Capital Gain

Basis of Charge Sec 45(1)

1. 2. 3. 4. There should be a capital asset Transfer should take place Transfer in the previous year Profits/gains

Capital Asset Sec 2(14)

Property of any kind (tangible/non-tangible), whether connected to business/profession or not E.g. land, building, vehicles, goodwill, patents etc. Excludes Specified Assets: i. Stock-in trade, consumable stores, raw material held for business/profession ii. Personal effects of the assessee means
a) b) c) Movable property, including apparel and furniture Held for his personal use or of any dependent family member Excludes Jewellery, Ornaments of gold, silver, platinum or any precious metal, archeological collections, drawings, paintings, sculptures or work of art and therefore these assets will be considered capital assets

iii. iv. v. vi.

Agricultural land in India not situated in an urban area (Agricultural Land in rural areas not a capital asset) Gold Bonds issued by Central Govt. Special Bearer Bonds Gold Deposit Bonds.

Personal effects should be movable property it should be held for personal use and it should not be Jewellery, archaeological collections, drawings, paintings, sculptures, or any work of art. Gold and Silver coins and bars used for pooja of deities as a matter of pride or ornamentation are not personal effects. Therefore taxable. Furniture is for personal use. Therefore not taxable. Foreign Stamp collections not a personal effect. Therefore taxable. Car, Scooter etc., are under personal effects. Therefore exempted

 Dealer in Property Computer for Personal use Personal car, garments, furniture, household goods Personal jewellery, house property, immovable asset, archaeological collections, drawings, paintings, sculptures or work of art for ones personal use or use by any family members.

Definition of Transfer-Sec 2(47)

Transfer includes: 1. Sale/exchange/relinquishment 2. Extinguishment 3. Compulsory Acquisition 4. Conversion into Stock 5. Part Performance of Contract 6. A right of occupation in case of flats in cooperative societies 7. Zero Coupon Bonds

 SHORT TERM CAPITAL ASSETS

Term capital assets. In case of i. Equity/Preference Shares in a Company (whether quoted /not) ii. Securities such as Debentures/Government Securities(listed in a recognised stock exchange) iii. Units of UTI iv. Units of Mutual funds v. Zero Coupon bonds the term is 12 instead of 36 months. Month should be ascertained on date to date basis e.g. Feb 14 to March 13.
LONG TERM CAPITAL ASSETS

If the asset is held for Less than 36 Months then they are Short

If the asset is held for More than 36 Months then they are Long Term Capital Assets.

Transfer of equity shares-listed

Short term capital gain on equity shares /equity oriented fund shall be liable to tax at 15% (transaction should take place through recognised Stock Exchange and subject to STT) Long term capital gain arising from transfer of equity share (transaction should take place through recognised Stock Exchange and subject to STT) of a company/unit of equity oriented fund (listed in stock exchange) is exempt from tax. Sec 10(38)

SHORT TERM CAPITAL GAINS

1. To determine the Value of Consideration 2. To deduct expenditure incurred for the transfer 3. To deduct the cost of acquisition. 4. To deduct cost of improvement. 5. The balance amount is Short Term Capital Gains. Short Term Capital Gains are chargeable to Tax based on SLAB RATES.

Computation of Depreciation/Short-term Capital Gain/Loss on Depreciable Assets

Questions done in class

LONG TERM CAPITAL GAINS

1. To determine the Value of Consideration 2. To deduct expenditure incurred for the transfer. 3. To deduct indexed cost of acquisition 4. To deduct indexed cost of improvement. 5. The balance amount is Long Term Capital Gains. Long Term Capital Gains are chargeable to Tax on Flat Rate i.e 20%

 What is Indexation:Indexation is nothing but working out the value of asset based on cost inflation index. Cost inflation index for the year 1981-82 is 100. Cost inflation index for the year 2007-08 is 551.
If an assessee had purchased an asset during the year 81-82 for a sum of Rs.100.00. The same assets value will be 551 if purchased during the year 2007-08 based on cost inflation index.

Therefore the assessee gets additional benefit by deducting 551 instead of 100.

P.Y. 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94

CII 100 109 116 125 133 140 150 161 172 182 199 223 244

1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

259 281 305 331 351 389 406 426 447 463 480 497 519 551 582 632 711 785 852

Indexation not applicable

To short term assets Transfer of bond/debenture Transfer of shares/debentures of an Indian co. by a non-resident assessee

Computation of Indexed Cost of Acquisition

Computation of Indexed Cost of Acquisition depends upon two factors: i. How the capital asset is acquired-directly or in a mode mentioned u/s 49(1) i.e. gift, inheritence etc. ii. When the asset has been acquired before/after 1.4.81

Deemed Cost of Acquisition- Sec 49(1)

Assessee might have become the owner of the property under the following circumstances: i. Under gift or will ii. Inheritence iii. On distribution of assets on partition of HUF Cost to the previous owner = cost of acquisition Previous owner means the last previous owner who acquired the property by means other than those mentioned above Cost of improvement by the previous owner is taken into account.

