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CHAPTER: 1
INTRODUCTION
1.1 MEANING:
A capital gain is a profit that results from a disposition of a capital asset, such
as stock, bond or real estate, where the amount realized on the disposition exceeds the
purchase price. The gain is the difference between a higher selling price and a lower
purchase price. Conversely, a capital loss arises if the proceeds from the sale of a capital
asset are less than the purchase price.
Capital gains may refer to "investment income" that arises in relation to real assets, such
as property; financial assets, such as shares/stocks or bonds; and intangible assets. An
increase in the value of a capital asset that gives it a higher worth than the purchase price.
The gain is not realized until the asset is sold. A capital gain may be short term or long
term and must be claimed on income taxes. A capital loss is incurred when there is a
decrease in the capital asset value compared to an asset's purchase price.
Profit that results when the price of a security held by a mutual fund rises above its
purchase price and the security is sold. If the security continues to be held, the gain is
unrealized. A capital loss would occur when the opposite takes place. Long-term capital
gains are usually taxed at a lower rate than regular income. This is done to encourage
entrepreneurship and investment in the economy. Tax conscious mutual fund investors
should determine a mutual fund's unrealized accumulated capital gains, which are
expressed as a percentage of its net assets, before investing in a fund with a significant
unrealized capital gain component. This circumstance is referred to as a fund's capital
gains exposure. When distributed by a fund, capital gains are a taxable obligation for the
fund's investors.
CAPITAL GAINS
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1.2 DEFINITION:
Capital gains are the profits that an investor realizes when he or she sells the capital asset
for a price that is higher than the purchase price. Capital gains taxes are only triggered
when an asset is realized, not while it is held by an investor. An investor can own shares
that appreciate every year, but the investor does not incur a capital gains tax on the shares
until they are sold.
The amount by which an asset's selling price exceeds its initial purchase price. A realized
capital gain is an investment that has been sold at a profit. An unrealized capital gain is an
investment that hasn't been sold yet but would result in a profit if sold. Capital gain is
often used to mean realized capital gain. For most investments sold at a profit, including
mutual funds, bonds, options, collectibles, homes, and businesses, the IRS is owed money
called capital gains tax.
A capital gain is the difference between what you paid for an investment and what
received when you sold that investment. Investments include mutual funds, bonds,
stocks, options, precious metals, real estate, and collectibles. If we sold an investment for
more than what you paid for it, then we have a gain. If we sold an investment for less
than what we paid for it, then we have a loss. Our capital gains and losses are reported
on IRS Form 1040 Schedule D, with the result carried to Form 1040.
Capital gains are calculated as follows:
Selling price
CAPITAL GAINS
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The long-term holding period is more than one year. Long-term capital gains are taxed at
long-term capital gains rates, which is usually less than ordinary tax rates. The long-term
capital is zero percent, 15%, or 20%, depending on your marginal tax bracket.
In addition, high income taxpayers may have a 3.8% unearned income Medicare
contribution tax applied to their capital gains and other net investment income. Thus the
highest tax rate that could apply to capital gains income is 39.6+3.8= 43.4% on short
term gains taxed at ordinary rates or 23.8% (20% + 3.8%) on long-term gains.
Tax planning for investors focuses on deferring the sale of profitable investments until
you qualify for the discounted long-term capital gains tax rate.
CAPITAL GAINS
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CHAPTER: 2
SHORT TERM CAPITAL GAINS
2.1 MEANING:
A short term capital gain is a capital gain which holds 36 months or less than that. Land is
the example of short term capital gains. A capital gain realized by the sale or exchange of
a capital asset that has been held for exactly one year or less. Short-term gains are taxed
at the taxpayer's top marginal tax rate. A short-term gain can only be reduced by a shortterm loss. A taxable capital loss is limited to $3,000 for single taxpayers and $1,500 for
married taxpayers filing separately.
Short-term gains and losses are netted against each other. For example, assume a taxpayer
purchased and sold two different securities during the tax year: Security A and Security
B. If he/she earned a gain on Security A of $5,000 and a loss on Security B of $3,000,
then the net short-term gain is $2,000.
