Capital gains

ByAugustin

Amaladas.LourduswamyM.Com.,AICWA.,B.Ed.,PGD

FM

Capital Assets• Any stock-in-trade, consumable stores or raw materials held for the

purpose of his business or profession; • Personal effects, i.e., movable property (including wearing apparel

and furniture, excluding jewellery), held for personal use by the assessee or any member of his family dependent on him.

• Agricultural land in India, not being land situated in the following:- • In any area which is comprised within the jurisdiction of a

municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and, which has a population of not less than ten thousand according to the last preceding census.

• In any area within such distance, not being more than eight kilometers, from the local limits of any municipality or cantonment board referred to in item

Capital assets

• 6.5 per cent Gold Bonds 1977, or 7 per cent Gold Bonds 1980, National, Defence Gold Bonds, 1980, issued by the Central Government;

• Special Bearer Bonds, 1991, issued by the Central Government;

• Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government.

transfer of house property

• Under S 54, exempt from tax provided• The following conditions are satisfied • The house is a residential house is taxable under the

head "income form house property" • The house property, which may be self-occupied or

let out, is a long term capital asset (i.e. held for a period of more than 36 months before sale or transfer.)

• 1+2 or 3 • Invest upto capital gain in the same nature of asset• The house property, so purchased or constructed,

has not been transferred within a period of 3 years from the date of purchase or construction.

consequences if a new house is transferred within 3 years?

• the amount of capital gain that arise, together with the amount of capital gains exempted earlier, will be chargeable to tax in the year of the sale of the new house property.

If new house transferred?

• The gain along with exempted gain is taxed as short term

Computation of Short-term capital gain 1. Find out the full value of consideration

2. Deduct the following:  a. Expenditure incurred

wholly and exclusively in connection with such

transfer.

  b. Cost of acquisition. c. Cost of improvement

3. From the resulting sum deduct the exemption provided by section 54B, 54D and 54G.

4. The balancing amount is the short-term capital gain.

Short term capital gain

Computation of Long-term capital gain

• 1. Find out the full value of consideration2. Deduct the following:  a. Expenditure incurred wholly and exclusively in connection with such transfer  b. Indexed Cost of acquisition  c. Indexed Cost of improvement.

3. From the resulting sum deduct the exemption provided by section 54, 54B, 54D, 54EC,, 54F and 54G, and 54GA.

4. The balancing amount is the long-term capital gain.

How IS long term capital gain taxed?

• Flat rate-20%+Surcharge+Educational cess+ Secondary and higher education cess.

• Surcharge-10% if net income exceed Rs.10,00,000 for individual,HUF,AOP,BOI

• Educational cess-3% on tax • Companies -10% if net income does not exceed 1 crore

rupees. 3% educational cess

• For Assesment year 2008-09 secondary and higer education cess-1% on( tax+surcharge)

Indexed cost of acquisition

• Formula• Cost *Index of the year of sale/index of the

year of acquisition of the present owner

• cost= cost of acquisition of the present owner or

• Cost of acquisition of the previous owner in case of will or gift

indexed cost of acquisition? • S 48 defines "indexed cost of acquisition" as the amount, which

bears to the cost of acquisition the same proportion as Cost Inflation Index for the year, in which the asset is transferred, bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later.

The Cost Inflation Index, in relation to a previous year, means such Index as the Central Government may, having regard to 75% of average rise in the Consumer Price Index for urban non-manual employees for the immediately preceding previous year to such previous year, by notification in the Official Gazette.

tax shelter for avoiding capital gains tax?

• The Income Tax Act grants total/partial exemption of capital gains under Sec.- 54, 54B, 54D, 54EC, 54F, 54G and 54H.

• Under S 54, exempt from tax provided• The following conditions are satisfied • The house is a residential house is taxable under the

head "income form house property" • The house property, which may be self-occupied or

let out, is a long term capital asset (i.e. held for a period of more than 36 months before sale or transfer.)

• 1+2 or 3 • Invest upto capital gain in the same nature of asset• The house property, so purchased or constructed,

has not been transferred within a period of 3 years from the date of purchase or construction.

Under S 54

Under S 54B

• Individuals• agricultural land used for atleast for 2 years

before transfer

a. provided the assessee has purchased another land for agricultural purpose within a period of 2 years from the date of such transfer.

b. In the case of compulsory acquisition, It is exempted from tax as per section 10(37) with effect from assessment year 2005-06 onwards.

***Capital gains exemted U/S 10para 95.2

• 1. Capital gain on transfer of US 64[Section 10(36)]- both long term and short term

• 2. Long term capital gain on transfer of BSE-500 Equity Shares[10(36)]-long term

• 3.Compulsory acquisition of urban agriculture land[10(37)]-longterm and short term.-individual and HUF.

• 4. Securities not chargeable to tax if covered under transaction tax-such as mutual fund equity linked issued by domestic companies.

