CAPITAL GAIN

As per section 45(1), profits or gains arising on transfer of a capital asset shall be chargeable
under the head “Capital Gains”.

Conditions to be satisfied to charge any income under the head “Capital Gains” are
There must be a Capital Asset
The assessee transfers such capital asset.

There must be profit or gain (including negative profit or gain) on such transfer.

CAPITAL WHEN TRANSFER RESULTS TO

GAIN
CAPITAL GAIN

“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 Foreign Institutional Investor (if such investment is in accordance
with regulations under the SEBI Act).

Exceptions of Capital Asset:

Stock-in-trade [other than the securities held by foreign institutional investor as per the SEBI
Act].

Personal movable effects i.e. any movable assets held for personal use by the assessee or any
dependent family member.

EXCLUSIONS OF PERSONAL EFFECT (means, following shall always be treated as capital

asset):
a) Jewellery (i.e. ornaments made of precious metal or precious stones like diamonds, etc.);
b) Archaeological collections;
c) Drawings;
d) Paintings;
e) Sculptures;
f) Any work of art.
IMPORTANT RULINGS regarding personal effects: -
If anything (like Gold Coin, etc.) placed before God / Goddess, at the time of Puja – will NOT
constitute personal effect.

Silver utensils, subject to nature of article and in a reasonable quantity – will constitute personal
effect by virtue of tradition in Indian families.

Gold utensils – will never constitute personal effect, means, shall always be treated as capital
asset.

Note: An immovable property held for personal use are not personal effect and hence are Capital
assets.

Agricultural Land in rural areas is not a Capital Asset. Non-Agricultural land is a Capital Asset
and any agricultural land situated outside India is also a Capital Asset.

Gold Bonds, Special Bearer Bond and Gold Deposit Bond: Bond issued by the Central
Government or Gold Deposit Scheme or Gold Monetisation Scheme are not a Capital Assets.

Types of Capital Asset:

Capital Assets may be –
Short Term Capital Asset.
Long Term Capital Asset.

In following Cases Period of Holding

Short Term Long Term Capital
Capital Asset Asset
Listed Equity/ Preference Shares
Other Listed Securities unit Less than or equals More than 12 months
Units of Unit Trust of India or Equity to 12 months
Oriented Fund
Zero Coupon Bond
Shares of Unlisted Company Less than or equals More than 24 Months
Immovable Property to 24 months
Others Less than or equals More than 36 months
to 36 months

TRANSFER [Sec 2(47)]

Includes the following transaction Do not Includes or Transactions not regarded

as Transfer
Sale Distribution of capital asset on total or partial
Exchange partition of Hindu undivided family.
 Relinquishment of the asset Transfer of capital asset under a gift or will
(Surrender/withdraw of asset) or an irrevocable trust.
Extinguishment of any right in an asset Transfer of a capital asset by a holding
Compulsory acquisition of an asset company to its 100% subsidiary company
under any law (i.e. Indian co.). [This exemption shall not be
Conversion of asset into stock-in-trade available if the capital asset is transferred as
Any transaction of immovable property stock in trade]
Maturity or redemption of a zero- Transfer of a capital asset by a 100%
coupon bond. subsidiary company to its holding company
(i.e. Indian co.). This exemption shall not be
available if the capital asset is transferred as
stock in trade.
Transfer of capital assets by amalgamating
company to the amalgamated company (i.e.
Indian company) in the scheme of
amalgamation.
Transfer of capital assets in a scheme of
amalgamation of a banking company with a
banking institution, as brought into force by
the Central Government.
Transfer in a demerger of a capital asset by
the demerged company to resulting company
(i.e. Indian
Distribution of assets in kind by a company
to its shareholders on its liquidation.
Conversion of Preference Shares of a
company into Equity shares of that company.