CAPITAL GAINS
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Short term capital asset mans a capital asset held by an assessee for not more than 36
months immediately prior to its date of transfer. Gains from transfer of short term capital
assets give rise to short term capital gains.
Gains arising at the time of sale of Short Term Capital Asset shall be computed in the
following manner:Full Value of Consideration
xxx
(Less)
xxx
(Less)
Cost of Acquisition
xxx
(Less)
Cost of Improvement
xxx
xxx
CAPITAL GAINS
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xxx
xxx
Tax as per the Income Tax Slab Rates shall be payable on the Short Term Capital Gain
computed above
CHAPTER 3
LONG TERM CAPITAL GAINS
3.1 MEANING:
An asset other than a short-term capital asset is regarded as a long term capital asset.
Thus, shares/ securities/ units held for more than 12 months or any other asset held for
CAPITAL GAINS
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Long term Capital gains, if the assets like shares and securities, are held by the assessee
for a period exceeding 12 months or 36 months in the case of other assets. Units of UTI
and specified mutual funds will now be eligible for treatment as long term capital assets
if they are held for a period exceeding 12 months.
Long term Capital gains are computed by deducting from the full value of consideration
for the transfer of a capital asset the following:
Expenditure connected exclusively with the transfer;
The indexed cost of acquisition of the asset, and
The indexed cost of improvement, if any, of that asset. In the case of shares,
expenditure in connection with the transfer includes the stock brokers
commission but the salary of an employee is not deducted in computing capital
gains though the employee may have helped in the transfer of the shares.
Cost of acquisition, in such cases includes the price-paid, cost of share transfer stamps,
cost of postage for sending the shares for transfer to the transfer-agents of the company,
legal expenses etc.
Indexed cost of acquisition means an amount which bears to the cost of acquisition the
same proportion as Cost Inflation Index for the year in which the asset is transferred
bears to the Cost Inflation Index for the first year in which the asset was held by the
assessee.
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Under Section 54 Any Long Term Capital Gain, arising to an Individual or HUF, from
the Sale of a Residential Property (whether Self-Occupied or on Rent) shall be exempt to
the extent such capital gains is invested in the
1.
Purchase of another Residential Property within 1 year before or 2 years after the
due date of transfer of the Property sold and/or
2.
Provided that the new Residential House Property purchased or constructed is not
transferred within a period of 3 years from the date of acquisition. If the new property is
sold within a period of 3 years from the date of its acquisition, then, for the purpose of
computing the capital gains on this transfer, the cost of acquisition of this house property
shall be reduced by the amount of capital gain exempt under section 54 earlier. The
capital gain arising from this transfer will always be a short term capital gain.
Capital Gains shall be exempt to the extent it is invested in the purchase and/or
construction of another house i.e.
1.
If the entire amount is equal to or less than the cost of the new house, then the
entire capital gain shall be exempt
2.
If the amount of Capital Gain is greater than the cost of the new house, then the
cost of the new house shall be allowed as an exemption
CAPITAL GAINS
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xxx
(Less)
xxx
(Less)
xxx
(Less)
xxx
Gross LTCG
xxx
CAPITAL GAINS
xxx
xxx
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CHAPTER 4
COST OF ACQUISITION
4.1 MEANING:
Cost of acquisition of an asset is the value for which the asset was acquired by the
assessee. Expenses of capital nature for completing or acquiring the title to the property
are part of the cost of acquisition.
Following are treated as cost of acquisition:
Interest on moneys borrowed to purchase asset is part of actual cost of asset.
Litigation expenses incurred for compelling the company to register the shares in
the name of the assessee would be of capital nature, forming a part of the cost of
acquisition of the shares.
Following are not treated as cost of acquisition:
Ground rent cannot be said to be expenditure incurred by the assessee for the
acquisition of the capital asset.
