OVERVIEW
OF CAPITAL GAINS
4.1 CAPITAL
GAINS
Profit or gains arising from the transfer of a
capital asset during the previous year is 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.
4.2 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)held for personal use. Agricultural
land, except land situated within or in area upto 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 Defense Bonds and Special Bearer Bonds.
4.3 TYPE
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 is known as Long Term Capital Gains. In case of
shares of a company or unit of UTI or a unit 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 there
from are known as Short Term Capital Gains. It may be mentioned here that Long
Term Capital Gains are taxed at a flat rate of 20%, the benefit of indexing the
cost of acquisition is available and a number of exemptions there
from are also available, specified in Section 54 to section 54G of the Income
Tax Act. The Finance Act 1999 has provided that in case of transfer of a
long term capital asset, being listed securities, if the tax payable
exceeds 10% of the amount of capital gains computed without indexing the cost
of acquisition, then such excess would be ignored for the purpose of
computing the tax payable by the assessee.
4.4 COMPUTATION
OF CAPITAL GAINS (Sec.48)
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 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
(i)
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.
(ii)
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.
(iii)
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.
(iv)
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
(v)
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.
4.5 IMPORTANT
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 a
public This amount should subsequently be used for construction may be
deposited in the Capital Gains Account Scheme of sector bank before the due
date of filing of Income Tax Return. 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:
(i)
If cost of new asset is greater than the net consideration received, the entire
capital gain is exempt.
(ii)
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 specified assets is made within a period of 6
months from the date of transfer, then exemption would be available as computed
in section54F 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 (including bonds issued by National Bank for Agricultural & Rural)
Development or by National Highway Authority of India or by Rural
Electrification Corporation is made within 6 months from the date of transfer,
then exemption would be available as computed in Sec. 54F. 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. 54F.
4.6 LOSS
UNDER CAPITAL GAINS -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.
4.7 EXEMPT
INCOME
The Finance Act
2003, has introduced S.10(33) and S.10(36) w.e.f. 01.04.2004 which provide that
income arising from certain types of
transfer of capital assets shall be treated as exempt income. S.10(33)
provides for exemption of income arising
from transfer of units of the US
provides that income arising form
transfer of eligible equity shares held for a period of 12 months
or more shall be exempt.
The Finance Act'2004
has introduced section 10(38) of the I.T, Act which provides that no capital
gains shall arise in case of transfer of equity shares held as a long term
capital asset by an individual or HUF w.e.f. 01.04.2005 provided such a
transaction is chargeable to 'securities transaction tax'. COST OF INFLATION
INDEX |
Financial Year
|
Cost inflation
Index
|
|
1981-82
|
100
|
|
1982-83
|
109
|
|
1983-84
|
116
|
|
1984-85
|
125
|
|
1985-86
|
133
|
|
1986-87
|
140
|
|
1987-88
|
150
|
|
1988-89
|
161
|
|
1989-90
|
172
|
|
1990-91
|
182
|
|
1991-92
|
199
|
|
1992-93
|
223
|
|
1993-94
|
244
|
|
1994-95
|
259
|
|
1995-96
|
281
|
|
1996-97
|
305
|
|
1997-98
|
331
|
|
1998-99
|
351
|
|
1999-2000
|
389
|
|
2000-2001
|
406
|
|
2001-2002
|
426
|
|
2002-2003
|
447
|
|
2003-2004
|
463
|
|
2004-2005
|
480
|
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