CAPITAL GAINS

CAPITAL GAINS (Part 1)

• Definition: Capital gains refer to the income arising from the transfer of a capital asset.
• Key Components: The important constituents under this head are – capital asset, transfer, sale consideration, cost of acquisition, and the date of purchase and transfer.

Key Concept 1: Capital Asset

• Definition: As per Section 2(14) of the Income Tax Act, a capital asset means:
  • Property of any kind, held by an assessee, whether or not connected with his business or profession
  • Any securities held by a Foreign Institutional Investor (FII) which has invested in such securities in accordance with the SEBI Regulations
  • Any securities held by a Category I or Category II Alternative Investment Fund which has invested in such securities in accordance with the SEBI Regulations
  • Any unit linked insurance policy (ULIP) to which exemption under section 10(10D) does not apply
• Inclusions: All kinds of properties, whether movable, immovable, tangible, or intangible, including rights of management or control of an Indian company, are considered capital assets.
• Exclusions: The following assets are excluded from the definition of capital assets:
  • Stock-in-trade: Any stock-in-trade, consumable stores, or raw material held for the purpose of business or profession
  • Personal Effects: Movable property held for personal use of the assessee or any member of his family, dependent on him (except for jewellery, precious or semi-precious stones, archaeological collections, drawings, paintings, sculptures, and any work of art)
  • Agricultural land in India: Any agricultural land situated in a rural area in India (except for agricultural land situated in an urban area or within prescribed limits from municipalities)
  • Bonds: Certain specified bonds, such as 6.5% Gold Bonds, 1977, 7% Gold Bonds, 1980, and National Defense Gold Bonds, 1980

Key Concept 2: Types of Capital Assets

• Classification: Capital assets are classified into short-term capital assets or long-term capital assets based on the period of holding.
• Short-term vs. Long-term Capital Asset: The distinction between a long-term and short-term capital asset is based on the period for which an asset is held by the owner before transfer.
• Holding Period: The holding period is calculated from the date of purchase or acquisition till the date of transfer.
• Exceptions:
  • Exception 1: Certain assets are treated as short-term capital assets if held for not more than 12 months (e.g., listed shares, listed securities, units of UTI, units of Equity Oriented Fund)
  • Exception 2: Certain assets are always treated as short-term capital assets, irrespective of the period of holding (e.g., depreciable assets, Market Linked Debentures, Specified Mutual Funds)
• Table 8.1: Summarizes the required holding period for various capital assets to be termed as long-term capital assets.
• Table 8.2: Enumerates special provisions for calculating the period of holding of capital assets.

CAPITAL GAINS (Part 2)

• Definition of Transfer: The expression ‘transfer’ of property connotes the passing of a property or rights in a property from one person to another.
• Types of Transfer:
  • Sale of asset: A transaction voluntarily entered into between two persons, by which the buyer acquires property of the seller for an agreed consideration.
  • Exchange of asset: When two persons mutually transfer the ownership of one thing for the ownership of another thing, neither thing nor both things being money only.
  • Relinquishment of asset: When the owner withdraws himself from the property and abandons his/her rights thereto.
  • Extinguishment of rights: Refers to the case where rights of a person in a capital asset have extinguished and not the extinguishment of the capital asset as such.
  • Maturity or redemption of zero-coupon bonds: Redemption or maturity of zero-coupon bond, issued by any infrastructure capital company or infrastructure capital fund will be treated as transfer.
• Period of Holding:
  • Securities held in Demat form: Period of holding is determined as per First-in-First-out (FIFO) method.
  • Bonus shares: Period of holding is reckoned from date of allotment of bonus shares.
  • Sweat Equity shares or ESOPs: Period of holding is reckoned from date of allotment of Sweat equity shares or shares issued on exercise of ESOPs.
  • Conversion of preference shares into equity shares: The period for which the preference shares were held by the assessee is also included in the period of holding of equity shares.
  • Conversion of bonds/debentures/debenture-stock/deposit certificates into shares or debentures: The period of holding of the original asset shall also be taken into consideration while determining the period of holding of converted assets.
• Transactions not regarded as transfer:
  • Distribution of capital asset on the total and partial partition of a Hindu undivided family.
  • Any transfer of a capital asset under a gift or will or irrevocable trust.
  • Transfer among non-residents.
  • Redemption of Sovereign Gold Bonds.
  • Conversion of securities (e.g., conversion of bonds, debentures, debenture-stock or deposit certificate of a company into shares or debentures of that company).
  • Consolidation of mutual fund.
  • Lending of securities.
  • Rollover of fixed maturity plans.
  • Distribution in case of liquidation.
  • Conversion of Gold into Electronic Gold Receipt or vice versa.

