Income from Capital Gains

If assesse sell or transfer of a capital assets and earn any profit

through such sell or transfer is known as Capital Gains.
Thus the essential elements of Capital Gains are:-
• Capital Assets
• Transfer of Capital Assets
• Capital Gain

Capital Assets
Capital assets mean any movable, tangible, intangible, fixed and
floating property held by the assesse whether connected with his
business or not. It also includes securities and intellectual properties.
For example land, building, plant and machinery, furniture, goodwill,
lease hold property, jewellery, share debenture, bonds, securities, etc.
but capital assets does not include:-
(i) Stock in trade
(ii) Movable assets for personal use (household goods)
(iii) Agriculture land
(iv) Gold bonds
(v) National defence gold bonds
(vi) Special bearer bonds
(vii) Gold deposit bonds
(viii) Stridhan (woman wealth)

Kinds of capital assets:-

Capitals are assets are divided into two categories:
 Short term capital assets (held by the assesse less than 36 months)
 Long term capital assets (held by the assesse more than 36 months)
Transfer of Capital Gains
Transfer of capital assets includes
• Sale of assets
• Exchange of assets
• Compulsory acquisition assets
• Increase in intangible assets
• Conversion of business into another business
• Redemption of zero coupon bonds
• Any other transaction which change the ownership of the property

Transactions which are not treated as transfer

• Distribution of capital assets on the partition of H.U.F.
• Transfer of capital assets under a gift or will or trust
• Transfer of capital assets by it subsidiary company to its holding company
and vice versa
• Transfer of capital assets in the nature of scientific or art collection to the
government or any national university or museum or other approved of
institution
• Any transfer of foreign currency bonds
• Any transfer assets by AOP (Association Of Person) to a company
• Any transfer of land by stick industrial unit
• Any transfer of sovereign gold bonds issued by RBI
• Any transfer by way of conversion of preference share into quantity shares
of the company

Capital Gain
As per section 48 the amount of Capital Gain is calculated as under:
 Computation of Short-term Capital Gain of......................
(A.Y. 20......-20.......)
Particulars Rs. Rs.
Sales proceeds/ Transfer Price ✓
Less:- Expenses on Sale or Transfer
Net sale proceeds ✓
Cost of Acquisition ✓
Less:-
Cost of Improvement ✓ ✓
Short term Capital Gain ✓
Less:- Exemption U/S 54, 54B, 54D, 54GG, 54GGA ✓ ✓
Taxable short-term Capital Gain ✓

Computation of Long-term Capital Gain of......................

(A.Y. 20......-20.......)
Particulars Rs. Rs.
Sales proceeds or transfer price ✓
Less:- Expenses on sale or transfer ✓
Net sale proceeds ✓
Less:- Index cost of acquisition: ✓
[Cost of acquisition X CII of sale year/
CII of purchase year or CII of 2001-02 ]

Less:- Index cost of improvement: ✓ ✓

[Cost of improvement X CII of sale year/
CII improvement year]
Long term Capital Gain ✓
Exemption U/S 54, 54B, 54D, 54EC,54EE, 54F, 54G,
Less:-
54GA, 54GB
✓
Less:- Amount deposited under CGAS 1988 U/S 54H ✓
Taxable long term Capital Gain ✓
Explanation of Provisions
(i) Sale Proceeds
The Gross Sale price or transfer price money received by the
assesse as consideration on the sale all transfer of a Capital asset
is treated as sale proceeds.
(ii)Expenses on Sale or Transfer
If assesse incurred any expense on sale or transfer of the capital
asset in treated as expenses on sale. For example:- Commission
brokerage, Registration and legal expenses, etc.
(iii) Cost of Acquisition
Cost of acquisition mean the expenses incurred on the purchase,
construction and reconstruction of the assets in other words the
value of an assets against which it acquired is treated as ‘Cost of
Acquisition. Following are the provisions U/S 49 of income tax Act
1961 in relation of cost of acquisition:-
(i) Cost of previous owner is taken as Cost of Acquisition if asset is
received by the assesse under a gift or thought will or by succession
or inheritance.
(ii) Cost of Acquisition of shares or securities
If the shares or securities were acquired before 1st April 2001, cost of
acquisition will be taken as the actual cost of shares or fair market
value on 1st April 2001 whichever is higher is treated as Cost of
Acquisition but if shares or securities are purchased after 31st March
2001 the actual Cost will be taken as Cost of Acquisition.
(iii) Cost of Acquisition of bonus share
Cost of bones share or securities received by the assesse without any
payment before 1st April 2001 the fair market value on 1st April 2001
is called Cost of Acquisition but this share acquired after 1 st April
2001 than Cost of Acquisition is taken as NIL.
 (iv) Cost of Acquisition of goodwill
Cost of Acquisition in relation of goodwill patents, right, trademarks
and others Intangible asset will be purchase price of Intangible assets
if such assets are acquired without any payment the cost Acquisition
will be taken as NIL.
(v) Cost of Acquisition right share
If assesse received right share from the company the actual amount
paid for acquiring these shares will be the cost of Acquisition if
assesse transfer the right of such share in favour of any other person
without acquiring these share the cost of acquisition will be taken as
NIL.
(vi) Cost of acquisition of Capital asset acquired before 1 st April 2001
Where the Capital asset became the property of the assesse before
1st April 2001 the cost of acquisition of asset may be actual cost of
asset or market price on 1st April 2001 whichever is more.
(vii) Cost of acquisition of asset acquired by the previous owner before
1st April 2001 under section 49 If Capital asset became property of
the previous owner before 1st April 2001 the cost of acquisition of
the asset will be the actual cost of acquisition or fair market value
of the asset on 1st April 2001 will be the cost of Acquisition
whichever is more.
(viii) Cost of Acquisition of shares in Amalgamated Company
If assesse is given shares of the amalgamated company which is an
Indian Company the cost of acquisition of such shares will be the cost
of shares in Amalgamating Company.
(ix) Cost of shares in resulting Company
The cost of Acquisition of share in the resulting Company shall be the
amount which bears to the cost of acquisition of shares held by the
assesse on the basis of Net Worth.
(x) Cost of Acquisition of Shares demerged Company
Cost of acquisition of share will be taken the value of share before
the demerger.
 (xi) Cost of equity Shares in lieu of preference share
Where equity share of a company are issued in lieu of preference
share shall be the cost of preference share in relation to which such
asset is acquired.
(xii) Cost of Acquisition in case of Advance money received as a result
of previous negotiation for transfer with someone else
As per Section 51 Any Advance money received and forfeited by the
assesse shall be deducted from the cost of acquisition or return down
value or share market value.
(xiii) Any property received without consideration or for without
inadequate consideration
The cost of Acquisition will be determined as per section 50 to 56
(Stamp Value or market Value whichever is more).