Methods of Computation of Capital Gain:

Calculation of Short-Term Capital gain

Particulars Amount Amount

Sales Consideration ******
Less: Expenses on transfer (****)
Net Sales Consideration ******
Less: Cost of Acquisition ******
Cost of Improvement ****** (******)
Short Term Capital Gain *******
Less: Exemption u/s 54B, 54D, 54G & 54GA (******)
Taxable Short Term Capital Gain *******
Calculation of Long Term Capital gain

Particulars Amount Amount

Sales Consideration ******
 Less: Expenses on transfer (****)
Net Sales Consideration ******
Less: Indexed Cost of Acquisition ******
Indexed Cost of Improvement ****** (******)
Long Term Capital Gain *******
Less: Exemption u/s 54, 54B, 54D, 54EC, 54ED, (******)
54EE,54F, 54G, 54GA & 54GB
Taxable Long Term Capital Gain *******

Indexed Cost of Acquisition: Adjusting proportionately according to the price level of the sale.
= Cost of Acquisition * Index of the year of Sale
Index of the year of Acquisition

Indexed Cost of Improvement: Cost of Improvement * Index of the year of Sale

Index of the year of Improvement

When an Asset is acquired before 1/4/2001, following points to be considered:

Indexation benefit shall be available from the year 2001-02. (Index of the year of Acquisition
will be 100 i.e. Indexation of year 2001-02)

Cost of Acquisition will be higher of Actual Cost of Acquisition or Fair Market Value.
Cost of Improvement incurred before 1/4/2001 shall be ignored.

Cost of Acquisition in Special Cases

Self-Generated Assets:
Cost of Cost of
Nature of Asset Acquisition improvement
Self- Generated Goodwill of Business, Right
to manufacture/ produce or process any Nil Nil
article/right to carry on business
Self-Generated Tenancy Rights, route
permits, Loom Hours, Trade Marks, Brand Nil Actual Cost
name associated with a business Incurred
Note: In case goodwill is purchased then its cost of acquisition shall be taken as actual cost of
acquisition. However, cost of improvement will be NIL whether purchased or self-generated.

Bonus Shares: Cost of Acquisition will be nil if bonus shares are allotted on or after 1/4/2001
whereas Fair Market Value on 1st April, 2001 will be considered if bonus shares are allotted
before 1/4/2001.

Right Shares and Right Entitlement: Cost of Acquisition for Right shares will be the price paid
for such Right Issue and Cost of Acquisition for Right Entitlement will be nil.

Advance Money Forfeited: If Amount received and forfeited before 1/4/2014 then it is reduced
from Cost of Acquisition (Before Indexation) charged under the head Capital Gain. However, if
amount received and forfeited after 1/4/2014 it will be taxable under the head Income from other
sources.

Depreciable Assets: Capital Gain (Short Term) arises only in the following cases:
The Block of Asset is empty. [Net Sales Consideration > WDV, STCG = Net Sales – WDV and
when WDV > Sales Consideration it is STCL: WDV- Net Sales]
When Block of asset remaining is Nil. [Net Sales – WDV: STCG]

Cases where Indexation benefit is not available even on transfer of Long Term Capital Asset:
Debenture or Bond
Slump Sale
Equity Shares and Equity oriented fund

Transactions by a non-resident: On Transfer of shares in or debentures of an Indian Company

acquired in foreign currency.
Transfer of Global Depository Receipt.

Deduction from Capital gain on Sale of Residential House Property [Sec 54]:
Conditions:
 Assessee must be an Individual or HUF
 Assessee must have transferred a long term residential house (whether Self-occupied or Let-
out)
 Assessee must have purchased one Residential house.
 Time Limit
 Purchase: Within a period of 1 year before transfer or 2 years after the date of transfer.
 Construction: Within a period of 3 years construction must start from the date of transfer.

Deduction: Minimum of the following:

 Investment in the new asset, or
 Capital Gain.

