Profits or gains arising from the transfer of a capital asset during the previous year are taxable as “Capital Gains” under section 45(1) of the Income Tax Act. The taxability of capital gains is in the year of transfer of the capital asset.
What is Capital Asset?
As defined in section 2(14) of the Income Tax Act, it means property of any kind held by the assessee except:
- Stock in trade, consumable stores or raw materials held for the purpose of business or profession.
- Personal effects, being moveable property (excluding Jewellery, archaeological collections, drawings, paintings, sculptures or any other work of art) held for personal use.
- Agricultural land, except land situated within or in area up to 8 kms, from a municipality, municipal corporation, notified area committee, town committee or a cantonment board with population of at least 10,000.
- Six and half percent Gold Bonds, National Defence Gold Bonds and Special Bearer Bonds.
Types of Capital Gains
When a capital asset is transferred by an assessee after having held it for at least 36 months, the Capital Gains arising from this transfer are known as Long Term Capital Gains. In case of shares of a company or units of UTI or units of a Mutual Fund, the minimum period of holding for long term capital gains to arise is 12 months. If the period of holding is less than above, the capital gains arising therefrom are known as Short Term Capital Gains.
Computation of Capital Gains
Capital gain is computed by deducting from the full value of consideration, for the transfer of a capital asset, the following:-
- Cost of acquisition of the asset(COA):- In case of Long Term Capital Gains, the cost of acquisition is indexed by a factor which is equal to the ratio of the cost inflation index of the year of transfer to the cost inflation index of the year of acquisition of the asset. Normally, the cost of acquisition is the cost that a person has incurred to acquire the capital asset. However, in certain cases, it is taken as following:
- When the capital asset becomes a property of an assessee under a gift or will or by succession or inheritance or on partition of Hindu Undivided Family or on distribution of assets, or dissolution of a firm, or liquidation of a company, the COA shall be the cost for which the previous owner acquired it, as increased by the cost of improvement till the date of acquisition of the asset by the assessee?
- When shares in an amalgamated Indian company had become the property of the assessee in a scheme of amalgamation, the COA shall be the cost of acquisition of shares in the amalgamating company.
- Where the capital asset is goodwill of a business, tenancy right, stage carriage permits or loom hours the COA is the purchase price paid, if any or else nil.
- The COA of rights shares is the amount which is paid by the subscriber to get them. In case of bonus shares, the COA is nil.
- If a capital asset has become the property of the assessee before 1.4.81, the assessee may choose either the fair market value as on 1.4.81 or the actual cost of acquisition of the asset as the COA.
- Cost of improvement, if any such cost was incurred. In case of long term capital assets, the indexed cost of improvement will be taken.
- Expenses connected exclusively with the transfer such as brokerage etc.
Exemptions from Long Term Capital Gains
- Section 54: In case the asset transferred is a long term capital asset being a residential house, and if out of the capital gains, a new residential house is constructed within 3 years, or purchased 1 year before or 2 years after the date of transfer, then exemption on the LTCG is available on the amount of investment in the new asset to the extent of the capital gains. It may be noted that the amount of capital gains not appropriated towards purchase or construction may be deposited in the Capital Gains Account Scheme of a public sector bank before the due date of filing of Income Tax Return. This amount should subsequently be used for purchase or construction of a new house within 3 years.
- Section 54F: When the asset transferred is a long term capital asset other than a residential house, and if out of the consideration, investment in purchase or construction of a residential house is made within the specified time as in sec. 54, then exemption from the capital gains will be available as:
- If cost of new asset is greater than the net consideration received, the entire capital gain is exempt.
- Otherwise, exemption = Capital Gains X Cost of new asset/Net consideration.
- It may be noted that this exemption is not available, if on the date of transfer, the assessee owns any house other than the new asset.
- It may be noted that the Finance Act 2000 has provided that with effect from assessment year 2001-2002, the above exemption shall not be available if assessee owns more than one residential house, other than new asset, on the date of transfer. Investment in the Capital Gains Account Scheme may be made as in Sec.54.
- Section 54EA: If any long term capital asset is transferred before 1.4.2000 and out of the consideration, investment in specified bonds/debentures/shares is made within 6 months of the date of transfer, then exemption from capital gains is available as computed in Section 54F.
- Section 54EB: If any long term capital asset is transferred before 1.4.2000 and investment in specified assets is made within a period of 6 months from the date of transfer, then exemption from capital gains will be available as :-
- If cost of new assets is not less than the Capital Gain, the entire Capital Gain is exempt.
- Otherwise exemption=Capital Gains X (Capital Gains/Cost of New asset)
- Section 54EC: This section has been introduced from assessment year 2001-2002 onwards. It provides that if any long term capital asset is transferred and out of the consideration, investment in specified assets (any bond issued by National Highway Authority of India or by Rural Electrification Corporation redeemable after 3 years), is made within 6 months from the date of transfer, then exemption would be available as computed in Sec. 54EB. The Finance Act, 2007 has laid an annual ceiling of Rs. 50 lakh on the investment made under this section w.e.f. 1.4.2007.
- Section 54ED: This section has been introduced from assessment year 2002-03 onwards. It provides that if a long term capital asset, being listed securities or units, is transferred and out of the consideration, investment in acquiring equity shares forming part of an eligible issue of capital is made within six months from the date of transfer, then exemption would be available as computed in Sec. 54EB. As per the Finance Act 2006 it has been provided that with effect from assessment year 2007-08, no exemption under this Section shall be available.
Losses under Capital Gains
They can not be set off against any income under any other head but can be carried forward for 8 assessment years and be set off against capital gains in those assessment years.