Index Cost of Acquisition

Present value as per income tax rules is treated as index Cost of
acquisition for this purpose we use the following formula
Cost of Acquisition X CII of Sale Year/
CII of purchasing Year or 2001-02

Note: If Assets is purchased before 1st April 2001 the purchasing is taken
as 1st April 2001 to 31st March 2002.

Cost of Improvement
Cost of improvement any addition or alteration which changes the
shape of the asset it should be taken as follows:-
In case if intangible assets – Nil
In case of Any other assets – All capital expenditure incurred by
owner or previous owner in relation of the property after 1 st April
2001 if improvement has done by owner or previous owner before
1st April 2001 shall not be considered as Cost of improvement.
 Index Cost of Improvement
If assesse make any improvement on long term asset before 3 years is
called Index Cost of improvement in other words the present value of such
improvement is called Index Cost of Improvement, the formula is :
Cost of Improvement X CII of Sale Year/
CII of Improvement Year

Exemption Under Section 54 to 54GB

Exemption U/S 54
LTCG arising on the transfer of residential house can be exempt U/S 54 if assesse
purchase or constructed a new self occupied house property within one year
before or 2 years after the date of sale but the condition is that assesse has no
residential house and new house property should not be resell up to 3 years from
the date of sale.

Exemption U/S 54B

Any capital gain arising on transfer on the agricultural land if in Urban area is
exempt if assesse purchased new agricultural land within 2 year from the date of
sale but such new agricultural land should not be resale up to 3 years from the
date of sale.

Exemption U/S 54D

Any capital gain arising on the transfer by way of compulsory acquisition under
any law of land or building is exempt U/S 54D if assesse purchase or constructed
new Industrial land and building for the purpose business and profession within 2
year after the transfer of assets but such new Industrial land & building cannot
resale up to 3 years from the date of purchase.
Exemption U/S 54EC
Long term capital gain arising on transfer of on long term capital asset can be
exempt U/S 54EC if assesse invest the amount of capital gain in the bonds of NHAI
and RECL. Such bonds should be purchased within six months from the date of
sale and not be resold up to 3 years from the date of purchase the maximum
amount of exemption will be 50 Lakh.
NHAI – National Highway Authority of India
RECL – Rural electrification Corporation Limited

Exemption U/S 54EF

Long term Capital Gain arising from transfer of a capital asset can be exempt U/S
54 EF if assesse invest amount of LTCG in units of a specified fund notified by
Central Government. Such units should be purchased within 6months from the
date of sale and not to be resold up to 3 years from the date of purchased the
maximum amount of deduction will be rupees 50 Lakh.

Exemption Under Section 54F

This deduction is authorised in respect of long term capital gain arising on the
transfer of any capital assets if interested in self occupied residential house
property the investment must be within one year before or two year after the
date of sale but the condition is that the assesse has not any residential house
and such new house should not be resale up to 3 years from the date of purchase
the deduction U/S 54F is calculated as following formula:

Amount of LTCG X Investment in new property/

Net Sale Proceeds
Exemption U/S 54G
Any Capital Gain arising on transfer of shifting of industrial Undertakings from
Urban area to rural area can be exempt U/S 54G if the assesse purchase or
constructed new assets of industrial undertakings in rural area. Such assets must
be acquired within one year before or 3 years after the date of shifting and such
new asset should not be resale up to 3 years from the date or purchase.
Exemption U/S 54GA
This exemption is available on the capital gains arising from transfers of an
industrial undertaking from urban to Special Economic Zone (SEZ) but condition is
that amount of capital gain should be invested in new business asset in SEZ area
within one year before and 3 years after date of shifting and such asset should
not be resale up to 3 years from the date of purchase.
Exemption U/S 54GB
This exemption is available on LTCG arising on the sale of land & building we for
residential purpose the amount of such long term capital gain can be exempt if
assesse must invest the amount of capital gain in equity share of a manufacturing
company such share should be purchased before the due date of filing income tax
return and such share should not be resale up to 3 years from the date of
purchase.
Note:
➢ The exemption amount U/S 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA, 54B,
cannot exceeds the amount of capital gain.
➢ Short term capital gain can be adjusted against long term capital gains as
well as short term capital gain.
➢ Long – term capital loss can be set off only against long – term capital gain

Amount deposited in Capital Gain Account Scheme 1988

Amount of long – term Capital Gain can be invested or deposited up to the period
of utilisation in any scheduled bank in the head of Capital Gain account scheme
1988 by specified purpose, after depositing the money should be utilised as per
the exemption U/S 54 to 54GB if it is not used it will be taxable in the heads of
Capital Gain after a expire of period.