Capital Gains

Normally, only revenue receipts are taxed.

As an exception to the normal rule, gains arising

from transfer of capital assets are subjected to
tax under the head capital gains.
 Transfer – Sec 2(47)
Includes:
Sale, exchange or relinquishment of a capital asset; or
Extinguishment of any rights therein; or
Compulsory acquisition under law; or
Conversion / treatment of capital asset into / as stock in trade; or
Maturity / redemption of a zero coupon bond
Any transaction involving the allowing of the possession of any
immovable property to be taken or retained in part performance of a
contract; or
Any transaction which has the effect of transferring or enabling the
enjoyment of any immovable property – flats in cooperative society
Date of transfer:
The date on which the asset is transferred is important because:
a) it determines the previous year in which the gains arise and
b) it determines whether gains are short term or long term
 Capital Asset – Sec 2(14)
Capital asset means:
Property of any kind held by the assessee, whether or not
connected with his business or profession, (tangible or intangible)
Any securities held by FII which has invested in such securities in
accordance with SEBI Regulations.
Land, Building, vehicles, goodwill, tenancy rights, leasehold rights,
patents are some examples of capital assets.
Note: The property should be a capital asset at the time of transfer in
order to attract capital gains tax.

State whether the following are capital assets or not:

Fridge in house
Car for personal use
Silver utensils in kitchen
Gold coins for daily pooja
House occupied for personal use
 Capital Asset – Sec 2(14)
It excludes: (does not include)
Stock-in-trade, raw material or consumable stores held for the
purpose of business / profession
*Personal effects of movable nature eg: wearing apparel, furniture,
vehicles, utensils, etc. held for personal use by the assessee or for
member of family dependent on him / her.
Agricultural land in India and not situated in any specified area.
Gold bonds issued by the Central Government
Special bearer bonds issued by the Central Government.
Specified Gold Bonds issued by the Central Government (6.5%
Gold Bonds 1977 / 7% Gold Bonds 1980 / National Defence Gold
Bonds 1980)
State whether the following are capital assets or not:
Fridge in house
Car for personal use
Silver utensils in kitchen
Gold coins for daily pooja
House occupied for personal use
 Capital Asset – Sec 2(14)
*Personal effects of movable nature excludes: (does not include)
Jewellery Drawings Paintings
Sculptures Archaeological collections Any work of art
Note: Jewellery includes
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,
Precious or semi-precious stones, whether or not set in any
furniture, utensil or other article or worked or sewn into any
wearing apparel.
State whether the following are capital assets or not:
Fridge in house Not a capital asset
Car for personal use Not a capital asset
Silver utensils in kitchen Not a capital asset
Gold coins for daily pooja Capital asset
House occupied for personal use Capital asset
 Whether the following are capital assets ?
Goodwill of a business Yes (includes intangibles)
A personal house Yes (immovable)
Vacant land Yes (immovable)
Jewellery Yes (excluded from personal effects)
Shares in AB Ltd. Yes
Debentures in XY Ltd. Yes
Personal scooter No (personal effect of movable nature)
Utensils No (personal effect of movable nature)
Paintings Yes (excluded from personal effects)

Sec 10(37): Exemption on compulsory acquisition of urban agricultural land

Capital gains arising to an individual / HUF from the transfer of urban agricultural
land is exempt provided the following conditions are satisfied:
Land is situated in the specified area,
Such land was used for agricultural purposes during the period of 2 years
immediately preceding the date of transfer by such individual (including his
parents) or HUF,
The land is compulsorily acquired under any law or the consideration is
determined or approved by the Central Government or the RBI,
Compensation is received on or after 1/4/2004.
 Types of capital assets – Sec 2(29A) / 2(42A)
Based on nature of asset:
Long term capital asset and Short term capital asset.
For listed shares, securities, units of UTI, zero coupon bonds and
units of Equity Oriented Fund – upto 12 months
Unlisted shares (private companies / unlisted public companies) –
upto 24 months
Capital asset in nature of land or building or both – upto 24 months
All other capital assets, units of Debt Oriented Funds, Unlisted
securities other than shares – upto 36 months
If held for more than 12/24/36 months then long term capital asset
else short term capital asset
 Types of capital assets & gains

Capital
Assets

Non Financial
Financial

Land / Others Unlisted Listed securities

/ Units of UTI /
Others
Building / Shares EOF / ZCB
Both

24 months 36 months 24 months 12 months 36 months

Types of capital gains – Sec 2(29B) / 2(42B)

Note: Expenditure on transfer must be wholly and exclusively in

connection with the transfer of the said asset. Examples: brokerage,
stamp duty, commission, registration fees etc.
 Determining holding period of an asset

See handout on determination of holding period

 Cost of acquisition – Sec 49 & 55
Actual cost of acquisition:
Cost of acquisition is the value for which the asset was acquired by the
assessee. Expenses of capital nature are added to the cost of asset. All
expenses till the asset is first put to use is added to the cost of the
asset.
Deemed cost of acquisition:
Some times the cost to the previous owner is considered as cost to the
present owner.
Example transfer under a will, gift, succession, distribution of assets
on liquidation, etc.

