PROJECT REPORT ON

“Capital Gain taxation including exemption u/s 54 & 54EC”

Submitted toUniversity of Mumbai

In Partial Fulfillment of the Requirement

For

M.Com (Accountancy) Semester IIIIn the subject

Direct Tax

By

Name of the student : - Vivek ShriramMahajanRoll No. : - 15 -9672

Name and address of the collegeK. V. Pendharkar College

Of Arts, Science & CommerceDombivli (E), 421203

NOVEMBER 2015

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DECLARATION

I VIVEK SHRIRAM MAHAJAN Roll No. 15 – 9672, the student of

M.Com (Accountancy) Semester III (2015), K. V. Pendharkar College,

Dombivli, Affiliated to University of Mumbai, hereby declare that the

project for the subject Direct Tax of Project report on “Capital Gain

taxation including exemption u/s 54 & 54EC” submitted by me to

University of Mumbai, for semester III examination is based on actual work

carried by me.

I further state that this work is original and not submitted anywhere else for any examination.

Place: Dombivli

Date:

Signature of the Student

Name: - Vivek Shriram Mahajan Roll No: - 15 -9672

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ACKNOWLEDGEMENT

It is a pleasure to thank all those who made this project work possible.

I Thank the Almighty God for his blessings in completing this task. The successful completion of this project is possible only due to support and cooperation of my teachers, relatives, friends and well-wishers. I would like to extend my sincere gratitude to all of them.

I am highly indebted to Principal A.K.Ranade, Co-ordinater P.V.Limaye, and my subject teacher Prajakta Karmarkar for their encouragement, guidance and support.

I also take this opportunity to express sense of gratitude to my parents for their support and co-operation in completing this project.

Finally I would express my gratitude to all those who directly and indirectly helped me in completing this project.

Name of the studentVivek Shriram Mahajan

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Table of Contents:CHAPTER No Topic Page no

CHAPTER 1 Introduction

Introduction to Subject………………………. 5

CHAPTER 2 Types of Taxes

Direct Tax......................Indirect Tax …................................

710

CHAPTER 3 Capital Gain

Definitions ……………………...............Section 54..................................................Section 54 EC...........................................Income Tax Return – 4...............................

13162022

CHAPTER 5 Conclusion

Conclusion………………………………….. 26

Webiliography………………………………. 27

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CHAPTER 1: Introduction

Introduction to Subject

A fee charged ("levied") by a government on a product, income, or activity. If tax is levied directly on personal or corporate income, then it is a direct tax. If tax is levied on the price of a good or service, then it is called an indirect tax. The purpose of taxation is to finance government expenditure. One of the most important uses of taxes is to finance public goods and services, such as street lighting and street cleaning. Since public goods and services do not allow a non-payer to be excluded, or allow exclusion by a consumer, there cannot be a market in the good or service, and so they need to be provided by the government or a quasi-government agency, which tend to finance themselves largely through taxes.

DEFINITION of 'Taxes'

An involuntary fee levied on corporations or individuals that is enforced by a level of government in order to finance government activities

BREAKING DOWN 'Taxes'

In the investing world, this is one of the most important types of taxes and, therefore, one of the most highly debated types of tax is capital gains tax. Capital gains tax represents the tax paid on the increase in value made on an investment.

DEFINITION of 'Income Tax'

A tax that governments impose on financial income generated by all entities within their jurisdiction. By law, businesses and individuals must file an income tax return every year to determine whether they owe any taxes or are eligible for a tax refund. Income tax is a key source of funds that the government uses to fund its activities and serve the public.

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Objectives of the study:

1) To understand the concept of Tax.

2) To study about Capital Gain.

3) To study the Capital Gain taxation including exemption u\s 54 &54EC.

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CHAPTER 2: Types of Taxes

Type of Taxes:

It mainly consist of two types

Direct Taxes

Indirect Taxes

Direct Taxes :

A Direct tax is a kind of charge, which is imposed directly on the taxpayer and paid directly to the government by the persons (juristic or natural) on whom it is imposed. A direct tax is one that cannot be shifted by the taxpayer to someone else. The some important direct taxes imposed in India are as under:

Income Tax: Income Tax Act, 1961 imposes tax on the income of the individuals or Hindu undivided families or firms or co-operative societies (other tan companies) and trusts (identified as bodies of individuals associations of persons) or every artificial juridical person. The inclusion of a particular income in the total incomes of a person for income-tax in India is based on his residential status. There are three residential status, viz.,

(i) Resident & Ordinarily Residents (Residents)(ii) Resident but not Ordinarily Residents and(iii) Non Residents.

