Taxation of Capital Gain in India
As per Wikipedia, Capital
Gain is a profit that results from a disposition of a capital asset,
such as stock, bond or real estate, where the amount realized on the
disposition exceeds the purchase price. The gain is the difference between a
higher selling price and a lower purchase price. Conversely, a capital loss
arises if the proceeds from the sale of a capital asset are less than the
purchase price. Capital gains may refer to “investment income” that arises in
relation to real assets, such as property; financial assets, such as shares/stocks
or bonds; and intangible assets.
Frequently Asked Questions on
Taxation of Capital Gains in India
What incomes are charged to tax under the head “Capital Gains”?
Any profit or gain arising from
transfer of a capital asset during the year is charged to tax under the head
“Capital Gains”.
What is the meaning of capital asset?
Capital asset means property of any
kind held by a taxpayer. However, the following items are excluded from the
definition of “capital asset”:
a. Any stock-in-trade, consumable stores,
or raw materials held by a person for the purpose of his business or
profession.
E.g., Motor car for a motor car dealer or gold for a
jewellery merchant, are their stock-in-trade and, hence, they are not capital
assets for them.
b. Personal movable effects of a
person, that is to say, movable property including wearing apparels (*) and
furniture held for use, by a person or for use by any member of his family
dependent on him. E.g., Car used by a salaried employee
for his personal use or for personal use of his family member is not a capital
asset for him.
(*) However, jewellery,
archeological collections, drawings, paintings, sculptures, or any work of art
are not treated as personal effects and, hence, are included in the definition
of capital assets.
The term jewellery has been given a
wider meaning and includes ornaments made up 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 stones, and
whether or not worked or sewn into any wearing apparel. It also includes
precious or semi-precious stones, whether or not set in any furniture, utensil,
or other article or worked or sewn into any wearing apparel.
c. Agricultural land situated in a
rural area. Rural area means any area which is outside the jurisdiction of a
municipality or a cantonment board (known by any name), which has a population
of 10,000 or more and is not situated in any area within the distance measured
aerially as given below :
- Within 2 kilometers from the local limits of any municipality/cantonment board, which has a population of more than 10,000, but not exceeding 1,00,000.
- Within 6 kilometers from the local limits of any municipality/cantonment board, which has a population of more than 1,00,000, but not exceeding 10,00,000.
- Within 8 kilometers from the local limits of any municipality/cantonment board, which has a population of more than 10,00,000.
Population is to be considered
according to the figures of last preceding census of which relevant figures
have been published before the first day of the year.
d. 6½% Gold Bonds, 1977 or 7% Gold
Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central
Government.
e. Special Bearer Bonds, 1991,
issued by the Government
f. Gold Deposit Bonds issued under
Gold Deposit Scheme, 1999.
What is the meaning of the term ‘long-term capital asset’?
Any capital asset held by a person
for a period of more than 36 months immediately preceding the date of its
transfer will be treated as long-term capital asset.
However, in respect of certain
assets like shares, units of specified mutual funds, listed securities like
debentures and Government securities, Units of UTI and Zero Coupon Bonds, the
period of holding to be considered is 12 months instead of 36 months.
Illustration for better understanding
Mr. Kumar is a salaried employee. On
8th April, 2009, he purchased a piece of land and sold the same
on 29th December, 2013. In this case, land is a capital asset
for Mr. Kumar. He purchased the land on 8th April, 2009 and
sold it on 29th December, 2013, i.e., after
holding for a period of more than 36 months. Hence, the land will be a
long-term capital asset.
Illustration for better understanding
Mr. Raj is a salaried employee. On 8th April,
2012 he purchased shares of SBI Ltd. and sold the same on 29th December,
2013. In this case, shares are capital assets for Mr. Raj. He purchased shares
on 8th April, 2012 and sold them on 29th December,
2013, i.e., after holding them for a period of more than 12
months. Hence, shares are long-term capital assets.
What is the meaning of the term ‘short-term capital asset’?
Any capital asset held by a person
for a period of not more than 36 months immediately preceding the date of its
transfer will be a short-term capital asset.
However, in respect of certain
assets like shares, units of specified mutual fund, listed securities like debentures and Government securities, Units of UTI and Zero Coupon Bonds the
period of holding to be considered is 12 months instead of 36 months.