Indexation is not applicable in the following cases:

a) short term capital asset
b) transfer of shares or debentures acquired by a non-resident, in
foreign currency, in an Indian company

See handout on determination of cost of acquisition

 Capital gains on depreciable assets
Depreciable asset:
1) Applicable to depreciable assets: These rules apply only to
capital assets belonging to any block of depreciable assets (plant,
machinery, building and furniture)
Capital gains arise when (a) out of the block only some assets are
transferred and (b) when all the assets are transferred.
Computation:
Full value of consideration xxx
Less: transfer expenses xxx
Less: opening WDV of block xxx
Less: cost of addition to block xxx
STCG xxx
 Depreciation
Based on block of assets
4 blocks namely Machinery, Plant, Building and Furniture-
Fixtures.
Computation:
Opening WDV xxxx
(+) cost of assets acquired xxxx
(-) sale value of assets xxxx
Closing WDV xxxx
Depreciation rates %
Depreciation amount xx
 Cost inflation index
Is computed based on 75% of the average rise in the consumer
price index for urban non-manual employees for the immediately
preceding previous year to such previous year, by notification in
the official gazette.

The base year of CII is 2001-02.

Cost inflation index
 Formulae
Case 1: This situation covers the case where a capital asset is directly
acquired by the assessee on or after 1.4.2001
Indexed cost of acquisition (COA) : COA x IYT
IY in which the assessee becomes the owner
Indexed cost of improvement (COI) : COI x IYT
IY of improvement

Illustration: Determine the amount of taxable capital gains in respect

of the following transaction:
Mr. Bond sells a residential property in Pune for Rs. 16,30,000 on
April 23, 2019 which was purchased by him on April 20, 2004 for Rs.
290,000
Solution ?
 Formulae
Case 2: This situation covers the case where a capital asset is directly
acquired by the assessee BEFORE 1.4.2001
Indexed COA : Higher of COA or FMV as on 1.4.2001 x IYT
100
Indexed COI : Cost of improvement on or after 1.4.2001 x IYT
IY of improvement
Note: All cost of improvement before 1.4.2001 should IGNORED
Illustration: Determine the amount of taxable capital gains in respect
of the following transaction:
Mrs. X sells the following capital asset during the PY 19-20
House, with a sale consideration of Rs. 6,40,500. It was acquired
during 95-96 at cost of acquisition of Rs.18,000. FMV as on 1/4/2001
75,000.
Solution ?
 Formulae
Case 3: Asset acquired by both assesses u/s 49 (1) before 1.4.2001
Indexed COA : Higher of previous owner’s COA/FMV on 1.4.01 x IYT
100
Indexed COI : COI after 1.4.01 x IYT
IY of improvement
Illustration: Mr. G purchased a house property for Rs. 30,000 on June
20, 1989. He gets the first floor constructed in 1994-95 by spending Rs.
20,000. He dies on 22.12.1998. The property is transferred to Mrs. G by
his will. Mrs. G spends Rs. 25,000 and Rs. 26,700 during 1999-00 and
2000-01 respectively for reconstruction of the property. Mrs. G sells the
house property for Rs.12,50,000 on February 15, 2020. Brokerage paid
by Mrs. G is Rs. 12,500. The fair market value of the house as on
1.4.2001 was Rs. 1,60,000. Ascertain capital gains.
Solution ?
 Formulae
Case 4: Asset acquired by original assessee u/s 49 (1) before 1.4.2001
and present owner after 1.4.2001
Indexed COA: Higher of previous owner’s COA/FMV on 1.4.01x IYT
IY in which the assessee becomes the owner
Indexed cost of improvement: COI after 1.4.2001 x IYT
IY of improvement
Illustration: X purchased a property on April 1, 1997 for Rs. 50,000.
Later on he gifts the property to his friend Y on June 10, 2016. The
following expenses are incurred by X and Y for renewals of the
property
Addition of one room by X during 98-99 Rs. 30,000
Addition of one room by X during 99-00 Rs. 40,000
Addition of one room by Y during 04-05 Rs. 115,000
FMV as on 1.4.2001 = Rs. 65,000. The property is sold for Rs. 10
lakh on Nov 30, 2019. Compute the capital gains in the hands of Y for
relevant AY.
Solution ? Reference to the case of Manjula J Shah.
 Formulae
Case 5: Asset acquired by both assessees u/s 49 (1) AFTER 1.4.2001