There are several steps involved in determining the residential status of a person. All residents are taxable for all their income, including income outside India. Non residents are taxable only for the income received in India or Income accrued in India. Not ordinarily residents are taxable in relation to income received in India or income accrued in India and income from business or profession controlled from India.

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Corporation Tax: The companies and business organizations in India are taxed on the income from their worldwide transactions under the provision of Income Tax Act, 1961. A corporation is deemed to be resident in India if it is incorporated in India or if it’s control and management is situated entirely in India. In case of non resident corporations, tax is levied on the income which is earned from their business transactions in India or any other Indian sources depending on bilateral agreement of that country.

Property Tax: Property tax or 'house tax' is a local tax on buildings, along with appurtenant land, and imposed on owners. The tax power is vested in the states and it is delegated by law to the local bodies, specifying the valuation method, rate band, and collection procedures. The tax base is the annual ratable value (ARV) or area-based rating. Owner-occupied and other properties not producing rent are assessed on cost and then converted into ARV by applying a percentage of cost, usually six percent. Vacant land is generally exempted from the assessment. The properties lying under control of Central are exempted from the taxation. Instead a 'service charge' is permissible under executive order. Properties of foreign missions also enjoy tax exemption without an insistence for reciprocity.

Inheritance (Estate) Tax: An inheritance tax (also known as an estate tax or death duty) is a tax which arises on the death of an individual. It is a tax on the estate, or total value of the money and property, of a person who has died. India enforced estate duty from 1953 to 1985. Estate Duty Act, 1953 came into existence w.e.f. 15th October, 1953. Estate Duty on agricultural land was discontinued under the Estate Duty (Amendment) Act, 1984. The levy of Estate Duty in respect of property (other than agricultural land) passing on death occurring on or after 16th March, 1985, has also been abolished under the Estate Duty (Amendment) Act, 1985.

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Gift Tax:

Gift tax in India is regulated by the Gift Tax Act which was constituted on

1st April, 1958. It came into effect in all parts of the country except Jammu and Kashmir. As per the Gift Act 1958, all gifts in excess of Rs. 25,000, in the form of cash, draft, check or others, received from one who doesn't have blood relations with the recipient, were taxable. However, with effect from

1st October, 1998, gift tax got demolished and all the gifts made on or after the date were free from tax. But in 2004, the act was again revived partially. A new provision was introduced in the Income Tax Act 1961 under section 56 (2). According to it, the gifts received by any individual or Hindu Undivided Family (HUF) in excess of Rs. 50,000 in a year would be taxable.

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Indirect Taxes :

An indirect tax is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the customer). An indirect tax is one that can be shifted by the taxpayer to someone else. An indirect tax may increase the price of a good so that consumers are actually paying the tax by paying more for the products. The some important indirect taxes imposed in India are as under:

Service Tax:The service providers in India except those in the state of Jammu and Kashmir are required to pay a Service Tax under the provisions of the Finance Act of 1994. The provisions related to Service Tax came into effect on 1st July, 1994. Under Section 67 of this Act, the Service Tax is levied on the gross or aggregate amount charged by the service provider on the receiver. However, in terms of Rule 6 of Service Tax Rules, 1994, the tax is permitted to be paid on the value received. The interesting thing about Service Tax in India is that the Government depends heavily on the voluntary compliance of the service providers for collecting Service Tax in India.

Sales Tax:Sales Tax in India is a form of tax that is imposed by the Government on the sale or purchase of a particular commodity within the country. Sales Tax is imposed under both, Central Government (Central Sales Tax) and State Government (Sales Tax) Legislation. Generally, each State follows its own Sales Tax Act and levies tax at various rates. Apart from sales tax, certain States also imposes additional charges like works contracts tax, turnover tax and purchaser tax. Thus, Sales Tax Acts as a major revenue-generator for the various State Governments. From 10th April, 2005, most of the States in India have supplemented sales tax with a new Value Added Tax (VAT).

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Value Added Tax (VAT):

The practice of VAT executed by State Governments is applied on each stage of sale, with a particular apparatus of credit for the input VAT paid. VAT in India classified under the tax slabs are 0% for essential commodities, 1% on gold ingots and expensive stones, 4% on industrial inputs, capital merchandise and commodities of mass consumption, and 12.5% on other items. Variable rates (State-dependent) are applicable for petroleum products, tobacco, liquor, etc. VAT levy will be administered by the Value Added Tax Act and the rules made there-under and similar to a sales tax. It is a tax on the estimated market value added to a product or material at each stage of its manufacture or distribution, ultimately passed on to the consumer. Under the current single-point system of tax levy, the manufacturer or importer of goods into a State is liable to sales tax. There is no sales tax on the further distribution channel. VAT, in simple terms, is a multi-point levy on each of the entities in the supply chain.

