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CAPITAL GAINS

INTRODUCTION
CAPITAL GAINS Any profit or gains arising from the transfer of capital assets is taxable under the head capital gains in the previous year in which the transfer has taken place.

Conditions for Gains to be charged under Capital Gains


There should be a capital asset. The capital asset should be transferred by the assessee. Such transfer should take place during the previous year. The profits or gains should arise as a result of this transfer. Such profit or gain should not be exempted from tax under sections 54, 54B, 54D, 54EC, 54F and 54G & 54GA.

DEFINITION OF CAPITAL ASSETS


Capital asset is defined to include property of any kind, whether fixed or circulating, movable or immovable, tangible or intangible.

EXCEPTIONS TO CAPITAL ASSETS


a) Any stock-in-trade, consumable stores or raw material held for the purposes of business or profession.

b) Movable property of the Assessee including wearing apparel and furniture held for his personal use or for the use of any member of his family dependent on him. The exception to this condition is jewellery, which is treated as a capital asset, even though it is meant for personal use.

CONTD.
c) Agricultural land in India provided it is not situated in urban area. d) 6 % Gold Bonds, 7% Gold Bonds or National Defence Gold Bonds, issued by the central government. e) Special Bearer Bonds, and f) Gold Deposit bonds issued under Gold Deposit Scheme of 1999.

SHORT TERM AND LONG TERM CAPITAL ASSETS


Short term capital assets means a capital asset held by the assessee for not more than 36 months, immediately prior to its date of transfer. However, the following assets are treated as short term assets if they are held for not more than 12 months, they are: Equity or preference shares in a company Securities like debentures, government securities listed in a recognized stock exchange in India. Units of UTI and Units of mutual funds. An asset other than a short-term capital asset is regarded as a long term capital asset.

METHOD OF DETERMINING PERIOD OF HOLDING


In case when the assessee acquires an asset as a gift or by a will, the period for which the previous owner holds the asset is also included.

TRANSFER OF CAPITAL ASSET [Sec2(47)]


Any transaction involving the allowing of the possession of any movable property to be taken or retained in part of performance of contract of the nature referred to in the sec53a of the transfer of property act,1982 Any transaction (whether by way of becoming a member of, or acquiring shares in a co-operative society, company association of person or by way of agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring or enabling the enjoyment of any immovable property

WHAT IS INCLUDED IN TRANSFER


Transfer Includes Sale Exchange Relinquishment Extinguishment Compulsory Acquisition Conversion of Capital Asset Into Stock in Trade[sec(47)(iv)]

WHAT IS NOT INCLUDED IN TRANSFER


Distribution of Assets to Its Shareholder on Its Liquidation [Sec46(1)] Distribution of Capital Assets in HUF to Its Member at the Time of Total or Partial Partition [Sec 47(1)] Transfer of a Capital Asset Under a Will or an Irrevocable Trust or a Gift [Sec 47(iii)] Transfer of a Capital Asset by a Company to Its Wholly Owned Indian Subsidiary Company [Sec 47(iv)] Transfer of a Capital Asset by a Wholly Owned Subsidiary Company to Its Indian Holding Company [Sec 47(v)]

CONTD.
Transfer in Case of Amalgamation Sec[47(vi)] Transfer in Case of Demerger Sec[47(vi B)] Transfer of Agricultural Land in India Effected Before March 1, 1970 [Sec 47(viii)] Transfer of a Capital Asset , Being Any Work of Art ,Scientific or Art Collection, Book, Drawing, painting, photograph Etc [Sec47(ix)]

Transfer by Way of Conversion of Bonds or Debenture of a Company Into Shares or Debenture of That Company [ Sec 47(x)]

SHORT TERM CAPITAL GAIN


1)Find full value of consideration 2)Deduct the followings. a) Expenditure incurred wholly and exclusively in connection with such transfer. b) Cost of acquisition. c) Cost of improvement 3) From resulting sum deduct exemption provided by u/s54 B, 54 D, 54 G, 54GA 4) The balancing amount is Short Term Capital Gain.

LONG TERM CAPITAL GAIN


1) Find full value of consideration 2) Deduct the followings a) Expenditure incurred wholly and exclusively in connection with such transfer. b) Indexed Cost of acquisition. c) Indexed Cost of improvement. 3) From resulting sum deduct the exemption provided by section 54, 54 B, 54 D, 54 EC, 54 F, 54 G, 54 GA The balancing amount is Long Term Capital Gain/Loss.

FULL VALUE OF CONSIDERATION


Full value means whole price without any deduction and consideration in which transferor receives in lieu of asset he parts with.

EXPENDITURE ON TRANSFER
Expenditure incurred wholly and exclusively in connection with transfer of capital asset is deductible from full value of consideration. This means expenditure incurred which is necessary to effect the transfer like brokerage commission, cost of stamp, registration fees and all

COST OF ACQUISITION
Cost of acquisition of an asset is the value for which it is acquired by the Assessee, expenses of capital nature for acquiring the title are include in cost of acquisition.

