CAPITAL GAINS

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CAPITAL GAINS

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INTRODUCTION

• CAPITAL GAINS
• Any profit or gains arising from the transfer
  of capital assets is taxable under the head
  capital gains in the previous year in which the
  transfer has taken place.

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• Conditions for Gains to be charged under Capital
  Gains
• There should be a capital asset.
• The capital asset should be transferred by the
  assessee.
• Such transfer should take place during the
  previous year.
• The profits or gains should arise as a result of
  this transfer.
• Such profit or gain should not be exempted from
  tax under sections 54, 54B, 54D, 54EC, 54F and
  54G 54GA.

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DEFINITION OF CAPITAL ASSETS

• Capital asset is defined to include property of
  any kind, whether fixed or circulating, movable
  or immovable, tangible or intangible.

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EXCEPTIONS TO CAPITAL ASSETS

• a) Any stock-in-trade, consumable stores or raw
  material held for the purposes of business or
  profession.
• b) Movable property of the Assessee including
  wearing apparel and furniture held for his
  personal use or for the use of any member of his
  family dependent on him.
• The exception to this condition is jewellery,
  which is treated as a capital asset, even though
  it is meant for personal use.

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CONTD.

• Agricultural land in India provided it is not
  situated in urban area.
• 6 ½ Gold Bonds, 7 Gold Bonds or National
  Defence Gold Bonds, issued by the central
  government.
• Special Bearer Bonds, and
• Gold Deposit bonds issued under Gold Deposit
  Scheme of 1999.

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SHORT TERM AND LONG TERM CAPITAL ASSETS

• Short term capital assets means a capital
  asset held by the assessee for not more than 36
  months, immediately prior to its date of
  transfer. However, the following assets are
  treated as short term assets if they are held for
  not more than 12 months, they are
• Equity or preference shares in a company
• Securities like debentures, government securities
  listed in a recognized stock exchange in India.
• Units of UTI and
• Units of mutual funds.
• An asset other than a short-term capital asset is
  regarded as a long term capital asset.

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METHOD OF DETERMINING PERIOD OF HOLDING

• In case when the assessee acquires an asset as a
  gift or by a will, the period for which the
  previous owner holds the asset is also included.

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TRANSFER OF CAPITAL ASSET Sec2(47)

• Any transaction involving the allowing of the
  possession of any movable property to be taken or
  retained in part of performance of contract of
  the nature referred to in the sec53a of the
  transfer of property act,1982
• Any transaction (whether by way of becoming a
  member of, or acquiring shares in a co-operative
  society, company association of person or by way
  of agreement or any arrangement or in any other
  manner whatsoever) which has the effect of
  transferring or enabling the enjoyment of any
  immovable property

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WHAT IS INCLUDED IN TRANSFER

• Transfer Includes
• Sale
• Exchange
• Relinquishment
• Extinguishment
• Compulsory Acquisition
• Conversion of Capital Asset Into Stock in
  Tradesec(47)(iv)

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WHAT IS NOT INCLUDED IN TRANSFER

• Distribution of Assets to Its Shareholder on Its
  Liquidation Sec46(1)
• Distribution of Capital Assets in HUF to Its
  Member at the Time of Total or Partial Partition
  Sec 47(1)
• Transfer of a Capital Asset Under a Will or an
  Irrevocable Trust or a Gift Sec 47(iii)
• Transfer of a Capital Asset by a Company to Its
  Wholly Owned Indian Subsidiary Company Sec
  47(iv)
• Transfer of a Capital Asset by a Wholly Owned
  Subsidiary Company to Its Indian Holding Company
  Sec 47(v)

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CONTD.

• Transfer in Case of Amalgamation Sec47(vi)
• Transfer in Case of Demerger Sec47(vi B)
• Transfer of Agricultural Land in India Effected
  Before March 1, 1970 Sec 47(viii)
• Transfer of a Capital Asset , Being Any Work of
  Art ,Scientific or Art Collection, Book, Drawing,
  painting, photograph Etc Sec47(ix)
• Transfer by Way of Conversion of Bonds or
  Debenture of a Company Into Shares or Debenture
  of That Company Sec 47(x)

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SHORT TERM CAPITAL GAIN

• 1)Find full value of consideration
•  2)Deduct the followings.
• a)    Expenditure incurred wholly and
  exclusively in connection with such transfer.
• b)   Cost of acquisition.
• c) Cost of improvement
•  3) From resulting sum deduct exemption provided
  by u/s54 B, 54 D, 54 G, 54GA
• 4) The balancing amount is Short Term Capital
  Gain. 

