Income From Capital Gain

SUSHIL JAIN
ASSISTANT PROFESSOR
KPMSOL, NMIMS, MUMBAI
 Capital Gain

⮚ It includes Income from Transfer of Capital assets.

⮚ Capital asset

⮚ Transfer
 CAPITAL ASSET

⮚ Capital Asset includes the followings:

1. Capital asset is the property of an assessee whether connected

with
❖ Business or not,
❖ Tangible or intangible,
❖ Fixed or floating,
❖ Movable or immovable.
2. Security held by Foreign Institutions Investors (FIIs)

3. Any unit linked Insurance policy to which exemption under

clause (10D) of section 10 doesn’t apply.
Certain things which are not included in
capital assets.

1. Stock in trade

2. Personal movable items like TV, VCR, Wearing Cloths,

Car, etc.
(Except jewellary, Drawings, etc.)3. Agricultural Land

3. Agricultural Lan
Certain things which are not included in
capital assets.

4. a) 6½% Gold Bond 1977.

b) 7% Gold Bond 1980.
c) National defense gold Bond 1980.

5. Gold Deposit Bond issued under Gold deposit Scheme 1999.

6. Special Bearer Bond 1991.

 KINDS OF CAPITAL ASSET

There are two types of capital assets.

1. Short term capital asset.

1. Long term capital asset.

 Capital Assets Are divided into two
parts

a) Financial Assets: - it includes four types of assets;

i) Listed Securities.
ii) Equity oriented fund.
iii) Unit of UTI
iv) Zero coupon bonds

b) Non-Financial Assets: - it includes all the capital assets except the

financial assets.
 SHORT TERM CAPITAL ASSETS

FINANCIAL ASSETS NON-FINANCIAL ASSETS

If Financial assets are held by assessee If Non-financial assets
are held by
for 12 months or less than 12 months assessee for 36 months or less than 36
before transfer, then these types of assets months before its transfer,
then these
are called as short term capital assets. types of assets are called as short term
capital assets.
However, if land or building or both,
unlisted shares of a company are held for
24 months or less than 24 months, they
are termed as short term capital asset.
 SHORT TERM CAPITAL GAIN

⚫ Any gain or loss arising from the transfer of short term capital
assets is called short term capital gain/loss.

⚫ If there is any short-term capital loss, it may be adjusted from

Short-term capital gain/Long-term capital gain.
 LONG TERM CAPITAL ASSETS

FINANCIAL ASSETS NON-FINANCIAL

ASSETS
If Financial assets are held by If Non-financial assets are held
assessee for by assessee

more than 12 months before its for more than 36 months

transfer, then these types of before its transfer, then these
assets are called as long term types of assets are called as
capital assets. long term capital assets.
However, if land or building or
both,
unlisted shares of a company
 LONG TERM CAPITAL GAIN

⚫ Any gain or loss arising from the transfer of long term capital asset
is called long term capital gain/loss.

⚫ If there is any Long-term capital loss, it may be adjusted from Long-

term capital gains only.
 Self Generated Assets

⮚ There are certain self generated assets like goodwill, tenancy right,
stage carriage permit, and loom hours, own right to manufacture,
produce or process articles.

⮚ IMPORTANT NOTE: - As these assets are self generated so when we

sale these assets the cost of acquisition is taken as nil.
TRANSFER OF CAPITAL ASSET u/s 2 (47)
⚫ Transfer includes

⮚ Sale, Exchange, Relinquishment of any asset.

⮚ The extinguishments of any right therein.

⮚ It compulsory acquisition under any law.

⮚ Where the assessee converts his capital asset into stock in trade.

⮚ To handover the possession of an immovable property in the

part performance of a contract for the transfer of the property

⮚ Maturity or Redemption of zero coupon bonds.

⮚ Conversion of business into limited company.

 Examples

⚫ Example of Relinquishment of Asset:

Suppose a co-owner of a property having definite share gives

away his right in the property in favour of other owners, it is called
relinquishment of asset.
 Examples

⚫ Example of Extinguishment of any right:

Suppose a promissory note is issued and the payment against

it is not asked for four years then after four years the right of taking
money doesn’t exists any more.
 Certain transaction not regarded as
transfer.

1. Distribution of capital assets on total or partial division of HUF.

Any transfer under gift, will or irrevocable trust.
2. Any transfer by subsidiary company to holding company.
3.

4. Any transfer from Amalgamating company to Amalgamated company.

Amalgamating Amalgamated
5. Transfer of Share by shareholder of amalgamating company in the
scheme of amalgamation to amalgamated company.
 Certain transaction not regarded as
transfer.

