exemption will be available to an individual or Hindu Undivided Family
subject to the following points:
i) Assessee owns an agricultural land situated in an urban area.
ii) Such land should be utilized by the individual or by his parents for
agricultural purpose prior to two years from the date of transfer.
iii) Such agriculture land is transferred by way of compulsory acquisition or
consideration for transfer is approved by Central Government or RBI.
iv) Capital gain must be received by the assessee after 31st March, 2004.

12.8 TAX ON SHORT-TERM CAPITAL GAIN ON

TRANSFER OF EQUITY SHARES IN A
COMPANY OR UNITS OF AN EQUITY
ORIENTED FUND
Under Section 111(a), where the amount of short-term capital gains arising
from transfer of equity shares in a company or units of an equity-oriented
fund is included, tax on short-term capital gain will be charged @ 15% +
surcharge, if any, +4% on the amount of income tax and surcharge as health
and education cess, subject to the fulfillment of the following conditions:
i) The equity share in a company or units of an equity oriented funds are
short-terms capital asset.
ii) The transaction of sale of such asset is entered into on or after
01.10.2004.
iii) Such transaction is chargeable to Securities Transaction Tax.

12.9 TAX ON LTCG ON TRANSFER OF LISTED

SECURITIES OR UNITS OF UNIT TRUST OF
INDIA (UTI) OR A MUTUAL FUND
Tax on LTCG on transfer of listed securities or units of the UTI or a mutual
fund specified in Section 10 (23 D) or Zero Coupon Bonds shall be charged:
i) @ 10% of LTCG computed without indexing the cost of acquisition; or
ii) @ 20% of LTCG computed after indexing the cost of acquisition;
whichever is less.
Surcharge on income tax:
i) In case of individual, HUF, AOP or BOI – If total income exceeds
41
Income from Capital a) Rs. 50 Lakhs and upto 1 Crore – 10%
Gains & Other
Sources b) Exceeds Rs. 1 crore and upto Rs. 2 crore – 15%
c) Exceeds Rs. 2 crore and upto Rs. 5 crore – 25%
d) Exceeds Rs. 5 crore– 37%
ii) In case of firm (If total income exceeds one crore rupees), 12% surcharge
is payable.
iii) In case of domestic company, 7% surcharge shall be charged if total
income exceeds Rs. 10 crores, however, if income is above Rs. 10 crores,
the rate of surcharge will be 12%.
iv) In case of foreign company, 2% surcharge shall be charged, if the total
income exceeds one crore rupees but less than 10 crores. However, if the
income exceeds 10 crore, surcharge shall be charged @ of 5 %.
Note: If the income exceeds one crore rupees, the rule of marginal relief will
be followed.
Health and Education Cess: On the amount of income tax and surcharge,
health and education cess shall be levied @ 4%
Illustration 14
Compute the tax payable by Sanjay Mittal for the A.Y. 2021-22.
Rs.
1) Equity shares purchased on 10.06.2003 23,150
Sold these shares in recognized stock exchange 26,000
on 15.12.2020
Brokerage paid Rs. 500 and securities transaction
tax Rs. 100
2) Equity shares purchased on 08.05.2019 1,50,000
Sold these shares in recognized stock exchange 3,00,000
on 06.02.2020
Brokerage paid Rs. 1000 and securities
transaction tax Rs. 400
3) Equity shares purchased on 09.05.2004 60,000
Company purchased its own shares during 5,00,000
previous year from shareholders and paid to
Sanjay Mittal for his holdings.
4) Other Income 70,000

Cost of inflation index 2004-05, 2003-04 and 2020-21 was 113, 109 and
301respectively.
Solution:
Calculation of Total Income and Tax Payable by Sanjay Mittal for the
A.Y. 2021-22

42 Rs. Rs.
 Capital Gains
1) Selling price of equity shares 63,928 26,000
��,������
Less: Indexed cost � ���
�
Brokerage 500 63,428
LTCL (Long Term Capital Loss) 37,428
(a)
2) Selling price of equity shares 3,00,000
Less: Cost 1,50,000
Brokerage 1,000 1,51,000
STCG u/s 111 A (b) 1,49,000