Estate duty paid in respect of inherited property can neither be treated as a part of
the cost of acquisition of property nor as cost of improvement.
Cost of Acquisition is the price which the assessee has paid, or the amount which the
assessee has incurred, for acquiring the Property /Asset. The Expenses incurred at the
time of completing the title are a part of the cost of acquisition.
CAPITAL GAINS
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In cases where the Capital Asset became the property of the assessee in any of the
manners mentioned below, the cost of acquisition shall be deemed to be the cost for
which the previous owner of the property acquired it:1.
2.
3.
4.
Where the cost for which the previous owner of the capital asset acquired the property
cannot be ascertained, the cost of acquisition to the previous owner shall be the fair
market value of the asset on the date on which the asset became the property of the
previous owner. The money borrowed for acquiring the capital asset will also form a part
of the cost of Asset.
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CAPITAL GAINS
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CHAPTER 5
COST OF IMPROVEMENT
5.1 MEANING:
All Capital Expenditures incurred in making any additions or alterations to the Capital
Asset by the Assessee after it became his property or alterations to the capital asset by the
assessee after it became his property shall be deductible as the Cost of Improvement. If
the Asset was transferred to the assessee under the cases specified immediately above, the
capital expenditure incurred by the previous owner shall also be treated as cost of
improvement.
However, the Cost of Improvement does not include any capital asset which is deductible
in computing the chargeable under head- Income from House Property, Profits or
Gains of Business or Profession, or Income from Other Sources. Only the Capital
Expenses are considered as a cost of Improvement and routine expenses on Repairs and
Maintenance do not form part of cost of improvement.
CAPITAL GAINS
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For the purpose of Computation of Long Term Capital Gain, Indexation using the Cost
Inflation Index shall be done to the Cost of Acquisition & Cost of Improvement and the
resultant figure shall be the Indexed Cost of Acquisition & Indexed Cost of Improvement
for the purpose of computation of LTCG
Indexed Cost
Actual Cost *
5.2 DEFINITION:
Cost of improvement is defined as follows:
1. Cost of improvement in relation to goodwill of a business or a right to manufacture,
produce or process any article or thing is taken to be nil.
2. Cost of improvement in relation to any other capital asset means all expenses of capital
nature incurred in making any addition/alteration to the capital asset by the assessee.
5.3 EXCLUDES:
Cost of improvement does not, however, include the following:
1. Any expenditure which is deductible in computing the income chargeable under any
other heads; and
2.expenditue incurred prior to April 1,1981( where the capital asset became the property
of the assessee or the previous owner before Apirl1,1981 irrespective of whether the
assessee opts for treating the fair market value as on 1-4-1981 as his cost of acquisition.
CAPITAL GAINS
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CHAPTER 6
CAPITAL GAINS ACCOUNT SCHEME
6.1 INTRODUCTION:
Although as per Section 54, the assessee is given 2 years to purchase the house property
or 3 years for the construction of the house property, but the capital gains on the transfer
of the original house property is taxable in the year in which it was sold. The Income Tax
Return of that year is required to be submitted in the relevant assessment year on or
before the specified due date for filing the Income Tax Return. Hence, the assessee will
have to take a decision for the purchase/construction of the house property till the date of
furnishing of the income tax return otherwise; the capital gain would become taxable. To
CAPITAL GAINS
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The Amount of Capital Gain which is not utilized by the Assessee for the purchase or
construction of the new house before the date of furnishing of the Income Tax Return
should be deposited by him under the Capital Gains Account Scheme, before the due date
of furnishing the return. The proof of such a deposit shall be attached with the Income
Tax Return. In this case, the amount already utilized by the assessee for the
purchase/construction of the new house shall be eligible for exemption
In case, the assessee deposits the amount in the Capital Gains Account Scheme but does
not utilize the amount deposited for the purchase or construction of a residential house
within the specified period, the amount not so utilized shall be charged as Capital Gains
of the year in which the period of 3 years from the date of sale of the Original Asset and it
will be long term capital gain of that financial year.
