Income Tax on Capital Gain

Last Updated On: May 30, 2020, 9:21 p.m.
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TAXATION OF CAPITAL GAINS

Capital gains refer to the gains which arise when a capital asset is sold for more than amount while purchasing the asset whereas when the asset is sold for a lesser amount than the original amount it is considered to be Capital Loss. Capital gains tax is a tax on profits gained from the sale of assets for more than a year.

Capital gains shall be chargeable to tax on the following conditions:

  • The asset should be a Capital asset
  • It should be transferred by the taxpayer during the previous year.
  • As a result of the transfer, the capital asset should have a profit or gain.

What is a Capital asset?

As per section 2(14), a Capital asset is defined as any kind of property held by an assessee, whether connected or not connected in the business or profession.

Any property held for personal use is not considered as a Capital asset.

TYPES OF CAPITAL ASSETS:

1.Short-term Capital Asset:

Capital assets are held less than 36 months prior to the date of transfer.

2.Long-term Capital Asset:

Capital Assets are held for 12 months or 24 months or 36 months prior to the date of transfer.

PERIOD OF HOLDING:

Different situations How to calculate the period of holding
Shares held in a company in liquidation The period subsequent to the date on which the company goes into liquidation shall be excluded.
A capital asset which becomes the property of the assessee in the circumstances mentioned in section 49(1) read with section 47 [i.e., when an asset is acquired by gift, will, succession, inheritance or the asset is required at the time of partition of family or under a revocable or irrevocable trust or under amalgamation, etc.] The period for which the asset was held by the previous owner should be included.
Allotment of shares in amalgamated Indian company in lieu shares held in amalgamating company The period of holding shall be computed from the date of acquisition of shares in the amalgamating company.
Right shares The period of holding shall be computed from the date of allotment of right shares.
Right entitlement The period of holding will be considered from the date of offer to subscribe to shares to the date when such right entitlement is renounced by the person.
Bonus shares The period of holding shall be computed from the date of allotment of bonus shares.
Issue of shares by the resulting company in a scheme of demerger to the shareholders of the demerged company The period of holding shall be computed from the date of acquisition of shares in the demerged company.
Membership right held by a member of recognized stock exchange In case of shares as well as trading/clearing rights, the period for which the person was a member of the stock exchange immediately prior to such demutualization/corporatization shall be included.
Flat in a co-operative society The period of holding shall be computed from the date of allotment of shares in the society.
Sweat equity shares allotted by employer The period of holding shall be reckoned from the date of allotment or transfer of such equity shares (applicable from the assessment year 2008-09)

Unit of a business trust [allotted pursuant to transfer of shares]

The period of holding shall include the period for which shares were held by the assessee.
Conversion of preference shares into equity shares The period of holding of equity shares shall include the period for which preference shares were held by the assessee
Units allotted to an assessee pursuant to consolidation of two or more scheme of a mutual fund The period of holding of such units shall include the period for which the unit or units in the consolidating scheme of the mutual fund were held by the assessee.
Shares in a company acquired by the non-resident assessee on redemption of Global Depository Receipts referred to in Section 115AC(1)(b) The period of holding of such shares shall be reckoned from the date on which a request for such redemption was made.
Transactions in shares and securities not given above:  

1)  Date of purchase (through stock exchanges) of shares and Securities

2)  Date of transfer (through stock exchanges) of shares and securities

3)  Date of purchase/transfer of shares and securities (transaction taken place directly between parties and not through stock exchanges)

4)  Date of purchase/sale of shares and securities purchased in several lots at different points of time but delivery taken subsequently and sold in parts

5)  Transfer of a security by a depository (i.e., demat account)

a)  Date of purchase by broker on behalf of investor.

b)  Date of broker’s note provided such transactions are followed up by delivery of shares and also the transfer deeds.

c)  Date of contract of sale as declared by parties provided it is followed up by actual delivery of shares and the transfer deeds.

d)  The FIFO method shall be adopted to reckon the period of the holding of the security, in cases where the dates of purchase and sale cannot be correlated through specific number of scrips.

e)  The period of holding shall be determined on the basis of the first-in-first-out method.

Conversion of stock-in-trade into capital asset The period of holding of such converted asset shall be reckoned from the date of conversion.

 

TRANSFER:

According to section2(47), the following terms are considered as “Transfer”.

  • Sale, exchange or relinquishment of the asset.
  • Elimination of any rights in relation to a capital asset.
  • Compulsory acquisition of an asset.
  • Conversion of capital asset into stock-in-trade.
  • Maturity or redemption of a zero-coupon bond.
  • Enabling possession of immovable properties to the buyer in part performance of the contract.
  • Any transaction which has the effect of transferring an immovable property.