6. Any transfer of capital asset being work of; art, book, and manuscript,
photograph etc. to Government, University or to national Museum.

7. Conversion of debentures, debenture stock,

deposit certificate of the company into shares or

8. Transfer of shares of an Indian company by foreign Amalgamating company to foreign
debentures of that company.
Amalgamated Company in the scheme of amalgamation.
Certain transaction not regarded as
transfer.

9. Any transfer of land by a sick company (A sick company is one

which is declared sick as per the provisions of sick industrial
companies act (SICA 1985) after it became sick and before it is
revived i.e. its net worth becomes equal to or more than its
accumulated losses.

[Link] a firm is succeeded by a company and due to this the

firms sells its assets to the company, in this case it will not be
treated as transfer, provided certain conditions are satisfied.

[Link] a sole traders business is succeeded by a company and

due to this the firms sells its assets to the company, in this case
it will not be treated as transfer, provided certain conditions are
satisfied.
Certain transaction not regarded as
transfer.

12. Any transfer of capital asset in the scheme of demerger by the

demerged company to the resulting Indian company.
13. When a shareholder of demerged company transfers its shares
to the resulting company at the time of demerger and the
resulting company issues share to such shareholder.
[Link] case of business reorganization where a predecessor
cooperative bank transfers its capital assets to the successor
cooperative bank.
[Link] as a result of business reorganization the shareholder of
predecessor cooperative bank transfer its shares to successor
cooperative bank and gets new shares from it.
[Link] an Individual redeems any sovereign gold bonds
originally issued by the Reserve bank of India.
 COMPUTATION OF CAPITAL GAIN

⮚ The study of computation of capital gain would be done

in four different situations.
1. Computation of capital gain in case of long term capital asset.

Here the formula for calculation of LTCG is

Full value of sales consideration

Minus

1. Indexed cost of Acquisition

2. Indexed cost of Improvement
3. Expenses on transfer

Long term capital Gain/Loss

 COMPUTATION OF CAPITAL GAIN

2. Computation of short term capital

gain

Take full value of consideration

Minus
Cost of Acquisition
Cost of Improvement
Expenses of sales

Short Term Capital Gain/Loss

------------------------------------
 COST OF ACQUISITION

⮚ Means cost of acquiring the assets, it simply means the

cost of purchase/acquiring of a capital asset plus all expenses
incurred to acquire it.

• Suppose One Machine is purchased for Rs 200000 and the

expenses on purchase like; carriage, installation, labour for
installation are Rs 40000. The cost of Acquisition in this case would
be 200000 +40000 = 240000.
 COST OF ACQUISITION

⚫ Following are the detailed rules regarding Cost of

Acquisition:

1. Cases where Cost to the previous owner is taken to be the cost of

Acquisition.
 COST OF ACQUISITION

∙ Distribution of Asset on Partial or Complete partition of HUF

HUF (previous Owner of Asset) Member (Present Owner of Asset)

Here suppose the cost of the asset to HUF was 1,00,000, and after
becoming owner the present owner sells the asset acquired from
HUF, in this case the cost to the present owner i.e. Member of HUF
would be 1,00,000(As it was for the previous owner i.e. HUF).

• b. Transfer of asset under Gift, will, revocable or irrevocable trust.

• c. Transfer by succession, inheritance, devolution.

 COST OF ACQUISITION

• Transfer of capital asset by a subsidiary company to its Indian

Holding company which holds its 100% share capital .
 COST OF ACQUISITION

⚫ Transfer of capital asset by a Holding company to its 100%

owned
Indian Subsidiary Company.
⚫
 COST OF ACQUISITION

⚫ When an amalgamating Co. transfers assets to Indian amalgamated

Co.
 COST OF ACQUISITION

⚫ Where a foreign amalgamating company transfers its investment in

the share of an Indian company under the scheme of
amalgamation to foreign amalgamated company.
 COST OF ACQUISITION

• Where member of HUF converts his self acquired property as the

property of HUF.

