Capital Gains

Capital Gains

1. Preconditions for charge u/s. 45
   
   Income under the head “Capital Gains” can be charged only if the following three conditions are satisfied
   1. There must be a “capital asset” [for definition of “capital asset” refer S. 2(14)]; [section 2(14) has been amended by Finance Bill, 2014 as follows w.e.f. 1-4-2015 :—
      
      capital asset” means––
      1. property of any kind held by an assessee, whether or not connected with his business or profession;
      2. any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992, but does not include––
         1. Any stock-in-trade [other than the securities referred to in sub-clause (b)
         2. Personal effects of the assessee;
         3. Agricultural land in a rural area (Definition of agricultural land as amended by Finance Act, 2013, w.e.f. 1st April, 2014);
         4. 6½% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Bonds, 1980 issued by the Central Government;
         5. Special Bearer Bonds, 1991 issued by the Central Government;
         6. Gold Deposit Bonds issued under Gold Deposit Scheme 1999.
            
            Explanation 1 – "property" includes any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever.
            
            Explanation 2 – (a) the expression “Foreign Institutional Investor” shall have the meaning assigned to it in clause (a) of the Explanation to section 115AD;
            (b) the expression “securities” shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956
   2. There must be a “transfer” of such capital asset [for meaning of “transfer”, refer Ss. 2(47), 47 & 46(1)]; and
   3. There must arise either profits or gains or loss out of such transfer. 
      
      
      
      
2. Year of Chargeability
   
   Capital Gains are generally charged to tax in the year in which “transfer” takes place (For exception to this general rule, refer column (4) of Table 3) 
   
   
   
   
3. Mode of Computation

3.1 Income under the head Capital gains is to be computed as follows:

a)	In respect of capital assets other than depreciable assets	as per S. 48
b)	In respect of depreciable assets other than mentioned in (c)	as per S. 50
c)	in respect of depreciable assets of an undertaking engaged in generation or generation and distribution of power	as per S. 50A
d)	In respect of slump sale	as per S. 50B

3.2 Capital gains u/s. 48 are computed as follows:

a)	Full value of consideration received or accruing as a result of the transfer of capital asset [also refer column 5 of Table 3]	a
b)	Less Expenditure incurred wholly & exclusively in connection with transfer [Expenditure by way of Securities Transaction Tax is not allowable]	b
c)	Less Cost of acquisition and cost of improvement (refer tree diagram below)	c
d)	*	d
	Income/Loss chargeable u/s. 45 r.w.s. 48	[a-b-(c-d)]

* Section 51 amended by Finance (No. 2) Bill, 2014 w.e.f. 1-4-2015 whereby where any sum of money, received as an advance or otherwise in the course of negotiations for transfer of a capital asset, has been included in the total income of the assessee for any previous year in accordance with the provisions of clause (ix) of sub-section (2) of section 56, then, such sum shall not be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition. 

Exceptions to S. 48:

1. In case of a non-resident, Capital Gains on transfer of shares in or debentures of an Indian company are to be computed firstly by converting cost of acquisition, full value of consideration and expenses incurred in connection with transfer into originally utilised foreign currency and reconverting the capital gains so computed into Indian rupees.
   
   Rule 115A prescribes the rates of conversion and reconversion for the purpose of calculation of capital gains in the above case. The rates of conversion and reconversion are as follows:

Cost of acquisition	The average of telegraphic transfer (TT) buying rate and TT selling rate (as on the date of acquisition) of the foreign currency utilised in the purchase of asset
Expenditure incurred wholly and exclusively in connection with transfer consideration	The average of TT buying rate and TT selling rate as on the date of transfer
Full value of consideration	The average of TT buying rate and TT selling rate as on the date of transfer
For reconverting the capital gains	TT buying rate as on the date of transfer

2. The benefit of indexation of cost will not be available for computation of Capital Gains on transfer of Bonds/Deb.
3. While calculating long-term capital gains (other than those covered under (a) and (b) above) cost of acquisition and cost of improvement are required to be indexed at prescribed indices (refer Table 2)

3.3 Capital gains u/s. 50 are computed as follows:

a)	Opening W.D.V. of the Block of Assets	‘a’
b)	Less Full value of consideration received or accruing as a result of transfer or transfers of asset falling within the concerned block of assets during the relevant previous year	‘b’
c)	Less Expenditure incurred wholly and exclusively in connection with such transfer or transfers. This deduction would not be available in a case where the entire block ceases to exist as such, for the reason that all the assets in that block are transferred during the year. ‘c’	’c’
d)	Add Actual cost of any asset falling within the concerned block of assets acquired during the relevant previous year.	‘d’
	Resultant figure	a+c+d-b

If the resultant figure is negative, the same is chargeable as deemed short-term capital gains u/s. 50.