The transactions which are not considered as “Transfer”:

The following transaction shall not be charged to Capital gains:

Section Particulars
46(1) Distribution of asset in kind by a company to its shareholders at the time of liquidation
47(I) Distribution of capital asset on the total or partial partition of HUF
47(iii) Transfer of capital asset under a gift or will or an irrevocable trust
47(iv) Transfer of capital asset by a company to its wholly-owned subsidiary company
47(v) Transfer of a capital asset by a wholly-owned subsidiary company to its holding company
47(via) Transfer of capital assets in a scheme of amalgamation
47(viab) Transfer of shares in an Indian company held by a foreign company to another foreign company under a scheme of amalgamation of the two foreign companies
47(viaa) Transfer of share of a foreign company (which derives, directly or indirectly, its value substantially from the share or shares of an Indian company) held by a foreign company to another foreign company under a scheme of amalgamation (subject to conditions)
47(vib) Transfer of capital assets in a scheme of amalgamation of a banking company with a banking institution
47(vic) Transfer of capital assets by the demerged company to the resulting company in a demerger
47(vica) Transfer of shares held in an Indian company by a demerged foreign company to the resulting foreign company
47(vicb) Any transfer of a capital asset by the predecessor co-operative bank to the successor co-operative bank in a business reorganization.

47(vicc)

Any transfer of a capital asset (being shares) held by a shareholder in the predecessor co-operative bank if the transfer is made in consideration of the allotment to him of any shares in the successor co-operative bank in a scheme of business reorganization
47(vid) Transfer or issue of shares by the resulting company to the shareholders of the demerged company in a scheme of demerger

47(vii)

Allotment of shares in an amalgamated company in lieu of shares held in amalgamating company
47(viia)

Transfer of capital assets (being foreign currency convertible bonds or GDR) by a non-resident to another non-resident.

47(viiaa) Any transfer made outside India, of a capital asset (being rupee denominated bond of an Indian company issued outside India) by a non-resident to another non-resident
47(viiab)

Any transfer of following capital assets by a non-resident on a recognized stock exchange located in any International Financial Services Centre:

a) Bond or GDR

b) Rupee Denominated Bond of an Indian Co.

c) Derivative

d) Such other securities as may be prescribed.

47(ix) Transfer of a capital asset (being work of art, manuscript, painting, etc.) to Government, University, National museum, etc.
47(x) Transfer by way of conversion of bonds or debentures into shares
47(xa) Transfer by way of conversion of bonds [as referred to in section 115AC(1)(a)] into shares or debentures of any company
47(xb) Any transfer by way of conversion of preference shares into equity shares
47(xi) Transfer by way of exchange of a capital asset being membership of a recognized stock exchange for shares of a company
47(xii) Transfer of land by a sick industrial company which is managed by its workers’ co-operative
47(xiia) Transfer of a capital asset by a firm to a company in the case of conversion of a firm into a company
47(xiiib) Transfer of a capital asset being a membership right held by a member of a recognized stock exchange in India
47(xiiib) Transfer of a capital asset by a private company or unlisted public company to an LLP, or any transfer of shares held in the company by a shareholder, in the case of conversion of a company into LLP
47(xiv) Transfer of a capital asset to a company in the case of conversion of proprietary concern into a company
47(xv) The transfer involved in a scheme of lending of securities
47(xvi) Transfer of a capital asset in a transaction of a reverse mortgage made under a scheme notified by the Government

47(xvii)

Transfer of a capital asset (being share of a special purpose vehicle) to a business trust in exchange of units allotted by that trust to the transferor
47(xviii) Transfer of units of a mutual fund pursuant to the consolidation of two or more schemes of an equity-oriented mutual fund or of two or more schemes of a mutual fund other than equity oriented mutual fund
47(xix) Transfer of units of a mutual fund from one plan to another pursuant to the consolidation of plans within the scheme of mutual funds

 

CALCULATION OF CAPITAL GAIN:

Computation of Capital gain is based on the nature of asset transferred i.e. Long-term asset or Short-term asset or Depreciable asset. Transfer of Short-term asset or Depreciable asset will lead to Short-term capital gain and Transfer of Long-term asset lead to Long-term Capital gain.

