Any profits or gains arising from the transfer of a capital asset effected in the P.Y. shall be chargeable to income tax under the head ‘Capital Gains’ in the P.Y. where the transfer occurred. Where any person receives at any time during any P.Y. any money or other assets under insurance from an insurer on account of damage to, or destruction of, any capital asset, as a result of:
- Flood, typhoon, hurricane, cyclone, earthquake, or another convulsion of nature; or
- Riot or civil disturbance; or
- Accidental fire or explosion; or
- Action by an enemy or action taken in combating an enemy (whether with or without a declaration of war), then, any profits or gains arising from receipt of such money or other assets shall be chargeable to Capital Gains in the P.Y. in which such money or other asset was received. The value of any money or the Fair Market Value (FMV) of other assets on the date of such receipt shall be deemed to be the full value of the consideration.
Capital asset means property of any kind held by an assessee, whether or not connected with his/her business or profession, but does not include:
- Any stock-in-trade, consumable stores, or raw materials held for the purposes of his business or profession.
- Personal movable property (including wearing apparel and furniture, but excluding jewelry held for personal use by the assessee or any member of his family dependent on him. For this purpose, ‘jewelry’ includes the following:
- Ornaments made of gold, silver, platinum, or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel.
- Precious or semi-precious stones, whether or not set in any furniture, utensil, or other article or worked or sewn into any wearing apparel.
- Agricultural land in India, not being land situated in any area which is comprised within the jurisdiction of a municipality or a cantonment board and which has a population of not
- less than 10,000 according to the last preceding census or in any area within 8 km, from the local limits of any municipality or cantonment board.
- Certain gold bonds and gold deposit bonds were issued under the Gold Deposit Scheme, 1999.
- Special Bearer Bonds, 1991.
ShortTerm and Long term Capital Asset
U/s 2(29A) ‘Long-Term Capital Asset’ means a capital asset, which is not a Short-Term Capital Asset.
U/s 2(42A) ‘Short-Term Capital Asset’ means a capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer. In the case of a share or any other security listed in a recognized stock exchange in India or a unit of the UTI or mutual fund specified u/s 10(23D), the period is 12 months.
Types of Capital Gains
- Long-Term Capital Gain: On the sale of a long-term capital asset
- Short-Term Capital Gain: On the sale of a short-term capital asset
Period of Holding
For computing, the period of holding of a capital asset, the date on which the asset is transferred is excluded.
- Period After Liquidation
- Cases Covered u/s 49(1)
- Right Shares
- Right Entitlement
- Bonus Shares
Period After Liquidation
In the case of shares, if the company goes into liquidation, the period after the date of commencement of the liquidation is to be excluded.
Cases Covered u/s 49(1)
In the case of a capital asset, which becomes the property of the assessee under the circumstances covered u/s 49(1), the period of holding of the previous owner is to be included.
In the case of shares in an Indian company, which becomes the property of the assessee in consideration of transferring his/her shares in the amalgamated company in a scheme of amalgamation, the period of holding of the shares in amalgamating company is to be included in the total period of holding shares in the amalgamated company.
In the case of a capital asset, being shares in an Indian company, which becomes the property of the assessee in consideration of a demerger, the period of holding of shares in the demerged company shall be included in the total period of holding of shares in the resulting company by the assessee.
In the case of right shares or any other securities (may be called financial assets), the period of holding is to be counted from the date of allotment of such financial assets.
In case of right entitlement, which is renounced in favor of any other person, the period of holding is to be counted from the date of such right offered by the company or institution to the date of renouncement.
In case bonus shares are issued to the shareholders, the period of holding of such shares is to be counted from the date of allotment of such shares or assets to the shareholders.
Mode of Computation
U/s 48 Capital Gains shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts :
- Expenditure incurred wholly and exclusively in connection with such transfer
- The cost of acquisition of the asset and the cost of any improvement thereto
Where long-term capital gain arises from the transfer of a long-term capital asset the words “cost of acquisition” and “cost of any improvement” are replaced by the words “indexed cost of acquisition” and “indexed cost of any improvement” respectively.
This shall not apply to the long-term capital gain arising from the transfer of a long-term capital asset being a bond or debenture other than Capital Indexed Bonds issued by the Government.