3) Selling price of equity shares 5,00,000

��,������ 1,59,823
Less: Indexed cost ���
LTCG 3,40,177
(c)
4) Other Income (d) 70,000
Total Income (a+b+c+d) = 5,21,749
1. Tax on Rs. 70,000 (other income) Nil
2. Tax on LTCG of Rs. 3,40,177- 60,350 60,350+400
38,428=3,01,749 @ 20% =60,750
[Securities transaction tax has not been 400
paid, hence not exempt u/s 10 (38)]
3. Tax on STCG u/s 111 A Rs. 1,49,000 14,900`
@ 10% =
Total Tax 60,750+14,900 = 75,650
Add: Surcharge Nil
Add: Health and Education Cess @ 4% 3,010
Tax Payable 78,660

43
Income from Capital
Gains & Other 12.10 COMPUTATION OF TAXABLE INCOME
Sources FROM CAPITAL GAINS
After the amount of capital gains is calculated and the exemption u/s 54, 54B,
54D, 54EC, 54ED, 54F and 54G allowed, the amount left is the income
chargeable to tax under the head income from capital gains.
Let us now look at few illustrations to clearly understand the computation of
income from capital gains.
Illustration 15
Compute the taxable capital gain of Arushi for A.Y. 2021-22

Assets Jewellery Debentures

Year of purchase 2003-04 November 2013
Year of sale 2020-21 2020-21
Rs. Rs.
Cost of acquisition 1,20,000 1,30,000
Cost of improvement in 2005-06 39,900
Selling expenses - 5,000
Consideration received 12,00,000 1,50,000

Cost inflation index for 2003-04, 2005-06, 2013-14 and 2020-21was 109,
117, 220 and 301 respectively.
Solution:
Computation of Capital Gain for A.Y. 2021-22
Rs.
1. Jewellery
Sale Proceeds 12,00,000
�,��,������ 3,31,376
Less: Indexed cost of acquisition ���
8,68,624
��,������ 1,02,649
Less: Indexed cost of improvement ���
L.T.C.G. 7,65,975

2. Debentures
Sale Proceeds 1,50,000
Less: Selling expenses 5,000
Net Sales 1,45,000
Less: Cost of acquisition 1,30,000
L.T.C.G. 15,000

Capital Gain liable to tax = Rs. 7,65,975 + 15,000 = Rs. 7,80,975

44
 Capital Gains
Note: Debentures are held by Aarushi for more than 12 months; hence it is a
long-term capital asset. Indexation is not done in case of debentures.
Illustration 16
Mrs. Rekha acquired a plot on 30.08.2000 for Rs. 2,50,000. She paid
brokerage and other incidental expenses in connection with plot Rs. 90,000.
Its fair market value on 01.04.2001 was Rs. 5,00,000. She sold the plot in
November 2020 for Rs. 25,00,000. Compute the amount of capital gain for
the A.Y. 2021-22. Can she claim deduction for ground rent paid by her
amounting to Rs. 10,000 during the period when she held the asset? Cost
inflation index in 2001-02 was 100 and that in 2020-21, it was 301.
Solution:
Computation of Taxable Capital Gain of Mrs. Rekha for A.Y. 2021-22
Rs.
Sale Proceeds 25,00,000
Less: Indexed cost of acquisition
�,��,������ 15,05,000
���
L.T.C.G. 9,95,000
Note: Ground rent is only in the nature of maintenance expenses and hence
not deductible.
Illustration 17
Mr. Mansukh purchased the agricultural land in 2003-04 for Rs. 2,32,000 and
sold for Rs. 12,00,000 in December 2020. He purchased another agricultural
land in January 2021, for Rs. 1,00,000 and deposited Rs. 60,000 in April
2021 in Capital Gain Account Scheme, 1988. Compute the taxable capital
gain of Mr. Mansukh for A.Y. 2021-22. The cost inflation index in 2003-04
was 109 and in 2020-21, 301.
Solution:
Computation of Taxable Capital Gain of Mr. Mansukh for A.Y. 2021-22
Rs.
Sale Proceeds 12,00,000
�,��,������ 6,40,661
Less: Indexed cost of acquisition of land ���
L.T.C.G. 5,59,339
Less: Exemption u/s 54B 1,60,000
Cost of agricultural land Rs.1,00,000
Amount deposited in Capital gain account Rs. 60,000
Taxable Capital Gain 3,99,339