Indexed COA : Cost of acquisition x IYT

IY in which the assessee becomes the owner
Indexed COI: COI x IYT
IY of improvement

Illustration: X owns a property. Cost of acquisition is Rs. 1,40,000

acquired on 10.3.2008. This property was gifted by X to his son Y on
April 1, 2017. On July 7, 2019, the property was sold by Y for Rs.
3,00,000. Compute capital gain chargeable to tax in hands of Y for
relevant AY
Solution ? Reference to the case of Manjula J Shah.
Conversion of capital asset into stock in trade
Conversion of an asset into stock in trade is considered as transfer u/s
2(47). It is transfer in the year of conversion. The notional capital
gains on conversion will be chargeable in year of sale of asset as stock
in trade.
For purpose of computing capital gains FMV on the date of
conversion is FVC. Period of holding is from acquisition to
conversion and not up to sale. Indexation is done where applicable.
After conversion and subsequent sale, business income arises in the
year of sale.
Business Income = Selling price – FMV as cost on date of conversion

Illustration: Mr. Chetanbhai has gold biscuits with him which he had
purchased on 1.5.10 for Rs. 1,50,000 as an investment. He starts
jewellery business on 1.6.17, and converts the above gold biscuits as
stock in trade on this date. The FMV of the asset 1.6.17 is Rs.
3,00,000. He sells the gold biscuits on 1.6.19 for Rs. 10,00,000.
State the taxability of these transactions.
Solution ?
Treatment of advance money received - Sec 51

Advance
amount
forfeited

Before On or after
01/04/2014 01/04/2014

Reduced from COA / Shall be chargeable to

FMV / WDV as the tax under the head
case may be “Income from other
Sources”
 Exemptions
Section 54
Section 54B
Section 54D
Section 54EC
Section 54F
Section 54G

See handout
 Illustration
R submits you the following information:

R purchased another agricultural land during the year for Rs.

15,00,000 and also invested in a new house property Rs. 10,00,000.
Compute taxable capital gains for relevant assessment year.
Solution
 Illustration
S purchased a plot for Rs. 300,000 in 1989-90 and it was sold on
10.12.2019 for Rs. 30,00,000. He paid Rs. 40,000 as brokerage
charges. He invested Rs. 4,00,000 in bonds of NHAI (notified u/s
54EC) on 28.5.2020 & Rs. 15,00,000 in the purchase of one
residential house on 15.6.2019. Compute C.G. assuming he does not
own any residential house on the date of transfer of plot.
Solution
FVC 30,00,000
(-) expenses in relation to transfer 40,000
(-) ICOA 300000*289/100 8,67,000
LTCG 20,93,000
(-) exemption u/s 54EC 4,00,000
(-) exemption u/s 54F 10,60,642 14,60,642
(20,93,000*1500000/2960000)
Taxable LTCG 6,32,358
 Tax on short term listed equity shares & units – Sec
111A
STCG arising from

a) An equity share in a company, or Other assets

b) Unit of an equity oriented fund, or
c) A unit of a business trust

Taxed at 15%* Taxed at slab rate or flat

rates, as the case may be
*If the following conditions are satisfied:
1. The transaction of sale takes place on or after 1/10/2004; and
2. Securities transaction tax (STT) is chargeable on such transaction
Note: In case of resident individual & HUF, basic exemption limit (BEL)
should be first utilised for income other than STCG & balance, if any, can be
used against STCG (benefit of availing BEL is not applicable to non residents).
Deductions under Chapter VIA cannot be claimed by any assessee.
 Tax on LTCG – Sec 112
LTCG arising from

