CAPITAL GAINS

Almost everything you own and use for personal or investment purposes is a capital asset. Examples include a home, personal use items like household furnishings, and stocks or bonds held as investments. When a capital asset is sold, the difference between the basis in the asset and the amount it is sold for is a capital gain or a capital loss. Generally an asset's basis is its cost, however, if you received the asset as a gift or inheritance, refer to Topic 703 for information about your basis. You have a capital gain if you sell the asset for more than your basis. You have a capital loss if you sell the asset for less than your basis. Losses from the sale of personal-use property, such as your home or car, are not deductible. Capital gains and losses are classified as long-term or short-term. If you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term. To determine how long you held the asset, count from the date after the day you acquired the asset up to and including the day you disposed of the asset. Capital gains and deductible capital losses are reported on Form 1040, Schedule D (PDF), Capital Gains and Losses, and on Form 8949 (PDF), Sales and other Dispositions of Capital Assets. If you have a net capital gain, that gain may be taxed at a lower tax rate than your ordinary income tax rates. The term "net capital gain" means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss for the year. The term net long-term capital gain means long-term capital gains reduced by long-term capital losses including any unused long-term capital loss carried over from previous years. Generally, net capital gain is taxed at rates no higher than 15%. However, for the years 2008 through 2012, some or all net capital gain may be taxed at 0% if you are in the 10% or 15% ordinary income tax brackets. There are three exceptions where capital gains may be taxed at rates greater than 15%: 1. The taxable part of a gain from selling Section 1202 qualified small business stock is taxed at a maximum 28% rate. 2. Net capital gains from selling collectibles (such as coins or art) are taxed at a maximum 28% rate.

3. The portion of any unrecaptured Section 1250 gain from selling Section 1250 real property is taxed at a maximum 25% rate. Note: Net short-term capital gains are subject to taxation at your ordinary income tax rate. If you have a taxable capital gain, you may be required to make estimated tax payments. Refer to Publication 505, Tax Withholding and Estimated Tax, for additional information. If your capital losses exceed your capital gains, the amount of the excess loss that can be claimed is the lesser of $3,000, ($1,500 if you are married filing separately) or your total net loss as shown on line 16 of the Form 1040, Schedule D (PDF). If your net capital loss is more than this limit, you can carry the loss forward to later years. You may use the Capital Loss Carryover Worksheet found in either Publication 550, Investment Income and Expenses, or the Form 1040, Schedule D Instructions (PDF), Capital Gains and Losses, to figure the amount eligible to be carried forward. When does Capital Gain arise? Capital Gains arise only where there is some capital asset. The capital asset is transferred by the assessee and such transfer takes place during the previous year. The consideration received thereon is more then the cost of purchase of that asset. What is Capitla Gain Asset? Capital asset means property of any kind held by the assessee, whether or not connected with his business or profession, but does not include the following: Any stock in trade, consumable stores or raw material Personal effects, i.e., moving property but excluding jewelry Agricultural land situated at places other than urban areas Certain Gold Bonds(which have already matured) Special Bearer Bonds, 1991 Gold Deposit Bonds issued under Gold Deposit Scheme, 1999

What are the items excluded from Capital Asset? Jewelry: Jewelry in any form will not be treated as a Capital Asset.Jewelry means here by specificaly given as under: Jewelry in common parlance Ornaments made of gold, silver, platinum or any other precious metal Precious and semi-precious stones whether kept loose, or embedded in jewellary, furniture, wearing apparel, utensils, or any other article Motor car and other conveyances: Motor car or any other conveyance held for personal use of the assessee can be treated as personal effect for capital gain purposes and also cannot be treated as a Capital Asset. Agricultural land situated at places other than urban areas: The Income Tax Act defines urban area as: o Area within the jurisdiction of a municipality or cantonment which has a population of at least 10000 according to latest published census figures o Areas within a radius of not more than 8 kilometers from the aforesaid areas What is Transfer of Asset? Transfer, for the purpose of Income Tax, has been given a very wide definition. However, for salaried employees, it covers the following: o Sale of an asset o Exchange of an asset o Extinguishing of any right in an asset o Compulsory acquisition of an asset under any law o Maturity/redemption of zero coupon bond (from 01-04-2006)

