INCOME FROM CAPITAL GAINS

BASIS OF CHARGE
The capital gain is chargeable to income tax if the following conditions are satisfied:
i]. There is a capital asset.
ii]. Assessee should transfer the capital asset.
iii]. Transfer of capital assets should take place during the previous year.
iv]. There should be gain or loss on account of such transfer of capital asset.
Thus Profits or gains arising from the transfer of a capital asset is chargeable to tax in the year in which transfer
takes place under the head "Capital Gains".

DEFINITIONS
Capital Asset [Sec. 2(14)]
Capital Asset means property of any kind (fixed, circulating, movable, immovable, tangible or intangible)
whether or not connected with business or profession. Exclusions are;
i]. Stock-in-trade, consumable stores or raw materials held for the purpose of the business or profession
ii]. Personal effects of the assessee i.e. movable property including wearing apparel and furniture held for
personal use by the assessee or any members of his family dependent on him but excludes; (a) Jewellery
which includes ornaments made of gold, silver, platinum or any other precious metal, precious or semiprecious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any
wearing apparel; (b) Archaeological collection; (c) Drawings; (d) Paintings; (e) Sculptures; (f) Any work of
art
iii]. Agricultural land in a rural area provided land is situated;
(a) In a municipality or a cantonment board and which has a population of less than 10,000
(b) In any area within a distance of;
more than 2 km. from the local limits of any municipality or cantonment board and which has a
population of more than 10,000 but less than 1,00,000, or
more than 6 km. from the local limits of any municipality or cantonment board and which has a
population of more than 1,00,000 but less than 10,00,000, or
more than 8 km. from the local limits of any municipality or cantonment board and which has a
population of more than 10,00,000
iv]. 6% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Bonds, 1980 issued by the Central
Government
v]. Special Bearer Bonds, 1991 issued by the Central Government.
vi]. Gold Deposit Bonds issued under Gold Deposit Scheme 1999
Transfer [Sec. 2(47)]
Transfer in relation to a capital asset includes;
the sale, exchange or relinquishment of the asset; or
the extinguishment of any right on asset; or
the compulsory acquisition of asset under any law; or
the conversion of capital assets into stock-in-trade of a business; or
the maturity or redemption of a zero coupon bond; or
any transaction involving the allowing of the possession of any immovable property to be taken or
retained in part performance of a contract of the nature referred to in section 53A of the Transfer of
Property Act, 1882; or
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 any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society,

company or other association of persons or by way of any agreement or any arrangement or in any other
manner whatsoever) which has the effect of transferring, or enable the enjoyment of, any immovable
property.
Transactions not regarded as Transfer [Section 47]
Section 47 specifies certain transactions which will not be regarded as transfer for the purpose of capital gains
tax;
(1) Any distribution of capita l assets on the total or partial partition of a HUF;
(2) Any transfer of a capital asset under a gift or will or an irrevocable trust;
(3) Any transfer of bonds or shares referred to in section 115AC(1);
(4) Any transfer of any of the following capital asset to the government or to the University or the National
Museum, National Art Gallery, National Archives or any other public museum or institution notified by
the Central Government to be of (national importance or to be of) renown throughout any State; (a)
work of art; (b) archaeological, scientific or art collection; (c) book; (d) manuscript; (e) drawings; (f)
paintings; (g) photographs; (h) printings.
(5) Any transfer by way of conversion of bonds or debentures, debenture stock or deposit certificates in any
form, of a company into shares or debentures of that company;
(6) Any transfer by way of conversion of Foreign Currency Exchangeable Bonds into shares or debentures of
a company;
(7) Any transfer of a capital asset in a scheme of reverse mortgage under a scheme made and notified by
the Central Government.
The list is inclusive. Text book can be referred for further reference.
Short-Term Capital Asset [Sec. 2(42A)]
Short term capital assets means a capital asset held by an assessee for not more than thirty six months
immediately preceding the date of its transfer. However, in the following cases, an asset, held for not more
than twelve months, is treated as short-term capital assets;
i].
Quoted or unquoted equity or preference shares in a company
ii]. Quoted Securities
iii]. Quoted or unquoted Units of UTI
iv]. Quoted or unquoted Units of Mutual Funds specified u/s. 10(23D)
v]. Quoted or unquoted zero coupon bonds
Long-Term Capital Asset [Sec. 2(29A)]
Long term capital assets means a capital asset which is not a short-term capital asset.
Determination of Period of Holding
The following points must be noted in this regard;
i]. In the case of a share held in a company in liquidation, the period subsequent to the date on which the
company goes into liquidation should be excluded;
ii]. Section 49(1) specifies some special circumstances under which capital asset becomes the property of an
assessee. E.g. an assessee may get a capital asset on a distribution of assets on the partition of a HUF or
he may get a gift or he may get the property under a will or from succession, inheritance etc. In such
cases, the period for which the asset was held by the previous owner should be taken into account.
iii]. In the case of a capital asset being a share or any other security or a right to subscribe to any share or
security where such right is renounced in favour of any other person, the period shall be calculated from