CAPITAL GAINS (Part 3)

• Vault Manager: A person who stores and safe-keeps gold deposited by the depositor for the purpose of trading in EGR and providing services incidental thereto.
• Computation of Capital Gains: Any profit or gain arising from the transfer of a capital asset is taxable on an accrual basis during the previous year in which such transfer takes place.

Key Concepts

• Short-term Capital Gains: Computed by subtracting the cost of acquisition, cost of improvement, and expenditure incurred in connection with the transfer from the full value of consideration.
• Long-term Capital Gains: Computed by subtracting the cost of acquisition, cost of improvement, and expenditure incurred in connection with the transfer from the full value of consideration, with indexation benefit available only for land or building acquired before July 23, 2024.
• Full Value of Consideration: The amount of consideration received or receivable by the owner of an asset in lieu of its transfer, which may be received in cash or in kind.

Special Cases for Full Value of Consideration

• Conversion of Capital Asset into Stock-in-Trade: Fair market value of the capital asset on the date of conversion.
• Transfer of Securities Allotted under ESOPs: Market value of such securities on the date of transfer.
• Redemption of Rupee Denominated Bonds: An amount equal to the value of appreciation of the rupee against a foreign currency from the date of issue to the date of redemption shall be excluded.
• Unquoted Shares Transferred for Less than Fair Market Value: Fair market value of such shares on the date of transfer.

Expenditure Incurred in Connection with Transfer

• Allowable Deductions: Brokerage, commission, stamp duty, registration fee, traveling expenses, and legal expenses incurred in connection with the transfer.
• Non-Allowable Deductions: Securities Transaction Tax (STT), Commodities Transaction Tax (CTT), and fees payable to investment advisers (unless directly related to the specific asset).

Cost of Acquisition

• General Principle: The value for which the asset was acquired by the assessee, including all expenses incurred in acquiring the capital asset.
• Special Cases: Cost of acquisition may differ from the actual cost in certain circumstances, such as shares acquired by way of purchase, shares acquired on or before March 31, 2001, and equity shares or units of an equity-oriented mutual fund.

Indexed Cost of Acquisition

• Indexation Benefit: Available for long-term capital assets transferred before July 23, 2024, and for land or building acquired before July 23, 2024.
• Concept of Indexation: Aims to nullify the effect of inflation while calculating capital gains, by adjusting the cost of acquisition based on the inflation index.

CAPITAL GAINS (Part 4)

• Indexation: Provides a facility to the taxpayer, allowing for the adjustment of the cost of acquisition of a capital asset based on the Cost Inflation Index (CII) notified by the Central Board of Direct Taxes (CBDT) every year.
• Indexed Cost of Acquisition: Calculated in a two-step process:
  • First, calculate the cost of acquisition of the capital asset.
  • Then, multiply the cost of acquisition by the CII of the year in which the capital asset is transferred, and divide by the CII of the year in which the asset is first held by the assessee or the CII of 2001-02, whichever is later.
• Cost of Improvement: Refers to all expenditure of a capital nature incurred on or after 01-04-2001 in making any addition or alterations to the capital asset, either by the assessee or the previous owner.
• Indexed Cost of Improvement: Calculated in the same manner as the indexed cost of acquisition.

Conversion of Capital Gains

• Foreign Currency Conversion: If income accrues or arises to a resident or non-resident person in foreign currency, it shall be converted into Indian Rupees at the prevalent conversion rate on the relevant dates.
• Computation of Capital Gains in Foreign Currency: For non-resident assessees, capital gains arising from the transfer of shares or debentures of an Indian company shall be computed in foreign currency and then converted into Indian currency.

Tax Rates on Capital Gains

• Short Term Capital Gains:
  • Taxed at 20% if covered under section 111A of the IT Act (transfer of equity shares, units of equity-oriented mutual funds, etc.).
  • Taxed at applicable slab rates for other short-term capital gains.
• Long Term Capital Gains:
  • Taxed at 12.5% for all categories of assets.
  • For listed equity shares, units of equity-oriented funds, etc., long-term capital gains exceeding Rs. 1,25,000 will be taxed at 12.5%.
  • For immovable property held as a long-term capital asset, tax rates vary depending on the date of acquisition and transfer.