If the resultant figure is positive and the entire block ceases to exist as such (for the reason that all the assets in that block are transferred during the year) the resultant figure indicates deemed short-term capital loss (refer CBDT Circular No. 469 dated 23-9-1986 — reported in 162 ITR (Stat) 21, 30).

If the resultant figure is positive and the block continues to exist (For the reason that at least one asset in the block continues to be owned by the assessee) then there will be no gains or losses and the assessee will be entitled to claim depreciation on the resultant figure.

3.4 Capital Gains u/s. 50B

Profit arising on slump sale of one or more undertakings would be chargeable to tax as Long-Term Capital Gain in the year of transfer if such undertakings have been owned and held by the assessee for at least 36 months before the date of transfer or as Short-Term Capital Gain if held for a shorter period.

The networth (as defined) of the undertakings would be regarded as the cost of acquisition and improvement. No indexation would be allowed in respect of such cost.

3.5 Indexation

In case the capital asset is a long-term capital asset, the cost of acquisition is to be increased by cost inflation index. The prescribed cost inflation index is given in column (2) of Table 2 below. Column (4) gives the multiplying factor in case of capital asset sold in financial year 2013-14.

For example, if cost of acquisition of an asset acquired in F.Y. 1994-95 is ₹ 50,000, its indexed cost of acquisition in F.Y. 2013-14 would be ₹ 1,81,274 (i.e., 50,000 x 3.625483)

4. Exempt Capital Gains
   
   Refer sections 10(33), 10(37), 10(38), sections 54 to 54GB and section 115F
   
   By Finance (No. 2) Bill, 2014 w.e.f. 1-4-2015 – Long term gain from sale of listed units of Business trust will be exempt u/s 10(38). However the provisions of this clause shall not apply in respect of any income arising from transfer of units of a business trust which were acquired in consideration of a transfer referred to in clause (xvii) of section 47. 
   
   
5. Rate of Tax on Capital Gains
   
   Refer “Rates of Tax” for relevant assessment year

TABLE

Sr. No.	Capital Asset	Minimum Holding Period for "Long-Term"
1	Listed security in a recognized stock exchange in India (other than a unit)	12 months
2	Unlisted security	36 months
3	Units of Unit Trust of India	12 months
4	Unit of an equity oriented fund	12 months
5	Units of a Mutual Fund specified u/s. 10(23D)	36 months
6	Any other Capital Asset	36 months

Proviso has been inserted in section 2(42A) w.e.f. 1st day of April, 2015 by Finance (No. 2) Bill, 2014 which states that capital gain arising on unlisted shares of a company and units of a Mutual Fund specified under clause (23D) of section 10 transferred during the period beginning on the 1st day of April, 2014 and ending on the 10th day of July, 2014 will be considered as short-term if the said shares/units were held for not more than twelve months.

