CAPITAL GAINS

Sec. 45 to 55A
 Conditions

 1. There should be a Capital Asset

 2. There should be a Transfer of
Capital Asset
 3. That Transfer should have taken
place in the financial year.
 4. Transaction will result either in
LTCG / LTCL /STCG /STCL
CAPITAL ASSET – SEC. 2(14)
 EXCEPTION :

 Stock in trade
 Personal effects (meaning movable
property including wearing apparel and
furniture)
 Rural Agricultural land in India;
 6 ½ % Gold Bonds, 1977
 7% Gold Bonds 1980
 National Defence Gold Bonds, 1980
 Special Bearer Bonds, 1991
 Gold Deposit Bonds, 1999
SEC. 2(14)
Cont..
 Capital Asset includes :
 1. Property of any kind whether or not connected
with business or profession;
 2. Investment in any securities held by a Foreign
Institutional Investor.
 Jewellery held for personal use either for the
assessee or for the family members dependent on
the assessee,
 Archaeological collections,
 drawings,
 paintings,
 sculptures
 Any work of art,
SEC.2(47) – TRANSFER

 Sale, exchange or relinquishment of the asset

 Extinguishment of any rights
 Compulsory acquisition under any law
 Treatment or conversion of capital asset into stock-
in-trade
 Maturity/Redemption of Zero Coupon Bond
 Part performance of a contract u/s.53A of the
Transfer of Property Act, 1882 and possession of
immovable property;
 Transactions which have the effect of
transferring/enabling the enjoyment of immovable
property
TRANSACTIONS NOT
REGARDED AS TRANSFER:
46(1) Distribution of assets in kind by a company to
its shareholders on its liquidation
47(i) Any distribution of capital assets in kind by
HUF to its members at the time of total or
partial partition
47(iii) Transfer of a capital asset under a Gift or a Will
or an Irrevocable Trust
47(iv) Transfer of capital asset by a company to its
wholly owned Indian subsidiary company.

47(v) Transfer of capital asset by wholly owned

Subsidiary company to its Indian Holding Co.

47(xiiia) Transfer of membership right in a stock

exchange.
SEC. 46 & 47 - TRANSACTIONS
NOT REGARDED AS TRANSFER:
 Similarly, wherever the transactions are not regarded as
transfer as per Sec.47 based on the stipulated conditions,
this exception will be withdrawn u/s.47A when the
assessee fails to fulfill the conditions stipulated as per
Sec.47. For example, where capital asset was
transferred from Holding co to subsidiary co, etc vide
Sec.47(iv) & 47(v), if the transferee company converts
the capital asset into stock-in-trade subsequently, or
parent company or its nominees cease to hold whole of
the share capital of the subsidiary company, exemption
shall be withdrawn and capital gains shall be brought to
tax in the year in which such original transfer took place.
This can be done by rectification of assessment
u/s.155(7B) within 4 years from the end of the F.Y. in
which conversion takes place or cessation of holding
takes place.
YEAR OF TAXABILITY

 Generally, year of taxability is the

year of transfer. But it is taxable in
the year other than year of
taxability in some cases.
45(1A) - Capital gains on receipt of
Insurance Compensation :
 Condition : There should be damage or destruction of
capital assets as a result of flood, typhoon, hurricane, etc,
Riot or civil disturbance or accidental fire or explosion or
Action by an enemy or action taken in comabting an
enemy.
 Chargeability : Year in which money or other asset was
received from the Insurer
 Amount : In case of money, whatever money is received
is the consideration. In case of other asset, FMV on the
date of receipt is the consideration
 Capital Gains – Money received or FMV of asset received
(-) COA or ICOA
 If it is a depreciable asset, it results in STCG.
45(2) – Capital gains on conversion
of capital asset into stock-in-trade :
 Chargeability- Taxable in the year in
which converted stock is sold or otherwise
transferred. Taxable in two parts
 Capital gains = FMV on the date of
conversion (-) COA/ICOA
 Business income = consideration on sale
(-) FMV of capital asset on conversion
 Indexation apply on the basis of year of
conversion
45(3) - Capital gains on introduction of
capital asset into firm :
 Chargeability – In the year in which
such transfer takes place in the
hands of partner.
 Capital gains – Amount credited in
books in the Partner’s capital account
(-) cost or ICOA.
 45(4) – Capital gains on
distribution of capital asset on
dissolution of Firm or AOP to its
partners or Members :
 Chargeability – In the year in which
such transfer takes place in the
hands of Firm/AOP .
 Capital gains – FMV on the date of
transfer (-) cost or ICOA.
45(5) – Capital gains on
compulsory acquisition of
capital asset :
 Normal or Original compensation is taxable in the year in
which it is first received.
 Whole of the compensation is taxable even if a portion is
received
 Compensation received subsequent to the death of assessee is
taxable in the hands of his legal heirs.
 Where normal or enhanced compensation is reduced by the
Court or Tribunal or any other authority, then capital gains shall
be recomputed again.
 Any compensation received due to interim order shall be deemed
as income chargeable u/s.45 of the year in which final order is
made
 Capital gains = Whole of the Normal compensation (-) COA or
ICOA
 Enhanced compensation is
taxable in the year in which such
enhanced compensation is
received.
 Capital gains = Enhanced
compensation (-) expenses
incurred for receiving enhanced
compensation
45(5) Capital gains on redemption of
80CCB Units