Central Excise Duty:The Central Government levies excise duty under the Central Excise Act, 1944 and the Central Excise Tariff Act, 1985. Central excise duty is tax which is charged on such excisable goods that are manufactured in India and are meant for domestic consumption. The term "excisable goods" means the goods which are specified in the First Schedule and the Second Schedule to the Central Excise Tariff Act 1985. It is mandatory to pay Central Excise duty payable on the goods manufactured, unless exempted e.g.; duty is not payable on the goods exported out of India.

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Customs Duty:

The Customs Act was formulated in 1962 to prevent illegal imports and exports of goods. Besides, all imports are sought to be subject to a duty with a view to affording protection to indigenous industries as well as to keep the imports to the minimum in the interests of securing the exchange rate of Indian currency. Duties of customs are levied on goods imported or exported from India at the rate specified under the customs Tariff Act, 1975 as amended from time to time or any other law for the time being in force. Under the custom laws, the various types of duties are levy able. (1) Basic Duty: This duty is levied on imported goods under the Customs Act, 1962. (2) Additional Duty (Countervailing Duty) (CVD).

Securities Transaction Tax (STT):

STT is a tax being levied on all transactions done on the stock exchanges. STT is applicable on purchase or sale of equity shares, derivatives, equity oriented funds and equity oriented Mutual Funds. Current STT on purchase or sell of an equity share is 0.075%. A person becomes investor after payment of STT at the time of selling securities (shares). Selling the shares after 12 months comes under long term capital gains and one need not have to pay any tax on that gain. In the case of selling the shares before 12 months, one has to pay short term capital gains @10% flat on the gain. However, for a trader, all his gains will be treated as trading (Business) and he has to pay tax as per tax sables. In this case the transaction tax paid by him can be claimed back/adjusted in tax to be paid.

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CHAPTER 3: Capital Gains Taxation

DEFINITION of 'Capital Gains Tax'

A type of tax levied on capital gains incurred by individuals and corporations. Capital gains are the profits that an investor realizes when he or she sells the capital asset for a price that is higher than the purchase price.

Capital gains taxes are only triggered when an asset is realized, not while it is held by an investor. An investor can own shares that appreciate every year, but the investor does not incur a capital gains tax on the shares until they are sold.

BREAKING DOWN 'Capital Gains Tax'

Most countries' tax laws provide for some form of capital gains taxes on investors' capital gains, although capital gains tax laws vary from country to country. In the U.S., individuals and corporations are subject to capital gains taxes on their annual net capital gains.

It is important to note that it is net capital gains that are subject to tax because if an investor sells two stocks during the year, one for a profit and an equal one for a loss, the amount of the capital loss incurred on the losing investment will counteract the capital gains from the winning investment.

A capital gains tax (CGT) is a tax on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a cost amount that was lower than the amount realized on the sale. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property. Not all countries implement a capital gains tax and most have different rates of taxation for individuals and corporations.

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As of 2008, equities are considered long term capital if the holding period is one year or more. Long term capital gains from equities are not taxed if shares are sold through recognized stock exchange and Securities Transaction Tax (STT) is paid on the sale.STT in India is currently between 0.017% and 0.1% of total amount received on sale of securities through a recognized Indian stock exchange like the NSE or BSE. However short term capital gain from equities held for less than one year, is sold through recognised stock exchange and STT paid should not be considered and it is taxable at a flat rate of 15% and other surcharges, educational cess are imposed. 15 %( w.e.f. 1 April 2009).

Many other capital investments (house, buildings, real estate, bank deposits) are considered long term if the holding period is 3 or more years.

The Central Government has been empowered by Entry 82 of the Union List of Schedule VII of the Constitution of India to levy tax on all income other than agricultural income (subject to Section 10(1)). The Income Tax Law comprises The Income Tax Act 1961, Income Tax Rules 1962, Notifications and Circulars issued by Central Board of Direct Taxes (CBDT), Annual Finance Acts and Judicial pronouncements by Supreme Court and High Courts.

The government of on taxable income of allpersons including individuals, Hindu Undivided Families (HUFs), companies, firms, association of persons, body of individuals, local authority and any other artificial judicial person. Levy of tax is separate on each of the persons. The levy is governed by the Indian Income Tax Act, 1961. The Indian Income Tax Department is governed by CBDT and is part of the Department of Revenue under theMinistry of Finance, Govt. of India. Income tax is a key source of funds that the government uses to fund its activities and serve the public.