Deduction from Capital gain on Sale of Urban Agricultural Land [Sec 54B]
Conditions
 Assessee must be an Individual or HUF
 Assessee must have transferred an Agricultural Land situated in Urban area. (Rural
agricultural land is not a capital asset)
 Assessee must have purchased one Agricultural Land (whether in Urban or Rural area)
 Time Limit: New Land should be purchased within 2 years from date of transfer.

Deduction: Minimum of the following:

 Investment in the new asset, or
 Capital Gain.

Compulsory Acquisition of land and building of an industrial undertaking [Sec 54D]

Conditions:
 Applicable to all assessee
 There must be compulsory acquisition of Land and Building of an Industrial Undertaking and
assessee must have been used in the last two years preceding the date of transfer
 Assessee must have purchased or constructed any building for shifting or setting up a new
industrial undertaking.
 Time Limit: Purchased or constructed new building within 3 years from date of transfer.
Deduction: Minimum of the following:
 Investment in the new asset, or
 Capital Gain.

Long Term Capital Gain from transfer of Land or Building or Both [Sec 54EC] Conditions:
 Applicable to all assessee
 Long Term Capital Asset being Land or Building or both are transferred.
 Capital Gain should be invested in Long Term Specified Assets like NHAI Bonds, RECL
Bonds, PCFL redeemable after 3 years.
 Time Limit: Within 6 months from the date of transfer.

Deduction: Minimum of the following:

 Investment in LTSA, (Restricted to ₹ 50,00,000 in any Financial Year) or
 Capital Gain.

Long Term Capital Gain from transfer of Long Term Capital Assets [Sec 54EE]
Conditions:
 Applicable to all assessee
 Any Long Term Capital Asset is transferred.
 Capital Gain should be invested in Long Term Specified Assets (notified units or specified
units) issued before 1/4/2019.
 Time Limit: Within 6 months from the date of transfer.

Deduction: Minimum of the following:

 Investment in LTSA, (Restricted to ₹ 50,00,000 in any Financial Year) or
 Capital Gain.

Capital Gain from transfer of Long Term Capital Asset other than Residential House. [Sec
54F]
Conditions:
 Applicable to only Individual and HUF.
 Transfer of any Long Term Capital Asset other than Residential House.
 Capital gain should be invested to purchase/construct 1 residential house.
 Time Limit: [Same as 54]
 Purchase: Within a period of 1 year before transfer or 2 years after the date of transfer.
 Construction: Within a period of 3 years construction must start from the date of transfer.
Deduction:
If Investment is more than or equals to Net Consideration then total Capital Gain is exempted
else exemption will be proportionately [(Capital Gain * Actual Investment)/ Net Consideration]
Illustration 1:
Lucky has a house property acquired on 18/08/2009 for 6,00,000. He used the house for his own
residential purpose. On 18/08/2012 he incurred capital expenditure on re-construction of house
3,00,000. On 15/05/2019, he brought office goods (inflammable) worth 1,00,000 at home to be
delivered to a party staying near to his home. At the night of that day accidental fire took place
and damaged the whole house property, furniture worth 5,00,000 and business stock.

Insurance claim received on 18/08/2019 –

1. for the house 1,00,000 in cash & a new house allotted to him (fair market value of which is
44,00,000 on 18/08/2019);
2. for house-hold furniture ` 2,00,000; and
3. for stock ` 80,000.

State – Tax-treatment under the head Capital gains. - How shall your answer differ if such
compensation is received by the assessee on 15/04/2020.

Solution:

As the damage occurred due to accidental fire, such case is governed by the provision of sec.
45(1A)

Computation of capital gain in the hands of Lucky for the A.Y. 2021-22

Particulars Workings Details Amount

Sale consideration
of house 1,00,000 + ` 44,00,000 45,00,000
Less: Expenses on Nil
transfer
Net sale 45,00,000
consideration
Less: i) Indexed 6,00,000 * 12,20,270
cost of acquisition 301/148
ii) Indexed cost of 3,00,000 * 4,51,500 16,71,770
improvement 301/200
Long Term Capital 28,28,230
Gain

For Furniture: No capital gain liability arises as furniture is a personal asset of the assessee and
hence not a capital asset. Compensation received on loss of furniture shall be treated as capital
receipt and hence not liable to tax.

