What is Capital Gain?

Capital gain means any profits or gains which arises from sale of capital assets.
Capital gain is chargeable to income tax under the head capital gains in that Previous year
in which the transfer takes place. Taxation of capital gains, thus, depends on two aspects
– capital assets and transfer.

What is Capital Asset?

Capital asset means any property whether it is movable or immovable, held by the
assessee either for business purpose or personal purpose. For example: building. furniture,
motor car or any other vehicle, jewelers, drawings, paintings, shares of companies, mutual
funds etc.

According Indian Income Tax Act Capital gain is divided in to two parts i.e. Short term
capital gain and long term capital gain.

TYPES OF CAPITAL GAIN

Capital gain is divided in two parts i.e Short Term Capital Gain and Long Term Capital Gain.

What Short Term Capital Gain?

 A capital asset held by the assessee for not more than the specified period
immediately preceding the date of its transfer is called as ‘short term capital asset’ capital
gain arising on its transfer is called ‘short term capital gain’. The specified period is as
under:-

What is Long Term Capital Gain? 

A capital asset held by the assessee for more than the specified period (as above) is
called ‘long term capital asset’ and capital gain arising on its transfer is called ‘long term
capital gain’. In other words and capital gain which is not short term capital gain, is called
long term capital gain.
 Difference between Short term capital Gain and Long term Capital gain

Distinctive Points Short term capital Gain Long term capital Gain

1. Meaning It is the result of transfer of It is the result of transfer of long

short term capital assets term capital assets
2. Indexation No Indexation Indexation is optional for all LTCA
(No Indexation for debentures,
bonds and depreciable assets)
3. Rate of tax Normal tax rate depending n It is not forming part of total Income
the total income of assessee so rate of tax 20% on capital gain
with indexation or 10% on capital
gain without Indexation.
4. Exemptions Exemption u/s 54B, 54D & 54G All exemption of sec 54 to 54 H are
u/s 54 are available available

Meaning: of transfer: Sec2(47)

1. Sale exchange or relinquishment of a capital assets or

2. Extinguishment of any rights in capital assets or
3. Compulsory acquisition of a capital assets under any law or
4. Conversion or treatment of a capital assets into a stock in trade or
5. The maturity or redemption of a zero coupon bound or
6. Any transaction involving the allowing of the possession of an immovable
property to be taken or retained in part performance of a contract or
7. Any transaction whether by way of acquiring shares in or by way of becoming a
member of a co-operative society, company or other association of person

Meaning of Capital Assets

Capital asset means property of any kind held by an assessee whether or not
connected to with his business and profession. Thus capital assets may be used for
private purpose or business purpose the assets may be moveble or Immovable, tangible
or Intangible, fixed or floating, Financial or non financial, However, personal effects of
movable nature other than jewelery, Painting arts etc. are excluded from the
definition of capital assets

Exception : following are not capital assets

1. Stock in trade : Any stock in trade, raw material or consumable stores held for
business or Profession
2. Persoal Effects : These are movable capital assets including wearing appeals and
furniture held for personal use by an assessee or any member of his family
dependent upon him. Eg: car, scooter or any other vehicles, television, refrigerator,
cooking utensils, household, articles furniture etc.,
a. Exception : The taxable personal effects are :jewellery, archeological
collections Drawings paintings sculpture any art work
3. Special bearer bonds of 1991
4. Agriculture land in India which is not situated in specified area
 5. 6 ½ % Gold bounds 1977 7% Gold Bound 1980 Or National Defiance gold Bound
issued by Government of India.
6. Gold Deposit Bounds 2000 issued under Gold Deposite Scheme 1999

Types of Capital Assets

A) On the basis of nature of capital assets they are classified into :
a. Financial Capital Asset:
b. Non Financial Capital Assets :
a) Financial Capital Asset:
Financial Capital assets refers to Equity & Prefernce shares,
securities like debentures Government securities listed on a recognized stock
exchange in India, units of mutual funds u/s 10 (23D) & Zero Coupon Bounds etc

b) Non Financial capital Assets:

refers to those capital assets which are not financial capital
assets eg ; Building, plant, and machinery, furniture, jewelery etc

On the basis of Period of capital assets they are classified into :

a. Short term capital Assets :

b. Long term capital Assets :

1. Short term capital Assets :

a. Non Financial capital Assets
Held by an assessee for not more than 36 months before the
date of its transfer is a short term capital assets
But in case of Financial Assets they will be treated as short
term capital assets if they are held for not more than 12 months
before date of transfer
Note: if an asset held exactly for 36 months or 12 months as
the case may be is a short term capital assets

b. Long term capital assets Sec2(29A)

A non financial capital asset held by an assessee for more than
36 months before date of transfer is a long term capital assets.

However the financial assets will be treated as long term

capital asset if it is held for more than 12 months before date
of its transfer.

Indexing means(CII)
Converting the purchased /acquired cost of the assets into its
present cost by using index numbers for inflation. The Index
numbers used in such conversion are called as Cost of Inflation
Index.(CII)

 
 How to Calculate Index Cost? 

