Transfer of capital assets denotes a concept that affects investors, property holders and business houses. Whether you are transferring ownership of land, share purchases or disposing of inherited property, the tax implications from the transfer of capital assets confer great importance and warrant a clear interpretation.
As per the provisions of the Income Tax Act, 1961, the term “transfer of capital assets’ imputes a legal connotation and sets out the process for the calculation of capital gains tax. This blog surveys what constitutes a capital asset, its transfer and the way in which the resulting profits or gains or losses are subject to taxation. Covering short and long-term capital returns, and the immunity granted under different sections, we will dive into the rules that oversee these transactions and the way they influence your tax burden.
Definition of Capital Assets
The definition of capital asset under Section 2(14) of the Income Tax Act involves:
- Various categories of property held by an assessee, irrespective of being associated with his business or calling.
- Any securities owned by a Foreign Institutional Investor (FII) whose investment in such securities conforms to the SEBI Regulations.
- Any securities in possession of Category I or Category II under the special investment class called the Alternative Investment Fund, and investment in such securities under the SEBI Regulations or IFSC Regulations.
- Any
- ULIP plan under which the immunities under Section 10(10D) are inapplicable,
- Land, Machinery, Buildings, Shares, Patents, Vehicles, and Jewellery.
- However, precious stones and gems, jewellery, and ornaments made of silver, platinum, gold or other valuable metals, archaeological curations and artefacts, paintings, carvings or any artefacts of intrinsic value shall be deemed to be a capital asset even if it’s for personal use,
What Capital Assets Excludes?
The terminology “capital asset” rules out the following:
- Stock-in-trade, consumable goods, supplies or organic matter used for commercial purposes or professional utility,
- Movable property kept for the private use of the assessee or his family members who rely on support and are reliant.
- Debt instruments like Special Bearer Bonds and Specified Gold Bonds
- Agricultural land subject to jurisdictional limits of municipality, notified or town panchayat or cantonment and density of population.
Category of Capital Assets
A part of the capital assets are longstanding non-current resources maintained by a person for their personal use or investment, and can be both tangible and intangible. Whatever generates value, be it stocks, machinery, properties or bonds, that a company or person keeps ownership of constitutes capital assets.
Two categories of capital assets include: short-term and long-term.
1. Short-Term Capital Asset
Retained capital assets beneath 24 months (36 months in cases where the transfer transpires before 23-07-2024) immediately before the date of transfer shall be considered to be a short-term capital asset. Nonetheless, the following assets shall be deemed to be short-term capital assets in possession up to 12 months:
- A company’s stock or preference shares are listed on specific accredited bourses across India.
- Diverse listed shares.
- Zero-Coupon Bonds
- UTI Units
- Units of equity-related mutual funds
2. Long-Term Capital Asset
Capital assets, on behalf of which investments are owned or held for more than 24 months, for example, stock funds and listed securities, which need a 12-month holding period, are considered to be long-term capital assets.
Meaning of Transfer of Capital Asset
“Transfer” with reference to a capital asset covers the following transactions:
- Sale, trading or giving up of the claim or right on the asset;
- Termination of specific entitlements related to a capital asset;
- Monetization of capital assets toward stock-in-trade;
- Compulsory takeover of an asset;
- Maturity or repurchase of a zero-coupon bond
- Granting the custody and ownership of immovable properties to the purchaser by way of partial performance of the agreement.
- Any transaction which leads to the transfer of (or allowing the usage of) an immovable property; or
- Transfer of or removal of any holding or the stakes in a property, or the creation of any investment category.
Section 2(47) of the Income Tax Act interprets “transfer” in an all-encompassing way, comprising the variety of transactions that lead to the abdication or transfer of ownership or claims over a capital asset. This is imperative since the transactions involving a transfer initiate the capital gains tax measures.
The Scope of Capital Asset Transfers
The comprehensive definition of the transfer of capital assets incorporates the specified modes of exchange:
- Sale: The sale of a capital asset plays a central part in ascertaining the capital gains tax amount payable and the resulting tax implications. As sale leads to transfer, it generates capital gains tax. In a sale, there is a transfer of ownership from the seller to the purchaser in lieu of consideration, in the form of money.
Calculation of Gains:
- Sale Consideration: The amount or value received or collectable from the sale.