When Transactions does not regarded as transfer? However, following transactions are not regarded as transfer as per Income Tax Act: Distribution of capital assets on total or partial partition of HUFs Transfer of capital assets under: A gift A will An irrevocable trust

Conversion of bonds or debentures into shares or debentures Transfer to the Government or a University or the National Museum National Art Gallery, National Archives or to any notified public museum or institution, of the following: Any work of art Archaeological, scientific or art collection Books Manuscripts Drawings Paintings Photographs or prints

What is Short-term Capital Assets?

The period for which an asset has been held by the assessee prior to its transfer is relevant in determining the quantum of capital gains liable for tax and its applicable tax rate. For this purpose, the act classifies the assets into two categories: Short-term capital asse Long-term capital asset

Short- term Capital Asset

A capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer, is known as short-term capital asset. However, the following assets shall be treated as short-term, if the period of holding is up to 12 months: Shares held in a company - equity or preference Any other security listed in a recognized stock exchange in India Units of Unit Trust Of India Zero Coupon Bonds (from 01-04-2006) What is Long-Term capital Assets? The period for which an asset has been held by the assessee prior to its transfer is relevant in determining the quantum of capital gains liable for tax and its applicable tax rate. For this purpose, the act classifies the assets into two categories: Short-term capital asset Long-term capital asset

Long- term Capital Asset

Any capital asset which is not a short-term capital asset will be treated as a long-term capital asset. However, in the following conditions, the period for which the asset was held by the pervious owner should also be included: Shares held in a company - equity or preference Distribution of capital assets on total or partial partition of HUF Under a will or gift By succession or devolution Distribution of assets on the liquidation of a company How is the consideration received on Deemed Basis?

If the consideration received for an asset being land and building is less than the value determined by stamp duty authorities, then the value determined by stamp duty authorities will be deemed to be full value of consideration. However, the assessing officer may refer the valuation to the valuation officer if the assessee claims that the value determined by stamp duty authority is less than the fair market value. After receipt of the Valuation Officers report, the deemed value of consideration will be taken as: The value determined by the valuation officer or The value determined by the stamp duty officer, whichever is less. How to calculate net consideration received? Net consideration received is calculated by deducting the following amounts from full value of consideration: Cost of stamp paper purchased Stamp duty and registration fees Brokerage and commission paid to negotiators/agents Any legal expenses incurred by the transferor to effect transfer of title If such expenses are borne by the assessee

What is meant by cost of Acquistion?

Amount expanded by the assessee for acquiring assets is known as cost of acquisition. However, this rule has certain exceptions Assets acquired in certain specific situations: Given are the cases where cost to previous owner is taken as cost of acquisition. Distribution of assets on partial/total partition of HUF Under will or gift By succession, inheritance or devolution

 Distribution of assets on liquidation of companies When cost of acquisition is be taken on fair market value? Given are such cases: Where the capital asset became the property of the assessee before 01-04-1981 Where the assets has been acquired by assessee as: A gift A will An irrevocable trust and the capital asset became the property of the previous owner before April 01, 1981. What is the cost of improvement for Assets? The act defines cost of improvements as all expenditure in making additions or alterations to the capital assets. However, following items are not considered as cost of improvements since they do not go to enhance the value of property: Property taxes Routine repairs and maintenance expenses Expenditure on removing encumbrances, if any, to property Estate duty, if any, paid on inherited property Expenditure, if any, incurred on improving title to the property How to compute short-term capital gains? Computation of short-term capital gains may take the following steps: Determine full value of consideration Determine net consideration Deduct from net consideration the cost of acquisition and cost of improvements, if any, made to the assets Resultant figure will be taxable as short-term capital gains.

What is tax on Short-term capital Gains? Short-Term capital gain on shares will be taxed @ 10% subject to following conditions: The taxpayer is an Individual/HUF/Firm/Company/Any other tax payer Short-term capital gain must arise from sale of shares The transaction of sale of such shares, etc., is entered into on or after 10.09.2004 Such transaction is chargeable to securities transaction tax

How to compute long-term capital gains?