In case of short-term Capital gain (section 48):

Particulars Amount
Full value of consideration XXX
Less: Cost of acquisition of an asset XXX
Less: Cost of improvement XXX
Less: Cost of improvement XXX
Less: Expenditure incurred wholly and exclusively in connection with such transfer XXX

 

In case of Long-term capital gain (section 48):

Particulars Amount

Full value of consideration

XXX
Less: Indexed Cost of acquisition XXX
Less: Indexed Cost of Improvement XXX
Less: Expenditure incurred wholly and exclusively in connection with such transfer

XXX

 

In case of Depreciable Capital gain (section 50):

Particulars Amount
Written Down Value of block of the asset at the beginning of the previous year XXX
Add: Actual cost of assets falling within that block acquired during the year XXX
Less: Full value of consideration of assets transferred during the year XXX
Less: Expenditure incurred in connection with such transfer XXX

 

 Indexed Cost of Acquisition =

[(Cost of Acquisition) × (CII for the year of transfer)]
(CII for the year of acquisition or for the Financial Year 2001-02, whichever is later)

Indexed Cost of Improvement =

[(Cost of Improvement) × (CII for the year of transfer)]
CII for the year of Improvement

Note: Cost Inflation Index (CII) for the current year is 289 as prescribed by the Central government.

 

Cost of Acquisition:

Cost of Acquisition refers to the amount of asset which is originally acquired by the assessee. It includes expenses related to purchasing and for completing the title of the company.

Cost of Acquisition shall be calculated on Notional Basis:

SL.NO: Particulars Notional Cost of Acquisition
1. Additional compensation in the case of compulsory acquisition of capital assets NIL
2. Assets received by a shareholder on liquidation of the company FMV of such asset on the date of distribution of assets to the shareholders
3. Stock or shares becomes the property of taxpayer on consolidation, conversion, etc. Cost of acquisition of such stock or shares from which such asset is derived
4. Allotment of shares in an amalgamated Indian co. to the shareholders of amalgamating co. in a scheme of amalgamation Cost of acquisition of shares in the amalgamating company
5. Conversion of debentures into shares That part of the cost of debentures in relation to which such asset is acquired by the assessee
5A Conversion of preference shares into equity shares The part of the cost of preference shares in relation to which such asset is acquired by the assessee.
6 Allotment of shares/securities by a company. to its employees under ESOP Scheme approved by the Central Government

a) If shares are allotted during 1999-2000 or on or after April 1, 2009, FMV of securities on the date of exercise of the option

b) If shares are allotted before April 1, 2007 (not being during 1999-2000), the amount actually paid to acquire the securities

c) If shares are allotted on or after April 1, 2007, but before April 1, 2009, FMV of securities on the date of vesting of the option (purchase price paid to the employer or FBT paid to the employer shall not be considered)

6A Listed Equity Shares or Units of Equity Oriented Funds or Units of Business Trust as referred to in Section 112A acquired before February 1, 2018.

Higher of :

(i) Cost of acquisition of such asset; and

(ii) Lower of:

(A) The fair market value of such asset; and

(B) The full value of the consideration received or accruing as a result of the transfer of such asset.

Note: For the meaning of ‘Fair Market Value’ refer Explanation to Section 55(2)(ac).

 

7 Property covered by section 56(2)(vii) or (viia) or (x) The value which has been considered for the purpose of Section 56(2)(vii) or (viia) or (x)
8 Allotment of shares in Indian resulting company to the existing shareholders of the demerger company in a scheme of demerger Cost of acquisition of shares in the demerged company? Net book value of assets transferred in a demerger? The net worth of the demerged company immediately before the demerger
9 Cost of acquisition of original shares in the demerged company after the demerger Cost of acquisition of such shares minus amount calculated above in point 8.
10

Cost of acquisition of assets acquired by successor LLP from predecessor private company or unlisted public company at the time of conversion of the company into LLP in compliance with conditions of Section 47(xiiib)

Cost of acquisition of the assets to the predecessor private company or unlisted public company

 

11 Cost of acquisition of rights of a partner in a LLP which became the property of the taxpayer due to conversion of a private company or unlisted public company into the LLP Cost of acquisition of the shares in the company. immediately before conversion
12 Depreciable assets covered under Section 50 Opening WDV of a block of assets on the first day of the previous year plus the actual cost of assets acquired during the year which fall within the same block of assets
13 Depreciable assets of a power generating unit as covered under Section 50A* WDV of the asset minus terminal depreciation plus balancing charge
14 Undertaking/division acquired by way of slump sale as covered under Section 50B The net worth of such an undertaking
15 New asset acquired for claiming exemptions under sections 54,  54B, 54D, 54G or 54GA if it is transferred within three years The actual cost of acquisition  minus exemption claimed under these sections
16 Goodwill of business or trademark or brand name associated with the business or right to manufacture, produce or process any article or thing or right to carry on any business or profession, tenancy right, stage permits or loom hours