For Stock: Compensation received on loss of stock shall be liable to tax u/s 28. In the given
case, loss of 20,000 (1,00,000 – 80,000) shall be allowed under the head “Profits & gains of
business or profession” In case such compensation is received on 15/04/2020 then the capital
gain of ` 28,94,878 as computed above shall be taxable in the Assessment year 2021-22
Illustration 2:
Sunil has a house property acquired on 7/07/1995 for 3,00,000. He incurred improvement
expenditure on such property 70,000 on 16/08/2000 and 50,000 on 17/07/2010. Market value of
such property as on 1/04/2001 is 4,50,000. On 16/08/2013, such property is compulsorily
acquired by the Government and compensation decided at 11,50,000. 20% of the compensation
received on 31/03/2020 and balance on 2/04/2020. On further appeal, on 16/08/2020 enhanced
compensation is declared by the Government 2,00,000. Expenditure incurred to get enhanced
compensation is 11,000. Such compensation received on 18/08/2021. Compute income under the
head Capital Gains of Sunil for the assessment year 2021-22, 2021-22 and 2022-23.

Solution

Computation of capital gains of Sunil for the A.Y. 2021-22

Particulars Working Details Amount
Sale consideration 11,50,000
Less: Expenses on transfer Nil
Net sale consideration 11,50,000
Less: i) Indexed cost of 4,50,000 * 220 /100 9,90,000
acquisition
ii) Indexed cost of improvement 50,000 * 220 /167 65,868 10,55,868
Long Term Capital Gain 94,132

1. The initial compensation (i.e. 11,50,000) decided by the Government shall be treated as sale
consideration.
2. Cost of acquisition is the original cost of acquisition (i.e. 3,00,000) or Fair market value as on
1/04/2001 (i.e. 4,50,000) whichever is higher.
3. Cost of improvement incurred before 1/04/2001 is to be completely ignored.
4. Though the property was compulsorily acquired by the Government in the P.Y 2013-14 but
the compensation was received in the P.Y.2020-21, therefore the amount shall be taxable in
the P.Y. 2020-21, however indexation benefit shall be available till the previous year 2013-
14.

Computation of capital gains of Mr. Sunil for the A.Y. 2021-22: As the assessee has not received
enhanced compensation during the P.Y.2020-21, hence nothing is taxable in the A.Y. 2021-22.

Computation of capital gains of Mr. Sunil for the A.Y. 2022-23

Particulars Working Details Amount
Sale Consideration Enhanced compensation 2,00,000
Less: Expenses on transfer 11,000
Net Sale Consideration 1,89,000
Less: i) Indexed cost of acquisition Nil
ii) Indexed cost of improvement Nil Nil
Long Term Capital Gain 1,89,000
In case of enhanced compensation, the cost of acquisition shall be taken as nil and the nature of
capital gain shall be same as that of initial compensation.

Illustration 3:
Liza transferred the following assets on 2-05-2020, determine capital gain for the A.Y. 2021-22
Particulars Cost MV 1/04/2001 Sale value
Land acquired in 1956 25,000 1,00,000 30,00,000
Goodwill of business [Business Nil 40,000 2,00,000
commenced on 1-05-1955]
Tenancy right Nil 30,000 3,00,000
Goodwill of profession Nil 15,000 1,50,000
[Profession commenced on 1-
05-1996]
Brokerage paid on transfer @ 2%

Solution:

Computation of capital gains in the hands of Liza for the A.Y. 2021-22
Particulars Workings Land Goodwill of Tenancy
business right
Sale consideration 30,00,000 2,00,000 3,00,000
Less: Expenses on 2% of above 60,000 4,000 6,000
transfer consideration
Net Sale Consideration 29,40,000 1,96,000 2,94,000
Less: Indexed cost of 1,00,000* 301/100 3,01,000 - -
acquisition
As per sec 55(2)(a) - Nil Nil
Less: Indexed cost of Nil Nil Nil
improvement
Long Term Capital Gain 26,39,000 1,96,000 2,94,000

Transfer of goodwill of a profession, even if it is a self-generated asset, is not covered by sec.

