11 CAPITAL GAINS ———— ror ‘Capital Gains’ is fourth important head of income. Incomes arising from gs or purchase, manufacturing activities, professional services are included under the Income from business or profession while the profit or loss arising from transte capital assets is taxable under the head ‘Capital Gains’. For example, an deals in purchase and sale of furmiture. In this situation profit and loss from 5, activities is matter of income from business. On the other hand a cloth merchant & famiture of his shop then profit or loss arising from such transfer will be covered un, the head ‘Capital Gains’. Any profit or gain arising from the sale or transfer of a capital asset , chargeable to tax under the head “Capital Gains”. Capital asset means any mova, or immovable asset like land, building, plot, gold, silver, jewellery, shares, securities ¢, Profit or loss arising from transfer of such assets is considered under the head capi: gains from Income tax point of view. Sections 45 to 55 of the Income Tax Act deal with capital gains. Section 45 of the Act, provides that any profits or gains arising from the transfer of: capital asset effected in the previous year shall be chargeable to incometu under the head “Capital Gains” and shall be deemed to be the income of tx previous year in which the transfer took place. ‘The requisites of a charge to Income tax, of capital gains under Section 45 22 (i) There must be a capital asset. (i) The capital asset must have been transferred. (ii), The transfer must have been effected in the previous year. (iv) There must be a gain arising on such transfer of a capital asset. Example- Mr. Mohan purchased a house for % 2,20,000 in 2022 and for € 3 lac in 2023. So he eamed % 80,000. It will be treated as Capital Gain? Income tax point of view, because - (i) The house is capital asset. (ii) It has been transferred during the previous year, and (ii) Gain arising % 80,000 from such transfer. [338]} $0 it is necessary to iven under Sec, 2 Capital asset means property of a (14) ovable or immovable, tangible or filver, precious metals, jewellery, ny type, wh intangible e.g ether fixed or circulating, shares, securitice fei eding, plot, gold, CAPITAL ASSETS » furniture, machinery etc. Simply the following assets are included ats und ‘Cans 1. Land, building, fiat, plot ete. immovable a ‘Capital Asset 2. Fumiture, machinery, plant ete. which are used for running the bust 3. Gold, Silver, Precious metals, precious stones, jewelle nea trade) ry (except stock in 4. Urban agricultural land which is situated in th 1 local limit ici or Cantonment Board or notified area populated not lem ieriaoee Shares, securities, Bonds etc. held by the assess: i . ee as an in\ ; 6. Goodwill, patent, interest in firm ete. ae O.ASSETS NOT TREATED AS CAPITAL ASSETS. Though property of any type held by an assessee whether or not connected with his business or profession is included in the definition of ‘Capital asset’ it does not include — 1. Stock in trade- Any stock in trade, consumable stores or raw materials held for the purposes of his business or profession is not capital asset. 2. Personal effects— Personal effects that is to say movable property including wearing apparel and furniture (but excluding jewellery) held for personal use by the assessee or any member of his family dependent on him. So, furniture, motorcar, wearing apparels, utensils, domestic appliances are not covered under the definition of capital assets. Consequently the profit or loss arise from the transfer of such personal effects is not taxable under the Income Tax Act. But the following shall not be treated as personal effects and on, its transfer assessee will be liable to pay tax on capital gains : (i) archaeological collections, (i) drawings, (iii) paintings, (iv) sculptures, (v) any work of art. 3. Agricultural Land in rural area Agricultural land in India, not beingland situated (a) within the jurisdiction of a munca or 7 Canteen Board i win has a population of not less than 10,000 according to the last prec Q in ayes within such distance, not being more than eight kilometers from ea local Sr tony Mopaly or Cantonment Bond eth Cen Conese having regard to the extent of any scope for urbanisation Gs relevant considerations, specify in this behelf by notification in the Official Gazette. 