• 5. Capital gain arising in the reconstruction or revival of power generation business [10(41)]

Under S 54D,

a. capital gains, arising on compulsory acquisition of any land or building forming part of an industrial undertaking, is exempt from tax, provided such land or building was used by the assessee for the purpose of the industrial undertaking for at least 2 years preceding the date of compulsory acquisition and, the assessee has, within a period of 3 years after that date, purchased any other land or building or right in any other land/ building or constructed any other building for the purpose of shifting or reestablishing the said undertaking or setting up another industrial undertaking.

Under S 54EC

• where the capital gain arises from the transfer of a long-term capital asset before the 1st day of April, 2000, and the assessee has, at any time within a period of six months after the date of such transfer invested the whole or any part of capital gains, in any of the assets,

• Bonds in NHAI, Rural Electrification

Under S 54 F

• where, in the case of an assessee being an individual or a Hindu undivided family,

• the capital gain arises from the transfer of any long-term capital asset,

• not being a residential house,• within a period of one year before• or two years after the date on which the

transfer took place purchased, or has within a period of three years after that date constructed, a residential house.

S 54 G Voluntary transfer of industry

• The shifting of such industrial undertaking to any area other than an urban area, and

• the assessee has, within a period of 1 year ,before

• or 3 years after the date on which the transfer took place, purchased a new machinery or plant for the purposes of business of the industrial undertaking

Sec.54GA Shifting from urban to Special Economic Zone

• Industry

• 1year before or 3 years after transfer

• New asset can not be transferred with in 3 years.

Special Cases

• 1.a capital asset is converted by the owner thereof into (or is treated by him as) stock-in-trade of a business that is carried on by him, such conversion (or treatment) of the capital asset shall also be treated as "transfer of the asset" and hence chargeable to income tax

How is it computed?

• Sec.45(2) Conversion amount to transfer in the year of conversion.

• But taxed in the year such stock is sold.

• Capital gain=FMV on the date of conversion into stock in trade –cost(Index) of acquisition.

• Business gain=sale-FMV

Transfer of personal asset to partnership firm

• Sec.45(3),(4):

• It amounts to transfer in the year of transfer to partnership firm.

• Capital Gain=Amount entered in the books of the firm-cost (Index).

• If retransferred to partners:

• Capital gain=FMV-Book value in the partnership firm

Capital gain on self generated assets(Sec.115F)

• Like goodwill, tenancy right, route permit

• Cost of acquisition is NIL

• Cost of improvement is considered

• Fair market value on 1stApril

1981 is irrelevant

Bonus Shares

• If alloted before 1981 –cost of acquisition is FMV on 1st April 1981.

• If aquired after 1st April 1981 cost of acquisition is NIL

Right shares

• Cost of acquiring right shares =cost of acquisition like any other assets

S 54H relaxation of time due to delay in compensation

• , the period of acquiring the new asset under S 54, 54B, 54D, 54EC and 54F by the assessee or the period for depositing or investing the amount of capital gain shall be extended in relation to such amount of compensation as is not received on the date of transfer. The extended period shall be reckoned from the date of receipt of the amount of compensation.

Inherited by the assessee or gifted to the assessee

• the cost of acquisition of the asset for which the previous owner acquired it, shall be deemed to be the cost of acquisition of the asset as increased by the cost of improvement of the assets if any, incurred or borne by the previous owner or the assessee as the case may be.

Amalgamation

• cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the shares(s) in the amalgamating company.(old company )

conversion of bonds or debentures, debenture-stock

• the cost of acquisition of the asset to the assessee shall be deemed to be that part of the cost of debenture, debenture- stock or deposit certificates in relation to which such asset is acquired by the assessee.

Demerger

• The cost of acquisition of the shares in the resulting company shall be the amount which bears to the cost of acquisition of shares, held by the assessee in the demerged company

Compensation for loss of capital asset(Insurance claim)

• It amounts to extinguishment of right

• Sec.45(1A)

• Taxable in the year of compensation

Compensation for revenue asset-stock in trade

Compensation for revenue asset-stock in trade

• It amounts to revenue receipt u/s-28 from business

• Or income from other sources u/s 56

Buy back of shares

• Sec.46A

• Transfer in the year of buy back

• Capital gain=consideration received minus cost of acquisition(Index if long term)

Slump sale[50B]

• Assets are not sold individually but collectively

• Capital gain=Sale- Net worth

• Net worth= Assets—liabilities appearing in the books of accounts

• No index

Advanced money received and forfeited

• Negotiation failed advance money forfeited by the current owner

• Deduct from the original cost of acquisition before calculating index cost of acquisition

• Amount forfeited by the previous owner is not deductible

Computation of capital gain on land and Building[50C]

• Both for depreciable and non depreciable asset

• Sale=The stamp duty valuation all purposes

• If disputed – FMV if it is lower than Stamp duty value.

No Index please!!!

• Depreciated asset

• Bonds[Debentures]

• Short term assets

Personal effect

• Only Movable assets used by the assessee or by the family members

• Not a capital asset-No capital gain and will not be taxed under any other heads