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    Capital Gains


    Basis of Charge(Sec. 45[1])
    Capital gain is the gain which arises from the transfer of a capital asset. Any profits or gains arising from the transfer of a capital asset effected in the previous year, shall be chargeable to income-tax under the head 'Capital Gains' and shall be deemed to be the income of the previous year in which the transfer took place unless such capital gain is exempt u/s 54, 54B, 54D, 54EC, 54F, 54G or 54GA.
    The following are the essential conditions for taxing capital gains:
    (A)  there must be a capital asset;
    (B)  the capital asset must have been transferred;
    (C)  there must be profits or gains on such transfer, which will be known as capital gain;
    (D)  such capital gain should not be exempt u/s 54, 54B, 54D, 54EC, 54F, 54G or 54GA.

    Capital Assets
    Under section 2(14), property of any kind, held by any assessee, is a capital asset for the purpose of Income Tax Act excluding the following:
    a)      Any stock in trade, consumable stores or raw material, held for the purposes of business or profession.
    b)      Personal effects of the assessee, i.e. movable property, including wearing apparel and furniture, held for his personal use or for the use of any member of his family, dependent upon him. However, the following assets shall not be treated as personal effects though these assets are moveable and may be held for personal use: (a)     jewellery; (b) archaeological collections; (c) drawings; (d) paintings; (e) sculptures; or (f) any work of art.
    c)       Agricultural land in India, provided it is not situated (a) in any area within the territorial jurisdiction of a municipality or a cantonment board, having a population of 1000 or more or (b) n any notified area.
    d)      6.5 % gold bonds, 1977 or 7% Gold bonds, 10980 or National Defense Gold Bonds, 1980,issued by the Central Government.
    e)      Special Bearer Bonds 1991.
    f)       Gold Deposit Bonds, issued under gold Deposit Scheme, 1999.
    Note: It makes no difference whether or not the property is connected with the business or profession. Property of any kind, held by any assessee, is treated as a capital asset except those assets, which are specifically excluded as capital assets as mentioned above.

    Types of Capital Assets:
    a)      Short term Capital Assets
    b)      Long term Capital Assets

    Short term Capital Assets are those which are held by an assessee for not more than 36 months immediately preceding the date of its transfer but in case of  Shares held in a company (on which STT has been paid), Any other security listed in a recognised stock exchange in India, Units of the Unit Trust of India or units of a Equity oriented Mutual Fund  Zero coupon bond – the period shall be 12 months not 36 months. Gain arising on transfer of such assets is called Short Term Capital Gain (STCG).

    Long-term capital asset as per sec. 2(29A) means a capital asset which is not a short-term capital asset i.e., Assets which are held by an assessee for more than 36 months immediately preceding the date of its transfer. Gain arising on transfer of such assets is called Long Term Capital Gain (LTCG).

    Transfer Sec. 2(47)
    Transfer, in relation to capital asset, includes:
    (i)    the sale, exchange or relinquishment of the asset; or
    (ii)   the extinguishment of any rights therein; or
    (iii)  the compulsory acquisition thereof under any law; or
    (iv) in a case where the asset is converted by the owner thereof into, or is treated by him, as stock-in-trade of a business carried on by him, such conversion or treatment; or
    (v)  the maturity or redemption of zero coupon bonds; or
    (vi) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882; or
    (vii)        any transaction (whether by way of becoming a member of, or acquiring shares in a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of any immovable property.

