INCOME-TAX - LECTURE VII

CAPITAL GAINS
WHAT IS CAPITAL GAIN
Any profit or gain arising from the sale or
transfer of a capital asset is chargeable to tax
under the head Capital Gains.
Capital gains can be Short Term Capital Gains
or Long Term Capital Gains depending on
whether the asset sold/transferred is Short
Term Capital Asset or Long Term Capital Asset.
MEANING OF CAPITAL ASSET

Capital asset include property of any kind
whether fixed or not, movable or immovable,
tangible or intangible.
WHAT IS NOT A CAPITAL ASSET
Stock in trade, consumable stores or raw
materials held for the purpose of business or
profession.
Personal effects like apparels and furniture. From
AY 2008-09 Jewellery, archeologial collections,
work of art etc. are capital asset.
Agricultural land but not in municipality/
cantonment/notifie areas.
Certain Bonds(6.5% Gold Bonds,1977, 7% Gold
Bonds 1980, National Defence Gold Bonds
1980,Gold Deposit Bonds 1999, Special Bearer
Bonds 1991. )
SHORT-TERM/LONG TERM
CAPITAL ASSETS
Any Capital asset held for more than 36 months or for
more than 12 months in the following cases, is called a
Long Term Capital Asset.
Equity or Preference Shares, Securities, Debentures,
Units of UTI or Mutual Funds, Zero Coupon Bonds.
(It may be noted, if the asset is acquired by gift, will,
succession, inheritance or partition, the period for
which the asset was held by the previous owner should
be included. In case of shares, etc. the period if any,
after the date on which the company goes into
liquidation shall be excluded. In De-mat account, FIFO
method can be applied.)
TAX RATES FOR CAPITAL GAINS
Short term capital gain 15%
Long term capital gain 20%

WHAT IS TRANSFER
Transfer, in relation to a capital asset, include
sale, exchange or relinquishment of the asset,
extinguishment of right or compulsory acquisition
under any law.
Conversion of personal asset into stock in trade of
his business is transfer.
Any transaction which has he effect of
transferring any immovable property (eg. A flat in
a co-op. society.)
Maturity/redemption of bonds is also transfer.
WHAT IS NOT A TRANSFER
FOR CAPITAL GAINS PURPOSE
Distribution of assets to shareholders on liquidation.
Distribution of assets on partition by HUF
Transfer by gift, will or to an irrevocable trust
Transfer by a company to fully-owned Indian subsidiary
or vice-versa
Transfer by a scheme of amalgamation or demerger or
re-organization or conversion of proprietary concern or
firm into a company, if the prop./partners are
shareholders and are paid in shares only.
Transfer of work of art etc. to University, National
Museum/Art Gallery/Archives as notified by C.G.


HOW CAPITAL GAIN IS TAXED
Find full value of consideration*.
Reduce any expenditure incurred wholly and exclusively in
connection with such transfer
Reduce cost of acquisition with indexation where applicable.
Reduce cost of improvement with indexation where applicable.
Deduct exemption u/s.54, 54B,54D,54EC, 54ED, 54F, 54G, wherever
applicable.
The balance is capital gain.

* Full value of consideration means the actual price or market value
or value adopted by Stamp Valuation Authority or money from
Insurance Co. or market value of the asset exchanged.
INDEXATION
Indexation means the increase in the cost or improvement, on
account of inflation. Cost multiplied by the index on the date
of sale divided by the index on the date of acquisition is the
indexed cost.
Indexation is not applicable to shares, debentures, bonds and
Units, GDRs( global depository receipts), etc.

Cost of acquisition/improvement x Index on date of
Index on date of acquisition/ transfer
improvement
RATES OF INDEXATION
YEAR INDEX RATE YEAR

