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Capital Gain Tax: Types of Capital Gains Tax

Capital Gain Tax: Types of Capital Gains Tax

Capital Gains:- ​Any profit or gain arising from transfer of a capital asset during the year is charged to tax under the head “Capital Gains”.​

Any profit or gain that arises from the sale of a ‘capital asset’ is known ‘income from capital gains’. Such capital gains are taxable in the year in which the transfer of the capital asset takes place. This is called capital gains tax. There are two types of Capital Gains: short-term capital gains (STCG) and long-term capital gains(LTCG).

What is the meaning of capital asset?

Capital asset is defined to include:

a) Any kind of property held by an assessee, whether or not connected with business or profession of the assesse.

b) Any securities held by a FII which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992.

However, the following items are excluded from the definition of “capital asset”:

  • Any stock-in-trade, consumable stores, or raw materials held by a person for the purpose of his business or profession.E.g., Motor car for a motor car dealer or gold for a jewellery merchant, are their stock-in-trade and, hence, they are not capital assets for them.
  • Personal effects of a person, that is to say, movable property including wearing apparels (*) and furniture held for personal use, by a person or for use by any member of his family dependent on him.(*) However, jewellery, archeological collections, drawings, paintings, sculptures, or any work of art are not treated as personal effects and, hence, are included in the definition of capital assets.
  • Agricultural Land in India, not being a land situated:

* Within jurisdiction of municipality, notified area committee, town area committee, cantonment board and which has a population of not less than 10,000;

* Within range of following distance measured aerially from the local limits of any municipality or cantonment board:

*​ not being more than 2 KMs, if population of such area is more than 10,000 but not exceeding 1 lakh;

* not being more than 6 KMs , if population of such area is more than 1 lakh but not exceeding 10 lakhs; or

* not being more than 8 KMs , if population of such area is more than 10 lakhs.

Population is to be considered according to the figures of last preceding census of which relevant figures have been published before the first day of the year.

  • 6½% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government.
  • Special Bearer Bonds, 1991, issued by the Central Government
  • Gold Deposit Bonds issued under Gold Deposit Scheme, 1999.
  • Deposit certificates issued under the Gold Monetisation Scheme, 2015.​

Following points should be kept in mind :

  • The property being capital asset may or may not be connected with the business or profession of the taxpayer. E.g. Bus used to carry passenger by a person engaged in the business of passenger transport will be his  Capital asset.
  • Any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 will always be treated as capital asset, hence, such securities cannot be treated as stock-in-trade.

What is the meaning of the term ‘long-term capital asset’?

Any capital asset held by a person for a period of more than 36 months immediately preceding the date of its transfer will be treated as long-term capital asset.

However, in respect of certain assets like shares (equity or preference) which are listed in a recognised stock exchange in India, units of equity oriented mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months.

In case of unlisted shares in a company, the period of holding to be considered is 24 months instead of 36 months.

With effect from Assessment Year 2018-19, the period of holding of immovable property (being land or building or both), shall be considered to be 24 months instead of 36 months.

What is long-term capital gain and short-term capital gain?

​​Gain arising on transfer of long-term capital asset is termed as long-term capital gain and gain arising on transfer of short-term capital asset is termed as short-term capital gain. However, there are a few exceptions to this rule, like gain on depreciable asset is always taxed as short-term capital gain.​​​

Why capital gains are classified as short-term and long-term?

The taxability of capital gain depends on the nature of gain, i.e. whether short-term or long-term. Hence to determine the taxability, capital gains are classified into short-term capital gain and long-term capital gain. In other words, the tax rates for long-term capital gain and short-term capital gain are different. Similarly, computation provisions are different for long-term capital gains and short-term capital gains.​

How to compute long-term capital gain?

Long term capital gain arising on account of transfer of long-term capital asset will be computed as follows:

Particulars Rs.
Full value of consideration (i.e., Sales consideration of asset) XXXXX
Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (E.g., brokerage, commission,  etc.)  

(XXXXX)

Net sale consideration XXXXX
Less: Indexed cost of acquisition (*) (XXXXX)
Less: Indexed cost of improvement, if any (*) (XXXXX)
Long-Term Capital Gain XXXXX

 

Indexed cost of acquisition is computed with the help of following formula :

Cost of acquisition × Cost inflation index of the year of transfer of capital asset

Cost inflation index of the year of acquisition

Indexed cost of improvement is computed with the help of following formula :

Cost of improvement × Cost inflation index of the year of transfer of capital asset

Cost inflation index of the year of improvement

How to compute short-term capital gain?

Short-term capital gain arising on account of transfer of short-term capital asset is computed as follows:

Particulars Rs.
Full value of consideration (i.e., Sales value of the asset) XXXXX
Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (E.g., brokerage, commission, etc.)  