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the date of allotment of such share or security or from the date of offer of such right by the company or
institution concerned.
The list is inclusive. Text book can be referred for further reference.

SCOPE AND YEAR OF CHARGEABILITY TO TAX [Sec 45]

The scope of the head Capital Gains is explicitly clear if the provisions of sec 45 are analyzed in the following
manner. Sub-section (1) is a general provision applicable to all transactions other than those covered by subsections (1A) to (6).
SubTransaction
Section
(1)
Transfer of a Capital Asset
(1A)

Damage to or destruction of any

capital asset

(2)

Conversion of a capital asset into

stock in trade
Transfer of securities made by the
depository who is deemed to be the
registered owner
under
the
Depositories Act, 1996
Transfer of a capital asset by a
partner to the firm or by a member
to the AOP or BOI by way of capital
contribution or otherwise
Transfer of a capital asset by way of
distribution on dissolution or
otherwise of a firm or AOP or BOI
Transfer of a capital asset by way of
Compulsory acquisition under any
law
Repurchase of mutual fund units
referred to in Sec 80CCB

(2A)

(3)

(4)

(5)

(6)

(7)

Year of Chargeability
Previous year in which
transfer takes place
Previous year in which
money or other asset is
received
from
the
Insurance Company
Previous year in which
stock in trade is sold
Previous year in which
transfer takes place on
(FIFO)
first-in-first-out
method
Previous year in which
transfer takes place

Consideration
Consideration for the transfer
The value of money or the fair
market value of asset received on
the date of such receipt
Fair market value as on the date
of conversion
Consideration for the transfer is
chargeable in the case of the
beneficial owner and not in the
case of the depository
The value of the asset recorded
in the books of the firm or AOP
or BOI

Previous year in which Fair market value as on the date

transfer takes place
of transfer

When consideration or part The initial compensation or

enhanced compensation as the
thereof is first received
case may be
Previous year in which such Repurchase Price
repurchase takes place or
the scheme terminates
Maturity and redemption of Zero At the time of maturity or Redeemed Value
Coupon Bonds
redemption

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EXEMPT CAPITAL GAINS UNDER SECTION 10

10(33)

Transfer units of US 64 on or after April 1, 2002

10(37)

Compulsory acquisition of Urban Agriculture Land where consideration is received after

March 31, 2004.

10(38)

Long-term capital gain arising on transfer on or after October 1, 2004 of equity shares or
units of equity oriented mutual fund and the STT is paid at the time of transfer.

COMPUTATION OF CAPITAL GAINS [SEC. 48]

The method of computation depends on the nature of capital asset transferred. It is calculated as follows:Short-term Capital Gain
A. Find out Full Value of Consideration
B. Deduct:
(i) expenditure incurred wholly and exclusively
in connection with such Transfer.
(ii) Cost of Acquisition
(iii) Cost of Improvement
(iv) Exemption provided by Sec 54B, 54D & 54G,
54GA
C. (A B) is Short-term Capital Gain

Long-term Capital Gain

A. Find out Full Value of Consideration
B. Deduct:
(i) expenditure incurred wholly and exclusively in
connection with such Transfer.
(ii) Indexed Cost of Acquisition
(iii) Indexed Cost of Improvement
(iv) Exemption provided by Sec 54, 54B, 54D, 54EC,
54ED, 54F & 54G, 54GA,54GB
C. (A B) is a Long-Term Capital Gain