Any asset

Taxed at 20%
Note:
1. Where the transferred LTCA is in the nature of listed securities
(other than a unit) or a zero coupon bond, the gain arising from the
transfer of such securities shall be liable to tax @ 10% on such
LTCG computed without the benefit of indexation or @ 20% on
such LTCG computed availing the benefit of indexation,
whichever is more beneficial to the assesse.
2. LTCG arising from transfer of bonds / debentures (other than
Capital Indexed bonds issued by the Government & Sovereign
Gold Bond issued by the RBI) are not eligible for indexation
benefit.
 Tax on LTCG – Sec 112
1. For the purpose of computation of long term capital gain u/s 48,
which is includible in the Gross Total Income, the amount of
Capital Gain computed by applying indexation shall be considered.
2. The possibility of applying 10% / 20% tax rate shall arise only in a
case where the listed shares are not traded through a recognized
stock exchange and not chargeable to securities transaction tax.
Otherwise, the transfer of listed shares is dealt u/s 112A.
3. Sec 112 is subject to provisions of sec. 112A. Implying that where
sec. 112A is applicable, sec. 112 shall not apply.
Note:
In case of resident individual & HUF, basic exemption limit (BEL) should be
first utilised for income other than LTCG & balance, if any, can be used
against LTCG (benefit of availing BEL is not applicable to non residents).
Deductions under Chapter VIA cannot be claimed by any assessee.
Tax on long term listed equity shares & units
– Sec 112A
The provisions of this section are applicable if the total income of an
assesse includes capital gain arising from transfer of a long-term
capital asset in the nature of:
1. An equity share in a company, or
2. A unit of an equity-oriented fund, or
3. A unit of a business trust
and are subject to payment of securities transaction tax (STT) as
below:
a) Equity shares of a company: STT to be paid on its acquisition
and transfer
b) Units of an equity oriented fund / business trust: STT to be paid

on its transfer
The provisions of this section are applicable to all assesses
Tax on long term listed equity shares & units
– Sec 112A
The cost of acquisition for the purpose of computing capital gains in
respect of shares or units referred to u/s 112A and acquired by the
assesse on / before 31st January 2018 shall be the higher of the
following:
1. Actual cost of acquisition (COA) of the asset, and
2. Lower of the:
a) Fair market value (FMV) of such asset, and
b) The full value of consideration received or receivable on
account of transfer of such capital asset
COA of bonus or right share shall be determined based on the
period of allotment of such shares:
1. Shares allotted on / before 31/1/2018: COA shall be determined
as discussed above
2. Shares allotted on / after 1/2/2018: COA of bonus shares shall
be NIL while that of right shares shall be the amount paid to
purchase such shares
3. The benefit of indexation shall not be allowed while computing
the LTCG subject to tax u/s 112A.
Tax on long term listed equity shares & units
– Sec 112A
Fair market value (FMV) shall mean:
Tax on long term listed equity shares & units
– Sec 112A
Fair market value (FMV) shall mean:
Tax on long term listed equity shares & units
– Sec 112A
If the given conditions are fulfilled, income tax on total income of the
assesse shall be computed as follows:

Total income

Amount of LTCG covered u/s 112A Remaining total income

If not exceeding Exceeds Rs. 1 lakh Taxed at slab rate or

Rs. 1 lakh flat rates, as the case
may be
Nil @ 10% on capital gains
exceeding Rs. 1,00,000
Tax on long term listed equity shares & units
– Sec 112A
Note:
In case of resident individual & HUF, basic exemption limit (BEL)
should be first utilised for income other than LTCG u/s 112A &
balance, if any, can be used against LTCG u/s 112A (benefit of
availing BEL is not applicable to non residents).
Deductions under Chapter VIA cannot be claimed by any assesse
and tax rebate of Rs. 12,500 u/s 87A shall not be allowed to such
LTCG
 Illustration
Mr. A furnishes the following information for the year ended 31/3/2020:
5,000 Shares held in TechMahindra Ltd., a listed company. These shares
were purchased on 1/7/2017 @ Rs. 500 per share. Of these shares 3,000
were sold on 18/11/2019 @ Rs. 900 per share. His taxable income from
business is Rs. 1,75,000. Highest Fair Market Value of shares of
TechMahindra Ltd. Recorded on 31/1/2018 on the recognized stock
exchange was Rs. 750 per share.
Determine the amount of tax payable for relevant assessment year.

Solution
Computation of cost of acquisition:
Higher of:
1. Actual cost of acquisition, (3,000 x 500) or 15,00,000
2. Lower of :
i. FMV on 31/1/2018 (3,000 x 750) 22,50,000
ii. Full value of consideration (3,000 x 900) 27,00,000 22,50,000
iii. Cost of acquisition for the purpose of capital gains 22,50,000
 Solution
Computation of taxable capital gains:
Full value of consideration 27,00,000
(-) Cost of acquisition 22,50,000
Long term capital gains (LTCG) 4,50,000
(-) Exempt u/s 112A 1,00,000
LTCG taxable u/s 112A 3,50,000

Computation of total income and tax:

Business income 1,75,000
Capital gains 3,50,000
Total income 5,25,000
Tax on above (2,75,000*10%) 27,500
(+) 4% health & education cess 1,100
Total tax payable 28,600
BEL:2,50,000.First utilize against business income of RS
1,75,000.Balance 75,000 of BEL is to be utilized against LTCG.Therefore
 Lets practice
See handouts