Dividend and Capital gain taxation from 1 April 2007 Individuals Dividend Equity schemes Debt schemes Dividend distribution tax Equity schemes Nil Nil Nil Tax free Tax free Tax free Tax free Tax free Tax free Corporate NRI *

Debt schemes

12.5% + 10% 12.5% + 10% 12.5% + 10% surch. cess 14.163% + 3% surch. cess 22.66% + 3% surch. cess 14.163% + 3%

Money

market

and 25% +10% + 25% +10% + 25% 10% +3% 3% 28.325% 3% 28.325% 28.325%

Liquid schemes

Long term Capital gains Equity schemes Nil Nil Nil

Debt schemes

10%

without 10%

without 10%

without or

indexation

or indexation

or indexation

20% indexation whichever

with 20% indexation is whichever

with 20% indexation is whichever

with

is

lower + 10% + lower + 10% + lower + 10% + 3% cess 3% cess 3% cess

Without indexation With indexation Short term Capital gains Equity schemes

11.33% 22.66%

11.33% 22.66%

11.33% 22.66%

10% +10%+3% 11.33%

flat 10% +10%+3% 11.33%

flat 10% +10%+3% 11.33%

flat

Debt schemes

30% +10%+3%

30% +10%+3%

30% +10%+3%

33.99% Short term Equity Debt 11.33% 33.99%

33.99% Long term NIL 22.66%

33.99%

What is the tax on Long-Term Capital Gain? Long Term Capital Gain (LTCG) normally charged at a flat rate of 20% if the transfers assets is computed with indexation. But if it is computed without using indexation it will be charges at 10% accordingly. However, whichever option is more suitable to the tax payer can chose and tax liability will be applicable accordingly.

What is Indexation Benefit? Long Term Capital Gain is chargeable to tax at a flat rate of 20% amd the gain can be adjusted for inflation cost. This inflation adjustment is called Indexation Benefits How to compute indexation cost of Long-Term Capital gains? For assets acquired by the assessee either by himself or in any manner specified before 01.04.1981:

Indexed cost of acquisition =

Fair market value as on 01.04.81 * Cost inflation index for the year in which asset is transferred ___________________________________________________ Cost inflation index for 1981-82

For assets acquired by the assessee either by himself or in any manner specified after 01.04.1981 and before 01.04.1981 by previous owner:

Indexed cost of acquisition =

Fair market value as on 01.04.81 * Cost inflation index for the year in which asset is transferred

___________________________________________________ Cost inflation index for the year in which asset is first acquired by the assessee For assets acquired by the assessee either by himself or in any manner specified after 01.04.1981 and after 01.04.1981 by previous owner:

Indexed cost of acquisition =

Actual cost to previous owner * Cost inflation index for the year in which asset is transferred ___________________________________________________ Cost inflation index for the year in which asset is first acquired by the assessee For assets acquired by the assessee either by himself or in any manner specified after 01.04.1981 and after 01.04.1981 by previous owner: Indexed cost of acquisition = Actual cost of acquisition to him * Cost inflation index for the year in which asset is transferred ___________________________________________________ Cost inflation index for the year in which asset is first acquired by the assessee Indexed Cost of Improvement: Actual cost to acquisition * Cost inflation index for the year in which asset is transferred

___________________________________________________ Cost inflation index for the year in which improvement took place

What is Bonus Share? Bonus Shares or security is allotted to the assessee without any payment and it is allotted on the basis of holding of any share or security, then the cost of acquisition of such share or security allotted shall be taken as NIL. What is Right Share? Where by virtue of holding a share or security, the assessee becomes entitled to subscribe any more additional share or security is known as right share. The cost of acquisition of Right Share is the amount paid to the company or institution. When are the Exemption applicable?

When gains from one house property is reinvested in another house property (Section 54):
Exemption is available on gains arising from the transfer of any residential house property owned by the assessee, if the following conditions are satisfied: The asset transferred must be long term capital asset The assessee has: Either purchased another residential house within one year before, or within two years after the date of transfer Or constructed a residential house within three years after the date of transfer The assessee does not transfer the new property within the period of three years after its purchase or construction Quantum of Exemption: Amount invested in the property The net capital gains arising from transfer of old property,whichever is less.