Illustration for better understanding
Mr. Raj is a salaried employee. On 8th April,
2012, he purchased a piece of land and sold the same on 29th December,
2013. In this case, land is a capital asset for Mr. Raj. He purchased the land
on 8th April, 2012 and sold it on 29th December,
2013, i.e., after holding it for a period of less than 36
months. Hence, land will be a short-term capital asset.
Illustration for better understanding
Mr. Kumar is a salaried employee. On
8th April, 2013, he purchased shares of SBI Ltd. and sold the
same on 29th January, 2014. In this case, shares are capital
assets for Mr. Kumar. He purchased shares on 8th April, 2013
and sold them on 29th January, 2014, i.e., after
holding them for a period of less than 12 months. Hence, shares are short-term
capital assets.
What is long-term capital gain and short-term capital gain?
Gain arising on transfer of
long-term capital asset is termed as long-term capital gain and gain arising on
transfer of short-term capital asset is termed as short-term capital gain.
However, there are a few exceptions to this rule, like gain on depreciable
asset is always taxed as short-term capital gain.
Why capital gains are classified as short-term and long-term?
Particulars
|
Rs.
|
Full value of consideration (i.e., Sales
consideration of asset)
|
XXXXX
|
Less: Expenditure
incurred wholly and exclusively in connection with transfer of capital asset
(E.g., brokerage, commission, advertisement expenses, etc.)
|
(XXXXX)
|
Net sale consideration
|
XXXXX
|
Less: Indexed
cost of acquisition (*)
|
(XXXXX)
|
Less: Indexed
cost of improvement, if any (*)
|
(XXXXX)
|
Long-Term Capital Gain
|
XXXXX
|
The taxability of capital gain
depends on the nature of gain, i.e. whether short-term or long-term. Hence to
determine the taxability, capital gains are classified into short-term capital
gain and long-term capital gain. In other words, the tax rates for long-term
capital gain and short-term capital gain are different.
How to compute long-term capital gain?
Long term capital gain arising on
account of transfer of long-term capital asset will be computed as follows:
(*) Cost of acquisition is the
purchase price of the capital asset and cost of improvement is the cost
incurred on post purchase capital expenses incurred on additions/improvement to
the capital asset. Indexation is a process by which the cost of acquisition/improvement
is adjusted against inflationary rise in the value of asset. For this purpose,
Central Government has notified cost inflation index for different years. The
benefit of indexation is available only to long-term capital assets. For
computation of indexed cost of acquisition/indexed cost of improvement,
following factors are to be considered:
- Year of acquisition/improvement
- Year of transfer
- Cost inflation index of the year of acquisition/improvement
- Cost inflation index of the year of transfer
Indexed cost of acquisition is computed with the help of following formula :
Cost of acquisition × Cost
inflation index of the year of transfer of capital asset ÷ Cost
inflation index of the year of acquisition
Indexed cost of improvement is computed with the help of following formula :
Cost of improvement × Cost
inflation index of the year of transfer of capital asset ÷ Cost
inflation index of the year of improvement
Illustration for better understanding
Mr. Raja is a salaried employee. On
2nd May, 2000 he purchased a residential house consisting two
floors for Rs. 8,40,000. In December, 2005 he constructed third floor at a cost
of Rs. 1,00,000. The house is sold on 1st January, 2014. What
will be the indexed cost of acquisition and indexed cost of improvement?
On the basis of formula discussed
above, indexed cost of acquisition will be computed as follows :
Rs. 8,40,000 × 939 ÷ 406 = Rs. 19,42,759
Cost inflation index as
notified by the Government for financial year 2013-14 is 939 and for financial
year 2000-01 is 406.
On the basis of formula discussed
above, indexed cost of improvement will be computed as follows :
Rs. 1,00,000 × 939 ÷ 497 = Rs. 1,88,934
Cost inflation index as notified by
the Government for financial year 2013-14 is 939 and for financial year 2005-06
is 497.
How to compute short-term capital gain?
Short-term capital gain arising on
account of transfer of short-term capital asset is computed as follows:
Particulars
|
Rs.
|
Full value of consideration (i.e., Sales
value of the asset)
|
XXXXX
|
Less: Expenditure incurred wholly and exclusively in
connection with transfer of capital asset (E.g., brokerage, commission,
advertisement expenses, etc.)
|
(XXXXX)
|
Net Sale Consideration
|
XXXXX
|
Less: Cost of acquisition (i.e., the purchase price
of the capital asset)
|
(XXXXX)
|
Less: Cost of improvement (i.e., post purchase
capital expenses incurred on addition/improvement to the capital asset)
|
(XXXXX)
|
Short-Term Capital Gain
|
XXXXX
|
Is the benefit of indexation available while computing capital gain arising on transfer of short-term capital asset?