Illustration 18
Compute the total income and cost of bonus units, if any, from the following
information:
i) 4000 units of Mutual Fund purchased on 01.09.2020 for Rs. 80,000.
ii) Record date 10.10.2020
45
Income from Capital iii) 2000 bonus units were allotted to him on record date.
Gains & Other
Sources
iv) 4000 original units sold on 08.03.2021 for Rs. 60,000
v) Other short-term capital gains Rs. 1,50,000
Solution:
Rs.
Cost of 4000 units 80,000
Selling price of 4000 units 60,000
Loss on sale 20,000

a) The units have been sold within 9 months from the record date; hence,
loss on sale of such units can't be set off against other income, hence,
total income Rs 1,50,000.
b) Cost of bonus units: Loss on sale of original units shall be deemed to be
the cost of bonus units, i.e. Rs. 20,000 u/s 94 (8).
Illustration 19
X purchased 400 listed shares in 1998 for Rs. 15 per share. The market value
of these shares on 01.04.2001 was Rs. 10/- per share. Calculate the tax
payable by X on capital gains if the above shares were sold on 15.11.2020 for
(a) Rs. 2,10,000 (b) Rs. 1,40,000. The shares are not sold through recognized
stock exchange.
Solution:
(i) Computation of Capital Gain Tax on Shares (with indexation)
Case (a) Case (b)
Rs. Rs.
Sale price 2,10,000 1,40,000
Less: Indexed cost of (15×400 = 6,000)
��� 18,060 18,060
i.e. 6,000 × ���
Long-term capital gain after indexation 1,91,940 1,21,940
Tax @ 20% 38,388 24,388

(ii) Computation of Capital Gain Tax on Shares (without indexation)

Case (a) Case (b)
Rs. Rs.
Sale price 2,10,000 1,40,000
Less: Cost (15×400) 6,000 6,000
Long-term capital gain 2,04,000 1,34,000
Tax @ 10% (Incase of without indexation) 20,400 13,400
Tax payable (i) or (ii) above, whichever is 20,400 13,400
lower
Add: Health & Education Cess @ 4% 816 536
Net Tax payable 21,216 13,936
46
 Capital Gains
Net Tax payable Rounded off 21,220 13,940

Illustration 20
From the following information, compute capital gain and tax payable by Z
for the assessment year 2021-22.
i) Listed shares purchased on 01.01.2018 for Rs. 50,000
ii) Shares sold on 01.11.2020 for Rs. 5, 00,000 through a recognized stock
exchange.
iii) Fair market value as on 31.01.2018 is Rs. 3,70,000
Solution:
Computation of Capital Gain of Z for A.Y. 2020-21
Rs.
Sale Proceeds 5,00,000
Less: cost of acquisition (See Note Below) 3,70,000
L.T.C.G. 1,30,000

Computation of Tax
Rs.
Tax on L.T.C.G. (as above) @ 20%
�� 26,000
i.e. 1,30,000 × ���
Add: health and Education Cess @ 4% 1,040
Taxable Capital Gain 27,040

Note: Determination of cost of acquisition:-

Higher of the following:
i) Cost of acquisition i.e. Rs. 50,000.
ii) Lower of the following.
a. Fair market value i.e. Rs. 3,70,000.
b. Sale price of shares i.e. Rs. 5, 00,000
Illustration 21
X holds 100 shares of RMP Ltd. a listed company, which were acquired by
him in 1997 for Rs. 10 per share. The market value of the share as on
01.06.2020 is Rs. 250 per share. The company offers him a Right to
subscribe to 100 additional shares at the rate of Rs. 160 per share. Compute
his cost of acquisition in the following cases:
a) When X subscribes to the shares.
b) When X renounces the Right in favor of Y at the rate of Rs. 50 per share.
c) When Y subscribes to the 100 shares.

47
Income from Capital
Gains & Other
Sources Solution:

Case (a) Cost of acquisition : Rs.

(i) For original 100 shares 10 per share
(ii) For 100 right shares 160 per share
Case (b) (i) For original shares Rs. 10 per
(ii) Cost of acquisition : share
[Full amount of Rs. 5,000 (100×50) shall be Nil
treated as capital gain]
Case (c) Commutation of cost of acquisition for Y.
(i) Amount paid to the company (100×160) 16,000
Add: (ii) Amount paid to Y for renouncing the right 5,000
(50×100)
Cost of acquisition (For Y) 21,000

