Any profit or gain that arises from the sale or transfer of a ‘capital asset’ is a capital gain. In other words, Transaction involving the transfer of Capital Assets will attract Capital Gain if any profit or loss is realized by an assessee. Such Income or Loss is chargeable under the head of Income from Capital Gains in the previous year in which transactions took place Capital gain is further classified on the basis of period of holding of Capital assets.
1. Short Term Capital Gains– Income or Losses arising due to the transfer of Short-term capital assets.
2. Long Term Capital Gains – Income or Losses arising due to the transfer of Long-term capital assets.
Definition of Capital Asset
Capital asset means Property of any kind held by an assessee, related to business or not. Such property can be movable, immovable, tangible, intangible, etc.) but it excludes the following type of capital assets-
- Stock in Trade- Held for purpose of business E.g. Raw material, Consumables
- Movable property held for the personal use of the assessee or his dependent relative- E.g. Motor Car, Watches, Clothes but some held for personal use is still considered as capital assets. –
- Jewelry/ Bullion
- Collectibles such as drawing/architectural collections
- Work of Art etc.
- Rural Agricultural Land
- Bonds of Gold Deposited Bonds issued by Government under following schemes-
- Gold Deposit Scheme, 1999
- Gold Monetisation Scheme, 2015
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Types of Capital Assets
The period of holding determines whether the capital asset is Long Term Capital Asset or Short Term Capital Asset. The time period is defferent for different capital assets.
| Particular | Short-Term | Long-Term |
| Listed Shares | POH is less than or equal to 12months | POH is more than 12months |
| Unlisted Shares | POH is less than or equal to 24months | POH is more than 24months |
| Listed securities other than shares | POH is less than or equal to 12months | POH is more than 12months |
| Units of Equity Oriented Mutual Funds Listed or Unlisted | POH is less than or equal to 12months | POH is more than 12months |
| Units of Unit Trust of India Listed or Unlisted | POH is less than or equal to 12months | POH is more than 12months |
| Zero-Coupon Bond | POH is less than or equal to 12months | POH is more than 12months |
| Immovable Property such as Land, Building or Both | POH is less than or equal to 24months | POH is more than 24months |
| Any Other Capital Asset Such as Gold, Silver, Artwork Etc. | POH is less than or equal to 36months | POH is more than 36months |
Note: POH- Period of Holding
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Definition of Transfer
Transfer of Capital Assets includes-
- Sale / Exchange
- Extinguishment of Any right.
- Compulsory Acquisition
- Maturity or Redemption of Zero-Coupon Bond
- Any Transaction u/s 53A of Transfer of Property Act.
- Any transaction which enables the enjoyment of any immovable property permanent.
Indexation
There is a concept of indexation applied to long term investments in Income tax. Indexation refers to recalculating the purchase price, after adjusting for inflation index, as published by the Income Tax authorities. Since the purchase price is adjusted for inflation, the capital gain gets reduced.
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
Rates of tax on capital gain
1. Short Term Capital Gains
a) Short-term capital gains shall be included in the gross total income of the taxpayer and will be taxed at the normal rates;
b) Short-term capital gains arising from transfer of Equity Shares, Units of an Equity Oriented Funds or a unit of a business trust which is chargeable to securities transaction tax shall be taxed at 15% under Section 111A;
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2. Long Term Capital Gains
a) Long-term capital gains are subject to tax at 20%;
b) Long-term capital gains arising from transfer of listed securities, units or a zero coupon [other than as referred to in point d) below] bonds shall be taxable at lower of following:
i. 20% after taking benefit of indexation; or
ii. 10% without taking benefit of indexation.
c) Long-term capital gains arising to a non-residents or foreign company from transfer of unlisted securities shall be taxed at without giving benefit for indexation;
d) Long-term capital gains arising from 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.
Read Also: Tax on Interest Income – Saving Account, PPF, Fixed Deposits, bonds, R/D
Computation of Capital Gains
First, an assessee will identify whether the Capital asset is a Short-term capital asset or long-term capital asset.