The Income Tax Department is the biggest revenue mobilizer for the Government.

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Guide to Short-term vs. Long-term Capital Gains Taxes

Short-term capital gains

Short Term capital gains do not benefit from any special tax rate – they are taxed at the same rate as your ordinary income. For 2015, ordinary tax rates range from 10 percent to 39.6 percent, depending on your total taxable income.

If you sell an asset you have held for one year or less, any profit you make is considered a short-term capital gain. The clock begins ticking from the day after you acquire the asset up to and including the day you sell it.

Long-term capital gains

If you can manage to hold your assets for longer than a year, you can benefit from a reduced tax rate on your profits. For 2015, the long-term capital gains tax rates are 0, 15, and 20 percent for most taxpayers. If your ordinary tax rate is already less than 15 percent, you could qualify for the zero percent long-term capital gains rate. For high-income taxpayers, the capital gains rate could save as much as 19.6 percent off the ordinary income rate.

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Section 54: Old Asset: Residential Property, New Asset: Residential Property

Introduction

A person wanted to shift his residence due to certain reason, hence, he sold his old house and from the sale proceeds he purchased another house. In this case the objective of the seller was not to earn income by sale of old house but to acquire another suitable house. If in this case the seller was liable to pay income-tax on capital gains arising on sale of old house, then it would be a hardship on him. Section 54 gives relief from such a hardship. Section 54 gives relief to a taxpayer who sells his residential house and from the sale proceeds he acquires another residential house. The detailed provisions in this regard are discussed in this part.

Basic conditions

Following conditions should be satisfied to claim the benefit of section 54.

• The benefit of section 54 is available only to an individual or HUF.

• The asset transferred should be a long-term capital asset, being a residential house property.

• Within a period of one year before or two years after the date of transfer of old house, the taxpayer should acquire another residential house or should construct a residential house within a period of three years from the date of transfer of the old house. In case of compulsory acquisition the period of acquisition or construction will be determined from the date of receipt of compensation (whether original or additional). With effect from assessment year 2015-16 exemption can be claimed only in respect of one residential house property purchased/constructed in India. If more than one house is purchased or constructed, then exemption under section 54 will be available in respect of one house only. No exemption can be claimed in respect of house purchased outside India.

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Under Section 54 – Any Long Term Capital Gain, arising to an Individual or HUF, from the Sale of a Residential Property (whether Self- Occupied or on Rent) shall be exempt to the extent such capital gains is invested in the

1. Purchase of another Residential Property within 1 year before or 2 years after the due date of transfer of the Property sold and/or

2. Construction of Residential house Property within a period of 3 years from the date of acquisition

Provided that the new Residential House Property purchased or constructed is not transferred within a period of 3 years from the date of acquisition .

If the new property is sold within a period of 3 years from the date of its acquisition, then, for the purpose of computing the capital gains on this transfer, the cost of acquisition of this house property shall be reduced by the amount of capital gain exempt under section 54 earlier. The capital gain arising from this transfer will always be a short term capital gain.

QUANTUM OF DEDUCTION UNDER SECTION 54

Capital Gains shall be exempt to the extent it is invested in the purchase and/or construction of another house i.e.

1. If the entire amount is equal to or less than the cost of the new house, then the entire capital gain shall be exempt

2. If the amount of Capital Gain is greater than the cost of the new house, then the cost of the new house shall be allowed as an exemption

RELEVANT POINTS REGARDING SECTION 54

1. Budget 2014 has introduced an amendment to Section 54 and from Financial Year 2014-15 i.e. Assessment Year 2015-16, exemption under Section 54 is available if the amount is re-invested in 1 Residential House situated in India.

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2. The exemption under Section 54 would also be available if the amount is invested in an under construction residential house. However, Service Tax is levied on purchase of under construction property.

Capital Gains Account Scheme

Although as per Section 54, the assessee is given 2 years to purchase the house property or 3 years for the construction of the house property, but the capital gains on the transfer of the original house property is taxable in the year in which it was sold. The Income Tax Return of that year is required to be submitted in the relevant assessment year on or before the specified due date for filing the Income Tax Return. Hence, the assessee will have to take a decision for the purchase/construction of the house property till the date of furnishing of the income tax return otherwise, the capital gain would become taxable.