NOTIONAL COST OF ACQUISITION


Cost to previous owner is considered as cost of acquisition to the assessee if that capital asset become property in cases like. a) Distribution of asset on partial or total partition of Hindu Undivided Family. b) Acquisition of property under gift and will. c) Acquisition of property by a HUF where one of its member has converted his self acquired property into joint family property after Dec 311969.

COST OF IMPROVEMENT
- It means all expenses of capital nature incurred in making any addition/ alteration to capital asset by assessee. 1) Expenditure after 31 mar 1981

INDEXED COST OF ACQUISITION OR IMPROVEMENT


Cost Inflation Index.
Cost inflation Index for any year means such index as the central government may , having regard to 75% of average rise in consumer price index for urban non manual employees of the immediate preceding pervious year to such year, by notifying in official gazette

COMPUTATION OF INDEXED COST.


Case1) Capital asset acquired before 1-4-1981 Cost X Cost Inflation Index in the year of Transfer Or FMV on 01.04.1981 Cost Inflation Index for yr 1981-82 (whichever is high)

2) Capital asset acquired after 1-4-1981 Cost X Cost Inflation Index in the year of Transfer Cost Inflation Index for yr of purchase

3) Capital asset acquired by assesse before 1-4-1981 & originally acquired by previous owner before 1-4-1981. Cost to Previous Owner X Cost Inflation Index in the year of Transfer Or FMV on 01.04.1981 Cost Inflation Index for yr 1981-82 (whichever is high) 4) Capital asset acquired by assesse after 1-4-1981 & originally acquired by previous owner before 1-4-1981. Cost to Previous Owner X Cost Inflation Index in the year of Transfer Or FMV on 01.04.1981 CI Index for yr the asset is first held by assesee (whichever is high) 5) Capital asset acquired by assesse after 1-4-1981 & originally acquired by previous owner after 1-4-1981. Cost to Previous Owner X Cost Inflation Index in the year of Transfer CI Index for yr the asset is first held by assese

Indexed Cost of Improvement


1. Ignore Improvement Before 1.04.1981
Indexed Cost =Cost of Improvement X CI Index in Yr of Transfer CI Index in Yr of Improvement

INTRODUCTION OF A CAPITAL ASSET AS CAPITAL CONTRIBUTION


Section 45(3) Taxable in the hands of the partner Consideration: Amount recorded in the books of accounts

DISTRIBUTION OF CAPITAL ASSETS ON A FIRMS DISSOLUTION


Section 45(4) Chargeable in the hands of the firm Consideration : fair market value as on the date of transfer

SLUMP SALE SEC 50B


Slump sale means transfer of one or more undertakings as a result of sale for lump sum consideration without values being assigned to individual assets and liabilities in such sales Section 2(42C).

SLUMP SALE
Cost of acquisition : Net worth
No indexation Short term/long term Value of assets : Depreciable/non-depreciable Value in the hands of purchaser.

CAPITAL GAINS ON CONVERSION OF DEBENTURES INTO SHARES [SEC 49(2A)]:


1) Any transfer by way of conversion of debentures, debenture stock, or deposit certificates in any form, of a Co. into shares or debentures of that co. is not regarded as a transfer giving rise to Capital gains.
2) Cost of Acquisition will be the cost of debentures, debentures stock or deposit certificates which has been appropriated towards to shares or debentures in case there is sale of above transferred assets giving rise to capital gains.

CAPITAL GAINS ON CONVERSION OF DEBENTURES INTO SHARES [SEC 49(2A)]:


In case of conversion of debentures into Shares: 1) Cost of Debentures will be the Cost of acquisition of shares. 2) To find out whether or not shares are LTCA or STCA, the period of holding shall be determined from date of allotment of shares. 3) The indexation will start from the date of conversion of debentures into shares. 4) Not applicable for preference shares converted into equity shares.

CAPITAL GAINS ON TRANSFER OF SECURITY BY DEPOSITORY


[ SEC 45(2A) ]
1) Any beneficial will be chargeable to Income tax, if in PY he has had any profits or gains by virtue of transferring of any securities through depository or participant of such beneficial interest. 2) It shall not be income of the depository. 3) Cost of Acquisitions and the period of holding of any securities shall be determined on the basis of the First In First Out (FIFO)

Sec 45(2A)(contd.)
4)FIFO shall be applied only in respect of dematerialized holdings, as physical form of shares are still in possession of the investor when there is sale of dematerialized shares. 5) FIFO shall be applied accountwise incase if there are multiple depository accounts, as sale in particular account shall not be construed as sale in other accounts. 6) Date of entry is used for the basis of FIFO.

COMPUTATION OF CAPITAL GAINS IN THE CASE OF SELF GENERATED ASSETS.


