Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Capital Gains under Income Tax Act. 1961 – LTCG & STCG

Capital Gains under Income Tax Act. 1961 – LTCG & STCG
Capital Gains under Income Tax Act. 1961 – LTCG & STCG

1.   Basis of Charge – Capital Gains [Section 45(1)]

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.

Conditions for taxing capital gains: 

(A)          there must be a capital asset;

(B)          the capital asset must have been transferred;

(C)          there must be profits or gains on such transfer, which will be known as capital gain;

(D)          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 as mentioned –

(i)    damage or destruction of any capital asset by fire or other calamities

(ii)  conversion of capital asset into stock-in-trade

(iii)  compulsory acquisition of an asset

(iv) transfer of capital asset, being land or building or both by an individual HUF under a specified agreement with the developer.

2.   [Section 2(14)]- Capital Gain arises only in case of Capital Asset

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,

but does not include—

(i)            any stock-in-trade other than the securities referred to in sub-clause (b) above), consumable stores or raw materials held for the purposes of his business or profession,

(ii)           personal effects, 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:

(a)          jewellery;

(b)          archaeological collections;

(c)           drawings;

(d)          paintings;

(e)           sculptures; or

(f)           any work of art.

(iii)          Agricultural Land in India, which is not an urban agricultural land. In other words, it must be a Rural Agricultural Land.

(iv)          Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under Gold Monetization Scheme, 2015 notified by the Central Government.

(1).  Short-Term Capital Asset [Section 2(42A)]:

A capital asset held by an Assessee for not more than 36 months immediately preceding the dale of its transfer is known as a short-term capital asset.

Exceptions:

(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(29A)]:

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.
Note:

There is a need to make the distinction between short-term and long-term capital gain as short-term capital gain like any other incomes is taxable at normal rate of income-tax. whereas long-term capital gain is taxed at a concessional rate.

3.   [Section 2(47)]- Capital Asset must have been Transferred to arise Capital Gain

Capital gain arises only when there is a transfer of capital asset. If the capital asset is not transferred or if there is any transaction which is not regarded as, there will not be any capital gain.

However, in case of profits or gains from insurance claim due to damage or destruction of property, there will be capital gain although no asset has been transferred in such case.

Under Section 2(47), Transfer, in relation to capital asset, includes:

(i)    Sale:

There is no definition of sale under the Income-tax Act, 1961. In order to find out legal implication of sale one must resort to the Transfer of Property Act in the case of immovable property and to the Sale of Goods Act in the case of movable property.

Section 54 of the Transfer of Property Act which defines sale and also deals with mode of transfer and contract for sale reads as under:

Sale is a transfer of ownership in exchange for a price paid or promised or part-paid and part promised.

(ii)   Exchange:

When two persons mutually transfer the ownership of one thing for the ownership of another, neither thing or both things being money only, the transaction, according to section 118 of the Transfer of Property Act, 1882 is called an exchange. The definition of the word exchange is not limited to immovable property. It also includes barter of moveable assets.

Like sale, exchange requires two persons. There cannot be exchange with one self. Exchange covers both movable and immovable properties. Exchange is a bilateral transaction involving two parties each of whom owns an asset which constitute the subject matter of exchange. While in the case of sale, the consideration for transfer is necessarily money, in the case of exchange, the consideration is another asset.

Person liable to be assessed in exchange:

In this case, though there is only one transaction of exchange, the tax liability is on two persons on different amounts of notional gain. Further, one of them may be liable to short-term capital gains tax and the other to long-term capital gains tax.

(iii)  Relinquishment of the Asset:

Relinquishment means withdrawn from, abandoning or giving up anything.  By relinquishment a person ceases to own the asset concerned through some act on his part. In other words, the owner withdraws himself from the properly and abandons his rights hereto. The property, however, continues to exist and will become the property of someone else.

(iv)  Extinguishment of Rights in an Asset:

Extinguishment connotes total destruction, annihilation, termination or extinction of a capital asset. However, destruction or extinction of a capital asset is not regarded as transfer except in case of section 45(1A) (refer para 7.13b). In fact, there should be a destruction or extinction of “rights” in the capital asset as it may be noticed that in respect of the expression “relinquishment or Exchange”, the subject matter of transfer is “assets and in case of extinguishment”, it is “rights”.

Examples of extinguishment—

(i)         Forfeiture of shares is an extinguishment of right.

(ii)        Extinguishment of capital rights.

(iii)       Reduction of share capital of a company and payment to shareholders.

Where there is a reduction of capital by a company and repayment is made to the shareholders, such repayment has two components:

(a)        distribution attributable to accumulated profits which will be chargeable as deemed dividends as per section 2(22)(d), and

(b)        distribution attributable to capital which will be subject to capital gain tax.

