Income From Capital

Gains

DIRECT TAXATION
 INCOME FROM CAPITAL GAIN

1. Capital gains/loss is the gain/loss which is computed on the transfer of a capital

asset which is chargeable to tax.

2. Capital Asset u/s 2(14) :-

Capital gain is charged on the sale of a capital asset as specified under the act.
Capital asset refers to any property excluding the following specified asset,

a) any stock in trade use for the purpose of business of the assessee.
b) any personal effect i.e., movable property for personal use, however jewellery
is considered to be a capital asset
c) agricultural land situated is rural India.
d) 6.5% gold bond (1977)
e) special bearer bond (1991)
f) gold development bond (1999)
g) 7% gold bond (1980)
h) national defence gold bonds (1980)
3. Transfer u/s 2(47) :-

Capital gain is chargeable on transfer of a capital asset.

Transfer includes,

a) sale (in Rs.), exchange (in kinds), relinquishment (surrender).

b) compulsory acquisition.
c) conversion of capital asset in to stock in trade.
d) possession of immovable property on transfer.
e) enjoyment of immovable property and its rights.

4. Types of Capital Assets :-

a) Short term capital asset :

If any share, debt, units of UTI or any mutual funds is transferred
within
12 months then it is treated as STCA otherwise LTCA.

b) Long term capital asset :

If any capital asset beside share, debt, units are transferred within 36
month then they are charged as STCA otherwise LTCA.
5. Computation Of Capital Gain U/S 48 :-

A) Computation Of Short Term Capital Gain :

Full Value Of Consideration XX

Less : Expenses Of Transfer (XX)
Less : Cost Of Acquisition (XX)
Less : Cost Of Improvement (XX)
Short Term Capital Gain XX

B) Computation Of Long Term Capital Gain :

Full Value Of Consideration XX

Less : Expenses Of Transfer (XX)
Less : Indexed Cost Of Acquisition (XX)
Less : Indexed Cost Of Improvement (XX)
Long Term Capital Gain XX
6. Cases When FMV = Sales Consideration :-

A) Capital Asset Into Stock In Trade

B) Distribution Of Capital Asset By FIRM, AOP, BOI
C) Barter/ Exchange
D) Asset Distributed In Kind On Liquidation
E) Asset Transferred By Way Of Gift/ Will

7. Expenses of Transfer :-

a) Brokerage and Commission

b) Cost of Stamp
c) Registration fees borne by vendor
d) Travelling expenses
e) Litigation expenses (i.e, expenses on registration of share)
8. COST OF ACQUISITION - COST INFLATION INDEX (CII)

PY CII PY CII PY INDEX

1981-82 100 1993-94 244 2005-06 497
1982-83 109 1994-95 259 2006-07 519
1983-84 116 1995-96 281 2007-08 551
1984-85 125 1996-97 305 2008-09 582
1985-86 133 1997-98 331 2009-10 632
1986-87 140 1998-99 351 2010-11 711
1987-88 150 1999-00 389 2011-12 785
1988-89 161 2000-01 406 2012-13 852
1989-90 172 2001-02 426 2013-14 939
1990-91 182 2002-03 447
1991-92 199 2003-04 463
1992-93 223 2004-05 480
B) Cost Of Previous Owner U/S 49(1) :-

In Certain Cases Cost To The Owner Will Be Deemed To Cost Of The

Previous Owner,
A) Asset Received By Gift, Will.
B) Partition Of HUF.
C) Transfer Of Asset To The Partner On Dissolution.
D) Transfer Of Asset On Liquidation Of The Company
E) Transfer Of Asset On Amalgamation Of A Company
F) Transfer By A Holding Co. To Indian Subsidiary Co.
G) Transfer By A Subsidiary Co. To Indian Holding Co.
H) Transfer By Trust.