Self Generated Assets 1. Goodwill of a Business 2. Tenancy Rights, Route Permits & loom Hours 3.Rights to manufacture, Produce or Process any article 4. Trade mark or brand name associated with a business Sale Consideration Actual Cost of Acquisition Nil Cost of Improvement Nil Expenses on transfer Actual

Actual

Nil

Actual

Actual

Actual

Nil

Nil

Actual

Actual

Nil

Actual

Actual

CAPITAL GAINS IN CASE OF BONUS SHARES


Original Shares
Acquisition
Acquired before April1, 1981

Bonus Shares
Acquisition
Acquired before April1, 1981

Cost of Acquisition
Actual Cost or Fair Market Value on 1st April 1981 whichever is more Actual Cost or Fair Market Value on 1st April 1981 whichever is more Actual Cost

Cost of Acquisition
Fair Market Value on 1st April 1981

Acquired before April1, 1981

Acquired after April1, 1981

Nil

Acquired after April1, 1981

Acquired after April1, 1981

Nil

CAPITAL GAIN ON TRANSFER OF RIGHTS SHARES


For Original Shareholder ( Renouncer )
Cost of Acquisition : Cost of acquiring original shares. Cost of aquiring Rights shares. Premium Received on renouncement Short Term Capital Gain.

For the Renouncee


Cost of Acquisition : Amount paid to Company Premium paid to the renouncer.

CAPITAL GAINS IN CASE OF COMPULSORY ACQUISITION OF AN ASSET [SEC 45(5)]


Applicability : Transfer of capital asset by way of compulsory acquisition under any law. Capital asset is transferred (not by way of compulsory acquisition), & consideration is approved or determined by central Gov. or RBI. Chargeability : Initial Compensation is full value of consideration. Charged in the year in which Initial Compensation is received Enhanced Compensation.

OTHER SPECIAL PROVISIONS


Capital Gains in case of Depreciable Assets ( Sec 50 ) Buy Back of Shares Transfer of Land & Bldg ( Sec 50 [c])

EXEMPTION U/S 54
Conditions : Gains are from Transfer of Residential House Property Applicable only to Individual / HUF Asset Sold is a Long Term Capital Asset Assessee should invest in another Residential House Property within the specified time limit. New asset should not be sold within 3 years of acquisition, otherwise will be treated as a short term capital gain. Exemption = Amount Invested OR Capital Gains whichever is Less.

EXEMPTION U/S 54B


Available if agricultural land transferred. The said land should be used by the individual or his parents for agricultural purposes during at least 2 years immediately prior to transfer. Available only to an individual. Asset Sold should be Short term / Long term Capital Asset. Investment in agricultural land (rural or urban) within 2 years. New Asset should not be sold within 3 years of acquisition, otherwise will be treated as a short term capital gain. Exemption = Amount Invested OR Capital Gains whichever is Less.

EXEMPTION U/S 54D


Available if land or building forming part of an industrial undertaking is compulsorily acquired by the govt and which is used during 2 years for industrial purposes prior to acquisition. Available to any person. Asset Sold should be Short term / Long term Capital Asset. Investment in land or building for industrial purposes within 3 years. New Asset should not be sold within 3 years of acquisition, otherwise will be treated as a short term capital gain. Exemption = Amount Invested OR Capital Gains whichever is Less.

EXEMPTION U/S 54EC


Available if any long term capital asset is transferred after 31.3.2000. Available to any person. The asset should be a Long term capital asset. Investment within 6 months in bonds of NHAI or RECL which are redeemable after 3 years.

New Asset should not be sold within 3 years of acquisition, otherwise will be treated as a short term capital gain. Exemption = Amount Invested OR Capital Gains whichever is Less.

EXEMPTION U/S 54F


Available if any long term capital asset( other than a residential house property) is transferred, Available to an individual / HUF. Investment should be made in a residential house property within time Limit . New Asset should not be sold within 3 years of acquisition, otherwise will be treated as a short term capital gain. Exemption = Amount Invested * Capital gains Net sale consideration

EXEMPTION U/S 54G


Available if any land, building, plant or machinery is transferred in order to shift an industrial undertaking from urban to rural area. Available to any person. Asset may be short term / long term. Investment should be made in land, building or plant and machinery to shift the undertaking in a rural area. New Asset should not be sold within 3 years of acquisition, Exemption = Amount Invested OR Capital Gains whichever is Less

EXEMPTION U/S 54GA


Available if any land, building, plant or machinery is transferred in order to shift an industrial undertaking from any area to SEZ. Available to any person. Asset may be short term / long term. Investment should be made in land, building or plant and machinery to shift the undertaking to SEZ area. New Asset should not be sold within 3 years of acquisition, Exemption = Amount Invested OR Capital Gains whichever is Less

PROVISIONS OF SEC 112


Section 112 provides an alternative option for charging long term capital gains to tax, if the following conditions are satisfied : The taxpayer is an individual, HUF, company or any other person(may be resident or non resident) The asset is a long term capital asset The long term capital asset is : - a security listed in any recognised stock exchange in India or, - a unit of UTI or a mutual fund(whether listed or not)

Sec 112 (contd.)


If the conditions are satisfied, then the other option is to charge the capital gains at the rate of 10% without taking the benefit of indexation in the cost of acquisition. The tax payable by the assessee will be lower of 20%(+ surcharge)on the capital gain calculated giving benefit of indexation or @10% without the benefit of indexation, whichever is lower. In the case of listed bonus shares, listed debentures and listed bonds, Option u/s 112 will be better.

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