Exemption for Capital Gains

• Exemption Conditions: The Income Tax Act allows exemption from capital gains tax if the amount of capital gains or consideration is further invested in specified new assets, subject to certain conditions.
• Exemption Provisions: Summarized in Table 8.5, which outlines the type of assessee, original capital asset, new capital asset, time limit for investment, and amount of exemption.

CAPITAL GAINS (Part 5)

• Section 54D: This section provides exemption from capital gains if the gains are invested in a new industrial undertaking. The assessee can be any individual or company, and the original asset can be land or building. The new asset must be used for industrial purposes and must be acquired within 3 years from the date of compulsory acquisition.
• Section 54EC: This section provides exemption from capital gains if the gains are invested in bonds of NHAI or REC. The assessee can be any individual or company, and the original asset can be long-term capital asset. The investment must be made within 6 months from the date of transfer, and the exemption is limited to Rs. 50,00,000.
• Section 54EE: This section provides exemption from capital gains if the gains are invested in units of notified funds. The assessee can be any individual or company, and the original asset can be long-term capital asset. The investment must be made within 6 months from the date of transfer, and the exemption is limited to Rs. 50,00,000.
• Section 54F: This section provides exemption from capital gains if the gains are invested in a residential house. The assessee can be an individual or HUF, and the original asset can be long-term capital asset other than residential house. The investment must be made within 1 year before or 2 years from the date of transfer, and the exemption is computed as per the formula: Eligible Investment * Long-term capital gain/Net sale consideration.
• Section 54G: This section provides exemption from capital gains if the gains are invested in assets of an industrial undertaking in a non-urban area. The assessee can be any individual or company, and the original asset can be short-term or long-term capital asset. The investment must be made within 1 year before and 3 years from the date of transfer, and the exemption is computed as per the formula: Aggregate of amount invested in new asset or transfer of establishment and deposited in capital gain account scheme.
• Section 54GA: This section provides exemption from capital gains if the gains are invested in assets of an industrial undertaking in a SEZ. The assessee can be any individual or company, and the original asset can be short-term or long-term capital asset. The investment must be made within 1 year before and 3 years from the date of transfer, and the exemption is computed as per the formula: Aggregate of amount invested in new asset or transfer of establishment and deposited in capital gain account scheme.
• Section 54GB: This section provides exemption from capital gains if the gains are invested in equity shares of an eligible startup company. The assessee can be an individual or HUF, and the original asset can be long-term capital asset. The investment must be made within 1 year from the date of transfer, and the exemption is computed as per the formula: Investment in new asset * Capital gain/Net sale consideration.
• Section 115F: This section provides exemption from capital gains if the gains are invested in shares or debentures of an Indian company. The assessee can be a non-resident Indian, and the original asset can be long-term capital asset. The investment must be made within 6 months from the date of transfer, and the exemption is computed as per the formula: Investment in new asset * Capital gain/Net sale consideration.

CAPITAL GAINS (Part 6)

• Capital Gains Calculation: The calculation of capital gains involves determining the sale consideration, cost of acquisition, and indexed cost of acquisition.
• Key Components:
  • Sale Consideration: The amount received from the sale of the asset.
  • Cost of Acquisition: The original cost of the asset.
  • Indexed Cost of Acquisition: The cost of acquisition adjusted for inflation using the Cost Inflation Index.
• Tax Liability:
  • Old Provisions: Tax payable at 20% on the long-term capital gains calculated using the indexed cost of acquisition.
  • New Provisions: Tax payable at 12.5% on the long-term capital gains calculated using the cost of acquisition.
• Exemptions:
  • Section 54: Exemption available for investment in a new asset, subject to certain conditions.
• Example Calculation:
  • Sale Consideration: Rs. 3,00,00,000
  • Cost of Acquisition: Rs. 1,00,00,000
  • Indexed Cost of Acquisition: Rs. 1,97,28,260 (using Cost Inflation Index)
  • Long-term Capital Gains: Rs. 1,02,71,740 (old provisions) and Rs. 2,00,00,000 (new provisions)
  • Exemption under Section 54: Rs. 1,50,00,000
  • Capital Gains after Exemption: Nil (old provisions) and Rs. 50,00,000 (new provisions)
  • Tax Payable: Nil (old provisions) and Rs. 6,25,000 (new provisions)