Illustration 22
Compute the capital gain in the following cases:
a) i) K commenced a business on 15.04.2002 but sold this business on
18.04.2020 and received Rs. 12,00,000 for goodwill.
ii) What will be your answer in the above case, If K had acquired the
goodwill for this business for Rs. 4,00,000.
b) X is a practicing Chartered Accountant in Mumbai since March 1983. He
transfers the practice to Y, another Chartered Accountant on 13.07.2020
for Rs. 5, 00,000 towards goodwill.
c) T is paying Rs. 500 p.m. as rent since May 1994 for an accommodation
occupied by him. The landlord got the accommodation vacated on
16.07.2020 against a payment of Rs. 5, 00,000 for vacating the house.
d) M. purchased a tenancy right for Rs. 4,00,000 on 01.04.1999. This right
was sold by him on 14.08.2020 for Rs. 20,00,000, fair market value of
this tenancy right as on 01.04.2001 was Rs. 5,50,000
Solution:
Case (a) Rs.
(i) Sale consideration 12,00,000
Less: Indexed cost of Acquisition Nil
L.T.C.G. 12,00,000
(ii) Sale consideration 12,00,000
Less: Indexed cost of Acquisition 11,46,667
���
�Rs. 4,00,000 × ����
L.T.C.G. 53,333
Case (b) (Asset) Nil
Since, it is goodwill of a profession and not of a
business, it will be treated as self-generated asset.
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 Capital Gains
There is no capital gain on self-generated asset.
Case (c)
Sale consideration 5,00,000
Index cost of Acquisition (Self-Generated) Nil
L.T.C.G. 5,00,000
Case (d)
Sale price 20,00,000
��� 12,04,000
Less: Indexed cost of Acquisition Rs. 4,00,000 × ���
L.T.C.G. 7,96,000

Note: For case (d), the option to choose fair market value on 1/4/2001 is not
available.
Check Your Progress B
1) Read the following and tick mark the correct answer in each of the
following:
i) On 31.07.2020 'D' earns a profit of Rs. 50,000 by selling a piece of
land in Lucknow on which vegetables were being grown and which
was purchased on 30.12.2001. In his Income-tax Assessment for
2021-22 the profit would be taxable as:
a) Short-term capital gain;
b) Long-term capital gain;
c) Not taxable, being profit on sale of agricultural land.
ii) 'A' purchased a motor car for his personal use on 10.01.2002 for Rs.
20,000. He spent Rs. 5,000 on fittings, accessories etc. and sold it
for Rs. 35,000 on 31.07.2020. The capital gains from the sale of the
car to be included in total income for the assessment year 2021-22
would be:
a) Rs. 10,000
b) Rs. 5,000
c) Nil
iii) The income tax rate of LTCG for an individual is.
a) 10%
b) 20%
c) 15%
d) 30%
iv) The income from sale of household furniture is:
a) Taxable Income
b) Exempted income
c) Capital Gain
d) Revenue Gain
2) Fill up the blanks:
i) Any distribution of capital assets on the partition of a Hindu
Undivided Family is …………….. as transfer.
49
Income from Capital ii) The income from the sale of household furniture is
Gains & Other
Sources
……………..income
iii) Unabsorbed long-term capital losses are allowed to be carried
forward for ………. Years.
iv) Money deposited under Capital Gains Account Scheme, 1988 is …
v) Cost of acquisition of bonus shares received after 1981 is deemed to
be …….

12.11 LET US SUM UP

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’. Capital asset means property of any kind held by an assessee whether
or not connected with his business or profession, but does not include Stock-
in-trade, consumable stores, raw material held for the purpose of his business
or profession and personal effects. Capital assets are of two types: Long-term
and Short-term. Long-term capital assets are those which are held by the
assessee for more than 36/24/12 month (as the case may be) before transfer
and short-capital assets are those which are held by the assessee for not more
than 36/24/12 (as the case may be) months before transfer.
Capital gains arising from the transfer of short-term capital assets are called
Short- term capital gains and capital gains arising from the transfer of long-
term capital assets are called long-term capital gains.
Transfer of a capital asset means sale, exchange or extinguishment of any
rights therein, or its compulsory acquisition under any law or its conversion
into stock-in- trade etc.
The income chargeable under the head 'Capital Gains’ shall be computed by
deducting from the full value of the consideration received or accruing as a
result of the transfer of the capital assets : (i) expenditure incurred wholly and
exclusively in connection with the transfer, and (ii) the cost of acquisition of
the capital asset and cost of any improvement thereto.
Only long-term capital gains are exempt from tax under Section 54, 54EC,
54ED and 54F, subject to the fulfillment of certain conditions. Similarly,
capital gains are also exempt under Section 54B, 54D and 54G subject to
fulfillment of certain conditions.