(v)   Compulsory acquisition thereof under any Law:

Section 2(47) of the Income-tax Act includes compulsory acquisition of capital asset under any law as transfer for the purposes of section 45 of the Act.

Acquisition of immovable properties under the Land Acquisition Act or acquisition of industrial undertaking under the industries (Development and Regulation) Act are some of the examples of compulsory acquisition of a capital asset. In such cases, though the Assessee was not willing to transfer the asset, it has been compulsorily acquired under law.

(vi)  In a case where the Capital Asset is converted or treated by the owner as stock-in-trade of a business carried on by him, such conversation or treatment:

Though, normally there can be no transfer if the ownership in an asset remains with the same person, however, the Income-tax Act provides an exception. When a person converts any capital, asset owned by him into stock-in-trade of a business carried on by him, it is regarded as a transfer. For example, where an investor in shares starts a business of dealing in shares and treats his existing investments as the stock-in-trade of the new business, such conversion is regarded as a transfer.

(vii)  Any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882

Normally transfer of an immovable property worth ₹100 or more is not complete without execution and registration of a conveyance deed. However, section 53A of the Transfer of Property Act envisages situations where under a contract for transfer of an immovable property, the purchaser has paid the price and has taken possession of the property, but the conveyance is not registered. In such cases the transferor is debarred from agitating his title to the property against the purchaser.

This would cover cases where (a) possession of the property has been handed over to the buyer; (b) sale consideration has been paid to the seller; (c) then although the sale deed has not been executed in favour of the buyer certain other documents like Power of Attorney/Agreement to Sell/Will, etc. have been executed and registered. In this case, the buyer will be deemed to be the owner of the property.

The Act of giving possession of an immovable property in part performance of a contract is treated as ‘transfer’ for the purposes of capital gains tax. This extended meaning of transfer applies also to cases where possession is already with the purchaser and he is allowed to retain it in part, performance of the contract.

(viii)  Any transaction (whether by way of becoming a member of, or acquiring shares in a cooperative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever)

Usually flats in multi-storeyed building and other dwelling units and plots in group housing schemes are registered in the name of a co-operative society formed by the individual allottees. Sometimes, companies are also floated for this purpose and allottees take shares in such companies. The shareholder/member in this case are deemed owners of the flat/house/ land although the legal owner is the co-operative society or the company. If the deemed owner transfers the rights to use and enjoy the flat by changing the membership of co-operative society or by transferring the shares in the company, it will be treated as a transfer.

Examples of transfer:

(a)           Redemption of preference shares by a company is a transfer in the hands of shareholders and they will be liable to capital gain for the same. [Anarkali Sarabai v CIT (1997) 90 Taxman 509 (SC)].

(b)          Conversion of preference share into ordinary shares amounts to transfer in hands of the shareholders. [CIT v Motors and General Stores P. Ltd. (1967) 66 ITR 692 (SC)].

(c)           Distribution of capital assets in case of liquidation of a company is not a transfer in the hands of the company but a transfer in the hands of the shareholders.

(d)          Proprietary business taken over by a firm. [CIT v Ramakrishnan (1969) 73 ITR 356 (Ker)(FB)].

(e)          Slump sale of an undertaking of a business (Section 50B).

(f)           Grant of mining lease at a premium [A.R. Krishnamurthy and Another v CIT (1989) 176 ITR 416 (SC)].

(g)       Salami or premium received for lease of plots for 99 years [R.K. Palshikar HUF v CIT (1988) 172 ITR  310 (SC)].

4.   [Section 46 and 47]- Transactions Not regarded as Transfer for purposes of Capital Gains

In many transactions although there is a transfer, but these are not considered to be transfer for purposes of Capital Gains. Some relevant transactions which are not regarded as Transfer are:

1.    where the assets of a company are distributed to its shareholders on liquidation of a company. such distribution shall not be regarded as transfer in the hands of the company [Section 46(1)];

2.   any distribution of capital assets on the total or partial partition of Hindu Undivided Family [Section 47(1)];

3.   any transfer of a capital asset under a gift or will or an irrevocable trust [Section 47(111)];

4.   any transfer of a capital asset by a company to its 100% subsidiary company provided the subsidiary company is an Indian company [Section 47(iv)];

5.   any transfer of a capital asset by a 100% subsidiary company to its holding company, if the holding company is an Indian company [Section 47(v)].

6.   any transfer in a scheme of amalgamation of a capital asset by the amalgamating company to the amalgamated company, if the amalgamated company is an Indian company [Section 47(vi)];

7.   any transfer in a scheme of amalgamation of shares held in an indian company by the amalgamating foreign company to the amalgamated foreign company if certain conditions are satisfied.