Computation of Short-Term Capital Gain
| Full Value of Consideration (FVC) | XXXX |
| Less: Expenses incurred | (XXXX) |
| Net Value of Consideration | XXXX |
| Less: Cost of Acquisition | (XXXX) |
| Less: Cost of Improvement | (XXXX) |
| Gross Short-term Capital Gains | XXXX |
| Less: Exemption u/s 54B /54D | (XXXX) |
| Taxable Short -Term Capital Gains | XXXX |
Computation of Long-Term Capital Gain
| Full Value of Consideration (FVC) | XXXX |
| Less: Expenses incurred | (XXXX) |
| Net Value of Consideration | XXXX |
| Less: Indexed Cost of Acquisition | (XXXX) |
| Less: Indexed Cost of Improvement | (XXXX) |
| Gross Long-term Capital Gains | XXXX |
| Less: Exemption u/s 54/54B /54D /54EC /54EE/54F | (XXXX) |
| Taxable Long -Term Capital Gains | XXXX |
Lets understand with example of Property in Land or Building or Both-
As per the above-mentioned provisions Holding Period of land or building or both, for classification as long-term or short-term, is 2 years or 24 months.
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Example of Long term capital assets-
Mr. A purchased land on 12th June 2010 for 20,00,000 and build the building in 2015 for 5,00,000. In FY 2019-20 he sold it for 50,00,000 by paying 0.5% as stamp duty. Index Number for 2010= 167, 2015=254, 2019=289
Solution: Combination of land and building is held for more than 2 years so it will be treated as a long-term capital asset
| Full Value of Consideration (FVC) | 50,00,000 |
| Less: Expenses incurred =50,00,000 X 0.5% | (25,000) |
| Net Value of Consideration | 49,75,000 |
| Less: Indexed Cost of Acquisition =20,00,000*289/167 | (34,61,078) |
| Less: Indexed Cost of Improvement =5,00,000*289/254 | (5,68,898) |
| Gross Long-term Capital Gains | 9,45,024 |
| Less: Exemption u/s 54/54B/54D/54EC/54EE/54F | (0) |
| Taxable Long -Term Capital Gains | 9,45,024 |
Rs. 9,45,024 is Long-Term capital Gain under section 112
Example of short term capital assets
Mr. A purchased land on 12th June 2018 for 20,00,000 and build the building in 2018 for 5,00,000. In FY 2019-20 he sold it for 50,00,000 on 8th January2020 by paying 0.5% as stamp duty.
Solution: Combination of land and building is held for less than 2 years so it will be treated as Short-term capital asset
| Full Value of Consideration (FVC) | 50,00,000 |
| Less: Expenses incurred | (25,000) |
| Net Value of Consideration | 49,75,000 |
| Less: Cost of Acquisition | (20,00,000) |
| Less: Cost of Improvement | (5,00,000) |
| Gross Short-term Capital Gains | 24,75,000 |
| Less: Exemption u/s 54B/54D | (0) |
| Taxable Short -Term Capital Gains | 24,75,000 |
Most of the Capital Assets are taxed as per the format we used for Land or Building just Holding period will be different for each capital asset except Listed Shares/Securities.
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Transactions which are not regarded as transfer [Section 47]
There are some transactions that shall not be regarded as transfer (subject to certain condition). Hence, 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 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(vi) | Transfer of capital assets in a scheme of amalgamation |
| 47(via) | 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(viab) | 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(viaa) | Transfer of capital assets in a scheme of amalgamation of a banking company with a banking institution |
| 47(vib) | Transfer of capital assets by the demerged company to the resulting company in a demerger |
| 47(vic) | Transfer of shares held in an Indian company by a demerged foreign company to the resulting foreign company |
| 47(vica) | Any transfer of a capital asset by the predecessor co-operative bank to the successor co-operative bank in a business reorganization. |
| 47(vicb) | Any transfer of 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(vicc) | 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 demerged foreign company to resulting foreign company in case of demerger (subject to conditions) |
| 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 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 recognised 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(viib) | Transfer of capital assets (being a Government security carrying periodic payment of interest) outside India through an intermediary dealing in settlement of securities by a non-resident to another non- resident |
| 47(viic) | Redemption of capital asset being sovereign gold bond issued by RBI under the Sovereign Gold Bond Scheme, 2015 |
| 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(xiii) | Transfer of a capital asset by a firm to a company in the case of conversion of firm into company |
| 47(xiiia) | 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 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) | Transfer involved in a scheme of lending of securities |
| 47(xvi) | Transfer of a capital asset in a transaction of 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 consolidation of two or more schemes of 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 consolidation of plans within scheme of mutual funds. |
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The author of the above article is Aditya Kishore.
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