As per the Income Tax Act, the taxpayer is allowed some time (2/3 years) to invest the
capital gains in specified instruments. However, in many cases the due date for filing
income tax returns for the year in which the capital gains arises is before the expiry of the
specified period.
To avoid such issues, the income tax act prescribes that the taxpayer should deposit the
amount of capital gains in the capital gains account scheme on or before the due date of
filing of income tax returns which can be easily withdrawn at the time of investment in
the specified instrument.
CAPITAL GAINS
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4. The profit that arises on the sale of any property is referred to as Capital Gains and is
chargeable to tax.
5. Government also provides for various schemes for saving tax on such capital gains
under Section 54, 54B, 54D, 54F etc.
7. However, if the due date of filing income tax returns falls before the expiry of the
specified period, the amount of capital gains is required to be invested temporarily in
the Capital Gains Account Scheme which can be easily withdrawn at the time of
investment in the specified instrument.
6.3 OPENING OF CAPITAL GAINS ACCOUNT
CAPITAL GAINS
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CAPITAL GAINS
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1. The Interest at such rates as may be specified by the Reserve Bank of India (RBI) from
time to time shall be allowed for each calendar month on the lowest balance between the
close of the 10th day and the end of the month and shall be credit to the account at the
end of each half year.
2. In case of cumulative deposit in Account B, the amount of interest accrued will be
deemed to have been reinvested and in case of non-cumulative deposit in Account B, the
amount of interest due will become due and payable at quarterly intervals.
3. In case of conversion of the account or premature withdrawal from the account or
closure of the account, the interest payable shall be the interest rate applicable for the
period for which the amount was deposited less 1% as penalty for premature withdrawal.
CAPITAL GAINS
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A depositor, if he so desires, may apply for transfer of his capital gains account,
from one deposit office to another deposit office of the same bank.
2.
3.
A depositor may also convert the whole of his Type A account into Type B
Account and vice-versa.
4.
If a request has been received for transfer of amount from Type B to Type A and
vice versa before the expiry of the specified period for which the deposit was made,
such request shall be treated as premature withdrawal of amount.
CHAPTER 7
CAPITAL GAINS TAX RATES
PAGE 22
stamps,
coins,
precious metals,
precious gems,
rare rugs,
antiques,
fine art.
However, certain precious metal coins and bullion are considered regular investment
assets and are not considered collectibles for tax purposes under Internal Revenue Code
Section 408(m)(3).
3. Tax Rate on Recaptured Depreciation of Real Property
Real property that has been depreciated is subject to a special depreciation recapture tax.
A special 25% tax rate applies to the amount of gain that is related to depreciation
deductions that were claimed or could have been claimed on a property. The remainder of
CAPITAL GAINS
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CAPITAL GAINS
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Capital gain income from assets held longer than one year are generally taxed at special
long-term capital gains tax rates. The rate that applies depends on which ordinary income
tax bracket you fall under.
0% applies to long-term gains and dividend income if a person is in the 10% and
15% tax brackets,
15% applies to long-term gains and dividend income if a person is in the 25%,
28%, 33%, or 35% tax brackets, and
20% applies to long-term gains and dividend income if a person is in the 39.6%
tax bracket.
2. Tax Rates on Dividend Income
Dividends are classified either as ordinary dividends or as qualified dividends. Ordinary
dividends are taxed at ordinary tax rates for whatever tax bracket you are in. Qualified
dividends are taxed at the long-term capital gains tax rates of zero percent, 15% or 20%
rates. To be eligible as a qualified dividend, the dividends must be from a domestic
corporation or a qualifying foreign corporation and you must hold the stock "for more
than 60 days during the 121-day period that begins 60 days before the ex-dividend date"
CAPITAL GAINS
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Then short-term gains are taxed And long-term gains are taxed
at:
at:
10%
10%
0%
15%
15%
0%
25%
25%
15%
28%
28%
15%
33%
33%
15%
35%
35%
15%
39.6%
39.6%
20%
Collectibles
28%
Depreciation recapture
25%
CAPITAL GAINS
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Qualified
small
stock
CHAPTER 8
PROBLEMS AND SOLUTIONS
ILLUSTRATION 1:
Mr. Kamlesh purchased a house property for Rs. 100000 on 27 August, 1978.He made
the following additions/alterations to the house property.
