Taxation on Sale of Movable Asset
Movable assets are nothing but physical objects like cars, equipment, manufacturing machines, or other materials. It includes, “corporeal property of every description, except land and things attached to the earth or permanently fastened to anything which is attached to the earth”. In short, we can conclude that it is nothing but the asset or property, the location of which can be changed and are not affixed to a landmass or any place for that matter. Such properties which cannot be moved would be termed as immovable property as their physical location cannot be changed.
So, now the question is about the sale of this asset. And we can see that often we end up in confusion regarding the taxation of the income which is arising out of the sale of such assets which are movable, while the answer to the taxation regarding the income from the sale of immovable property like land or building is known and easy. For this, we can take a reference to the meaning or definition which is given to capital asset as per Income Tax Act, for the purpose of taxation.
Meaning of Capital Asset as per Income Tax Act
Section 2(14) of the Income Tax Act defines or explains the meaning of capital asset as,
a) Any kind of property held by an assessee, whether or not connected with the business or profession of the assessee.
b) Any securities held by an FII which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992.
However, the term ‘capital asset’ shall exclude the following:
a) Stock-in-trade, consumable stores, raw materials held for the purpose of business or profession;
b) Movable property held for the personal use of the taxpayer or for any member of his family dependent upon him. However, jewellery, costly stones, and ornaments made of silver, gold, platinum or any other precious metal, archaeological collections, drawings, paintings, sculptures, or any work of art shall be considered as a capital asset even if used for personal purposes;
c) Specified Gold Bonds and Special Bearer Bonds;
d) Agricultural Land in India, not being a land situated:
- Within the jurisdiction of the municipality, notified area committee, town area committee, cantonment board and which has a population not less than 10,000;
- Within the range of the following distance measured aerially from the local limits of any municipality or cantonment board:
- not being more than 2 KMs, if the population of such area is more than 10,000 but not exceeding 1 lakh;
- not being more than 6 KMs, if the population of such area is more than 1 lakh but not exceeding 10 lakhs; or
- not being more than 8 KMs, if the population of such area is more than 10 lakhs.
- Deposit certificates issued under the Gold Monetisation Scheme, 2015
Keeping in light the definition of a capital asset which is given by the Income Tax Act, that capital assets includes both movable and immovable assets. At the same time, it evidently provides that the movable property or assets which are held for personal use will not be included in the purview of capital assets as per the Income Tax Act. But the Act has specifically provided that, capital assets do include the following namely:
- costly stones,
- ornaments made of silver, gold, platinum, or any other precious metal,
- archaeological collections,
- sculptures or,
- any work of art, which are nothing but movable assets.
Now there is clarity regarding the taxability of the income which is arriving out of the sale of the movable asset.
Further explanation with regard to jewellery, which is given below as the same is a movable asset, says;
“(a) 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 stone, and whether or not worked or sewn into any wearing apparel;
(b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel.”
Thus, taking into consideration the definition given to capital asset by the Income Tax Act, we can say that the sale of the movable asset would be attracting tax under the head, “Income from Capital Gains”.
Income from Capital Gains
Basically, under the head, ‘Income from Capital Gains’, the tax liability will be determined on the basis of the period of holding. A movable asset that is held for less than 3 years or 36 months will be classified as short term and if held for more than 3 years or 36 months the same will be classified as long term.
The short-term capital gain on the sale of the movable asset will be added with the incomes earned from other heads and taxed in accordance with the Income Tax Slab Rate, while the long-term capital gain will be taxed at a flat rate of 20% along with indexation.
Short-Term Capital Gain
Short-term capital gain is the gain or profit which is earned by an individual on the sale of short-term capital assets.
Short-term Capital Gain = Sale Consideration – Cost of Acquisition – Cost of Improvement (if any) – Expenses incurred for the sale of asset i.e., brokerage
Ms. NeenaSena bought jewellery worth INR 3,00,000 in January 2021 and sold the same for INR 4,00,000 in September 2021. Here the short-term capital gain on movable asset sale can be computed as follows:
Short term capital gain = 4,00,000 – 3,00,000 = INR 1,00,000.
This gain amount of INR 1,00,000 would then be added to the gross total income of the assessee which then would be taxed as per the normal income tax slab rates pertaining to the respective financial or assessment year and the type of taxpayer.
Long Term Capital Gains
Coming to the long-term capital gain, we can say that the same is derived from the sale of a movable asset that was held for more than 36 months by the assessee.
For example, we can say that Ms. NeenaSena was having gold or jewellery worth INR 2,50,000 bought in the month of April 1994 for INR 20,00,000. She sold the same during the month of January 2021. As it was held for more than 36 months or 3 years, we can say that the gain arising from the sale of jewellery is a long-term capital gain.
Long-term Capital Gain = Sale Consideration – Indexed Cost of Acquisition – Indexed Cost of Improvement (if any) – Expenses incurred for the sale of asset i.e., brokerage
Long term Capital Gain = 20,00,000 – [2,50,000*301/100] – 0 – 0
Long term Capital Gain = 20,00,000 – 752500 – 0 – 0
Long term Capital Gain = INR 12,47,500
Here it is to be noted that, CII for the base year, which is 2001-02 has been taken, as the jewellery was bought during 1994. And the CII for FY 2020-21 has been taken as the sale took place during the month of January in 2021.
Indexed cost of acquisition is done for adjusting any cost inflation and the same would be done by using the Cost Inflation Index (CII). So, the indexed cost of acquisition will be equal to [Cost of Acquisition*(CII of the year of sale as per the index/CII for the first year in which asset was held by assessee or base year 2001-02, whichever is later)].
Similarly, for the indexed cost of improvement, the computation;
[Cost of Improvement*(CII of the year of sale as per the index/CII for the year in which improvement to the asset took place)]
Now, the gain of INR 12,47,500 shall be taxed at a flat rate of 20%, which would amount to INR 2,49,500 and will be added to the total tax liability computed on the income (if any) taxed under other heads of income.
Taxability of Gifting of Movable Asset
In case the movable asset was transferred to the other person in the form of a gift, can be classified as following from the point of view of taxation:
- Any sum of money which is received without consideration could be termed as a monetary gift,
- Gift of movable property, when specified movable assets/property is received or gifted,
- When specified movable assets are received at an inadequate consideration, they can be termed as movable assets received for less than fair market value.
If the gift received is a monetary gift, by an individual or HUF (Hindu Undivided Family), then it will be charged to tax if the amount or the aggregate value of the sum of money received during the year exceeds INR 50,000 and the sum of money received without consideration.
Say, Mr. Samuel received a cash gift worth INR 75,000 during the financial year 2020-21, hence the same will be taxable as it is over and above INR 50,000 in aggregate for one financial year.
In case of any gift which is received by an employee from his or her employer will also be taxed as per the Income Tax Act, in the hands of the employee as income from salary, provided the aggregate value of such gift during a financial year is INR 5,000 or above.
Exceptions to the same:
Following are some of the instances which are kept out of the taxability under the Income Tax Act, when coming to the gifting of a movable asset;
- Money or property received from a relative,
- The gift is received on the occasion of marriage
- The gift received under a will or by way of inheritance or on the contemplation of death of payer,
and the same shall be kept out of the purview of taxation without regard to the value of the gift involved.
The Income Tax Act also specifically defines the word relative for the purpose of clarity and it includes spouse, brother or sister, brother or sister of the spouse, brother or sister of either of the parents, lineal ascendant or descendant, lineal ascendant or descendant of the spouse and spouse of the aforementioned persons.