Cost of Acquisition
Cost of acquisition ( COA ) in relation to a capital asset, being goodwill of a business or a trademark or brand name or a right to manufacture, produce or process any article or thing or right to carry on any business, tenancy rights, stage carriage permits, route permits or loom hours.
(i) in the case of acquisition of such an asset by purchasing it from a previous owner, means the purchase price and
(ii) in any other case shall be taken to be nil.
Note: Self-generated assets specifically mentioned above are liable to capital gains. Hence, there will be no capital gains on the sale of the goodwill of a profession.
COA in relation to any other capital asset means :
- If the capital asset became the property of the assessee before 1.4.1981, means the COA of the asset to the assessee or the fair market value ( FMV ) of the asset on 1.4.1981, at the assessee’s option.
- If the capital asset became the property of the assessee after 1.4.1981, means the COA of the asset to the assessee.
Cost of Improvement
Cost of Improvement ( COI )in relation to a capital asset being goodwill of a business or a right to manufacture, produce or process any article or thing or right to carry on any business shall be taken to be nil.
COI in relation to any other capital asset means :
- If the capital asset became the property of the previous owner or the assessee before 1.4.1981, all capital expenditure incurred in making any additions or alterations to the capital asset on or after 1.4.1981 by the previous owner or the assessee.
- Any expenditure incurred before 1.4.1981 is to be ignored.
- In any other case, it means all capital expenditure incurred in making any additions or alterations to the capital asset by the assessee after it became his property.
- If the capital asset became the property of the assessee through special modes, COI incurred by the previous owner.
Indexed Cost of Acquisition
Indexed cost of acquisition means an amount which bears to the cost of acquisition the same proportion as the Cost Inflation Index (CII ) for the year in which the asset is transferred bears to the CII for the first year in which the asset was held by the assessee or CII for the year beginning on 1.4.81 whichever is later.
Index Cost of Acquisition = COA * (CII of Year of Transfer / CII of Year of Acquisition)
- COA: Cost of Acquisition
- CII: Cost Inflation Index
Indexed Cost of Improvement
Indexed cost of improvement means an amount which bears to the cost of improvement the same proportion as CII for the year in which the asset is transferred bears to the CII for the year in which the improvement to the asset took place
Indexed Cost of Improvement = COI * ( CII of Year of Transfer/ CII of Year of Improvement)
Tax On Capital Gains Realized On Equity Shares
In the case of LTCG on the transfer of shares/securities/units, the assessee has the option of computing his tax in any one of the following manners:
|1. Find the sale consideration.|
|2. Deduct expenses on transfer, indexed cost of acquisition, and indexed cost of improvement as usual.|
|3. The balancing amount ( step 1-step 2 ) is LTCG.|
|4. The capital gains are taxed @ 20% plus a surcharge.|
|1. Find the sale consideration.|
|2. Deduct expenses on transfer, cost of acquisition, and cost of improvement without indexation.|
|3. The balancing amount ( step 1-step 2 ) is LTCG.|
|4. The capital gains are taxed @ 10% plus a surcharge.|
Transactions Of Shares In The Dematerialised Form
When the shares are held in dematerialized form, capital gains shall be taxable in the hands of the beneficial owner of these shares. For the purpose of computing the period of holding and the cost of acquisition, the FIFO method is followed. If the investor has multiple accounts, then the FIFO method shall be applied account-wise. If in an existing dematerialized account, the old physical stock is dematerialized and entered at a later date, under the FIFO method, the basis for determining the movement out of the account is the date of entry into the account.
Taxation of Zero Coupon Bonds
‘Zero Coupon Bond’ means a bond issued by any infrastructure capital company or infrastructure capital fund or a public sector company on or after 01.06.2005, in respect of which no payment and benefit is received or receivable before maturity or redemption from the such issuing entity and which the Central Government may notify in this behalf.
Maturity or redemption of a zero coupon bond will be regarded as a transfer and shall be chargeable under the head, ‘capital gains’. If the holding period is 1 year or less, then it will be subject to STCG. If the holding period is more than 1 year, then it will be subject to LTCG.
The proviso under Sec 112(1) shall apply.