Any profits or gains arising from the transfer of a capital asset effected in the previous year, shall be chargeable to income-tax under the head ‘Capital Gains’ and shall be deemed to be the income of the previous year in which the transfer took place unless such capital gain is exempt under section 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA or 54GB.
The following are the essential conditions for taxing capital gains:
Condition-1 : there must be a capital asset;
Condition-2 : the capital asset must have been transferred;
Condition-3 : there must be profits or gains on such transfer, which will be known as capital gain;
Condition-4 : such capital gain should not be exempt under section 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA or 54GB.
If the above conditions are satisfied, the capital gain shall arise and taxed in the previous year in which the asset is transferred, subject to certain exceptions.
Capital gain arises only when a capital asset is transferred. If the asset transferred is not a capital asset, it will not be covered under the head ‘capital gain’.
“Capital Asset” means—
(a) property of any kind held by an assessee, whether or not connected with his business or profession;
(b) 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,
(c) any unit linked insurance policy to which exemption under section 10(10D) does not apply on account of the applicability of the fourth and fifth provisos thereof. Fourth and fifth provisos of section 10(10D) relate to payment or aggregate payments of premium exceeding 2,50,000 made in any previous year in case of Unit Linked Insurance Policy/Policies issued on or after 1-2-2021.
but does not include—
(i) any stock-in-trade [other than the securities referred to in sub-clause (b) abovel, consumable stores or raw materials held for the purposes of his business or profession,
(ii) personal ejjects, that is to say, movable property (including wearing apparel and furniture), held for personal use by the assessee or any member of his family dependent on him. However, the following assets shall not be treated as personal effects though these assets are moveable and may be held for personal use:
- archaeological collections;
- sculptures; or
- any work of art.
Types of Capital Assets in case of Capital Gain.
Capital assets are of two types:
(1) Short-term capital asset
(2) Long-term capital asset
(1) Short-term Capital Asset [Section 2(42A)] :
A capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer is known as a short-term capital asset.
(i) The following assets shall be treated as short-term capital assets if they are held for not more than 12 months (instead of 36 months mentioned above) immediately preceding the date of its transfer:
(a) a security including shares (other than unit) listed in a recognised stock exchange in India
(b) a unit of an equity oriented fund
(c) a zero coupon bond
(ii) The following assets shall be treated as short-term capital assets if they are held for not more than 24 months (instead of 36 months/ 12 months mentioned above) immediately preceding the date of its transfer:
(a) Share of a company (not being a share listed in a recognised stock exchange in India)
(b) An immovable property being land and building or both.
Hence, if unlisted share or immovable property is transferred after 24 months from the date of its acquisition, the gain arising from the transfer of share or immovable property shall be treated as long-term capital gain.
(2) Long-term Capital Asset [Section 2(29AA)] :
It means a capital asset which is not a short- term capital asset. In other words, if the asset is held by the assessee for more than 36 months/24 months! 12 months, as the case may be, such an asset will be treated as a long-term capital asset.
Type of capital gains:
Since there are two types of capital assets, there will be two types of capital gains i.e.—
|(i)||Section 2(42B) short-term capital gain||gain arising on the transfer of short-term capital asset.|
|(ii)||Section 2(29B) long-term capital gain||gain arising on the transfer of long-term capital asset.|
|There is a need to make the distinction between short-term and long-term capital gain as short-term capital gain (other than referred to in section 111A) like any other incomes is taxable at normal rate of income-tax, whereas long-term capital gain is taxed at a concessional rate.|