Capital Gains

By Manisha Patawari
CHARGING SEC.45 (1)

• Capital gains shall be chargeable to tax if following conditions are satisfied:

a) There should be a capital asset. In other words, the asset transferred should be a capital
asset on the date of transfer;
b) It should be transferred by the taxpayer during the previous year;
c) There should be profits or gain as a result of transfer.
• Any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain. This gain
or profit is comes under the category ‘income’, and hence you will need to pay tax for
that amount in the year in which the transfer of the capital asset takes place. This is
called capital gains tax, which can be short-term or long-term. Capital gains are not
applicable to an inherited property as there is no sale, only a transfer of ownership. The
Income Tax Act has specifically exempted assets received as gifts by way of an
inheritance or will. However, if the person who inherited the asset decides to sell it,
capital gains tax will be applicable.
Meaning of Capital Asset [Sec 2(14)]

a) Any kind of property held by an assessee, whether or

not connected with business or profession of the
assessee.
b) Any securities held by a FII which has invested in such
securities in accordance with the regulations made under
the SEBI Act, 1992.
Capital Does not include

• a) Stock-in-trade, consumable stores, raw materials held

for the purpose of business or profession;
• b) Movable property held for personal use of taxpayer or
for any member of his family dependent upon him.
• c) Specified Gold Bonds and Special Bearer Bonds;
• d) Agricultural Land in India not situated in the “Specified
Area”
• e) Deposit certificates issued under the Gold
Monetisation Scheme, 2015
Type of Capital Assets:

• Short Term Capital Gains

• Long Term Capital Gains
 Short term Capital Gains Section 2(42A)

• Short term capital asset as a capital asset held by the assessee for not more than 36 months immediately preceding
the date of transfer. Therefore, an asset which is held by the assessee for period of > 36 months immediately
preceding the date of transfer is a long-term capital asset.

• However, a security (other than a unit) listed in a recognised stock exchange or a unit of an equity oriented fund, or
of UTI or a Zero-Coupon Bond, will be considered as a long-term asset if it is held for period of > 12 months
immediately preceding the date of transfer.

• A share of a company not being a share which is listed on a recognised stock exchange in India, would have a
holding period of 24 months.
Long term Capital Gains

• Assets other than short-term capital assets are known as ‘long-term capital assets’
and the gains arising therefrom are known as ‘long-term capital gains’. In the case of
other long- term capital assets, the period of holding is determinable subject to any
rules made by CBDT.An asset should be held for more than 36 months immediately
prior to the date of its transfer to become a long term capital asset.

• However, where a capital asset, being Immoveable property (land or building or

both) is transferred on or after April 1, 2017, then it will be treated as Long Term
Capital Asset if it is held for more than 24 months immediately prior to the date of its
transfer. [Amendment vide Finance Act, 2017 w.e.f. AY 2018-19]
Transfer
• The essential requirement for the
incidence of tax on capital gains is
the transfer of a “capital asset”. The
Act contains an inclusive definition
of “transfer”, and hence, it includes:
case law

• The Supreme court in the case of Vodafone International Holdings B.V vs. Union of India [2012] 204
Taxman 408 gave the following ruling -
(a) the transfer of shares in the foreign holding company does not result in an extinguishment of the
foreign company’s control of the Indian company.
(b) It does not constitute an extinguishment and transfer of an asset situated in India.
(c) Transfer of foreign holding company shares offshore, cannot result in an extinguishment of the
holding companies right of control of the Indian company and the same does not constitute
extinguishment and transfer of an asset/management and control of property situated in India.
What doesn’t constitute Transfer?
• Section 47 specifies certain transactions which will not be regarded as a transfer, as below:

1. Any distribution of capital assets on total / partial partition of HUF

2. Any transfer of a capital asset under a gift / irrevocable trust (doesn’t include ESOP’s)
3. Transfer of asset from Holding Company to its wholly owned Indian Subsidiary and vice-versa
4. Transfer of capital asset from amalgamating company to amalgamated company, in a scheme of
amalgamation, as long as the resultant company is an Indian Company
5. Transfer of capital asset from demerged company to resulting company, in a scheme of demerger, as
long as the resultant company is an Indian Company
6. Transfer / issue of shares by the resulting company to the shareholders of the demerged company, if
such transfer was made in consideration of such demerger
cont...
7. Transfer of shares by a shareholder, held in the amalgamating company, in a scheme of amalgamation,
if such transfer is made as a consideration, by way of allotment of shares in the amalgamated Indian
company
8. Transfer of rupee denominated bonds / any government security, outside India, by a non-resident to
another non-resident
9. Redemption of sovereign gold bonds, issued by RBI, by an individual
10.Transfer of any capital asset to the Government / University / National Museum / National Art
Gallery,
any work of art, book, manuscript, drawing, painting, print
11.Transfer made outside India of Rupee Denominated Bond (RDB’s) of an Indian Company, issued
outside India by a non-resident to another non-resident.
12. Transfer by way of conversion of bonds / debentures / preference shares into equity shares of that
Company.
13. Transfer of capital asset under reverse mortgage
14. Transfer by a unit holder under consolidation plans / schemes of Mutual Fund
Mode of Computation
• Section 48 of the Act provides that the income chargeable under the head
“capital gains” shall be computed by deducting from the full value of
consideration received or accruing as a result of the transfer of the capital
asset the following amounts –
• (i) the expenditure incurred wholly and exclusively in connection with
such transfer;
• (ii) the cost of acquisition of the capital asset and the cost of any
improvement thereto
Exemption of Capital Gains
Profit on sale of property used for residence (S. 54)
• Where any capital gain arises to an assessee, individual or H.U.F., on the transfer of a long-
term residential house (either self-occupied or let out), the income of which is chargeable
under the head, ‘Income from house property’, and where the assessee (or in case of his
death, his legal representative) has (i) purchased one residential house in India within a
period of one year before such transfer or within a period of two years after such transfer, or
(ii) constructed one residential house in India within three years after such transfer, the
capital gain arising on such transfer is to be treated in the following manner:
• There should be a transfer of a residential house
• It must be a long-term capital asset.
• Income from such house should be chargeable to tax under the head “Income from House
Property”
• One residential house MUST be purchased within 1 year before OR 2 years after the date of
transfer
• OR constructed within 3 years from date of transfer
Amount of Exemption under section 54
Amount of Exemption under section 54 will be lower of:
• Amount of capital gains arising on transfer of residential house; or
• Amount invested in purchase/construction of new residential house property.
(including the amount deposited in CGAS before due date of filing of return)

