Income Tax

Income from Capital Gain

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  Posted on June 16, 2021

Income from Capital Gain

Every Person when he /she sells any immovable property shares, mutual funds, or any other asset capital asset , then that income proceeds are subject to capital gain taxation.

Section 45 of Income Tax Act , 1961 provides that any profits or gains arising from the transfer of a capital asset effected in the previous year will be chargeable to income tax under the “Capital Gain”

Such capital gains will be deemed to be the income of the previous year in which the transfer took place.

Two terms to be noted are as follows

Capital asset

According to section 2(14), a 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 SEBI regulations.

However, it does not include

(i) Any stock-in-trade  consumable stores or raw materials held for the purpose of the business or profession of the assessee;

(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, but excludes –

(a) Jewelry;

(b) Archaeological collections;

(c) Drawings;

(d) Paintings;

(e) Sculptures; or

(f) Any work of art.

(iii) Rural agricultural land in India

(iv) 6½% Gold Bonds, 1977, or 7% Gold Bonds, 1980, or National Defence Gold Bonds, 1980, issued by the Central Government;

(v) Special Bearer Bonds, 1991 issued by the Central Government;

(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government.

Rural agricultural land means

Rural area for the above purpose is as follows –

From the assessment year 2014-15 – Any area which is outside the jurisdiction of a municipality or cantonment board having a population of 10,000 or more and also which does not fall within distance (to be measured aerially) given below –

2 kilometres from the local limits of municipality/cantonment board If the population of the municipality/cantonment board is more than 10,000 but not more than 1 lakh
6 kilometres from the local limits of municipality/cantonment board If the population of the municipality/cantonment board is more than 1 lakh but not more than 10 lakh
8 kilometres from the local limits of municipality/cantonment board If the population of the municipality/cantonment board is more than 10 lakh

 

For the above purpose, “population” means the population according to the last preceding census of which the relevant figures have been published before the first day of the previous year.

Up to the assessment year 2013-14 – Any area which is outside the jurisdiction of a municipality or cantonment board having a population of 10,000 or more and also which does not fall within such notified* distance [up to 8 kilometres – see Notification No. SO 10(E), dated January 6, 1994] from the local limits of such municipality or cantonment board.

Agricultural land :

The following guiding factors to be considered while determining the nature and character of the land :

  • Whether the land was classified in the revenue record as agricultural and whether it was subject to the payment of land revenue, but this factor alone will not be conclusive.
  • Whether the land was actually or ordinarily used for agricultural purposes at or about the relevant time.
  • Whether such user of the land was for a long period or whether it was of a temporary character or by way of stop-gap arrangement.
  • Whether the income derived from the agricultural operations carried on in the land bore any rational proportion to the investment made in purchasing the land.
  • Whether the land, on the relevant date, had ceased to be put to the agricultural use ; if so, whether it was put to an alternative use ; whether, such cesser and/or alternative user was of a permanent or temporary nature.
  • Whether the land, though entered in revenue record, had never been actually used for agriculture, whether the owner meant or intended to use it for agricultural purposes.
  • Whether the land itself was developed by plotting and providing roads and other facilities.
  • Whether there were any previous sales of portions of the land for non-agricultural use.

All these factors would not be present or absent in any case. In each case, one or more of these factors may make appearance and the ultimate decision will have to be reached on a balanced consideration of the totality of circumstances.

Transfer :

It provides an inclusive definition of “transfer”, in relation to capital asset of income tax return filing

(i) The sale, exchange or relinquishment of the asset; or

(ii) The extinguishment of any rights therein; or

(iii) The compulsory acquisition thereof under any law; or

(iv) The owner of a capital asset may convert the same into the stock-in-trade of a business carried on by him. Such conversion is treated as a transfer; or

(v) The maturity or redemption of a Zero Coupon Bond; or

(vi) Part-performance of the contract: Sometimes, possession of the immovable property is given in consideration of part-performance of a contract; or

(Vii) Lastly, there are certain types of transactions that have the effect of transferring or enabling the enjoyment of the immovable property. Even the power of attorney transactions is covered.