 Chargeability : Taxable as income

in the year in which repurchase of
units takes place
 Capital gains = Repurchase price
of units (-) Amount invested in such
units. No indexation benefit is
available.
46 Capital gains on Distribution of capital
asset by company in liquidation :

 In case assets sold by liquidator and

cash distributed to the
shareholders, then capital gains will
be taxed in the hands of the
company
 Otherwise, if the asset is
distributed in specie among the
shareholders, it is not a transfer
and hence not taxable in the hands
of company [sec.46(1)]
46 Capital gains on Distribution of
capital asset by company in
liquidation :
 Tax treatment in the hands of
shareholders :
 Capital gains = (FMV of asset recd
+ cash recd ) – shareholders
interest in the accumulated profit on
the date of liquidation i.e. deemed
dividend u/s.2(22)( c) – COA of
shares / ICOA of shares
46A Capital gains on Repurchase or
buy-back of shares, etc :

 Where a shareholder receives any

consideration from the company for
purchase of its own shares or other
specified securities, it is a transfer
chargeable to capital gains tax
 It is taxable in the year in which the
same are re-purchased by the
company
Sec.50 - Capital gains on
transfer of depreciable asset
 Taxable only as short-term capital gains.
 Condition : If all assets in the block are not
transferred -50(1)
 Computation : Consideration received
Less: Expenses on transfer
 Opening WDV
 Actual cost of assets
 acquired during the year
 Difference shall be taxed as STCG if it is profit & as
STCL if it is loss. If all assets in the block are
transferred, the difference will be treated as either
STCG /STCL.
Sec.50C – Capital gains on sale of
property at less than Government
value

 If any land or building or both are transferred for a

consideration less than the value adopted or
assessed/assessable by the Stamp Valuation
Authority, the such value adopted by Stamp
Valuation Authority shall be deemed tobe full value
of consideration for the purpose of computation of
capital gains. However if the assessee raises any
objection for adopting stamp value as stipulated in
Sec.50C, then the case shall be referred to the
Valuation Cell. In that case, Where the value
determined by the Valuation Officer exceeds the
stamp valuation, then stamp value shall be deemed
to be the full value of consideration.
Sec.50D – Capital gains when
consideration received is not
ascertainable/cannot be determined :

 FMV on the date of transfer can be

taken as the full value of
consideration
Sec. 51

 Advance received and forfeited in a

failed negotiations in the capital
asset transaction is taxable as
income from other sources u/s.
56(2)(x). This sum shall not be
deducted from the cost for which
the asset was acquired or WDV or
FMV, in computing the cost of
acquisition.
TYPES OF CAPITAL ASSETS
 SEC.2(42A) – SHORT TERM CAPITAL ASSET –
 Capital assets other than financial assets, held for
not more than 36 months immediately preceding the
date of transfer are treated as Short-term capital
assets.
 Securities listed in a Recognized stock exchange in
India, Units of UTI, Unit of an equity Oriented Fund
and Zero Coupon Bonds are considered as Financial
Assets. If held for not more than 12 months, they
are treated as Short-term Capital Assets.
 As per Sec.2(42B), capital gains from sale of
short-term capital asset is known as short term
capital gain.
SEC.2(29A) – LONG TERM
CAPITAL ASSET -
 Capital assets other than financial assets,
held by an assessee for more than 36
months immediately preceding the date of
transfer are treated as Long-term capital
assets.
 If financial assets if held for more than 12
months immediately preceding the date of
transfer, they are treated as Long -term
Capital Assets.
 As per Sec.2(29B), capital gains from sale
of short-term capital asset is known as
Long term capital gain.
Sec. 112 – RATES OF TAX :
 STCG is taxable at normal slab rates. However,
STCG leviable at 15% u/s.111A, if the following
conditions are satisfied :
 STCG is on transfer of equity share of the company,
Units, Equity Oriented Fund or Unit of a Business
Trust;
 Transfer taken place on or after 1.10.2004;
 Transaction is liable for Securities Transaction Tax.
 LTCG is taxable at 20% except in few cases like
Offshore funds and Non-Resident and foreign
companies where LTCG is taxable at 10% in certain
circumstances. However, LTCG on transfer of listed
securities are exempt from tax us/.10(38).
 COMPUTAITON OF STCG / STCL

Short-term capital gain

Considertion recd xxxxx

Less: Expenses on (xxxxx)

Transfer
Net consideration
xxxxx
Less: Cost of acquisition xxxxxxx
Cost of improvement XXXXX (xxxx)