Indexation is a process by which the cost of
acquisition/improvement of a capital asset is adjusted against inflationary
rise in the value of asset (as discussed in earlier FAQ). The benefit of
indexation is available only in case of long-term capital assets and is not
available in case of short-term capital assets.
In respect of capital asset acquired before 1st April, 1981 is there any special method to compute cost of acquisition?
Generally, cost of acquisition of a capital asset is the
cost incurred in acquiring the capital asset. It includes the purchase
consideration plus any expenditure incurred exclusively for acquiring the
capital asset. However, in respect of capital asset acquired before 1st April,
1981, the cost of acquisition will be higher of the actual cost of acquisition
of the asset or fair market value of the asset as on 1st April, 1981. This
option is not available in the case of a depreciable assets.
As per the Income-tax Law, gain arising on transfer of capital asset is charged to tax under the head “Capital gains”. What constitutes ‘transfer’ as per Income-tax Law?
Generally, transfer means sale, however, for the purpose of
Income-tax Law transfer means the act of giving up your right on an asset.
Thus, under Income-tax Law transfer includes sale, exchange or relinquishment
of the asset or extinguishment of any rights therein or compulsory acquisition
of asset under any law, etc.
What are the provisions relating to computation of capital gain in case of transfer of asset by way of gift, will, etc.?
Capital gain arises if a person transfers a capital asset.
Section 47 excludes various transactions from the definition of ‘transfer’.
Thus, transactions covered under section 47 are excluded from the definition of
‘transfer’ and, hence, these transactions will not give rise to any capital
gain. Transfer of capital asset by way of gift, will, etc., are few major
transactions covered in section 47. Thus, if a person gifts his capital asset
to any other person, then no capital gain will arise in the hands of the person
making the gift (*).
If the person receiving the capital
asset by way of gift, will, etc. subsequently transfers such asset, capital
gain will arise in his hands. Special provisions are designed to compute
capital gains in the hands of the person receiving the asset by way of gift,
will, etc. In such a case, the cost of acquisition of the capital asset will be
the cost of acquisition to the previous owner and the period of holding of the
capital asset will be computed from the date of acquisition of the capital
asset by the previous owner.
(*) As regards the taxability of
gift in the hands of person receiving the gift, separate provisions are
designed under section 56.
I have sold a house which had been purchased by me 5 years ago. Am I required to pay any tax on the profit earned by me on account of such sale?
Section under which benefit is available
|
Gain eligible for claiming exemption
|
Asset in which the capital gain is to be re-invested to
claim exemption
|
section 54
|
Long-term capital gain arising on transfer of residential
house property.
|
Gain to be re-invested in purchase or construction of
residential house property.
|
section 54B
|
Long-term or short-term capital gain arising on transfer
of agricultural land.
|
Gain to be re-invested in purchase of agricultural land.
|
section 54EC
|
Long-term capital gain arising on transfer of any capital
asset.
|
Gain to be re-invested in bonds issued by National Highway
Authority of India or by the Rural Electrification Corporation Limited.
|
section 54F
|
Long-term capital gain arising on transfer of any capital
asset other than residential house property.
|
Net sale consideration to be re-invested in purchase or
construction of residential house property.
|
section 54D
|
Gain arising on transfer of land or building forming part
of industrial undertaking which is compulsorily acquired by Government and
was used for industrial purpose for a period of 2 years prior to its
acquisition.
|
Gain to be re-invested to acquire land or building for
industrial purpose.
|
section 54G
|
Gain arising on transfer of land, building, plant or
machinery in order to shift an industrial undertaking from urban area to
rural area
|
Gain to be re-invested to acquire land, building, plant or
machinery in order to shift the industrial undertaking from an urban area to
a rural area
|
section 54GA
|
Gain arising on transfer of land, building, plant or
machinery in order to shift an industrial undertaking from urban area to any
Special Economic Zone
|
Gain to be re-invested to acquire land, building, plant or
machinery in order to shift the industrial undertaking from urban area to any
Special Economic Zone.
|
section 54GB
|
Long-term capital gain arising on transfer of residential
property (a house or a plot of land). The transfer should take place during 1st April,
2012 and 31st March 2017.
|
The net sale consideration should be utilised for
subscription in equity shares in an “eligible company”.
|
House sold by you is a capital
asset. Any gain arising on transfer of capital asset is charged to tax under
the head “Capital Gains”. Income-tax Law has prescribed the method of computing
capital gain arising on account of sale of capital assets. Thus, to check the
taxability in your case, you have to compute capital gain by following the
rules laid down in this regard, and if the result is gain, then the same will
be liable to tax.