8.   any transfer, in a demerger, of a capital asset by the demerged company to the resulting company, if the resulting company is an Indian company [Section 47(vib)];

9.   any transfer in a demerger, of a capital asset, being a share or shares held in an Indian company, by the demerged foreign company to the resulting foreign company, if certain conditions are satisfied.

10.   any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company if the transfer or issue is made in consideration of demerger of the undertaking [Section 47(vid)];

11.   any transfer by a shareholder, in a scheme of amalgamation, of shares held by him in the amalgamating company if certain conditions are satisfied:

12.   any transfer of Sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme, 2015, by way of redemption, by an Assessee being an individual.

13.   any transfer of a capital asset, being—

(a)           bond or Global Depository Receipt referred to in section 115AC (1); or

(b)          rupee denominated bond of an Indian company; or

(c)           derivative, or

(d)          such other securities as may be notified by the Central Government in this behalf made by a non-resident on a recognized stock exchange located in any International
Financial Services Centre and where the consideration for such transaction is paid or
payable in foreign currency. [Section 47(viiab)];

14.   any transfer of a capital asset, being any work of art, archaeological, scientific or art collection, book, manuscript, drawing, painting, photograph or print, to the Government or a University or the National Museum, National Art Gallery, National Archives or any such other public museum or institution, as may be notified by the Central Government in the Official Gazette to be of national importance, or to be of renown throughout any State or States [Section 47(ix)];

15.   any transfer by way of conversion of bonds or debentures, debenture-stock or deposit certificates in any form, of a company into shares or debentures of that company [Section 47(x)];

16.   any transfer by way of conversion of preference shares of a company into equity shares of that company [Section 47(xb)];

17.   any transfer of a capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm provided the following conditions are satisfied:

(a)           all the assets and liabilities of the firm, relating to the business immediately before the succession become the assets and liabilities of the company;

(b)          all the partners of the firm immediately before the succession become the shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of the succession;

(c)           the partners of the firm do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company;

(d)          the aggregate of the shareholding in the company of the partners of the firm is not less than 50% of the total voting power in the company and their shareholding continues to be as such for a period of 5 years from the date of the succession [Section 47(xiii)]; and

18.   any transfer of a capital asset or intangible asset by a private company or unlisted public company (hereafter in this clause referred to as the company) to a limited liability partnership or any transfer of a share or shares held in the company by a shareholder as a result of conversion of the company into a limited liability partner-ship in accordance with the provisions of section 56 or section 57 of the limited liability Partnership Act. 2008 provided following conditions are satisfied:

(a)           all the assets and liabilities of the company immediately before the conversion become the assets and liabilities of the limited liability partnership;

(b)          all the shareholders of the company immediately before the conversion become the partners of the limited liability partnership and their capital contribution and profit-sharing ratio in the limited liability partnership are in the same proportion as their shareholding in the company on the date of conversion;

(c)           the shareholders of the company do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of share in profit and capital contribution in the limited liability partnership;

(d)          the aggregate of the profit-sharing ratio of the shareholders of the company in the limited liability partnership shall not be less than fifty per cent at any time during the period of five years from the date of conversion;

(e)           the total sales, turnover or gross receipts in business of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed sixty lakh rupees; and

(ea)        the total value of the assets as appearing in the books of account of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed 5 crores; and

(f)           no amount is paid, either directly or indirectly, to any partner out of balance of accumulated profit standing in the accounts of the company on the date of conversion for a period of three years from the date of conversion. [Section 47(xiiib)]

19.   where a sole proprietary concern is succeeded by a company in the business carried on by it as a result of which the sole proprietary concern sells or otherwise transfers any capital asset or intangible asset to the company provided the following conditions are satisfied:

(a)           all the assets and liabilities of the sole proprietary concern relating to the business immediately before the succession become the assets and liabilities of the company;

(b)          the shareholding of the sole proprietor in the company is not less than 50%, of the total voting power in the company and his shareholding continues to remain as such for a period of 5 years from the date of the succession; and

(c)           the sole proprietor does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company [Section 47(xiv)];

20.   any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the Central Government [Section 47(xvi)];

21.   any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating scheme of a mutual fund, made in consideration of the allotment to him of a capital asset, being a unit or units, in the consolidated scheme of the mutual fund shall not be regarded as transfer.

Provided that the consolidation is of two or more schemes of equity-oriented fund or of two or more schemes of a fund other than equity-oriented fund [Section 47(xviii)];

22.   any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating plan of a mutual fund scheme, made in consideration of the allotment to him of a capital asset, being a unit or units, in the consolidated plan of that scheme of the mutual fund. [Section 47(xix)]

It may be observed that the above transactions are not treated as transfer for purposes of capital gains.

5.   Capital Gain should arise in the previous year in which Transfer of Capital Asset took place

Normally, capital gain arises in the previous year in which the transfer of the asset takes place even if the consideration for the transfer is received or realised in a later year.