C) Cost Of Converted Share/ Debenture U/S 49(2a) :-

Value Of Debentures Before Conversion XX

Less : Value Of Debentures After Conversion (XX)
Cost Of Acquisition Of Shares XX
F) Indexed Cost Of Acquisition :-
1. Original Cost Adjusted As Per Index.
2. Only For Long Term Capital Gain
3. By These Indexation Cost Will Increase And Assessee Will Pay
Less Tax On Capital Gain

Icoa = Acoa X Index Of Year Of Transfer

Index Of Year Of Acquisition

G) Indexation Is Not Available For The Following Assets :-

1. Any Short Term Asset
2. Any Depreciable Asset (Always Short Term)
3. Any Debentures

H) Cost Of Improvement :-
Cost Of Improvement Basically Relates To 2 Types Of Assets
A) For Goodwill And Rights = NIL
B) For Any Other Asset = Cost Of Addition Or Alteration Incurred

Note : Ignore Any Cost Of Improvement Incurred Before 1-4-81.

Icoi = Acoi X Index Of Year Of Transfer

Index Of Year Of Improvement
I) Different Cases Of Indexation :-

1. Asset Acquired By Assesee After 1-4-81

Icoa = Acoa X Index Of Year Of Transfer

Index Of Year Of Acquisition

Icoi = Acoi X Index Of Year Of Transfer

Index Of Year Of Improvement

2. Asset Acquired By Assessee Before 1-4-81

Icoa = Acoa Or X Index Of Year Of Transfer

Fmv On 1-4-81 Index Of Year Of Acquisition

Icoi = Acoi X Index Of Year Of Transfer

(After 1-4-81) Index Of Year Of Improvement
9. Computation of capital gains in the case of conversion of capital asset into stock in –
trade U/S 45(2) :-

Investment (2000-01)
Cg = sc – coa
(Taxed in the year on
sale)
Converted in to
Stock in trade (2005-06)
Bp = sales price – fmv on
date on conversion

Sale (2009-10)
A) Conversion of capital asset in to stock in trade is treated as transfer for the
Purpose of capital gain.
B) For this purpose the fmv on the date of conversion is taken as sales
consideration.
C) Thus capital gain = fmv on date of conversion – purchase cost.
D) However such capital gain will be charged to tax in the year of actual sale &
not in the year of conversion.
E) In the year of sale,
Business profit = actual sales price – fmv on date of conversion.
10. Deductions from Income from Capital Gains

Under Allowed Conditions Quantum of

Sectio Assessee Exemption
n
54 Indivividual/HUF 1) Transfer should be of Actual
residential house Amount
chargeable under invested in
income from house new capital
property. asset or
2) Long term capital capital gain
asset. whichever is
3) Purchase of another lower.
residential house
within 1 year before or
2 years after or
construction within 3
years of transfer.

54B Individual 1) Transfer should be of Actual

agricultural land. Amount
2) It must have been used invested in
in 2 years immediately new capital
preceding the date of asset or
Under Allowed Conditions Quantum of
Sectio Assessee Exemption
n
3) Another agricultural
land should be
purchased within 2
years of date of transfer.
54F Individual 1) The asset transferred If the cost of
should be a long- term the new
capital asset, not being residential
a residential house. house is not
2) Within a period of I year less than the
before or 2 years after net
the date of transfer, a consideration
residential house should , then the
be purchased or whole of the
constructed within a capital gain ,
period of 3 years after otherwise
the date of transfer. Capital Gain
3) The assessee should multiplied by
not own more than one Amount
residential house on the invested
date of transfer. divided by
net
Under Allowed Conditions Quantum of
Sectio Assessee Exemption
n
4)The assessee should not
within a period of one
year purchase or should
not within a period of 3
years construct any
residential house other
than the new asset
54EC Any Assessee 1) The asset transferred Actual
should be a long- term amount
capital asset. invested in
2) Within a period of 6 new asset or
months after the date the capital
of transfer, the capital gain
gain must he invested whichever is
in the specified assets less.
i.e. bonds redeemable However,
after 3 years issued by maximum
NHAl or RECL. amount
which can be
invested in