Last modified: 22 August 2016

Taxability of Capital Gains

Capital Asset

Capital Asset is defined to include:

  1. Any kind of property held by an assesse, whether or not connected with business or profession of the assesse.
  2. Any securities held by a FII which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992. However, the following items are excluded from the definition of "capital asset" :
    1. any stock-in-trade (other than securities referred to in (b) above), consumable stores or raw materials held for the purposes of his business or profession ;
    2. personal effects, that is, movable property (including wearing apparel and furniture) held for personal use by the taxpayer or any member of his family dependent on him, but excludes-
      1. jewellery;
      2. archaeological collections;
      3. drawings;
      4. paintings;
      5. sculptures; or
      6. any work of art.
        "Jewellery" includes -
      1. ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stones, and whether or not worked or sewn into any wearing apparel; precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel;
    3. Agricultural Land in India, not being a land situated:
      1. ithin jurisdiction of municipality, notified area committee, town area committee, cantonment board and which has a population of not less than 10,000;
      2. Within range of following distance measured aerially from the local limits of any municipality or cantonment board:
        1. not being more than 2 KMs, if population of such area is more than 10,000 but not exceeding 1 lakh;
        2. not being more than 6 KMs , if population of such area is more than 1 lakh but not exceeding 10 lakhs; or
        3. not being more than 8 KMs , if population of such area is more than 10 lakhs.

          Population is to be considered according to the figures of last preceding census of which relevant figures have been published before the first day of the year.

    4. 61/2 per cent Gold Bonds,1977 or 7 per cent Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government;
    5. Special Bearer Bonds, 1991;
    6. Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999.
Following points should be kept in mind:
  • The property being capital asset may or may not be connected with the business or profession of the taxpayer. E.g. Bus used to carry passenger by a person engaged in the business of passenger transport will be his capital asset.
  • 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 will always be treated as capital asset, hence, such securities cannot be treated as stock-in-trade.

Though there is no definition of "property" in the Income-tax Act, it has been judicially held that a property is a bundle of rights which the owner can lawfully exercise to the exclusion of all others and is entitled to use and enjoy as he pleases provided he does not infringe any law of the State. It can be either corporeal or incorporeal. Once something is determined as property it becomes a capital asset unless it figures in the exceptions mentioned above.

Short-term and long-term Capital Asset

  • Short-Term Capital Asset

    Any capital asset held by the taxpayer for a period of not more than 36 months immediately preceding the date of its transfer will be treated as short-term capital asset.

    However, in respect of certain assets like shares (equity or preference) which are listed in a recognised stock exchange in India (listing of shares is not mandatory if transfer of such shares took place on or before July 10, 2014), units of equity oriented mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months.

    Note:

    With effect from Assessment Year 2017-18, period of holding to be considered as 24 months instead of 36 months in case of unlisted shares of a company,

  • long-term capital asset.

    Any capital asset held by the taxpayer for a period of more than 36 months immediately preceding the date of its transfer will be treated as

    However, in respect of certain assets like shares (equity or preference) which are listed in a recognised stock exchange in India (listing of shares is not mandatory if transfer of such shares took place on or before July 10, 2014),, units of equity oriented mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months.

    Note:

    With effect from Assessment Year 2017-18, period of holding to be considered as 24 months instead of 36 months in case of unlisted shares of a company, LongShort-Term Capital Asset

Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG)

Transfer of a short term capital asset gives rise to 'Short Term Capital Gains' (STCG) and transfer of a long term capital asset gives rise to 'Long Term Capital Gains' (LTCG). Identifying gains as STCG and LTCG is a very important step in computing the income under the head Capital Gains as method of computation of capital gains and tax on the capital gains is different for STCG and LTCG.

However, there are few exceptions to this rule like gain on depreciable asset is always taxed as short-term capital gain.

Reason for bifurcation of capital gains into long-term and short-term

The taxability of capital gains depends on the nature of gain, i.e., whether short-term or long-term. Hence, to determine the taxability, capital gains are to be classified into shortterm and long-term. In other words, the tax rates for long-term capital gain and short-term capital gain are different.