Explanation 2 to section 2(47) clarifies that ‘transfer’ includes and shall be deemed to have always included:

  1. Disposing of or parting with an asset or any interest therein, or
  2. Creating any interest in any asset in any manner whatsoever

Directly or indirectly, – absolutely or conditionally, – voluntarily or involuntarily by way of an agreement (whether entered into in India or outside India) or otherwise.

Types of capital gain

Depending on the tenure of holding an asset, gains against an investment can be broadly divided into the following types –

Short term capital gain

If an asset is sold within 36 months of acquisition, then the profits earned from it is known as short term capital gains

However, tenure varies in the case of different assets. For Mutual Funds and listed shares, Long term capital gain happens if an asset is sold after holding back for 1 year.

Long term capital gain

The profit earned by selling an asset that is in holding for more than 36 months is known as long-term capital gains. After 31st March 2017, a holding period for non-moveable properties was changed to 24 months. However, it is not applicable in case of movable assets such as jewelery, debt-oriented Mutual Funds, etc.

Nature of capital asset can be determined as follows

Asset is considered to be long term in following cases

Particulars Held for
Equity or preference shares in a company (listed) More than 12 months
Equity or preference shares in a company (unlisted) More than 24 months
Immovable property (being land or building or both More than 24 months
securities (like debentures, bonds, government securities, derivatives, etc.) (listed) More than 12 months
Units of UTI (listed or unlisted) More than 12 months
Units of equity oriented mutual fund (listed or unlisted) More than 12 months
Units of debt oriented mutual fund (listed or unlisted) More than 36 months
Zero coupon bonds (listed or unlisted) More than 12 months
Other assets More than 36 months

 

Calculation of Capital Gains

The calculations of capital gains are dependent on the type of assets and their holding period.  A few terms that an individual must know before calculating gains against their capital investments are here as follows –

Full value consideration 

It is the consideration that is received by a seller for transfer of a capital asset.

Cost of acquisition 

The cost of acquisition is the value of an asset bought by the seller at the time of purchase

Cost of improvement 

The cost of improvement is the amount of expenses incurred by a seller in making any additions or alterations to a capital asset.

Note : Indexation benefit on cost of acquisition and cost of improvement is applicable only for long term capital asset

Tax Rates

Tax on Short-Term and Long-Term Capital Gains

 Tax Type Condition Tax applicable
Long-term capital gains tax Other than sale of equity shares/ units of equity oriented fund since it is covered under Section 112A 20%
Long-term capital gains tax On sale of Equity shares/ units of equity oriented fund Section 112A 10% over and above Rs 1 lakh
Short-term capital gains tax When securities transaction tax is not applicable The short-term capital gain is added to your income tax return and the taxpayer is taxed according to his income tax slab.
Short-term capital gains tax When securities transaction tax is applicable 15%.

 

Cost of Inflation Index for Capital Gains

  • As per the Section 48 Second Provision of Income tax rates, for computing long term capital gains ,the cost of acquisition and cost of improvement is increased by applying the Cost indexation index
  • Once the CII is applied the cost is known as Indexed cost of Acquisition and Indexed Cost of Improvement
  • Cost Inflation Index in relation to previous year means such index as may be notified by the central government having regard to 75% of average rise in the Consumer Price Index (Urban) for the immediately preceeding previous year to such previous year.

The benefit of indexation will not apply to

  • Short term capital gains
  • Capital indexed bonds issued by the government
  • Soverign gold bonds issued by Reserve Bank of India under the Soverign Gold Bond Scheme 2015
  • Incase of Depreciable assets ,there will be no indexation benefit since the capital gains are considered to be short term capital gains.

Cost Inflation Index is as follows

Financial Year Cost Inflation Index
2001-02 100
2002-03 105
2003-04 109
2004-05 113
2005-06 117
2006-07 122
2007-08 129
2008-09 137
2009-10 148
2010-11 167
2011-12 184
2012-13 200
2013-14 220
2014-15 240
2015-16 254
2016-17 264
2017-18 272
2018-19 280
2019-20 289
2020-21 301

 

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