It is computed for long term capital assets only (excepts for debenture, bounds and
depreciable assets whose WDV is given) it is computed as under

a) Indexed cost of acquisition up to 31.03.2017 =

(Cost of acquisition)   X  (Cost inflation index for the year of Transfer)
——————————————————————————————————
(Cost inflation index for the year of acquisition or 1981-82, Whichever is the later)

b) Indexed cost of Improvement      =

(Cost of improvement)  X  (cost inflation index for the year of Transfer)
—————————————————————————
Cost inflation index for the year of improvement

Meaning of Cost of acquisition:

Cost of acquisition of a capital is the value for which it is acquired or possessed or

purchased by assessee. It includes all expenses incurred by an assessee to acquire it. It is
also includes interest paid on loan taken for the purchases of the assets provided such
interest is not deducted under any other provision. It But does not includes any bounties
and subsidies received and cost met by others.

Exemption or Tax free capital gain:

The Income Tax act has granted several exemptions to capital gains under certain
circumstances. The Important provision is as follows:

1. Exemption for transfer of Residential house

Exemption is available on the capital gain on transfer of long term
residential house property and construction/ purchases of new
residential House (Sec 54) (subject to condition)
2. Exemption on Transfer of agriculture land(subject to condition)
3. Capital gain on compulsory acquisition of land and Building
forming part of Industrial undertaken Sec 54D (subject to condition)
2 mark questions:

1. What are capital gain

2. What is capital assets
3. What is long term capital asset?
4. What is short term capital assets
5. State the meaning of Indexed cost of acquisition
6. Give the meaning of Indexed cost of acquisition
7. Give the meaning of cost of improvement
8. What is cost of acquisition
9. What is Indexed cost of acquisition
10. Give the meaning of cost of improvement
11. What is cost of acquisition
12. What is indexed cost of acquisition
13. Weather an assessee has an option to apply
14. what are the exempted capital assets
15. which are the assets are not treated as capital assets
  

Note: Base for indexation of cost acquisition/improvement shifted to 01.04.2001 i.e.

2001-02. Up to financial year 2016-17 the base year for indexation was 1981-82

COMPUTATION OF CAPITAL GAIN

Capital gain is calculated as follows:-

1. Ascertain the full value of sales consideration.

2. Deduct the followings from the full value of sales consideration:-

 Transfer expenditure like brokerage, legal expenses etc.

 Cost of acquisition of the capital assets/indexed cost of acquisition in case of long
term capital assets.
 Cost of improvement to the capital asset/indexed cost of improvement in case of
long term capital asset.
3. The balance left-over is the gross capital gain/loss.

4. Deduct the amount of permissible exemptions u/s 54 of Income Tax Act as explained
below.

5. The balance is the net capital gain/loss, chargeable to income tax.

 Capital Gain Exempt From Income Tax (U/S 54)

Long Term Capital Gain From Transfer of a Residential House: Anindividual/HUF will

be exempt from tax if the assessee has within a period of one year before or two years after
the date of such transfer purchased, or within a period of three years constructed a
residential house.

The amount of exemption available is equal to the amount so utilized or the amount of

capital gain, whichever is the less. If the whole of capital gain is not utilized before the filing
of income tax return, the balance should be deposited in Capital Gain Account Scheme.
The amount can be utilized within the specified period to purchase or construct a residential
house.

Note: For availing this exemption, the assessee must not transfer the new house, within a
period of three years from the date of its purchase.

Long Term Capital Gain Invested In Certain Bonds : Any long term capital gain shall be
exempt from income tax if the whole of the amount of such capital gain is invested in long
term specified assets i.e. bonds issued by NHAI, or Rural Electrification Corporation Ltd.

Note:
1. Amount of long term capital gain must be invested in bonds within a period of 6
months from the date of transfer.
2. With effect from 01.04.07 the amount of investment in bonds during the financial
year, shall not exceed Rs.50 lakhs.
3.  Lock in period of the bonds is 3 years. It means these bonds can be redeemed after
completion of three years from the date of investment.
4. No deduction can be claimed by an income tax payee for investment made in these
bonds u/s 80-C if exemption is already being claimed against long term capital gain u/s 54.
Capital Gains From An Assets Other Than Residential House:  Any long term capital
gain arising to an individual/HUF, from the transfer of any assets other than a residential
house, shall be exempt if the whole of the net consideration is utilized within a period of
one year before or two years after the date of transfer for purchase, or within 3 years in
construction, of a residential house.

Note:

1. If the part of net consideration is so utilized, the amount of exemption shall be equal to:

Capital Gain     x      Cost of New Residential House

————————————————————–

Amount of Net Consideration

2. If the amount is not utilized before the filing of income tax return, the balance should be
deposited in Capital Gain Account Scheme. The amount can be utilized within the specified
period to purchase or construct a residential house.

3. If  a tax payer transfers the newly acquired residential house within a period of three
years of its purchase or construction, then the amount of capital gains arising from the
transfer of the original asset which was not charged to tax, shall become taxable as long
term capital gains for the year in which the new asset is transferred.

4. The concession will not be available in case where the assessee owns more than one
residential house on the date of the