4. Gold Bonds 61% Gold Bonds, 1997 or 7% tonal Defence Gold Bonds, 1980 issued by the Central Gove Gold Bonds, 1980 or mment 5340/Income Tax 5. Special Bearer Bonds- S Government, . id Deposit Bonds, 6. Gold deposit oe Ce Central Government. it Scheme, 1999 not 16. on . ve the Gold Monetisation ao excluded from nage! Capi ; owever, : - ce So, aforesaid asses OO fects (clothing, fume old Bonds, eae trade area (population less than 1 fone Tand in ru a al d under the definition of Capi, it Bonds are not covere ty .ds and Gold Deposit cial Bearer Bonds, 1991 issued by the C,,, Pp ty 4999, issued under the & Deposit certificates iss Mey agricultural Bearer Bon Assets. i TYPES OF CAPITAL ASSET: From Income Tax point o (1) Short term capital asset (2) Long term capital asset |. SHORT TERM CAPITAL GAIN/LOSS [2 Short term capital assets can be classified in the following categories according to period of holding- 1. Immovable assets Land - building, means immovable capital asset held by an assessee immediately preceding the date of transfer. Example- Mr. Sudesh Gupta purchased a plot on 1st August, 2021 for ® 2 lac and sold it for ® 3 lac on Ist May 2022. In this case the plot is treated as short tem capital asset, because the assessee held this property for not more than 24 months, Profit arising from such transfer ® 1 lac is taxable as short term capital gain. 2. Movable assets - Gold, Silver etc. ~ Capital gain from transfer movable assets - Gold, Silver, Omaments etc. shall be short term if such type of assets held by the assessee not more than 36 months. _3: Shares and securities~ However, in the case of the following the qualifying Beriod wil be 12 months. Thus profit on transfer of the following would be chargeable capital gains only if they are held for a period not exceeding 12 months- (a) Shares, (b) Any other security listed in a recognise: in Indi (2) Unis ofthe Unit Trust of India, e*CHange in nc (4) Unit of a Mutual Fund specified u/s 10 (23D). (@) Zero coupon Bonds, 4. De ot aad: DePrectable aesets” In the case of a capital asset forming part of a boc! alvays be deemed to be ¢ Gry erection has been allowed under the Act, its! the assessee, Shor term capital asset imespective of its holding period 5 AND GAINS f view capital assets are of two types (42A)] plot etc.- Short term capital asse for not more than 24 months . Computation of Sho: Short term rt term capital gain / loss ae Capital Gains means it isi ; men Coe Profit or loss arising from the transfet ©Capital Gains /341 uv er ee immovable assets are held by the assessee not Sin be a paar are held by the assessee for not more than @ st esa held byte eee merle 36 month a gabe en el re tn (a) = | mont | sport term capital gain or loss is computed in the following manner- pine annie | 05a Tess - Aggregate amount of the following : (a) Transfer Expenses (advertisement, brokerage, legal expenses etc.) | (b) Cost of acquisition of the asset (c) Cost of improvement | Short term capital gain / loss pate + If the aggregate amount of cost of acquisition improvement cost and is higher than sales consideration, the result will be short transfer expenses term capital loss. capital gain or long term capital gain, income. EXAMPLE : SHORT TERM C Short term loss can be adjusted against any short term but it can not be set off against other ‘APITAL GAINS SPP-1 An assessee Pp! 2021 and registration cl 180,000 for its improve 17,50,000. Brokerage pa Compute capital gains. se for % 3,60,000 on January 1, Z 60,000. Besides, he incurred 1, 2022 the house was sold for her expenses were % 20,000. urchased an old hou: harges were paid ment. On August id % 30,000 and ofl Solution : In above situation profit eat because the immovable property w' .d as short term capital gain, med by him will be treate ‘ot more than 24 months. ras held by the assessee ni Sales consideration Less -Aggregate amount of the following items (¢) Sales and transfer expenses {) Brokerage 30,000 oy Oiherenperses 20,000] 50,000 ) Cost of acquisition and improvement B Purchase pce 3,60,000 i) Registration expenses 60,000 (i) Improvement expenses 0,000] 500000)) 500° ae 2,00,000 — Short term capital gainTax ein LONG TERM CAPITAL GAIN / LOSS Ml Jd by the assessee for more than (a) 24 s he : Get Mn, If the transferred asset is 36 months incase of Gold-Sijy, "rs, b) , (t ding and Plot te van asst willbe treated asi er lnecae mee a secur hich fs nota short term capi months i lea wat capital asset. In other words a cap! . be long term capital