Note: Exemption can be claimed only in respect of one residential house property
purchased/constructed in India.
If till the date of filing the return of income, the LTCG on such transfer of the house is
not utilised (in whole orin part) to purchase or construct another house, then the benefit
of exemption can be availed by depositing the unutilised amount into Capital Gains
Deposit Account Scheme (CGAS) with any scheduled bank.
Transfer of land used for agricultural purposes [Section 54B]

• Where any capital gain either long-term or short-term arises on the transfer of land which, in
the two years immediately preceding the date of transfer, was being used by the assessee
being an individual or his parents or a Hindu Undivided Family for agricultural purposes and
where the assessee has purchased any other agricultural land within a period of two years
after the date of its transfer, such capital gain is to be treated as under:

• In such a case, if the cost of the new agricultural land is > the Capital Gains, the entire LTCG
will be exempt,and if less, then the LTCG will be exempt only to the extent of the cost of new
agricultural land.
Compulsory acquisition of lands and buildings [Section 54D]

• An assessee is entitled to exemption from tax in respect of capital gains arising from the
transfer, by way of compulsory acquisition, of any land or building forming part of an
industrial undertaking belonging to him provided the following conditions are satisfied:
• There must be a compulsory acquisition of land & building forming part of industrial
undertaking.
• Such land & building should have been used for business purposes of the undertaking for
immediately preceding 2 years
• The assessee must purchase another land / building / construct any building within 3 years
from date of transfer.
No tax on long-term capital gains if investments made in specified
bonds [Section 54EC]
• There should be a transfer of a long-term capital asset being land or building or both.
• The capital gains arising from transfer of such asset should be invested in a long-term specified asset
within 6 months from date of transfer.
• Long-term specified assets would imply, bonds redeemable after 5 years issued by National Highways
Authority of India (NHAI), or Rural Electrification Corporation Limited, Power Finance Corporation
Ltd., Indian Railway Finance Corporation Limited or any other notified bond.
• The assessee should neither transfer nor convert / avail loan with this bond as security for a period of
5 years from date of acquisition of such bonds, and in case that does happen before 5 years, the
capital gain exempted earlier shall be taxed as long-term capital gain in that year.
• In this case, the entire LTCG or amount invested in the specified bonds, whichever is lower, is
exempt.
Tax incentives for start-ups[Section 54EE]

• Investment of Long-term Capital Gains in units of a specified fund (to finance start-ups in
India)
• Within 6 months from date of transfer
• Maximum Investment Allowed is INR 50,00,000
In such case, the entire LTCG or amount invested in the bonds, whichever is lower, is exempt.

Units so acquired should not be transferred for a period of 3 years, and if that does happen
before 3 years, the capital gain exempted earlier shall be taxed as long-term capital gain in that
year.
Capital gain on the transfer of certain capital assets not to be charged in case of
investment in residential house [Section 54F]
• There must be a transfer of a long-term capital asset other than a residential house
• The assessee should purchase 1 residential house within 1 year before OR 2 years after the date of
transfer OR construct one within 3 years from date of transfer
If the cost of the investment in a new residential house is > the Net Sale Consideration, the entire LTCG
is exempt, and if less than Net Sale Consideration, then, LTCG is exempt proportionately (that is: LTCG
* Investment in New House / Net Sale Consideration).

There is also a condition, that the assessee should not own more than one house on the date of transfer
and should not purchase any more residential house within 2 years OR construct any within 3 years from
date of transfer of original asset, and if that does happen then, the entire LTCG exempted earlier will be
chargeable to tax as LTCG in that year.
• Benefit of Capital Gain Account Scheme can be availed as available under section 54.
• Additionally, if the new house is transferred within 3 years of purchase, capital gains would arise on
transfer and the LTCG exempt earlier would be taxable as LTCG in that year.
Extension of Time for Acquiring New Asset or Depositing or Investing Amount of
Capital Gain (Section 54H)

• Section 54H has been inserted by the Finance (No. 2) Act, 1991 with effect from 1.10.1991. This
section states that where the transfer of the original asset is by way of compulsory acquisition under
any law and the amount of compensation awarded for such acquisition is not received by the assessee
on the date of such transfer, the period of acquiring the new asset by the assessee referred to in
Sections 54, 54B, 54D, 54EC and 54F or for depositing or investing the amount of capital gain shall
be extended. This extended period shall be reckoned from the date of receipt of such compensation.
Tax on Short-Term and Long-Term Capital Gains