There are, however, 4 exceptional cases where capital gain is taxable not in the year of transfer of the asset, but in some other year. These exceptions are:

(i)            damage or destruction of any capital asset by fire or other calamities

(ii)           conversion of capital asset into stock-in-trade

(iii)          compulsory acquisition of an asset

(iv)         transfer of capital asset, being land or building or both by an individual HUF under a specified agreement with the developer [Section 45(5A)]

6.   [Section 48]- Computation of Capital Gains

As already discussed, capital gains are of Iwo types:

(i)           Short-term capital gain which arises on the transfer of a short-term capital asset; and

(ii)           Long-term capital gain which arises on the transfer of a long-term capital asset.

Short-term capital gain is the excess of the full value of consideration over the aggregate of the following three:

(1)            cost of improvement;

(2)           expenses of transfer,

(3)          cost of acquisition of the asset.

Whereas in the case of long-term capital gain, the capital gain shall be the excess of the full value of consideration over the aggregate of the following three amounts:

(1)            Expenses of transfer;

(2)           Indexed cost of acquisition of the asset

(3)          Indexed cost of improvement

From Capital Gain, computed above, certain Exemptions are available under Section 54 / 54B / 54D / 54EC / 54G / 54GA / 54GB. The Capital Gain after claiming the said Exemptions in known as Taxable Long-term or Short-term Capital Gain.

A format to compute the capital gain is given in table below:

Computation of Capital Gains

Computation of Short-term Capital Gains
Full value of consideration  —
Less: (a) Expenditure incurred wholly and exclusively in connection with such a transfer,
(b) Cost of acquisition
(c) Cost of improvement
Gross short-term capital gains
Less: Exemption, if available, u/s 54B/54D/54G/54GA
Taxable Short-term capital gains
 
Computation of Long-term Capital Gains
Full value of consideration
Less: (a) Expenditure incurred wholly and exclusively in connection with such a transfer
(b) Indexed Cost of acquisition
(c) Indexed Cost of improvement
Long-term capital gains
Less: Exemption if available u/s 54/54B/54D/54EC/54EE/54F/54G/54GA/ 54GB
Taxable long-term capital gains

Exceptions:

1.   In the case of an Assessee, who is a non-resident, capital gains arising from the transfer of a capital asset being shares in, or debentures of, an Indian company shall be computed by converting

–           the cost of acquisition,

–           expenditure incurred wholly and exclusively in connection with such transfer and

–           the full value of the consideration received or accruing as a result of the transfer of the capital asset

into the same foreign currency as was initially utilised in the purchase of the shares or debentures, and the capital gains so computed in such foreign currency shall be reconverted into Indian currency, so however, that the aforesaid manner of computation of capital gains shall be applicable in respect of capital gains accruing or arising from every reinvestment thereafter in, and sale of, shares in, or debentures of, an Indian company. [First proviso to section 48]

Note:

The above proviso has been inserted so as not to tax the capital gain in the hands of a non-resident on account of currency fluctuation in a transaction relating to purchase and sale of shares. 

2.   Where long-term capital gain arises from the transfer of a long-term capital asset, (other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso), the cost of acquisition and cost of improvement mentioned under clause (ii) of section 48, above, shall be substituted by the words “indexed cost of acquisition” and “indexed cost of improvement”, respectively. [Second proviso to section 48]

3.   The above first and second provisos shall not apply to the capital gains arising from the transfer of a long-term capital asset being an equity share in a company or a unit of an equity-oriented fund or a unit of a business trust referred to in section 112A. [Third proviso to section 48]

4.   Indexation of cost of acquisition and indexed cost of improvement referred to in second proviso above shall not apply to the long-term capital gain arising from the transfer of a long-term capital asset, being a bond or debenture other than—

(a)        Capital indexed bonds issued by the Government; or

(b)        Sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme, 2015. [Fourth proviso to section 48]

5.  In case of an Assessee being a non-resident, any gains arising on account of appreciation of rupee against a foreign currency at the time of redemption of rupee denominated bond of an Indian company held by him, shall be ignored for the purposes of computation of full value of consideration under this section. [Fifth proviso to section 48]

1.         Where shares, debentures or warrants referred to in the proviso to section 47(iii) are transferred under a gift or an irrevocable trust, the market value on the date of such transfer shall be deemed to be the full value of consideration received or accruing as a result of transfer for the purposes of this section:] [Sixth proviso to section 48]

2.         No deduction shall be allowed in computing the income chargeable under the head “Capital gains” in respect of any sum paid on account of securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004.] [Seventh proviso to section 48]

See also  [Rule 31]- Forms and Time limit of Issue of TDS Certificate
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