    The following transactions are not treated as transfer:
    a)      Distribution of asset in kind by a company to its shareholders at the time of liquidation.
    b)      Distribution of a capital asset on total or partial Partition of Hindu Undivided family.
    c)       Transfer of a capital asset by a company to its 100% subsidiary company.
    d)      Transfer of a capital asset by a 100% subsidiary company to its holding company.
    e)      Transfer of a capital asset in a scheme of amalgamation.
    f)       Transfer of shares in an Indian Company, held by a foreign company, under a scheme of amalgamation  of the two foreign companies.
    g)      Transfer in a demerger of a capital asset by the demerged company to the resulting company.
    h)      Transfer of shares, held in an Indian Company, by a demerged foreign company to the resulting foreign company.
    i)        Transfer or an issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company.
    j)        Allotment of shares in an amalgamated company in lieu of shares, held in an amalgamation company.
    k)      Transfer of a capital asset (being foreign currency convertible bonds or GDR) by a non-resident to another non-resident.
    l)        Transfer of agricultural land in India before March 1, 1970.
    m)    Transfer of a capital asset, (being a work of art, manuscript, painting etc.) to the Government, University/ national museum.
    n)      Transfer by way of conversion of bonds or debentures in to shares.
    o)      Transfer by way of exchange of a capital asset, being membership of a recognised stock exchange for shares of a company.
    p)      Transfer of a land by a sick industrial company, which is managed by its workers cooperative.
    q)      Transfer of a capital asset by a firm to a company in the case of conversion of firm in to company.
    r)       Transfer of a capital asset, being a membership right held by a member of a recognised stock exchange in India.
    s)       Transfer of a capital asset to a company in the case of conversion of proprietary concern in to a company.
    t)       Transfer involved in a scheme of lending of securities.


    Computation of Capital Gain and Tax Thereon
    Capital gain is computed on the basis of the asset transferred. The method of computation of capital gain is given below:
    Computation of Short Term Capital Gain
    A. Full value of consideration
    B. Deduct the following:
    a) Expenditure incurred wholly and exclusively in connection with transfer
    b) Cost of acquisition
    c) Cost of improvement
    XXXXXXXXXXXX


    C. Gross Short term Capital Gain (A – B)
    D. Less: Exemptions provided by section 54B, 54D, 54G and 54GA
    XXXXXXXXXXXX
    ---------------------
    E. Net Short Term Capital Gain
    XXXXXXXXXXXX


    Computation of Long Term Capital Gain
    A. Full value of consideration
    B. Deduct the following:
    a) Expenditure incurred wholly and exclusively in connection with transfer
    b) Indexed Cost of acquisition
    c) Indexed Cost of improvement
    XXXXXXXXXXXX


    C. Gross Long term Capital Gain (A – B)
    D. Less: Exemptions provided by section 54, 54B, 54D, 54EC, 54ED, 54FQ and 54G
    XXXXXXXXXXXX
    ---------------------
    E. Net Long Term Capital Gain
    XXXXXXXXXXXX


    Tax on Short Term Capital Gains:
    Short term Capital Gain tax rate other than securities mentioned below:  As per Normal income tax slab (i.e. added with total income).
    Any income arising from the transfer of a short-term capital asset, being an equity share in a company or a unit of an equity oriented fund and the following conditions are fulfilled—
    a)      the transaction of sale of such equity share or unit is entered into on or after 1-10-2004;
    b)      such transaction is chargeable to securities transaction tax;
    c)       such equity shares are transferred through a recognised stock exchange or such units are transferred through a recognised stock exchange or sold to the mutual fund
    the tax payable by the assessee @ 15 % on short-term capital gains.
    No deduction under Chapter VI-A (sections 80C to 80U) shall be allowed from such income. Shifting to claim full exemption of total income is allowed only in case of resident individual or HUF.

    Tax on long term capital gains
    Long-term capital gain is taxable at a special rate of 20% in case of all assessees whether resident or non-resident. LTCG is calculated after deducting indexation of cost of acquisition & improvement from the consideration price. No deductions permissible under Chapter VI-A (i.e. sections 80C to 80U) from long-term capital gain. Shifting is allowed in case of resident.

    Tax on long-term capital gains from listed securities: Although the long-term capital gain is taxable at the special rate of 20% but the tax payable by the assessee on long-term capital gain from securities listed on any recognised stock exchange in India or units of UTI or Mutual Funds Covered under section 10(23D) and Zero Coupon Bonds are exempted.