FULL VALUE OF CONSIDERATION

Full value of consideration means & includes the whole/complete sale price or exchange value or
compensation including enhanced compensation received in respect of capital asset in transfer. The following
points are important to note in relation to full value of consideration;
The consideration may be in cash or kind.
The consideration received in kind is valued at its fair market value.
It may be received or receivable.
In the following cases Fair Market Value is taken as full value of consideration;
Conversion of Capital Asset into stock in trade
Distribution of Capital Assets by a firm, AOP, BOI
Barter/Exchange
Assets distributed in kind at the time of liquidation of a company
Special provision for full value of consideration as mentioned in Section 50C;
i]. If consideration received on transfer of capital asset (land or building or both) < value adopted or
assessed by Stamp Valuation Authority, such value adopted is deemed as full value of consideration.
ii]. If assessee claims that Stamp value > FMV and he has not gone for appeal, revision etc. before any
court, then, the A.O. may refer the valuation to the valuation officer.
iii]. If the value determined by the valuation officer > stamp value, then stamp value will be the
consideration .

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COST OF ACQUISITION
Cost of Acquisition (COA) means any capital expense at the time of acquiring capital asset under transfer, i.e.,
to include the purchase price, expenses incurred on completing transfer in the form of registration, storage
etc. In other words, cost of acquisition of an asset is the value for which it was acquired by the assessee.
Expenses of capital nature for completing or acquiring the title are included in the cost of acquisition.
= [COA CII for the financial year in which the asset is transferred]
CII for the first financial year in which the asset was held by the
Assessee or the year beginning on 1.4.1981, whichever is later or the
year of Improvement of the asset
However, in case of Bonds, Debentures except capital indexed bonds, depreciable assets, and for nonresidents even if they are long term capital assets the benefit of indexation is not available.

Indexed Cost of Acquisition

**

COST OF ACQUISITION IN SPECIAL CASES

(1). If capital assets were acquired before 1.4.81, the assessee has the option to have either actual cost of
acquisition or fair market value as on 1.4.81 as the cost of acquisition. If assesses chooses the value as on
1.4.81 then the indexation will also be done as per the CII of 1981 [Sec 55(2)].
not applicable to depreciable/self generated asset
applicable if acquired in any mode referred to in sec.49(1) and the property of previous owner relates
prior to 1.4.81
(2). In case of conversion of bonds, debenture stock, deposit certificates into shares/ debentures of a
Company, cost of acquisition of bonds etc. will be the COA of shares or debentures.
(3). Advance money received earlier on any previous occasion by the assessee and forfeited will be reduced
from COA [Section 51]. However, advance money received and forfeited by the previous owner should not
be reduced from COA.
If advance money is forfeited during the previous year 2014-15, it is taxable under the head Income from
other sources in the year in which advance money is forfeited. It will not be deducted from COA.
(4). In case of transfer u/s 49 by Gift / Inheritance, cost to previous owner is taken to be the cost of acquisition.
Period of holding of previous owner is considered. Indexation benefit will be available only from the year
in which the assessee first held the asset [for cost of acquisition]. In case of improvement, indexation
benefit will be available from the year of improvement.
(5). In case of transfer of specified security/sweat equity shares u/s 17(2)(vi) Fair Market value on the date of
transfer will be considered as Cost of acquisition
(6). Goodwill of a business or a trademark or brand name associated with a business or a right to manufacture,
produce or process any article or thing, or right to carryon any business, tenancy rights, stage carriage
permits and loom hours;
If purchased

COA = Purchase value

If self Generated
COA = NIL
However, the above provision does not cover self-generated goodwill of a profession.
(7). Bonus and Right Shares
i]. Original and Bonus Shares
Particulars
Cost of Acquisition
If original and bonus shares are acquired Original shares = Actual cost or FMV on 01.04.81
whichever is more.
before 01.04.81
Bonus shares = FMV as on 01.04.81
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If original shares acquired before

01.04.81 but bonus shares allotted after
01.04.81
If original and bonus shares are acquired
on or after 01.04.81