Calculation of Short-term Capital Gains (STCG)
Value of consideration
Less: expenditure incurred wholly and exclusively in connection with such transfer
Less: cost of acquisition
Less: cost of improvement
Less: Exemption(s) available, if any.
The balancing amount is short-term capital gain
Calculation of Long-term Capital Gains (LTCG)
Full value of consideration
Less: indexed(*) cost of acquisition
Less: expenditure incurred wholly and exclusively in connection with such transfer
Less: indexed(*) cost of improvement
Less: Exemption(s) available, if any.
The balancing amount is long-term capital gain

(*) Indexation is a process by which the cost of acquisition is adjusted against inflationary rise in the value of asset. For this purpose, Central Government has notified cost inflation index. The benefit of indexation is available only to long-term capital assets. For computation of indexed cost of acquisition following factors are to be considered:

  • Year of acquisition/improvement
  • Year of transfer
  • Cost inflation index of the year of acquisition/improvement
  • Cost inflation index of the year of transfer

Indexed cost of acquisition is computed with the help of following formula :

  • (Cost of acquisition x Cost inflation index of the year of transfer of capital asset) / Cost inflation index of the year of acquisition

Indexed cost of improvement is computed with the help of following formula :

  • (Cost of improvement x Cost inflation index of the year of transfer of capital asset) / Cost inflation index of the year of improvement

The STCG and LTCG computed as above is taken as income under the head Capital Gains for the purposes of determining the total income.

Full Value of Consideration

This is the amount for which a capital asset is transferred. It may be in money or money's worth or a combination of both.

Where the transfer is by way of exchange of one asset for another, fair market value of the asset received is the full value of consideration. Where the consideration for the transfer is partly in cash and partly in kind fair market value of the kind portion and cash consideration together constitute full value of consideration.

Cost of acquisition

Cost of acquisition of an asset is the sum total of amount spent for acquiring the asset.

Where the asset was purchased, the cost of acquisition is the price paid. Where the asset was acquired by way of exchange for another asset, the cost of acquisition is the fair market value of that other asset as on the date of exchange.

Any expenditure incurred in connection with such; purchase, exchange or other transaction e.g. brokerage paid, registration charges and legal expenses also forms part of cost of acquisition.

Sometimes advance is received against agreement to transfer a particular asset. Later on, if the advance is retained by the tax payer or forfeited for other party's failure to complete the transaction, such advance is to be deducted from the cost of acquisition.

Cost of Acquisition with reference to Certain Modes of Acquisition

Where the capital asset became the property of the assessee:

  1. on any distribution of assets on the total or partial partition of a Hindu undivided family;
  2. under a gift or will
    • by succession, inheritance or devolution;
    • on any distribution of assets on the dissolution of a 'firm, body of individuals, or other association of persons, where such dissolution had taken place at any time before 01.04.1987;
    • on any distribution of assets on the liquidation of a company;
    • under a transfer to a revocable or an irrevocable trust;
    • by transfer in a scheme of amalgamation;
  3. by an individual member of a Hindu Undivided Family living his separate property to the assessee HUF anytime after 31.12.1969.

The cost of acquisition of the asset shall be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the asset incurred or borne by the previous owner or the assessee, as the case may be, till the date of acquisition of the asset by the assessee.

If the previous owner had also acquired the capital asset by any of the modes above, then the cost to that previous owner who had acquired it by mode of acquisition other than the above, should be taken as cost of acquisition.

Where the cost for which the previous owner acquired the property 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 owner.

Where the capital asset, being a share or debenture in a company, the cost of acquisition of the asset to the assessee shall be deemed to be that part of the cost of debenture, debenture-stock or deposit certificates in relation to which such asset is acquired by the assessee. Accordingly the cost of acquisition of rights share is the amount paid by the assessee to get them and the cost of acquisition of bonus shares is nil.

Cost of Improvement

The cost of improvement means all expenditure of capital nature incurred in making additions or alternations to the capital asset. However, any expenditure which is deductible in computing the income under the heads Income from House Property, Profits and Gains from Business or Profession or Income from Other Sources (Interest on Securities) would not be taken as cost of improvement. Cost of improvement for goodwill of a business, right to manufacture, produce or process any article or thing is NIL.

Cost of Transfer

This includes brokerage paid for arranging the deal, legal expenses incurred for preparing conveyance and other documents, cost of inserting advertisements in newspapers for sale of the asset and commission paid to auctioneer, etc. However, it is necessary that the expenditure should have been incurred wholly and exclusively in connection with the transfer. Besides an expenditure which is eligible for deduction in computing income under any other head of income, cannot be claimed as deduction in computing capital gains.

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