Are any capital gains exempt under section 10?
Section 10 provides list of incomes
which are exempt from tax Amongst these the major exemptions relating to
capital gains are listed below:
Section 10(33) : Long-term or short-term capital gain arising on transfer of
units of Unit Scheme, 1964 (US 64) (transferred on or after 1-4-2002).
Section 10(37) : An individual or Hindu Undivided Family (HUF) can claim
exemption in respect of capital gain arising on transfer of agricultural land
situated in an urban area by way of compulsory acquisition. This exemption is
available if the land was used by the taxpayer (or by his parents in the case
of an individual) for agricultural purpose for a period of 2 years immediately
preceding the date of its transfer.
Section 10(38) : Long-term capital gain arising on transfer of equity shares
or units of equity oriented mutual fund (*), will be exempt from tax, if the
following conditions are satisfied:
- The asset transferred should be equity shares of a company or units of an equity oriented mutual fund.
- The transaction should be liable to securities transaction tax at the time of transfer.
- Such asset should be a long-term capital asset.
- Transfer should take place on or after October 1, 2004.
(*) Equity oriented mutual fund
means a mutual fund specified under section 10(23D)
and 65% of its investible funds, out of total proceeds of such fund are
invested in equity shares of domestic companies.
At what rates capital gains are charged to tax?
For provisions in this regard check tutorials on “Tax on
Short-Term Capital Gains and Tax on Long-Term Capital Gains”.
Is there any benefit available in respect of re-investment of capital gain in any other capital asset?
A taxpayer can claim exemption from certain capital gains by
re-investing the capital gain into specified asset. The following table
highlights the assets in respect of which the benefit of re-investment is
available:
In order to claim the exemption on
account of re-investment in various situations as discussed above, other
conditions specified in the respective sections should be satisfied and the
re-investment should be made within the period specified in the respective
sections.
Are there any bonds in which I can invest my capital gains to claim tax relief?
Yes, as per section 54EC you can claim
tax relief by investing the long-term capital gains earned by you in the bonds
issued by the National Highway Authority of India or by the Rural
Electrification Corporation Limited. The investment should be done within a
period of 6 months and bonds should not be redeemed before 3 years.
This benefit cannot be availed in
respect of short-term capital gain.
What is the meaning of stamp duty value and what is its relevance while computing capital gain in case of transfer of capital asset, being land or building or both?
Stamp duty value means the value
adopted or assessed or assessable by any authority of a State Government for
the purpose of payment of stamp duty.
As per section 50C
, while computing capital gain arising on transfer of land or building or both,
if the actual sale consideration of such land and/or building is less than the
stamp duty value, then the stamp duty value will be taken as full value of
consideration, i.e.,as deemed selling price and capital gain will
be computed accordingly.
Illustration for better understanding
Mr. Raja sold his bungalow for Rs.
80,00,000. The value adopted by the Stamp Valuation Authority of the bungalow
for the purpose of payment of stamp duty is Rs. 84,00,000. In this situation,
while computing taxable capital gain arising on transfer of bungalow, Rs.
84,00,000 will be taken as full value of consideration (i.e., sale
value of the bungalow). Thus, actual selling price of Rs. 80,00,000 (being less
than stamp duty value) will not be taken into account while computing taxable
capital gain.
Illustration for better understanding
Mr. Karan sold his land for Rs.
25,20,000. The value adopted by the Stamp Valuation Authority of the bungalow
for the purpose of payment of stamp duty is Rs. 20,00,000. In this situation,
while computing taxable capital gain arising on transfer of land, Rs. 25,20,000
(being actual sale value) will be taken as full value of consideration. Thus,
stamp duty value (being less than actual selling price) will not be taken into
account while computing taxable capital gain.
Source- Income Tax India Website
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