55(2)(a), hence shall not be charged to tax.

Illustration 4:

Mr. X has sold following assets during the year 2019-20

Items Cost of acquisition Sale consideration Year of acquisition
Land 10 lacs 150 lacs 1998-99
Jewellery 30 lacs 120 lacs 2008-09
On 31/03/2020, he has purchased a residential house of 30,00,000 for self occupation as he had
no other house till date.
Compute capital gain.
Solution:
Computation of capital gains in the hands of Mr. X for the A.Y. 2021-22
Particulars Details Land Jewellery
Sale Consideration 1,50,00,000 1,20,00,000
Less: Expenses on transfer Nil Nil
Net Sale Consideration 1,50,00,000 1,20,00,000
Less: Indexed cost of 10,00,000 * 301 / 30,10,000 -
Acquisition 100
Less: Indexed cost of 30,00,000 * 301/ - 65,91,241
Acquisition 137
Less: Indexed cost of Nil Nil
improvement
Long Term Capital Gain 1,19,90,000 54,08,759
Less: Exemption u/s 54F Working 1 23,98,000 Nil
Long Term Capital Gain 95,92,000 54,08,759

Working 1: In the given case assessee can claim benefit u/s 54F, for any of the LTCG (land or
jewellery). A Comparative study is made under to decide from which LTCG such deduction
should be claimed:
Particulars Working Land Jewellery
Long Term Capital A 1,19,90,000 54,08,759
Gain
Net sale B 1,50,00,000 1,20,00,000
consideration
Benefit u/s 54F A/B * 30,00,000 23,98,000 13,52,190

Since deduction is higher in case of Land hence the deduction u/s 54F is 23,98,000

Illustration 5:
Mr Sardar acquired an inherited property on 30.8.2006 from his grandfather who purchased it at
210,000 on 30.6.2000. The Market Value of the property as on 1.4.2001 was 510,000. On
1.7.2005, he purchased gold valued 150,000 the Market Value of which was 147,000 as on
1.4.2005. He sold both the assets on 30.11.2019 for 60,00,000 and 21,00,000 respectively.
Calculate the amount of Capital Gain of Mr Sardar for the Assessment Year 2020-2021.

Solution:

Computation of Capital Gain of Mr Sardar for the AY 2020-2021

Particulars Building Gold
Sales Consideration 60,00,000 21,00,000
Less: Expenses on Transfer Nil Nil
Net Sale Consideration 60,00,000 21,00,000
Less: Indexed Cost of Acquisition
510,000 * 301/122 12,58,279
 150,000* 301/117 3,85,897
Less: Indexed Cost of Improvement Nil Nil
Taxable Long Term Capital Gain 47,41,721 17,14,103

Illustration 6:
Sonu has jewellery acquired on 17/07/2010 for ₹5,00,000. On 18/08/2013 Sonu incurred
improvement expenditure on such jewellery by adding diamond to it worth ₹3,00,000. On
18/08/2018, he transferred such jewellery to his friend Monu for ₹40,00,000.
Sonu already has a self-occupied house property in Lucknow, however on 17/03/2019 he
purchased another residential house property for ₹30,00,000 for the purpose of letting out.
As on 5/04/2020, his friend offered him house worth ₹25,00,000 (Value for Stamp duty purpose
is only ₹ 14,00,000/-) for ₹15,00,000 only Sonu purchased the same.
On 7/04/2021, Sonu sold the new house acquired from his friend for ₹19,00,000. Value
determined for the purpose of stamp duty purposes ₹22,00,000 and market value as on the date
of transfer is ₹ 26,00,000. Compute capital gain in hands of Sonu for several years.