(XXXXX)

Net Sale Consideration XXXXX
Less: Cost of acquisition (i.e., the purchase price of the capital asset) (XXXXX)
Less: Cost of improvement (i.e., post purchase capital expenses incurred  on  addition/improvement to the capital asset)  

(XXXXX)

Short-Term Capital Gain XXXXX

Is the benefit of indexation available while computing capital gain arising on transfer of short-term capital asset?

​​​​Indexation is a process by which the cost of acquisition/improvement of a capital asset is adjusted against inflationary rise in the value of asset. The benefit of indexation is available only in case of long-term capital assets and is not available in case of short-term capital assets.​​

In respect of capital asset acquired before 1st April, 2001 is there any special method to compute cost of acquisition?

​​​​Generally, cost of acquisition of a capital asset is the cost incurred in acquiring the capital asset. It includes the purchase consideration plus any expenditure incurred exclusively for acquiring the capital asset.

However, in respect of capital asset acquired before 1st April, 2001,the cost of acquisition will be higher of the following:-

  • actual cost of acquisition of the asset or
  • fair market value of the asset as on 1st April, 2001.

This option is not available in the case of a depreciable asset.

If any undisclosed income [in the form of investment in capital asset] is declared under Income Declaration Scheme, 2016, then what should be the cost of acquisition of such capital asset?

​​​The fair market value of the asset as on 1st June, 2016 [which has been taken into account for the purpose of said declaration Scheme, 2016] shall be deemed as cost of acquisition of the asset. [This provision is applicable w.e.f. 1-4-2017]​

As per the Income-tax Law, gain arising on transfer of capital asset is charged to tax under the head “Capital gains”. What constitutes ‘transfer’ as per Income-tax Law?

Generally, transfer means sale, however, for the purpose of Income-tax Law “Transfer”, in relation to a capital asset, includes:

i. Sale, exchange or relinquishment of the asset;
ii. Extinguishment of any rights in relation to a capital asset;
iii. Compulsory acquisition of an asset;
iv. Conversion of capital asset into stock-in-trade;
v. Maturity or redemption of a zero coupon bond;
vi. Allowing possession of immovable properties to the buyer in part performance of the contract;
vii. Any transaction which has the effect of transferring an (or enabling the enjoyment of) immovable property; or
viii. Disposing of or parting with an asset or any interest therein or creating any interest in any asset in any manner whatsoever.

What are the provisions relating to computation of capital gain in case of transfer of asset by way of gift, will, etc.?

​Capital gain arises if a person transfers a capital asset. section 47 excludes various transactions from the definition of ‘transfer’. Thus, transactions covered under section 47 are not deemed as ‘transfer’ and, hence, these transactions will not give rise to any capital gain.  Transfer of capital asset by way of gift, will, etc., are few major transactions covered in section 47. Thus, if a person gifts his capital asset to any other person, then no capital gain will arise in the hands of the person making the gift (*).

If the person receiving the capital asset by way of gift, will, etc. subsequently transfers such asset, capital gain will arise in his hands. Special provisions are designed to compute capital gains in the hands of the person receiving the asset by way of gift, will, etc. In such a case, the cost of acquisition of the capital asset will be the cost of acquisition to the previous owner and the period of holding of the capital asset will be computed from the date of acquisition of the capital asset by the previous owner.

(*) As regards the taxability of gift in the hands of person receiving the gift, separate provisions are designed under section 56​​. ​

I have sold a house which had been purchased by me 5 years ago. Am I required to pay any tax on the profit earned by me on account of such sale?

​​​​​House sold by you is a long-term capital asset. Any gain arising on transfer of capital asset is charged to tax under the head “Capital Gains”. Income-tax Law has prescribed the method of computing capital gain arising on account of sale of capital assets. Thus, to check the taxability in your case, you have to compute capital gain by following the rules laid down in this regard, and if the result is gain, then the same will be liable to tax.​

Is there any benefit available in respect of re-investment of capital gain in any other capital asset?

A taxpayer can claim exemption from certain capital gains by re-investing the amount of capital gain into specified asset. The following table highlights the assets in respect of which the benefit of re-investment is available:

a) Section 54- Capital Gain arising from the transfer of residential house property
b) Section 54B- Capital Gain arising from the transfer of land used for agricultural purpose
c) Section 54D- Capital Gains on compulsory acquisition of land and building, forming part of industrial undertaking
d) Section 54EC- Capital Gain not be charged on investment in certain bonds
e) Section 54EE- Capital Gain not to be charged on investment in units of a specified fund
f) Section 54F- Capital Gain on transfer of a long term capital asset other than a house property
g) Section 54G- Capital Gain arising on transfer of assets in case of shifting of industrial undertaking from the urban area
h) Section 54GA- Capital Gain arising on transfer of assets in case of shifting of industrial undertaking from the urban area to any Special Economic Zone
i) Section 54GB ​- Capital Gain on transfer of residential property

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