a) If these assets were acquired by gift, will, etc., under section 49(1) and the previous owner had purchased these assets: Cost of acquisition to the previous owner

b) If the owner has purchased these assets: Actual cost of acquisition

c) If these assets are self-generated: Nil

17 Right shares The amount actually paid by the assessee
18 Right to subscribe to shares (i.e., right entitlement) NIL
19 Bonus shares

a) If allotted to the assessee before April 1, 1981: Fair market value on that date

b) In any other case: Nil

20 Allotment of equity shares and right to trade in stock exchange, allotted to members of stock exchange under a scheme of demutualization or corporatization of stock exchanges as approved by SEBI

a) Cost of acquisition of shares: Cost of acquisition of original members of the stock exchange

b) Cost of acquisition of trading or clearing rights of the stock exchange: Nil

21 Capital asset, being a unit of business trust, acquired in consideration of transfer as referred to in section 47(xvii) Cost of acquisition of shares as referred to in section 47 Any other capital assets:xvii) [applicable from AY 2015-16]
24 Any other capital asset:

a) If it became the property of taxpayer before April 1, 2001, by gift, will, etc., in modes specified in section 49(1): Cost of acquisition to the previous owner or FMV as on April 1, 2001, whichever is higher.

Note: The FMV on 1st April 2001 shall not exceed the stamp duty value of such assets as on 1st April 2001 where such stamp duty value is available. (This amendment will be applicable w.e.f. AY 2021-22)

b) If it became the property of taxpayer before April 1, 2001: Cost of acquisition or FMV as on April 1, 2001, whichever is more

Note: The FMV on 1st April 2001 shall not exceed the stamp duty value of such assets as on 1st April 2001 where such stamp duty value is available. (This amendment will be applicable w.e.f. AY 2021-22)

c) If it became the property of taxpayer after April 1, 2001, by gift, will, etc., in modes specified in section 49(1): Cost of acquisition to the previous owner

d) If it became the property of taxpayer after April 1, 2001: Actual cost of acquisition

 

 

COST OF IMPROVEMENT:

Cost of improvement, in relation to the capital assets shall include all capital expenditure incurred in making addition or alteration to the capital assets by the assessee or the previous owner. The cost of improvement does not include any expenditure incurred prior to 01-04-2001.

Cost of Improvement shall be calculated in this manner:

SL. No. Particulars Cost of Improvement
1. In relation to the goodwill of a business, right to manufacture, produce any article or thing or right to carry on business or profession NIL
2. In relation to a capital asset which becomes property of the assessee or previous owner before 01-04-2001 Any expenditure of capital nature incurred on or after 01-04-2001
3. In relation to a capital asset which becomes property of the assessee or previous owner before 01.04.2001 by way of any mode specified under Section 49(1) Any expenditure of capital nature incurred on or after 01-04-2001 by the assessee or the previous owner
4. In relation to a capital asset which becomes property of the assessee or previous owner on or after 01.04.2001 Any expenditure of capital nature incurred by the assessee or the previous owner
5. In relation to a capital asset which becomes property of the assessee or previous owner on or after 01-04-2001 by way of any mode specified under Section 49(1) Any expenditure of capital nature incurred by the assessee or the previous owner

  

Rates of Tax under Capital Gains:

1.SHORT-TERM CAPITAL GAIN:

  • Short-term capital gains added in the gross total income of the taxpayer and Tax will be charged at normal rates.
  • under Section 111A, Short-term capital gains arising from the transfer of Equity Shares, Units of an Equity Oriented Funds or a unit of a business trust which is chargeable to securities transaction tax will be taxed at 15%.

2.LONG-TERM CAPITAL GAIN:

  • Long-term capital gains tax charged to 20%.
  • Long-term capital gains arising from the transfer of listed securities, units or zero-coupon bonds shall be taxable at lower of following:
  • 20% after taking benefit of indexation
  • 10% without taking the benefit of indexation.
  • Long-term capital gains arising to non-residents or foreign company from the transfer of unlisted securities shall be taxed without giving any benefit for indexation
  • Long-term capital gains arising from the transfer of listed equity share, or a unit of an equity oriented fund or a unit of a business trust as referred to in Section 112A shall be chargeable to tax at the rate of 10% in excess of Rs. 1 Lakh.
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