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LONG TERM CAPITAL GAIN

• 1)   Find full value of consideration
• 2)   Deduct the followings
• a) Expenditure incurred wholly and
  exclusively in connection with such transfer.
• b) Indexed Cost of acquisition.
• c)  Indexed Cost of improvement.
• 3)  From resulting sum deduct the exemption
  provided by section 54, 54 B, 54 D,
• 54 EC, 54 F, 54 G, 54 GA
• The balancing amount is Long Term Capital
  Gain/Loss.

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FULL VALUE OF CONSIDERATION

• Full value means whole price without any
  deduction and consideration in which transferor
  receives in lieu of asset he parts with.

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EXPENDITURE ON TRANSFER

• Expenditure incurred wholly and exclusively in
  connection with transfer of capital asset is
  deductible from full value of consideration. This
  means expenditure incurred which is necessary to
  effect the transfer like brokerage commission,
  cost of stamp, registration fees and all

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COST OF ACQUISITION

• Cost of acquisition of an asset is the value for
  which it is acquired by the Assessee, expenses of
  capital nature for acquiring the title are
  include in cost of acquisition.

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NOTIONAL COST OF ACQUISITION

• Cost to previous owner is considered as cost of
  acquisition to the assessee if that capital asset
  become property in cases like.
• a) Distribution of asset on partial or total
  partition of Hindu Undivided Family.
• b) Acquisition of property under gift and
  will.
• c) Acquisition of property by a HUF where one
  of its member has converted his self acquired
  property into joint family property after Dec 31-
  1969.

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COST OF IMPROVEMENT

• -    It means all expenses of capital nature
  incurred in making any addition/ alteration to
  capital asset by assessee.
• Expenditure after 31 mar 1981

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INDEXED COST OF ACQUISITION OR IMPROVEMENT

• Cost Inflation Index.
• Cost inflation Index for any year means such
  index as the central government may , having
  regard to 75 of average rise in consumer price
  index for urban non manual employees of the
  immediate preceding pervious year to such year,
  by notifying in official gazette

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COMPUTATION OF INDEXED COST.

• Case1) Capital asset acquired before 1-4-1981
• Cost X Cost
  Inflation Index in the year of Transfer
• Or FMV on 01.04.1981 Cost
  Inflation Index for yr 1981-82
• (whichever is high)
• 2) Capital asset acquired after 1-4-1981
• Cost X Cost
  Inflation Index in the year of Transfer
• 
  Cost Inflation Index for yr of purchase

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• 3) Capital asset acquired by assesse before
  1-4-1981 originally acquired by previous owner
  before 1-4-1981.
• Cost to Previous Owner X Cost Inflation
  Index in the year of Transfer
• Or FMV on 01.04.1981 Cost
  Inflation Index for yr 1981-82
• (whichever is high)
• 4) Capital asset acquired by assesse after
  1-4-1981 originally acquired by previous owner
  before 1-4-1981.
• Cost to Previous Owner X Cost Inflation
  Index in the year of Transfer
• Or FMV on 01.04.1981 CI Index for yr
  the asset is first held by assesee
• (whichever is high)
• 5) Capital asset acquired by assesse after
  1-4-1981 originally acquired by previous owner
  after 1-4-1981.
• Cost to Previous Owner X Cost Inflation
  Index in the year of Transfer
• 
  CI Index for yr the asset is first held by assese

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Indexed Cost of Improvement

• 1. Ignore Improvement Before 1.04.1981
• Indexed Cost
• Cost of Improvement X CI Index in Yr of
  Transfer
• CI
  Index in Yr of Improvement

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INTRODUCTION OF A CAPITAL ASSET AS CAPITAL
CONTRIBUTION

• Section 45(3)
• Taxable in the hands of the partner
• Consideration Amount recorded in the books of
  accounts

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DISTRIBUTION OF CAPITAL ASSETS ON A FIRMS
DISSOLUTION

• Section 45(4)
• Chargeable in the hands of the firm
• Consideration fair market value as on the date
  of transfer

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SLUMP SALE SEC 50B

• Slump sale means transfer of one or more
  undertakings as a result of sale for lump sum
  consideration without values being assigned to
  individual assets and liabilities in such sales
  Section 2(42C).