Capital Gains on Specific Transfers

(‘C.A.’ refers to Capital Asset) TABLE

Section	Particulars of transfer	Capital Gains assessable in the hands of	Year in which chargeable	Amount deemed to be the full value of consideration for the purpose of S. 48
45(1A)	Moneys/other assets received from insurance co. towards damage/destruction of C.A. due to certain specified natural calamities	The person receiving the money/assets	Year in which moneys/other asset is received from insurance co.	Value of moneys/FMV of assets received from insurance co.
45(2)	Conversion of C.A. into stock-in-trade	The owner of such asset	Year in which sale or transfer of stock-in-trade takes place	FMV of the asset on date of conversion
45(2A)	Transfer of Securities made by depository. (Refer note 1)	The beneficial owner of the securities	Year in which such securities are transferred	Amount of consideration received
45(3)	Transfer of C.A. by a person to firm/AOP/BOI as his capital contribution or otherwise	The partner or the member so transferring	Year in which asset is so transferred	The amount recorded in the books of the firm / AOP / BOI
45(4)	Transfer of C.A. by way of distribution thereof on dissolution of firm/AOP/BOI or otherwise	The firm/ AOP/BOI	Year of distribution	FMV on the date of distribution
45(5)	Transfer of C.A. by compulsory acquisition under any law OR transfer where consideration determined/ approved by Central Govt./RBI (a) Initial compensation (b) Enhanced compensation	The transfer or    The transferor	Year in which initial compensation is first received Year in which enhanced compensation is first received Proviso inserted w.e.f. 1-4-2015 - any amount of compensation received in pursuance of an interim order of a court, Tribunal or other authority shall be deemed to be income chargeable in the year in which the final order of such court, Tribunal or other authority is made.	Amount of initial compensation as reduced by order of any Court/Tribunal/ other authority Enhanced amount (cost of acquisition and improvement are deemed to be NIL) as reduced by order of any Court/Tribunal or other authority
45(6)	Transfer of units referred to in S. 80CCB(2) by way of repurchase	The transferor	Year in which repurchase takes place	The repurchase price
46(2)	Distribution of assets of a Company to its share holders on its liquidation	The share holder	Year in which the share holder receives any money or other assets	Moneys received from the Co. + Market value of other assets on the date of distribution less amount assessed as deemed dividend u/s. 2(22)(c)
46A	Purchase by a company of its own shares/specified securities (buy back of shares)	The share holder or the holder of the specified securities	Year in which such shares or other specified securities purchased by the company	Amount received from the company
Proviso to s. 47(iii)	Shares, debentures, warrants allotted to employees under Employees Stock Option Plan or Scheme framed in accordance with guidelines issued by the Central Government	The employee	Year in which shares, debentures, warrants are transferred under a gift or an irrevocable trust to the employee	FMV on the date of its transfer
50B	Slump sale of Capital assets or business undertaking	The transferor	Year in which slump sale takes place	The value received/receivable as the sale
50C	Transfer of land or building	The transferor	Year in which asset is transferred	Higher of : (i) sale consideration (ii) value adopted/ assessed/ assessable by State Government for stamp duty valuation

Note :

1. As per Circular No. 768, dated 24th June, 1998, FIFO method shall be followed in case dematerialised securities. Where the investor has more than one security account, FIFO method shall be followed account wise.
2. As per Section 55A the AO may refer to the Valuation Officer for ascertaining the fair market value of the asset under following circumstances:
   1. Where in view of the AO the value of the asset claimed by the assessee in accordance with the estimate made by a registered valuer, is less than is FMV or (w.e.f. 1-7-2012, section 55A, clause (a) is amended as follows:
      
      Where in view of the AO, the value of the asset claimed by the assessee in accordance with the estimate made by a registered valuer is at variance with its fair market value)
   2. Where in view of the AO the value of the asset claimed by the assessee is less than the FMV by so much percentage or by so much amount as may be prescribed or
   3. Having regard to the nature of the asset and other relevant circumstances, it is necessary to do so.
      
      The amendment in clause (a) above is with effect from 1st July, 2012.
3. As per newly introduced section 50D (with effect from 1st April 2013), where the consideration received or accruing as a result of the transfer of a capital asset by an assessee is not ascertainable or cannot be determined, then, for the purpose of computing income chargeable to tax as capital gains, the fair market value of the said asset on the date of transfer shall be deemed to be the full value of the consideration received or accruing as a result of such transfer.
4. The definition of agricultural land has been amended and divided into three categories based on population and shortest aerial distance. Notification by Central Government now not required. 
   
   

  COST OF ACQUISITION TABLE 4

* Provision deeming cost of acquisition of self generated goodwill as Nil not applicable to professional firms and cases of notional transfers; e.g., when a person becomes a partner [CBDT Cir. No. 495 of 22-9-1987 168 ITR (St) 87, 105, 106.]

** In case of any capital asset (other than goodwill, trademark, brand name, tenancy rights, stage carriage permit, loom hours or right to manufacture etc.), acquired by the assessee (or the previous owner) before 1-4-1981, the fair market value of the asset as on 1-4-1981 may, at the option of the asses­see, be treated as cost of acquisition.

Note: Where the cost to the previous owner cannot be ascertained the cost of acquisition to the previous owner means the fair market value on the date on which the capital asset became the property of the previous owner. [Sec. 55(3)] The provisions of section 49(2AAA) are inserted by Finance Act, 2010.