- Minus: Indexed cost of acquisition, upgradation, and transfer costs.
- Outcome: Long-term or Short-term capital gain based on the holding period.
In the course of the sale of land or buildings, there is an application of Section 50C, wherein if the sale price is less than the value of the stamp duty, the latter is the assessed value of the purchase price for the purpose of computation of capital gains.
However, certain sales may be free from capital gains tax on grounds of:
- Reinvestment done under Sections 54, 54F
- Transfer of an asset to a family member by way of a gift (not deemed to be a sale).
Exchange: Exchange means the transfer of one capital asset for the purchase of another whenever an actual exchange occurs. One item forming part of tax issues is the market value of the asset received in exchange.
- Giving up the claims or Abandonment of the Asset: This includes scenarios where the holder of the asset abandons their rights linked with the capital asset. Such a scenario results when the owner, out of their own accord, surrenders their ownership over the asset even without getting commission or profit.
- Extinguishment of specific prerogatives in lieu of transfer: This encompasses situations where possession is not transferred directly, but the rights linked with the asset are cancelled or ended, causing capital gains. For example, if there is a cancellation of a contract pertaining to a capital asset, and the party gets a reward for such a cancellation.
If a tenant renounces their tenancy rights associated with a commercial property and gets paid Rs 40 lakhs by way of payment from the landlord. Where the tenant originally acquired the tenancy rights for Rs. 10 lakhs, now, here the renunciation of tenancy rights represents a transfer, and the difference between the payment received (Rs. 40 lakhs) and the cost of acquisition (Rs. 10 lakhs) denotes the capital gain of Rs. 30 lakhs.
- Turning of the capital asset into stock-in-trade: Whenever a capital asset is turned into stock-in-trade by a taxpayer, it is deemed to be a transfer and attracts capital gain regulations. The actual value or fair market price of the asset on the effective date when conversion occurs is taken to be the total value of the payment or arising out of the transfer.
- Compulsory purchase resulting from any law: When a compulsory acquisition takes place by a government or other sanctioned body or entity subject to legal principles, like the Land Acquisition Act, it is held to be a transfer. The payment paid is perceived to be the indemnification.
- Any transaction that grants the holding or title of immovable property to be inhabited or maintained ownership of due to part performance of a contract mentioned under Section 53A of the Transfer of Property Act,1882: This stipulation encompasses conditions where possession of an immovable property is exchanged under an agreement, irrespective of the formal sale deed not being signed or performed. Section 53A entitles the transferee who has obtained ownership of the property on the basis of a written agreement, has completed the part of his agreement, and is amenable and ready to implement the remaining part.
- Any transaction producing the result of transferring or allowing the enjoyment of immovable property with no formal sale.
- Any kind of disposal or distribution of an asset or any perks to it, which is not clearly stated in the diverse clauses, will be considered to be a transfer.
Important Factors That Determine Transfer
- Intention of the parties to the transfer and the form of transaction.
- Active control over an asset irrespective of formal ownership transfer (clause (viii) of Section 2(47).
- Extinguishment of an exclusive right despite the retaining of ownership by the original owner can activate capital gains tax.
- Consideration received in family dwellings by way of one member remitting payments to abandon their share is deemed to be a transfer.
- Transfer of the gifted or inherited asset invokes capital gains tax, with the cost of acquisition determined on the basis of the original owner’s cost.
- Development agreements, where a property or landowner allows a property developer to develop the property in lieu of a share of the built property, need close scrutiny to ascertain if a transfer is involved. If possession is handed over to the developer who can develop the land, it is a transfer according to section 2(47 (v) or (vi).
Conclusion
The meaning of transfer as observed by Section 2(47) of the Income Tax Act is broad enough to include diverse transactions and determine when a capital gains tax liability emerges. Every kind of asset transfer, be it a sale, exchange, or abandonment, or only an alteration into stock-in-trade, has inherent consequences and needs a cautious evaluation in the context of the provisions of the Act. A knowledge of the regulations on the computation of capital gains, exclusions where transfer of a capital asset does not take place and the indexation benefits helps to assist the taxpayers to arrive at well-considered decisions and evade unwarranted tax implications. Always consult a tax professional for a foolproof assessment of a capital asset-related transaction and navigate the complexities of capital gains tax.
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