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SLUMP SALE

• Cost of acquisition Net worth
• No indexation
• Short term/long term
• Value of assets Depreciable/non-depreciable
• Value in the hands of purchaser.

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CAPITAL GAINS ON CONVERSION OF DEBENTURES INTO
SHARES SEC 49(2A)

• 1) Any transfer by way of conversion of
  debentures, debenture stock, or deposit
  certificates in any form, of a Co. into shares or
  debentures of that co. is not regarded as a
  transfer giving rise to Capital gains.
• 2) Cost of Acquisition will be the cost of
  debentures, debentures stock or deposit
  certificates which has been appropriated towards
  to shares or debentures in case there is sale of
  above transferred assets giving rise to capital
  gains.

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CAPITAL GAINS ON CONVERSION OF DEBENTURES INTO
SHARES SEC 49(2A)

• In case of conversion of debentures into Shares 
• 1)  Cost of Debentures will be the Cost of
  acquisition of shares.
• 2)  To find out whether or not shares are LTCA
  or STCA, the period of holding shall be
  determined from date of allotment of shares.
• 3)  The indexation will start from the date of
  conversion of debentures into shares.
• 4)  Not applicable for preference shares
  converted into equity shares.

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CAPITAL GAINS ON TRANSFER OF SECURITY BY
DEPOSITORY SEC 45(2A)

• 1) Any beneficial will be chargeable to Income
  tax, if in PY he has had
• any profits or gains by virtue of
  transferring of any securities through
• depository or participant of such beneficial
  interest.
• 2) It shall not be income of the depository.
• 3) Cost of Acquisitions and the period of
  holding of any securities shall be determined on
  the basis of the First In First Out (FIFO)

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Sec 45(2A)(contd.)

• 4)FIFO shall be applied only in respect of
  dematerialized holdings, as physical form of
  shares are still in possession of the investor
  when there is sale of dematerialized shares.
• 5) FIFO shall be applied accountwise incase if
  there are multiple depository accounts, as sale
  in particular account shall not be construed as
  sale in other accounts.
• 6) Date of entry is used for the basis of FIFO.

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COMPUTATION OF CAPITAL GAINS IN THE CASE OF SELF
GENERATED ASSETS.
Self Generated Assets Sale Consideration Cost of Acquisition Cost of Improvement Expenses on transfer
1. Goodwill of a Business Actual Nil Nil Actual
2. Tenancy Rights, Route Permits loom Hours Actual Nil Actual Actual
3.Rights to manufacture, Produce or Process any article Actual Nil Nil Actual
4. Trade mark or brand name associated with a business Actual Nil Actual Actual
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CAPITAL GAINS IN CASE OF BONUS SHARES
Original Shares Original Shares Bonus Shares Bonus Shares
Acquisition Cost of Acquisition Acquisition Cost of Acquisition
Acquired before April1, 1981 Actual Cost or Fair Market Value on 1st April 1981 whichever is more Acquired before April1, 1981 Fair Market Value on 1st April 1981
Acquired before April1, 1981 Actual Cost or Fair Market Value on 1st April 1981 whichever is more Acquired after April1, 1981 Nil
Acquired after April1, 1981 Actual Cost Acquired after April1, 1981 Nil
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CAPITAL GAIN ON TRANSFER OF RIGHTS SHARES

• For Original Shareholder ( Renouncer )
• Cost of Acquisition
• Cost of acquiring original shares.
• Cost of aquiring Rights shares.
• Premium Received on renouncement Short Term
  Capital Gain.
• For the Renouncee
• Cost of Acquisition
• Amount paid to Company
• Premium paid to the renouncer.

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CAPITAL GAINS IN CASE OF COMPULSORY ACQUISITION
OF AN ASSET SEC 45(5)

• Applicability
• Transfer of capital asset by way of compulsory
  acquisition under any law.
• Capital asset is transferred (not by way of
  compulsory acquisition), consideration is
  approved or determined by central Gov. or RBI.
• Chargeability
• Initial Compensation is full value of
  consideration.
• Charged in the year in which Initial Compensation
  is received
• Enhanced Compensation.