To avoid the above situation, the Income Tax Act specifies an alternative in the form of deposit under the Capital Gains Account Scheme. The Amount of Capital Gain which is not utilised by the Assessee for the purchase or construction of the new house before the date of furnishing of the Income Tax Return should be deposited by him under the Capital Gains Account Scheme, before the due date of furnishing the return. The proof of such a deposit shall be attached with the Income Tax Return. In this case, the amount already utilised by the assessee for the purchase/construction of the new house shall be eligible for exemption In case, the assessee deposits the amount in the Capital Gains Account Scheme but does not utilise the amount deposited for the purchase or construction of a residential house within the specified period, the amount not so utilised shall be charged as Capital Gains of the year in which the period of 3 years is completed from the date of sale of the Original Asset and it will be long term capital gain of that financial year.

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Allotment of Flats

Allotment of a flat by DDA under the Self-Financing Scheme shall be treated as construction of the house (Circular No. 471, dated 15-10- 1986). Similarly, allotment of a flat or a house by a co-operative society, of which the asseessee is the member, is also treated as construction of the house (Circular No. 672, dated 16-12-1983). Further I these cases, the assessee shall be entitled to claim exemption in respect of capital gains even though the construction is not completed within the statutory time limit [Shashi Verma v CIT (1997) 224 ITR 106 (MP)]

Delhi High Court has applied the same analogy where the assessee made substantial payment within the prescribed time limit and thus acquired substantial domain over the property, although the builder failed to hand over the possession within the stipulated period [CIT v R.C. Sood (2000) 108 Taxman 227 (Del)]

Judicial Decisions

1. House Property does not mean a complete Independent House. It includes residential units also, like flats in a multi-storeyed complex. [CIT (Addl.) v Vidya Prakash Talwar (1981) 132 ITR 661 (Del)].

2. Where a Property is owned by more than one person and the other co-owner or co-owners release his or their share respective share or interest in the property in favour of one of the co-owners, it will be deemed that the property has been purchased by the release. Such release also fulfils the condition of Section 54 as to purchase. [CIT v T.N. Aravinda Reddy (1979) 120 ITR 46 (SC)]

3. The unutilised deposit amount in the Capital Gains Account Saving Scheme in the case of an individual who dies before the expiry of the 2/3 years stipulated period under section 54, 54B, 54D, 54F and 54G, cannot be taxed in the hands of the deceased. This amount is not taxable in the hands of the legal heirs also as the unutilised portion of the deposit does not partake the character of income in their hands but is only a part of the estate. (Circular No. 743, dated 06-05-1996).

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Section 54EC: Old Asset: Any Asset, New Asset: Specified Bonds

Gains arising from the transfer of any long term capital asset are exempt under section 54EC if the assessee has within a period of 6 months after the due date of such transfer invested the capital gain in long term specified bonds as notified by the Govt. for a minimum period of 3 years.

In case where the long term specified asset is transferred or converted into money at any time within a period of 3 years from the date of its acquisition, the amount of capital gain exempt u/s 54EC, shall be deemed to be long term capital gain of the previous year in which the long term specified asset is transferred or converted into money If the Assessee even takes a loan or advance on the security of such long term specified asset, he shall be deemed to have converted such long term specified asset into money on the date on which such loan or advance is taken These specified binds are usually issued by REC and NHAI and the Interest Rate offered is 6%T. ax on the Interest earned is also liable to be paid as the Interest is not tax-free.

QUANTUM OF DEDUCTION UNDER SECTION 54EC

1. Capital Gains shall be exempt to the extent it is invested in the long term specified assets (subject to a maximum limit of Rs. 50 Lakhs) within a period of 6 Months from the date of such transfer.

2. Budget 2014 has also introduced an amendment to Section 54EC and from FY 14-15 i.e. AY 15-16 onwards, the investment made by an assessee in the long term specified asset, out of capital gains arising from the transfer of one or more original asset or assets are transferred and in the subsequent financial year does not exceed Rs. 50 Lakhs.

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Income Tax Return – 4

Capital Gains

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CHAPTER 4: Conclusion

1.  Capital gains will be taxed upon realisation.

2. Primary residences will be exempt from capital gains taxation.

3. The capital gains tax will be indexed to inflation from date of

implementation.

4. To save long term capital gain the seller has to buy a house property

within two years of sale of capital asset or construct a house within three

years. If seller is not able to identify a property he/she can open a capital

gain accounting scheme’s special account and park the money until he

finds the property (with limit of 3 years). Seller also can invest money in

specific bond up to limit of Rs 50 Lakhs to save LTCG tax.

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Webilography

http://www.slideshare.net http://www.investmentyogi.com/ https://en.wikipedia.org http://www.business-standard.com/

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