12.12 KEY WORDS

Capital Asset: Capital Asset means property of any kind held by an assessee,
whether or not connected with his business or profession except stock-in-
trade, consumable stores, raw material and personal effects.
Capital gains: Profits or gains arising from the transfer of a capital asset is
called capital gain.
Long Term Capital Gains: Capital gain arising from the transfer of an asset
held for more than 36 months / 24 months / 12 months (as the case may be) is
50
 Capital Gains
called long-term capital gain. In case of shares, 12 months’ time period will
be applicable.
Short-term capital gain: Capital gain arising from the transfer of an asset
held for not more than 36 months/ 24 months / 12 months (as the case may
be) is called short-term capital gain. In case of shares, 12 months’ time period
will be applicable.
Transfer: Transfer in relation to a capital asset includes the sale, exchange or
relinquishment of an asset, the extinguishment of any rights therein, or
compulsory acquisition thereof under any law or conversion of an asset into
stock-in-trade.

12.13 ANSWERS TO CHECK YOUR PROGRESS

Check Your Progress A
2) a) Individual and HUF, b)20%, c)Exempt, d)Goodwill, e)
Indexation
Check Your Progress B
1) i) b; ii) c; iii) b; iv) b
2) i) not regarded, ii) exempted, iii) 8, iv) Exempted, v) Nil

12.14 TERMINAL QUESTIONS/ EXERCISES

1) What does the term ‘Capital Gains’ signify under the Income Tax Act?
2) Explain the following terms in the context of the I.T. Act.
i) Capital Assets
ii) Short-term Capital Assets
iii) Transfer of Capital Assets
iv) Cost of improvement
v) Cost of acquisition of capital asset
3) Discuss the provisions of the Income Tax Act regarding exemption of
capital gains u/s54F?
4) Anshul sold on 31.10.2020 an agricultural land, which he has been
using for agricultural purposes for several years, for Rs. 32,00,000.He
acquired that land in 1978 for Rs. 1,00,000.The market value of such
land as on 1.04.2001 was Rs 8,50,000. He purchased rural agricultural
land for Rs 3,50,000 on 25.02.2021 which was sold for Rs 5,00,000
on 15.05.2021. Further, a sum of Rs 5,50,000 was invested by him in
purchase of residential property on 25.05.2021. He owned only one
house property before this date. The new house property was sold on
31.08.2021 for Rs. 6,50,000. Compute capital gain for assessment
year 2021-22 and assessment year 2022-23.
[Answer: Long term capital gain for AY 2021-22: 1,81,242
Short term capital gain for AY 2022-23: 1,00,000]
51
Income from Capital 5) On 1st July 2019, Manish sold shares of Infosys Ltd for Rs 4 lakhs and
Gains & Other
Sources
earned a long term capital gain amounting to Rs 1,50,000. On 1st
November, 2019, he invested Rs 50,000 to purchase equity shares in
XYZ ltd through public issue which are exempt under Section 54ED.On
1st February, 2019 he purchased a residential house costing Rs 2,40,000
for his own residence. Balance amount Rs 1,10,000 invested in
debentures.
Find out taxable amount of ‘Capital Gains’ for assessment year 2020-21.
Note:
1) No exemption is allowed on debentures
2) Exemption u/s 54ED has been omitted with effect from Assessment
year 2007-08.
[Answer: Taxable Capital Gains- Rs 60,000]
[Answer: Taxable Capital Gain –Rs 10,57,366]
6) Rajat purchased a plot of land in Chennai for Rs 7,00,000 on
05.07.2012. He constructed a residential house on this plot which was
completed on 8.10.2018. The cost of construction was Rs. 5,00,000.
The entire house was sold on 6.08.2020 for Rs. 21,00,000 which
includes Rs 15,00,000 for the land and the balance for the super
structure. Compute the capital gain on sale of the house for the
assessment year 2021-22. CII for previous years 2012-13, 2015-16
and 2020-21 is 200, 254 and 301 respectively.
[Answer: Short term capital gain Rs 1,00,000]

Note: These questions and illustrations are helpful to understand this

unit. Do efforts for writing the answers of these questions but do not
send your answers to university. It is only for your practice.

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