Solution:

Computation of capital gain of Sonu for the A.Y. 2019-20

Particulars Workings Details Amount
Sale consideration of jewellery 40,00,000
Less: Expenditure of transfer Nil
Net sale consideration 40,00,000
Less: Indexed cost of acquisition ₹ 5,00,000*280/167 8,38,323
Less: Indexed cost of ₹ 3,00,000*280/220 3,81,818 12,20,142
improvement
Long term capital gain 27,79,858
Less: Exemption u/s 54F (₹ 30,00,000/₹ 40,00,000 x 27,79,858) 20,84,894
Taxable Long term Capital gain 6,94,965

Computation of capital gain of Sonu for the A.Y. 2021-22: Since the assessee acquired
another house property therefore the earlier exemption availed u/s 54F shall be revoked and shall
be liable to long term capital gain. Hence taxable long-term capital gain for the A.Y. 2021-22 is
₹ 20,84,894.

Computation of capital gain of Sonu for the A.Y. 2021-22

Particulars Details Amount
Sale consideration Value determined for stamp duty [Sec. 50C] 22,00,000
Less: Expenditure on transfer Nil
Net sale consideration 22,00,000
Less: Cost of acquisition 15,00,000
Less: Cost of improvement Nil 15,00,000
Short term capital gain 7,00,000

Illustration 7:
Mr. Mitra furnishes the following particulars for the previous year 2019-20:
He sold his residential house on December 15, 2019 for ₹ 7,70,000. He purchased the house on
March 2, 1998 at a cost of ₹ 75,000 (Fair market value on April 1, 2001 was ₹1,50,000).
He sold the shares of AB Co. Ltd. on February 12, 2020 for ₹ 18,700 (purchased on March 21,
2019 for ₹ 15,300). Compute his income from capital gain/loss for the A.Y. 2021-22.

Solution:

Computation of Capital Gains of Mr. Mitra for the A.Y. 2021-22

Particulars Amount
House
Sale Proceeds 7,70,000
Less: Expenses on transfer Nil
Net sale consideration 7,70,000
Less: Indexed Cost of acquisition [(₹ 1,50,000*301)/100] 4,51,500
Long Term Capital Gain 3,18,500
Shares
Sale Proceeds 18,700
Less: Expenses on transfer Nil
Net sale consideration 18,700
Less: Cost of acquisition 15,300
Short Term Capital Gain 3,400

Illustration 8:
Mr. Bablu acquired a Jewellery for ₹ 60,000 as on 01.07.1995. On 01.07.2005, Mr. Bablu has
sewn a diamond worth ₹ 25,000 in such jewellery. As on 01.06.2019, Mr. Bablu sold the
jewellery for ₹ 8,00,000. Brokerage @ 1% of sale value was paid by him. The Fair Market value
of the jewellery as on 01.04.2001 ₹ 2,00,000. Compute capital gain/loss in hands of Mr. Bablu.

Solution:

Computation of Capital Gain in the hands of Mr. Bablu for the A.Y. 2021-22
Particulars Working Details Amount
Sale consideration 8,00,000
Less: Expenses on transfer 1% of ₹ 8,00,000 8,000
Net sale consideration 7,92,000
Less: i) Indexed cost of acquisition ₹2,00,00*(301/100) 6,02,000
ii) Indexed cost of improvement ₹ 25,000*(301/177) 64,316 6,66,316
Long Term Capital Gain 1,25,684
Note: Cost of acquisition shall be taken as cost of acquisition in the hands of owner or fair
market value as on 1/4/2001, whichever is higher.