INDEX RATE

YEAR

INDEX RATE

1981-82 100 1990-91 182 1999-00 389
1982-83 109 1991-92 199 2000-01 406
1983-84 116 1992-93 223 2001-02 426
1984-85 125 1993-94 244 2002-03 447
1985-86 133 1994-95 259 2003-04 463
1986-87 140 1995-96 281 2004-05 480
1987-88 150 1996-97 305 2005-06 497
1988-89 161 1997-98 331 2006-07 519
1989-90 172 1998-99 351 2007-08 551
2008-09 582 2009-10 632 2010-11 711
2011-12 785 2012-13 852 2013-14 ?
DEPRECIABLE ASSETS
In the case of Depreciable assets, the net sale
proceeds on transfer of any asset, is reduced from
the relevant block of assets.
If the net sale proceeds of a part of the block,
exceeds the written down value + the cost of new
asset in the same block acquired, the excess is taxed
as short term capital gain.
If total block is transferred, the excess of net sales
proceeds over the wdv + cost of new asset, is taxed
as short term capital gain.
VALUATION OFFICER
The Assessing Officer can refer the matter to a
Valuation Officer for fair valuation -
If the Assessing Officer is of the opinion that having
regard to the nature of an asset and relevant
circumstances, it is necessary to do so; or
If the fair market value exceeds the sale value
declared by more than 15% or Rs.25,000/-; or
If the AO has reason to believe that the Fair Market
Value exceeds the valuation of the Registered Valuer
EXEMPTED CAPITAL GAINS-Sec.54
(Residential House)
U/s.54: If an Indl. or HUF transfers a Long Term
Residential House Property (taxable under House
Propery Income as SOP or LOP), and purchases
within a year or constructs within 3 years, another
residential house, the capital gain to the extent of
the cost of the new house, is exempt from tax.
However, if such new house is transferred within a
period of 3 years, such exempted Capital Gain shall
be taxed along with the capital gain of the new
house.
EXEMPTED CAPITAL GAINS-Sec.54
(Residential House)
If one could not purchase within one year or
construct within 3 years, a new house, he can
claim exemption by deposit the capital gain in
a specific Deposit Account of Public Sector
Bank for exclusive utilisation for purchase/
construction of new house within stipulated
time. If he fails to do so, it will be taxed in the
year in which 3 years from transfer ends.
The exemption is not limited to one HP.
EXEMPTED CAPITAL GAINS-Sec.54B
(Agricultural Land)
U/s.54B: If an Indl. or HUF transfers a Long Term land used for
agricultural purpose for atleast two years, and purchases
within 2 years, another land for agricultural use, the capital
gain to the extent of the cost of the new land, is exempt from
tax to the extent of cost of new land.
However, if such new land is transferred within a period of 3
years, such exempted Capital Gain shall be reduced from the
cost of the said land.
The rule regarding depositing in the specified Deposit Account
applies here also.
EXEMPTED CAPITAL GAINS-Sec.54D
(Compulsory Acquisition of land and Building)
Capital gains arising out of compulsory acquisition of land and
building used for Industrial Undertaking, is exempt if the
capital gain is used for acquiring new land and building for
industrial undertaking, within a period of 3 years to the extent
of cost of new land.
However, if such new land/bldg. is transferred within a period
of 3 years, such exempted Capital Gain shall be reduced from
the cost of the new land/bldg.
The rule regarding depositing in the specified Deposit Account
applies here also.

EXEMPTED CAPITAL GAINS-Sec.54EC
(Investment in certain Bonds)
Long Term Capital Gains arising to any person are
exempted u/s.54EC, if it is invested in the specified
assets within 6 months of transfer. Specified asset
means Bonds redeemable after 3 years issued by
National Highway Authority of India Ltd. and Rural
Electrification Corporation Ltd. Maximum exemption
Rs.50 lakhs.
However, if such deposit is transferred within a
period of 3 years, such exempted Capital Gain shall
be taxed in the year of such transfer.

EXEMPTED CAPITAL GAINS-Sec.54F
(Other Assets)
If an Indl. or HUF transfers a Long Term Asset other than
Residential House Property (taxable under House Propery
Income as SOP or LOP), and purchases within one year before
or two years after or constructs within 3 years, a residential
house, the capital gain to the extent of the cost of the new
house, is exempt from tax. However, the assessee should not
own more than one residential house and he should not
purchase another residential house within two years or
construct one within 3 years of the transfer.
However, if such new house is transferred within a period of 3
years, such exempted Capital Gain shall be taxed along with
the capital gain of the new house.

EXEMPTED CAPITAL GAINS-Sec.54F
(Urban Indl. Undertakings)
Capital Gains arising out of transferring of
assets of an Industrial Undertaking from an
urban area to an area which is not urban, is
exempt to the extent of cost of assets of the
new undertaking. It can also enjoy this
benefit if the capital gain is so utilised within 3
years or deposited before furnishing of
Return, in specified Deposit Account of Public
Sector Bank, as per terms mentioned earlier
EXEMPTED CAPITAL GAINS-Sec.54GA
(Urban Indl. Undertakings)
If the assets of an urban Industrial Taking is
transferred to a Special Economic Zone, the
capital gain is exempt from tax. The provisions
mentioned for sec.54G applies here also.
PROBLEM1
Mr. X purchased a flat at Borivali for Rs.3,50,000/- on 15
th

December 1987. He paid brokerage of Rs.25000/-. The
registration charges, stamp fees and legal fees worked
out to 15,000/- In October 1996 he had incurred major
renovation costing Rs. 3,00,000/- On 25
th
March 2010,
he sold the same for Rs.27,50,000/- He had to pay
brokerage of Rs.21,500/- The Stamp Charges and
registrations charges and legal charges worked to
1,56,000/- to be met by the purchaser. Calculate the
taxable capital gains assuming the index rates of 150, 305
and 632 respectively on 31.03.1988 31.03.1997 and
31.03.2010.