Short term capital gains xxxxx

Less: Exemption u/s.54B,

54D, 54G, 54GA (xxxx)

Taxable STCG /STCL XXXXX

COMPUTATION OF LTCG / LTCL
Long term capital gain
Considertion recd xxxxx
Less: Expenses on
(xxxxx)
Transfer
Net consideration
xxxxx
Less Indexed cost of xxxxxxx
acquisition (xxxx)
XXXXX
Indexed cost of
improvement
Long term capital gains Xxxxx
Less: Exemption u/s.54
(xxxx)
to 54GA
Taxable LTCG / LTCL XXXXX
 INDEXATION

 Indexed Cost of Acquisition (ICA) :

 If asset acquired before 1.4.1981 :
 ICA = FMV as on 1.4.81 or (COA of assessee or previous owner) w.e. is higher x CII for
year of transfer / 100


 If asset acquired after 1.4.1981

 ICA = COA incurred by assessee or previous owner x CII for year of transfer
 CII or year of acquisition


 Indexed Cost of Improvement – This can be computed only if it is incurred on or after

1.4.1981
 ICI = COI incurred by assessee or previous owner x CII for year of transfer
CII or year of improvement

 However, in some of the cases like bonds/debentures except Capital Indexed Bonds
issued by Govt., Shares / Debentures of Indian Company acquired by using convertible
forex, depreciable assets, slump sale, 80CCB Units, etc., benefit of indexation is not
available to LTCG.
 COST INFLATION INDEX
FY CII FY CII FY CII
1981-82 100 1991-92 199 2001-02 426
1982-83 109 1992-93 223 2002-03 447
1983-84 116 1993-94 244 2003-04 463
1984-85 125 1994-95 259 2004-05 480
1985-86 133 1995-96 281 2005-06 497
1986-87 140 1996-97 305 2006-07 519
1987-88 150 1997-98 331 2007-08 551
1988-89 161 1998-99 351 2008-09 582
1989-90 172 1999-00 389 2009-10 632
1990-91 182 2000-01 406 2010-11 711
2011-12 785 2012-13 852 2013-14 939
2014-15 1024 2015-16 1081 2016-17 1125
 EXEMPTIONS
54 54B 54F 54EC

Applicability Individual/HUF -do- -do- All assessees

Asset Residential **Urban Any LTCA other Any LTCA

transferred House Agricultural land than residential
used for house property
Agriculture

New asset to be w.e.f. 1.4.15, Agricultural land w.e.f. 1.4.15, Notified Bonds
acquired one residential one residential such as NHAI
house property house property and RECL.
in India in India.

Amount of Cost of new -do- LTCG X Amount of

exemption asset or capital Investment in investment
gains whichever house property / subject the
is less Net maximum of
consideration Rs.50 lacs or
capital gains
w.e. less
SET OFF & CARRY FORWARD
OF CAPITAL LOSS
TYPES OF SET OFF OF LOSSES
LOSSES
CARRY
FORWARD OF
LOSSES

Heads of Intrahead / Interhead Adjustme Adjustme No. of Is it Should

income Intersource Adjustm nt in the nt in the years for necessary the
Adjustment ent same other which to filed business
Sec.70 Sec.71 head head loss can return of be
be carried loss in continued
forward time
for set off Sec.80
Long-term Long-term No Long-term No 8 Yes NA
Capital capital gain capital
Loss -74 only gain only
Short- Short term No Short term No 8 Yes NA
term capital gain capital
capital or Long gain or
loss - 74 term capital Long term
gain capital
gain
TAXABILITY OF INTANGIBLE
ASSET
Intangible assets Cost of acquisition Cost of improvement

1. Goodwill of a business If the assets are Cases (1) to (3) – Cost

purchased of improvement - Nil
2. Right to manufacture, -Actual cost of
produce or process any acquisition
article or thing,
Note: Fair market value
3. Right to carry on as at 01.04.81 shall not
business, be considered even if the
asset was purchased
4. Tenancy rights,
prior to 01.04.81
Cases (4) to (7) - Actual
5. Trade mark or brand
If the assets are self improvement cost .
name of a business,
generated
6. Stage carriage permits : Nil

7. Loom hours
EXEMPTION U/S.10(36)
 LTCG on transfer of equity shares:
 Condition :
 1. Asset should be a LTCA;
 2. Asset should be eligible Equity
Share in a company acquired between
 1.3.03 and 29.3.04
 3. It is listed in a recognised stock
exchange.
 3. Sale should be through Recognised
Stock Exchange in India.

EXEMPTION U/S.10(38)
 LTCG on transfer of Securities :
 Condition :
 1. The transaction should be held on or
after 01.10.04;
 2. Securities Transaction Tax should
have been paid on the transaction;
 3. Asset transferred should be a LTCA
 4. Asset should be equity share in a
company or a unit of an Equity
Oriented Fund