asset. term capital a! e Labe assets - Land, building, plot etc. held by the See (i) Immo * rte. oe cr mouabe assets like Gold, Silver, Jewellery ete. he, yy, recess for move then 36 months. aoe a Example- Mr. Paresh Shah held a house property since, 2016. He transi. mple- Me. ty in 2022. In this case profit arising from such transfer will be treated as prope! a sset means ~ ‘bonds, units held by the assessee for mo, & , long ital gain because the assessee held the property for more than 24 Monthy? term capit L GAIN / LOSS OF LONG TERM CAPITAL Gi : cepa erlow ring om telona em cpt set wil be chargeable term capital gain or loss. oo Procedure for computation of long term capital gain / loss bony Full value of consideration Less- Total of the following - (i) Indexed cost of acquisition (i) Indexed cost of improvement (ii) Transfer expenses Long term capital gain / loss > Note : If the result of above calculation comes in plus (+) it will be long tem Capital Gains and if it is in minus (+) treated as long term Capital Los. Long term capital loss can be set off against other lo, but it can not be adjusted against short term capital O Explanation- ‘computation of long te Where long te asset such long term capital gains will be comp Consideration, the expenditure incurred in com Sost of acquisition’ and ‘indexed cost of i Any expenditure incurred '8 deductible from full consi Some examples of transi ng term capital gain gain, The meaning of above mentioned items used at the timed *m capital gains is as under- vm cepital gain arises from the transfer of a long term cori! uted by deducting from the full valued nection with the transfer, the ‘indexed improvement’. the assessee regarding the transfer of capital salient Advertisement, legal expenses, brokerage et: ** ‘er expenses,ae Capital Gai: 1/34: ___ INDEX COST OF acquisirion _ " eee shall have to be adjusted b ee rer xe of acquisition, y the Cost Inflation Index to - e es the yar in prich the aset i transferred bears to the Cost Ina index fon the Ist day of April 2001 whichever ceo 3 ofr the year List of cost inflation index is given below as felt ,, cost Inflation Index are notified as under aaa mire | 2063 | ae" —)7—-—— 100 16 wad 2004.05 113 2005-06 2006-07 117 122 ro07-os oe 129 2009-10 aon | el 2011-12 2012-13 148 167 184 jen 2013-14 2014-15 201516 | 2016-17 ane ame = = J. 2019-20 2020-21 72 2 280 | 289 301 2021-22 Index for the year of transfer 317 2022-23 : 331 0 ASSETS ACQUIRED BEFORE 1.4.2001 BY THE ASSESSEE- If the transferred asset is held by the assessee prior to 1.4.2001, the cost of acquisition will be taken- (a) Original cost of acquistion or (0) Fair market value of the asset on 1.4.2001, which ever is opted by the assessee. Normally assessee Opts higher value from aforesaid options to minimise tax liability. > Note : Improvement expenses incurred before 1.4.2001 should be ignored. It will not be added to original cost. Formula : Original cost or fair ee fae the yer in Market Value on 1.4.2001 x which the asset is Indexed Cost (generally whichever is more) transferred, ie.2022-23 (331) of Acquisition = =" Coat Inflation Index for 2001-02, ic.100 SPP.2 a house on 1st January, 1995 for & 1,40,000 and sold it on Ist. fate ed 28 for & 5,80,000. On Ist April, 2001 fair market Value ofthe property was € 1,50,000. Cost Inflation Index for the year 2022-23; 331. Determine the cost of acquisition and compute Long Term Capital Gains.344 / Income Tax Site property is head by assessee before 1 * ee (1995) = 1.40,000 an Fair a value (1.4.2001) %1,50,000 ic 000 wl be taken as cost of i Calculation of Long te ‘Transfer consideration of the asset Less- Index cost of acquisition Cost of acquist a Index for 2001-02 1,50,000 x 331 (year 2022 - 23) = 100 (2001 - 02) Long term capital gain fion (1.4.2001) x Index of the transfer year 4.2001 then cost of acquisition , 580,00) (-)4,96,500 aha 83,500 Q FOR ASSETS ACQUIRED BY THE ASSESSEE ON OR AFTER 1.4.2001 If the transferred asset is acquired by the assessee after 31.3.2001, then actual cost of acquisition will be taken for finding the index cost of acquisition. It will be calculated in the following manner - Cost of Acquisition x Index for the year Indexed Cost in which the asset is transferred (2022-23) of Acquisition = Cost Inflation Index for the base year in which the asset is acquired by the assessee ‘SPP-3 ‘An assessee purchased a building for & 1,80,000 ; 80, Ist and sold it for 5 lac on 1.8.2022. Cost inflation Indexes fo: Dove 7 ood 2022-23 are 122 and 331 respectively. Solution : Computation of Long term capital gain ‘Transfer consideration Less- Indexed cost Indexed cost of acuisition- = Atal Cost acquistion x Index for 2022.03 Index for 2006-07 (year in which property aqui — 180,000 x 331 ae . 