    Important Terms in Calculation of Capital Gains
    Full value of Consideration
    The total amount, received by the assessee from the asset transferred by him, is known as full value of consideration. This consideration can be in cash or in kind. If it is received in kind, then the fair market value of such asset is taken as full value of consideration. Even if the full consideration is received is the same, the entire value of consideration is considered for computing the capital gain.

    Expenses on transfer
    Expenses on transfer are those expenditure incurred, whether directly or indirectly, for the purpose of transfer. These expenses are deductible in calculation of Net Capital Gain e.g.  Advertisement,Brokerage, commission, cost of stamp, registration fees on sales and legal expenses etc.
    STT leviable on sale of shares and units of equity oriented mutual fund shall not be allowed as deduction in computing capital gains. In other words, STT neither form a part of the cost in case of purchase nor be allowed as deduction as expenses of transfer in case of sale of such equity shares and mutual funds.

    Cost of Acquisition (Section 55[2])
    a)      It includes brokerage, fees, stamp duty paid at the time of purchase of capital asset.
    b)      Cost to the previous owner will be deemed to be the cost of acquisition in the following cases :-
    Ø  Distribution of HUF`s capital asset.
    Ø  Capital asset acquired under will or gift.
    Ø  Distribution of assets on liquidation of companies.
    Ø  If the cost to previous owner is not identified then the Market value as on the date of assets acquired by previous owner will be deemed  as cost of acquisition.
    Ø  For calculation of Short term/Long term capital gain – the holding period of previous owner also included.

    c)       Acquisition  before 1st April, 1981: MV  or  the cost of acquisition (improvement cost incurred before Apr.1981 - ignored)  whichever is higher  on 1st April, 1981 will be deemed as cost of acquisition. This rule is not applicable on depreciable assets.
    d)      Amount forfeited paid as advance to vendor due to non-fulfillment of terms and condition, such forfeited amount will be deducted from the cost of acquisition before indexation.
    e)      Bonus Shares: Acquired on or after 1 Apr.1981 – NIL.  Acquired before 1 Apr.1981 – Fair Market Value.
    f)       Right shares: Amount paid to the company for such shares. For transfer of right entitlement -  NIL.
    g)      Conversion of debentures: Conversion of debentures, debenture stock, deposit certificate into equity shares or debentures of a company will not generate capital gain. On transfer of these converted equity shares or debentures , cost of acquisition will be equal to the cost of old debentures converted into shares etc.

    Cost  of  Improvement (Section 55(1)(b))
    Any  improvement cost incurred after 1st April, 1981 will be considered for computation income under the head capital gain otherwise not.
    Cost of improvement in respect of  :
    1.  Good will of business. 2.  Right to manufacture, produce or process any article or thing. 3.  Right to carry on any business.
                   Shall be taken as NIL.

    Indexed cost of acquisition/ improvement (Explanation (iii) to section 48)
    Cost of acquisition X
    Cost of improvement X
                                    was made by the assessee or previous owner.
    For calculating the long tern capital gain, indexation of cost of acquisition and improvement is to be made.
    However, Indexation of cost not allowed in following cases
    Ø  Transfer of bonds and debentures other than capital indexed bonds issued by the Government.
    Ø  Transfer of shares or debentures acquired by a non-resident in foreign currency in an Indian company.
    Ø  Transfer of undertaking or division in a slump sale.
    Ø  Transfer of units of Unit Trust of India or Mutual Fund covered u/s 10(23D) purchased in foreign currency by overseas financial organisation also known as Offshore funds.
    Ø  Transfer of Global Depository Receipt or bonds of an Indian company or share or bonds of public sector company sold by the Government and purchased in foreign currency by a non-resident.
    Ø  Transfer of Global Depository Receipt purchased in foreign currency by an individual resident in India and employee of an Indian company.
    Ø  Transfer of securities by Foreign Institutional Investors.
    Ø  Transfer of foreign exchange asset by a non-resident Indian

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