INCOME-TAX - LECTURE VII

CAPITAL GAINS

WHAT IS CAPITAL GAIN

• Any profit or gain arising from the sale or transfer of a capital asset is chargeable to tax under the head ‘Capital Gains’.

• Capital gains can be Short Term Capital Gains or Long Term Capital Gains depending on whether the asset sold/transferred is Short Term Capital Asset or Long Term Capital Asset.

MEANING OF CAPITAL ASSET

• ‘Capital asset’ include property of any kind whether fixed or not, movable or immovable, tangible or intangible.

WHAT IS NOT A CAPITAL ASSET• Stock in trade, consumable stores or raw

materials held for the purpose of business or profession.

• Personal effects like apparels and furniture. From AY 2008-09 Jewellery, archeologial collections, work of art etc. are capital asset.

• Agricultural land but not in municipality/ cantonment/notifie areas.

• Certain Bonds(6.5% Gold Bonds,1977, 7% Gold Bonds 1980, National Defence Gold Bonds 1980,Gold Deposit Bonds 1999, Special Bearer Bonds 1991. )

SHORT-TERM/LONG TERM CAPITAL ASSETS

• Any Capital asset held for more than 36 months or for more than 12 months in the following cases, is called a Long Term Capital Asset.

• Equity or Preference Shares, Securities, Debentures, Units of UTI or Mutual Funds, Zero Coupon Bonds.

• (It may be noted, if the asset is acquired by gift, will, succession, inheritance or partition, the period for which the asset was held by the previous owner should be included. In case of shares, etc. the period if any, after the date on which the company goes into liquidation shall be excluded. In De-mat account, FIFO method can be applied.)

TAX RATES FOR CAPITAL GAINS

• Short term capital gain – 15%• Long term capital gain – 20%

WHAT IS TRANSFER

• Transfer, in relation to a capital asset, include sale, exchange or relinquishment of the asset, extinguishment of right or compulsory acquisition under any law.

• Conversion of personal asset into stock in trade of his business is transfer.

• Any transaction which has he effect of transferring any immovable property (eg. A flat in a co-op. society.)

• Maturity/redemption of bonds is also transfer.

WHAT IS NOT A TRANSFER FOR CAPITAL GAINS PURPOSE

• Distribution of assets to shareholders on liquidation.• Distribution of assets on partition by HUF• Transfer by gift, will or to an irrevocable trust• Transfer by a company to fully-owned Indian

subsidiary or vice-versa• Transfer by a scheme of amalgamation or demerger or

re-organization or conversion of proprietary concern or firm into a company, if the prop./partners are shareholders and are paid in shares only.

• Transfer of work of art etc. to University, National Museum/Art Gallery/Archives as notified by C.G.

HOW CAPITAL GAIN IS TAXED• Find ‘full value of consideration*’.• Reduce any expenditure incurred wholly and exclusively in

connection with such transfer• Reduce cost of acquisition with indexation where applicable.• Reduce cost of improvement with indexation where applicable.• Deduct exemption u/s.54, 54B,54D,54EC, 54ED, 54F, 54G, wherever

applicable.• The balance is capital gain.

* Full value of consideration means the actual price or market value or value adopted by Stamp Valuation Authority or money from Insurance Co. or market value of the asset exchanged.

INDEXATION• Indexation means the increase in the cost or improvement,

on account of inflation. Cost multiplied by the index on the date of sale divided by the index on the date of acquisition is the indexed cost.

• Indexation is not applicable to shares, debentures, bonds and Units, GDRs( global depository receipts), etc.

Cost of acquisition/improvement x Index on date ofIndex on date of acquisition/ transfer improvement

RATES OF INDEXATIONYEAR INDEX RATE YEAR INDEX RATE YEAR INDEX RATE

1981-82 100 1990-91 182 1999-00 389

1982-83 109 1991-92 199 2000-01 406

1983-84 116 1992-93 223 2001-02 426

1984-85 125 1993-94 244 2002-03 447

1985-86 133 1994-95 259 2003-04 463

1986-87 140 1995-96 281 2004-05 480

1987-88 150 1996-97 305 2005-06 497

1988-89 161 1997-98 331 2006-07 519

1989-90 172 1998-99 351 2007-08 551

2008-09 582 2009-10 632 2010-11 711

2011-12 785 2012-13 852 2013-14 ?

DEPRECIABLE ASSETS

• In the case of Depreciable assets, the net sale proceeds on transfer of any asset, is reduced from the relevant block of assets.

• If the net sale proceeds of a part of the block, exceeds the written down value + the cost of new asset in the same block acquired, the excess is taxed as short term capital gain.

• If total block is transferred, the excess of net sales proceeds over the wdv + cost of new asset, is taxed as short term capital gain.