Original shares = Actual cost or FMV on 01.04.81

whichever is more.
Bonus shares = NIL
Original shares = Actual cost
Bonus shares = NIL

ii]. Right Shares

(a) When such a right is renounced by the assessee in favour of any person, then COA=NIL.
(b) When it is subscribed on the basis of the said entitlement, then COA= amount actually paid by him
for acquiring such asset.
(8) Special provision for non-residents - In order to give protection to non-residents who invest foreign
exchange to acquire capital assets, section 48 contains a proviso. Accordingly, in the case of non-residents,
capital gains arising from the transfer of shares or debentures of an Indian company is to be computed as
follows;
The cost of acquisition, the expenditure incurred wholly and exclusively in connection with the transfer
and the full value of the consideration are to be converted into the same foreign currency with which such
shares were acquired. The resulting capital gains shall be reconverted into Indian currency. The aforesaid
manner of computation of capital gains shall be applied for every purchase and sale of shares or
debentures in an Indian company. Rule 115A is relevant for this purpose.

COST OF IMPROVEMENT
Cost of improvement is the capital expenditure incurred by an assessee for making any addition or
improvement in the capital asset. In other words, cost of improvement includes all those expenditures, which
are incurred to increase the value of the capital asset.
In case of transfer u/s 49(1), cost of improvement means capital expenditure in making any addition or
alterations to the capital assets incurred by the previous owner. It do not includes;
Expenditure allowed under other head of income
Amount spent prior to 1.4.81
Self generated assets

EXPENDITURE ON TRANSFER
Expenditure incurred wholly and exclusively for transfer of capital asset is called expenditure on transfer. It is
fully deductible from the full value of consideration while calculating the capital gain. It includes;
i]. Brokerage/Commission
ii]. Cost of Stamp
iii]. Registration Fees
iv]. Travelling Expenditure in connection with transfer
v]. Litigation Expenditure claiming enhancement of compensation awarded in the case of compulsory
acquisition of assets
Expenditure on transfer do not include Securities Transaction tax paid by the seller

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COST INFLATION INDEX (CII)

The Central Govt. has notified the CII for the purpose of LTCG as follows;
Financial Year
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92

CII
100
109
116
125
133
140
150
161
172
182
199

Financial Year
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03

CII
223
244
259
281
305
331
351
389
406
426
447

Financial Year
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15

CII
463
480
497
519
551
582
632
711
785
852
939
1024

CAPITAL GAIN ON DEPRECIABLE ASSETS

Section 50 provides for the computation of capital gains in case of depreciable assets which have overriding
effect in spite of anything contained in section 2(42A) which defines a short-term capital asset. In Income Tax
Act, depreciation is provided block wise i.e. Assets are divided into four different blocks; (i) Buildings; (ii)
Furniture; (iii) Plant and Machinery; and (iv) Intangible Assets.
Capital gains in case of transfer of asset on which depreciation has been allowed under Section 32(1)(ii) in
respect of block of assets shall be computed as follows;
(a) Block of assets does not cease to exist but WDV of block is reduced to zero [Section 50(1)]:
Full value of consideration
Less : (1) Expenses on transfer
(2) WDV of asset on 1st day of the previous year
(3) Cost of assets acquired during the previous year and falling within that block
Short Term Capital Gains

***
***
***
***
****

(b) Block of assets ceases to exist due to the sale of all assets falling within that block [Section 50(2)]:
Full value of consideration
Less : (1) Expenses on transfer
(2) WDV of asset on 1st day of the previous year
(3) Cost of assets acquired during the previous year and falling within that block
Short Term Capital Gains/Loss

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SHORT TERM CAPITAL GAINS IN RESPECT OF EQUITY SHARES AND UNITS OF AN EQUITY ORIENTED FUND [SECTION 111A]
Any STCG arising from the transfer of an equity share in a company or a unit of an equity oriented fund shall be
liable to concessional rate of tax @15% if the following conditions are satisfied:
i]. The transaction of sale should take place through a recognized stock exchange.
ii]. Such transaction is chargeable to STT.
Assessee is not entitled to claim any deductions provided under chapter VI-A in respect of STCG u/s 111A.
In the case of resident an Individual or a HUF, if the basic exemption not exhausted by any other income
then STCG u/s 111A shall be reduced by the unexhausted basic exemption limit and only the balance STCG
shall be chargeable to tax@15%.