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OTHER SPECIAL PROVISIONS

• Capital Gains in case of Depreciable Assets ( Sec
  50 )
• Buy Back of Shares
• Transfer of Land Bldg ( Sec 50 c)

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EXEMPTION U/S 54

• Conditions
• Gains are from Transfer of Residential House
  Property
• Applicable only to Individual / HUF
• Asset Sold is a Long Term Capital Asset
• Assessee should invest in another Residential
  House Property within the specified time limit.
• New asset should not be sold within 3 years of
  acquisition, otherwise will be treated as a short
  term capital gain.
• Exemption Amount Invested OR Capital Gains
• whichever is Less.

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EXEMPTION U/S 54B

• Available if agricultural land transferred. The
  said land should be used by the individual or his
  parents for agricultural purposes during at least
  2 years immediately prior to transfer.
• Available only to an individual.
• Asset Sold should be Short term / Long term
  Capital Asset.
• Investment in agricultural land (rural or urban)
  within 2 years.
• New Asset should not be sold within 3 years of
  acquisition, otherwise will be treated as a short
  term capital gain.
• Exemption Amount Invested OR Capital Gains
• whichever is Less.

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EXEMPTION U/S 54D

• Available if land or building forming part of an
  industrial undertaking is compulsorily acquired
  by the govt and which is used during 2 years for
  industrial purposes prior to acquisition.
• Available to any person.
• Asset Sold should be Short term / Long term
  Capital Asset.
• Investment in land or building for industrial
  purposes within 3 years.
• New Asset should not be sold within 3 years of
  acquisition, otherwise will be treated as a short
  term capital gain.
• Exemption Amount Invested OR Capital Gains
• whichever is Less.

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EXEMPTION U/S 54EC

• Available if any long term capital asset is
  transferred after 31.3.2000.
• Available to any person.
• The asset should be a Long term capital asset.
• Investment within 6 months in bonds of NHAI or
  RECL which are redeemable after 3 years.
• New Asset should not be sold within 3 years of
  acquisition, otherwise will be treated as a short
  term capital gain.
• Exemption Amount Invested OR Capital Gains
• whichever is Less.

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EXEMPTION U/S 54F

• Available if any long term capital asset( other
  than a residential house property) is
  transferred, Available to an individual / HUF.
• Investment should be made in a residential house
  property within time Limit .
• New Asset should not be sold within 3 years of
  acquisition, otherwise will be treated as a short
  term capital gain.
• Exemption Amount Invested Capital gains
• 
  Net sale consideration

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EXEMPTION U/S 54G

• Available if any land, building, plant or
  machinery is transferred in order to shift an
  industrial undertaking from urban to rural area.
• Available to any person.
• Asset may be short term / long term.
• Investment should be made in land, building or
  plant and machinery to shift the undertaking in a
  rural area.
• New Asset should not be sold within 3 years of
  acquisition,
• Exemption Amount Invested OR Capital Gains
• whichever is Less

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EXEMPTION U/S 54GA

• Available if any land, building, plant or
  machinery is transferred in order to shift an
  industrial undertaking from any area to SEZ.
• Available to any person.
• Asset may be short term / long term.
• Investment should be made in land, building or
  plant and machinery to shift the undertaking to
  SEZ area.
• New Asset should not be sold within 3 years of
  acquisition,
• Exemption Amount Invested OR Capital Gains
• whichever is Less

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PROVISIONS OF SEC 112

• Section 112 provides an alternative option for
  charging long term capital gains to tax, if the
  following conditions are satisfied
• The taxpayer is an individual, HUF, company or
  any other person(may be resident or non resident)
• The asset is a long term capital asset
• The long term capital asset is
• - a security listed in any recognised
  stock exchange in India or,
• - a unit of UTI or a mutual fund(whether
  listed or not)

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Sec 112 (contd.)

• If the conditions are satisfied, then the other
  option is to charge the capital gains at the rate
  of 10 without taking the benefit of indexation
  in the cost of acquisition.
• The tax payable by the assessee will be lower of
  20( surcharge)on the capital gain calculated
  giving benefit of indexation or _at_10 without the
  benefit of indexation, whichever is lower.
• In the case of listed bonus shares, listed
  debentures and listed bonds, Option u/s 112 will
  be better.

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