VALUATION OFFICER

• The Assessing Officer can refer the matter to a Valuation Officer for fair valuation -

• If the Assessing Officer is of the opinion that having regard to the nature of an asset and relevant circumstances, it is necessary to do so; or

• If the fair market value exceeds the sale value declared by more than 15% or Rs.25,000/-; or

• If the AO has reason to believe that the Fair Market Value exceeds the valuation of the Registered Valuer

EXEMPTED CAPITAL GAINS-Sec.54(Residential House)

• U/s.54: If an Indl. or HUF transfers a Long Term Residential House Property (taxable under House Propery Income as SOP or LOP), and purchases within a year or constructs within 3 years, another residential house, the capital gain to the extent of the cost of the new house, is exempt from tax.

• However, if such new house is transferred within a period of 3 years, such exempted Capital Gain shall be taxed along with the capital gain of the new house.

EXEMPTED CAPITAL GAINS-Sec.54 (Residential House)

• If one could not purchase within one year or construct within 3 years, a new house, he can claim exemption by deposit the capital gain in a specific Deposit Account of Public Sector Bank for exclusive utilisation for purchase/ construction of new house within stipulated time. If he fails to do so, it will be taxed in the year in which 3 years from transfer ends.

• The exemption is not limited to one HP.

EXEMPTED CAPITAL GAINS-Sec.54B(Agricultural Land)

• U/s.54B: If an Indl. or HUF transfers a Long Term land used for agricultural purpose for atleast two years, and purchases within 2 years, another land for agricultural use, the capital gain to the extent of the cost of the new land, is exempt from tax to the extent of cost of new land.

• However, if such new land is transferred within a period of 3 years, such exempted Capital Gain shall be reduced from the cost of the said land.

• The rule regarding depositing in the specified Deposit Account applies here also.

EXEMPTED CAPITAL GAINS-Sec.54D

(Compulsory Acquisition of land and Building)• Capital gains arising out of compulsory acquisition of land and building used for Industrial Undertaking, is exempt if the capital gain is used for acquiring new land and building for industrial undertaking, within a period of 3 years to the extent of cost of new land.

• However, if such new land/bldg. is transferred within a period of 3 years, such exempted Capital Gain shall be reduced from the cost of the new land/bldg.

• The rule regarding depositing in the specified Deposit Account applies here also.

EXEMPTED CAPITAL GAINS-Sec.54EC(Investment in certain Bonds)

• Long Term Capital Gains arising to any person are exempted u/s.54EC, if it is invested in the ‘specified assets’ within 6 months of transfer. Specified asset means Bonds redeemable after 3 years issued by National Highway Authority of India Ltd. and Rural Electrification Corporation Ltd. Maximum exemption Rs.50 lakhs.

• However, if such deposit is transferred within a period of 3 years, such exempted Capital Gain shall be taxed in the year of such transfer.

EXEMPTED CAPITAL GAINS-Sec.54F(Other Assets)

• If an Indl. or HUF transfers a Long Term Asset other than Residential House Property (taxable under House Propery Income as SOP or LOP), and purchases within one year before or two years after or constructs within 3 years, a residential house, the capital gain to the extent of the cost of the new house, is exempt from tax. However, the assessee should not own more than one residential house and he should not purchase another residential house within two years or construct one within 3 years of the transfer.

• However, if such new house is transferred within a period of 3 years, such exempted Capital Gain shall be taxed along with the capital gain of the new house.

EXEMPTED CAPITAL GAINS-Sec.54F(Urban Indl. Undertakings)

• Capital Gains arising out of transferring of assets of an Industrial Undertaking from an urban area to an area which is not urban, is exempt to the extent of cost of assets of the new undertaking. It can also enjoy this benefit if the capital gain is so utilised within 3 years or deposited before furnishing of Return, in specified Deposit Account of Public Sector Bank, as per terms mentioned earlier

EXEMPTED CAPITAL GAINS-Sec.54GA(Urban Indl. Undertakings)

• If the assets of an urban Industrial Taking is transferred to a Special Economic Zone, the capital gain is exempt from tax. The provisions mentioned for sec.54G applies here also.

PROBLEM1• Mr. X purchased a flat at Borivali for Rs.3,50,000/- on

15th December 1987. He paid brokerage of Rs.25000/-. The registration charges, stamp fees and legal fees worked out to 15,000/- In October 1996 he had incurred major renovation costing Rs. 3,00,000/- On 25th March 2010, he sold the same for Rs.27,50,000/- He had to pay brokerage of Rs.21,500/- The Stamp Charges and registrations charges and legal charges worked to 1,56,000/- to be met by the purchaser. Calculate the taxable capital gains assuming the index rates of 150, 305 and 632 respectively on 31.03.1988 31.03.1997 and 31.03.2010.