Cost of construction of 1st floor in Financial Year 1983-84
Rs.300000
Rs.400000
Fair market value of the property on 01-04-1981 was Rs. 500000. He sold the property on
20th October, 2013 for Rs.9500000. He paid the brokerage of Rs.55000 for the sale
transaction. The Cost Inflation Index for Financial year 1981-82 is 100,for Financial year
1983-84 is 116, for Financial year 1990-91 is 182, for Financial year 2013-14 is 939.
Compute the Capital gain of Mr. Kamlesh chargeable to tax for the Assessment Year
2014-15.
SOLUTION:
NAME OF ASSESSEE: Mr. Kamlesh
PREVIOUS YEAR: 2013-14
CAPITAL GAINS
STATUS: INDIVIDUAL
ASSESSMENT YEAR: 2014-15
PAGE 27
AMT.
9500000
4695000
2428448
2063736
55000
9242185
257815
ILLUSTRATION 2:
Mr. Rakesh purchased a house property on 14th April, 1979 for Rs. 50000.Later on, he
gifted the house property to his friend Mr. A on 15 th June, 1986. Following renovations
were carried out by Mr. Rakesh and Mr. A to the house property:
Particulars
Amt.
10000
50000
190000
The fair market value of the property as on 1-4-1981 is Rs.70000.The house was sold by
Mr. A to Mr. Sanjay on 2nd January, 2014 for a consideration of Rs. 2500000.Compute the
capital gains of Mr. A for the assessment year 2014-15. Cost inflation indices are as
under:
CAPITAL GAINS
PAGE 28
1981-82
100
1983-84
116
1986-87
140
1993-94
244
2013-14
939
SOLUTION:
NAME: MR.RAKESH
PREVIOUS YEAR: 2013-14
STATUS: INDIVIDUAL
ASSESSMENT YEAR: 2014-15
Amt.
2500000
657300
404741.38
731188.52
706770.10
ILLUSTRATION 3
Mr. Thomas inherited a house in Jaipur under will of his father in May,2003. The house
was purchased by his father in January, 1981 for Rs. 250000. He invested an amount of
Rs. 700000 in construction of one more floor in this house in June, 2005. The house was
CAPITAL GAINS
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SOLUTION:
NAME: MR.THOMAS
STATUS:INDIVIDUAL R & OR
ASSESSMENT YEAR:2014-15
Amt.
Sale consideration
4725000
37500
2535300
3895335.21
829664.79
Note: The house was inherited by Mr. Thomas under the will of his father and therefore
the cost incurred by the previous owner shall be taken as the cost. Value as on 1-4-1981
accordingly shall be adopted as th cost of acquisition of the house property.
ILLUSTRATION 4:
Mrs. Sarita purchased a house property for Rs.200000 in the year 1969-70. Following
expenses were incurred for the house property.
CAPITAL GAINS
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STATUS: INDIVIDUAL
ASSESSMENT YEAR: 2012-13
Amt.
9500000
5000
3925000
2198000
965164
2406836
Note:
CAPITAL GAINS
7088164
PAGE 31
ILLUSTRATION 5:
Miss Anjali purchased a capital asset on 1-1-1977 at a price of Rs.475000 & spent
Rs.15000 on registration (FMV as on 1-4-1981 is RS.485000). She made the following
improvement as given below:
Date
Amt.
1-12-1980
10000
1-6-1994
150000
1-2-2004
200000
STATUS: INDIVIDUAL
ASSESSMENT YEAR: 2012-13
Amt.
8500000
PAGE 32
42500
3846500
454633
339093
4640226
3817274
BIBLIOGRAPHY
Websites:
www.google.com
Books:
CAPITAL GAINS
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