Fair Market value on 1.4.81

1. Option of taking actual cost or FMV on 1.4.81 as cost of acquisition available - when asset is acquired before 1.4.81 2. Option not available on depreciable assets and intangible assets 3. Cost of improvement before 1.4.81 is to be ignored in all cases.

Asset directly acquired before 1-4-81

Q1. M owns a residential house at Mumbai since 1968. The house is sold by him for Rs 50 lakhs on June 30,2011 (Cost of acquisition : Rs.3,00,000, FMV on 1.4.81 is Rs. 5,10,000. Determine the amount of capital gains chargeable to tax.

Cost of Improvement before and after 1-4-81

Q2. X purchases a house property for Rs.50,000 on 30th April, 1977. The following expenses are incurred by him for making additions/alterations to the house property: Cost of construction of 1st Floor in 1979-80 Rs.2,00,000 Cost of construction of second floor in 1982-83 Rs.3,40,000 Alteration/Reconstruction of the property in 1989-90 Rs.2,90,000 FMV of the property on 1.4.81 is Rs.4,50,000. The house property is sold by X on August 15, 2011 for Rs.75,70,000 (expenses incurred on transfer: Rs.10,000). Calculate capital gains. Determine the amount of capital gains chargeable to tax.

Acquisition of asset before 1.4.81; covered u/s 49(1)

Q3. G purchases a house property for Rs.30,000 on June 20,1963. He gets the first floor of the house constructed in 1964-65 by spending Rs.20,000. He dies on December 22, 1979. The property is transferred to Mrs. G by his will. Mrs. G spends Rs.25,000 and Rs.26,700 during 1979-80 and 1984-85 respectively for reconstruction of the property. Mrs. G sells the house property for Rs.15,50,000 on Feb 15,2012. Brokerage paid by Ms. G is Rs.12,500. The FMV of the house on 1.4.81 is Rs.1,60,000. Ascertain capital gains.

Acquisition of asset after 1.4.81, covered u/s 49 (1); originally acquired by the previous owner before 1.4.81
Q4. X purchases a property on 1.4.65 for Rs.50,000. Later on he gifts the property to his friend Y on June 10, 1984. The following expenses are incurred by X and Y for renewals of the property. Addition of one room by X during 1978-79 Rs.30,000 Addition of two rooms by X during 1982-83 Rs.40,000 Addition of four rooms by Y during 1989-90 Rs.1,15,000 FMV of the property on 1.4.81 is Rs.65,000. The property is sold for Rs.15 lakhs on November 30,2011. Compute the capital gain chargeable to tax in the hands of Y for the A.Y.2012-13.

Acquisition of asset after 1.4.81; covered u/s 49(1); originally acquired by the previous owner too after 1.4.81

Q5. X owns the following shares: Cost of acquisition Rs. 1,40,000 Date of acquisition 10.3.92 These shares are gifted by X to his son Y on 1.4.98. On July,7, 2011, these assets are sold by Y for Rs.5,00,000. Compute the capital gain chargeable to tax in the hands of Y for A.Y. 2012-13.

Q6. A director of a Co. had a personal car which was bought at Rs.70,000 in 1989. He sold it at Rs.65,000 in 2010-2011. Assess the capital gain chargeable to tax.

Q7. X acquired a plot of land on June 30, 1983 for Rs.2,20,000. Brokerage and other expenses for acquiring the plot amounted to Rs.1,48,500. X sold the plot of land on June 30, 2011 for Rs.50 lakhs. What will be the amount of capital gain for A.Y. 2012-13?

Q8. A is holding 1,000 debentures of ABC Ltd. He acquired them in June 1999 at a cost of Rs.1,000 each. The company made an offer to the debenture holders in June 2011 to redeem these debentures (listed in Mumbai Stock Exchange ) at Rs.1200 each. What will be the tax consequences of the offer in the hands of Mr. A?

Conversion of capital asset into stock in trade

If capital asset is converted into stock-in-trade during a previous year relevant to the A.Y.1985-86 (or any subsequent year), the following rules shall be applicable1. It shall be assumed that the capital asset is transferred in the year of conversion 2. Fair Market Value (FMV) of the asset on the date of conversion will be taken as value of sales consideration 3. Capital Gain shall not be taxable in the year of conversion. It will be taxable in the year in which stock-in-trade is transferred.

Conversion of capital asset into stockin-trade

Q9. X converts his capital asset (acquired on June 10,1982 for Rs.70,000) into stock-intrade on May 10, 1987 (FMV Rs.4,80,000) and subsequently sells the stock-in-trade so converted for Rs.18,00,000 on July 20, 2012. Determine the amount of assessable profits.