• Where a firm is succeeded by a company

• Where a sole traders business is succeeded by a company

• In case of business a
reorganization where cooperative the
predecessor
successor
bank transfersits capital assets
to cooperative bank.
• Where as a result of business reorganization the shareholder of
predecessor cooperative bank transfer its shares to successor
cooperative bank and gets new shares from it.
 COST OF ACQUISITION

• Cost of Bonus share

⮚ Where the bonus shares have become the

propertyof
assesses before 1-4-2001, in this case its cost would the FMV as
on 1-4-2001.
⮚ Suppose bonus share were allotted in 1980 ---100 cost NIL
⮚ 1-4-2001 FMV 20000 higher 20000 COA

⮚ Suppose bonus allot 2005 cost NIL

⮚ Where bonus shares have become the property of assesses

on or after 1-4-2001, the cost of acquisition will be NIL.
 COST OF ACQUISITION

• Cost of Acquisition of goodwill, right to manufacture

produce or process articles, tenancy right, stage carrier,
loom hours.

⮚ If these assets are purchased, in this case the cost of acquisition

would be actual purchase price paid to acquire these assets.

⮚ If these assets are self generated then cost of acquisition

shall be NIL.
 COST OF ACQUISITION

• Cost of acquisition for right shares:-

This topic may be studied in three situations

⮚ Where such right is exercised by the original share holder, then the
purchase price of shares would be cost of acquisition.
⮚ Where he transfers his right to another person, in this case the cost
of acquisition would be nil and whole amount of sales
consideration would be treated as capital gain.
⮚ Cost of acquisition for the person who purchases the right of
shares, would be, the price given for purchasing right plus the cost
of shares paid to company.
⚫ Suppose Mr. A is the shareholder of a paper mill having 100 shares.
In 2005 he was given a right to purchase 200 more shares.

⚫ 1. suppose he decides to buy the shares

⚫ 200X12= 2400 Cost of acquisition

⚫ 2. suppose he decides to renounce the right.

⚫ right=-----kamal ------500

⚫ 3. 500+2400= 2900
 COST OF ACQUISITION

• Asset received without giving consideration or giving

less consideration
This topic is studied depending upon the nature of the asset i.e.
whether the asset is movable or immovable.

⮚ In case where the asset is immovable: in this case the cost of

acquisition shall be the Stamp duty value.

⮚ In case where the asset is movable: in this case the cost of

acquisition shall be the fair market value which was considered for
income tax purposes
 SECTION 54

Section 54 provides an exemption from long-term capital gains (LTCG)

arising from the sale of a residential house property if the taxpayer
purchases or constructs a new residential house. The key conditions are:

• The new house must be purchased either 1 year before or 2 years after
the date of sale.
• The new house can be constructed within 3 years of the sale.
• The exemption amount is the lesser of the capital gain or the cost of the
new house.
Example: Mr. A sells his residential house for ₹50 lakhs, and the indexed
cost of acquisition of the house is ₹30 lakhs. Thus, the capital gain is ₹20
lakhs. He buys a new residential property worth ₹15 lakhs within 1 year of
the sale. The exemption will be ₹15 lakhs (the cost of the new house), and
the taxable capital gain will be ₹5 lakhs (₹20 lakhs – ₹15 lakhs).
 SECTION 54 D

Section 54D provides an exemption from capital gains arising from the
compulsory acquisition of land or building that was being used for
industrial purposes. The exemption applies if the taxpayer uses the
compensation received to acquire another land or building for industrial
purposes within 3 years from the date of acquisition.

Example: An industrial plot owned by Mr. B is compulsorily acquired by the

government, resulting in a capital gain of ₹10 lakhs.
If Mr. B purchases another industrial plot for ₹8 lakhs within 3 years, then
the exemption under Section 54D will be ₹8 lakhs. The remaining ₹2 lakhs
will be taxed as capital gains.
 SECTION 54 EC

Section 54EC provides an exemption on long-term capital gains (LTCG) from

the sale of any asset (immovable property) if the taxpayer invests the
capital gain in certain specified bonds (like those issued by NHAI or REC)
within 6 months from the date of the transfer. The exemption is subject to
a maximum investment of ₹50 lakhs in a financial year, and the bonds must
be held for at least 5 years.

Example: Mr. C sells a commercial property, generating an LTCG of ₹30

lakhs. He invests the entire ₹30 lakhs in NHAI bonds within 6 months. Since
the investment is within the limit, the entire ₹30 lakhs will be exempt from
tax under Section 54EC.
 SECTION 54 F

Section 54F provides an exemption on long-term capital gains arising from

the sale of any capital asset other than a residential house (e.g., shares,
plot of land) if the sale proceeds are used to purchase or construct a new
residential house within the specified time period. The exemption will be
proportionate if only part of the sale consideration is invested in the new
house.

Key conditions:
• The new house must be purchased within 1 year before or 2 years after
the sale or constructed within 3 years.
• The taxpayer should not own more than one residential house other
than the new one on the date of transfer.