122 Compute Long term Capital gain. 5,00,000 4,88,361 ee 11,639 }(qindexed cost of improvement an a ‘Any expenditure incurred by n y the assessee i or extention ie ee after acquisition is called "Coat ot Teorevene ince og term capi cost of improvement will also be indexed to eadoai ta aon to find out Long term LSial gain. Such indexed cost of improve 4 coPsideration alongwith index cost of Beate to be oe from sales enses. It is important that improvem. considered I sbioala be ignored. Gast of Kepeowaanend mn be eo dered only which Is re lated after 31.3.2001 ‘Indexed cost of any Improve Saen gn amount which bears to the cost of improvement the some proportion 00 Cost Inflation Index for the year in which the asset is transferred bez Bo the Cost In son Index for the year in which the improvement to the asset took plese es Formula : Cost of Improvement x Index for the transfer year Cost Inflation Index for the year in which improvement to the asset took place. mm EXCEPTIONS : WHERE INDEXATION IS NOT ALLOWED In the following cases indexed cost shall not be found out even though the transferred asset is long term nature- 1, Long term bonds and securities Cost of acquisition of bonds and securities (debentures etc.) will not be indexed, ven if such securities are held by the assessee for more than 12 months. However the sreesee can opt 10 pay tax @10% of long term capital gain arising from such securities. : So actual cost of long computing long- term capital gains. Example : An assessee purchased Ist April 2021 for % 38,000 and sold them o1 Situation debentures will be long term capital " accossee for more than 12 months. Profit arising from such transfer will be treated as long term capital Gains also, but benefit of indexing is not available to the assessee, SO 27,000 difference of amount is long term capital gain. transferred out side stock exchange rm) bond, Units or listed shares after 12 months ot available. benefit of indexing is n¢ in foreign exchange issued by Indian 5-C to 11541, the term securities will be taken instead of indexed cost while debentures of Reliance Industries Limited on n Ist August 2022 for = 45,000. In this asset because these are held by the 2. Cost of acquisition of shares (long te! Ifan assessee transfers any security, he can opt to pay tax @10%. In this case 3. Shares or debentures purchased by Non-residents i If a Norresident assessee transfers shares or debentures companies purchased in foreign currency ‘and opts taxation ws C2st of acquisition will not be indexed.CAPITAL GAINS owing proced : IMPORTANT POINTS IN OF SHORT TERM OR LONG TERM. ould determine whether the asset yer asset in the following manner. Capital Gains /361 ‘ure should be adopted for computation of capital gains ~ * transferred is Long term capital Period of holding from the Nature of date of acquisition pital as (a) Upto 24 months Short term, (b) More than 24 months Long term {a) Upto 36 months Short term: (b) More than 36 months Long term (@) Upto 12 months Short term (b) More than 12 months Long term Period of holding is immaterial | Short term 2 CAPITAL GAINS OR LOSS ON SHORT TERM ASSETS: c Jon of Short term capital gain / oss will be made as under- Sam consideration Ins Aggregate emount of the following- Cost of acquisition (actual) Cost of improvement (S) Trensfer expenses Short term capital gain / loss Short term capital gain is chargeable at normal rates of income tax. Short term loss can be set off against long term capital gains but it can not be set off against the income of other heads. ©) Incase of depreciable assets cost of acquisition will be Written Down Value of the asset at the beginning of the previous year. A. CAPITAL GAINS OR LOSS ON LONG-TERM ASSETS : Computation of long-term capital gains / loss will be made as under- Sales consideration Aggregate amount of the following Transfer expenses ) Indexed cost of acquisition =) Indexed cost of improvement ula : Indexed cost of acquisition : * of acquisition Index for the transfer year 2022-23 i.e. 331 Index for the first year in which asset is acquired