When gains from asset other than a residential house property is reinvested in one house property (Section 54F)
The conditions to be satisfied are as follows: The assessee should be an individual or HUF The asset transferred must be a long-term capital asset other than a residential house The assessee must: Either purchased another residential house within one year before, or within two years after the date of transfer Or constructed a residential house within three years after the date of transfer The assessee does not transfer the new property within the period of three years after its purchase or construction The assessee should not acquire a second residential house by purchase within two years, or by construction within three years, after the date of transfer

When gains from asset other than a residential house property is reinvested in one house property (Section 54F):
Quantum of Exemption: Where the cost of the house exceeds the net consideration vis a vis capital asset transferred, entire capital gain will be exempt Where the cost of the house is less than the net consideration of the asset transferred, the exemption will be reduced proportionately

When gain from urban agricultural lands is reinvested in agricultural lands (Section 54B):
The conditions to be satisfied are as follows: The lands sold should have been used for agricultural purposes The assessee must purchase another land, and such land must be meant to be used for agricultural purposes only The purchase should be effected within a period of two years after the date of transfer

 The land so purchased should not be transferred by the assessee within the period of three years following the purchase Quantum of Exemption: Amount invested in the property The net capital gains arising from transfer of old property whichever is less

Reinvestments in respect of transfers of long term capital assets effected on or after 1-4-2000: [Section 54EC]
Conditions of exemption: A long term capital asset is transferred by an assessee on or after 1-4-2000; Within 6 months from the date of transfer, the assessee should invest the whole or any part of capital gains in a specified asset The specified asset should not be transferred or converted into money within three years of acquisition; The cost of specified asset shall not qualify for deduction under section 80C.

Reinvestments in respect of transfers of long term capital assets effected on or after 1-4-2000: [Section 54EC]
Then: If the cost of specified asset is not less than the capital gain, then whole of the capital gain is exempt; If amount invested in specified asset is less than the capital gain then, the amount of exemption is equal to sum invested in the specified asset. However: If the specified asset is transferred within 3 years of its purchase, the amount of exemption will be deemed to be the income from long term capital gains.

Reinvestments of gains on transfer of securities in new issues: [Section 54ED]

Conditions of exemption: A long term capital asset being securities is transferred by an assessee during previous year 2002-03 (or any subsequent year); Within 6 months from the date of transfer, the assessee should invest the whole or any part of capital gains in a Eligible issue of capital The specified asset should not be transferred or converted into money within three years of acquisition; The cost of specified asset shall not qualify for deduction under section 80C.

Reinvestments of gains on transfer of securities in new issues: [Section 54ED]

Then: If the cost of specified asset is not less than the capital gain, then whole of the capital gain is exempt; If amount invested in specified asset is less than the capital gain then, the amount of exemption is equal to sum invested in the specified asset.

However: If the specified asset is transferred within 3 years of its purchase, the amount of exemption will be deemed to be the income from long term capital gains.

Exemption on compulsory acquisition of urban agricultural land [Section 10(37)]:

The conditions to be satisfied are as follows: The assessee should be an individual or HUF Land must be situated in urban area During the period of two years immediately preceding the date of transfer, such land was being used for agricultural purposes by the individual or a parent of his or by HUF Such transfer is by way of compulsory acquisition under any law Such income has arisen from compensation or consideration for such transfer received by an individual on or after 01-04-2004 Quantum of Exemption: Full capital gain is exempt from tax What is the Capital Gain on compulsory Acquisiton? In case of compulsory acquisition of assets, the period for making investment in any specified asset (residential house, etc.) shall be reckoned from the date of receipt of consideration and not from the date of transfer. What is meant by capital Losses? Where net consideration received is less than the cost of acquisition then capital loss arises.

It may be treated as follows: Short-term capital loss can be set off against capital gains either short term or long term. Loss arising from long-term capital asset will be allowed to be set off only against longterm capital gain Further, a long-term capital loss may be carried forward for 8 years to be set off only against long-term capital gains