TAXATION OF LTCG [SECTION 112]

Where the transferred long term asset is in the nature of listed securities or units of UTI or mutual fund or zero
coupon bonds which are sold outside the stock exchange, then the gain arising from the transfer of such
securities or units shall be liable to tax;
i]. @10% on such LTCG computed without the benefit of indexation, OR
ii]. @ 20% on such LTCG computed availing the benefit of indexation
Whichever is more beneficial to the assessee.
In the case of a resident Individual or a resident HUF, if the basic exemption not exhausted by any other
income then LTCG shall be reduced by the unexhausted basic exemption limit and only the balance LTCG
shall be chargeable to tax.
Assessee is not entitled to claim any deductions provided under chapter VI-A in respect of LTCG.
It may be noted that the possibility of applying 10% or 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 STT.
The long term capital gain on equity shares or units of equity oriented mutual fund which are sold in the stock
exchange and on which securities transaction tax is paid, is exempt u/s 10(38).

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CAPITAL GAINS VARIOUS EXEMPTION DETAILS

Section

54

54B

54D

54EC

54F

54G

54GA

54GB

Kind of
assets
transferre
d

Long-term
Capital
Assets
being House
Property
used for
residential
purpose

Land used
for
agricultural
purposes

Land &
Building or
any right
therein used
by an
industrial
undertaking
compulsorily
acquired
under any law

Any Long
Term Capital
Assets

Any long term

capital asset
other than
residential
house

Land or
Building or
any right
therein or
Plant or
Machinery in
Urban Area
used for the
business

Land or
Building or
any right
therein or
Plant or
Machinery in
Urban Area
used for the
business

Residential Property
owned by the eligible
assessee

Eligible
Assessee

Individual &
HUF

Individual &
HUF

All

All

Individual &
HUF

Industrial
undertakings
in urban area
shifting to an
area other
than urban
area

Industrial
undertakings
in urban area
shifting to
any Special
Economic
Zone

Individual & HUF

Condition
of
period of
holding of
original
Asset

3 years

2 years

2 years

1 year for
Shares,
Listed
Securities,
Units of UTI/
Mutual Fund
specified u/s
10(23D),
Zero
coupon
bonds, 3
years for any
other capital
assets

1 year for
Shares, Listed
Securities,
Units of
UTI/Mutual
Fund specified
u/s 10(23D),
Zero-coupon
bonds, 3 years
for other
capital assets

No period
specified

No period
specified

No period specified

Condition
of

Purchase of
Residential

Purchase of
Agricultural

Purchase/con
struction of

Investment
of whole or

Purchase of
Residential

Acquire
similar assets

Acquire
similar assets

(a) The eligible

assessee, before the

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Section

54

54B

54D

54EC

54F

54G

54GA

utilization
of
considerati
on

House
within 2
years after
or 1 year
prior to
date of
transfer: or
constructio
n of
residential
house
within 3
years from
the date of
transfer

Land
within 2
years from
the date of
transfer

land, building,
or any right
therein within
3 years from
the date of
transfer by
way of
compulsory
acquisition for
the purpose
of shifting/
reestablishing/
setting up
another
industrial
undertaking

any Part of
Capital Gain
in specified
assets as
stipulated in
the section.

House within
2 years after
or 1 year prior
to date of
transfer; or
construction
of residential
house within
3 years from
date of
transfer

& incur
expenses on
shifting
original asset,
within 1 year
before, or 3
years from
the date of
transfer

& incur
expenses on
shifting
original
asset, within
1 year
before, or 3
years from
the date of
transfer

due date of furnishing

the return of income
u/s 139(1) of the Act,
utilizes the amount of
Net Consideration, for
subscribing to the
Ordinary Shares of an
eligible company; and
(b) The eligible
company, within one
year from the date of
subscription, utilizes
the amount for
purchase of new plant
and machinery.

The amount
of gain or,
the cost of
new asset,
whichever
is
less

Lower of
the Capital
Gain or the
Cost of
acquisition
of new
agricultural
land

Lower of the
Capital Gain
or the Cost of
acquisition of
new land and
building

Lower of the
Capital Gain
or the
investment
in specified
assets
subject to a
maximum of
Rs. 50 lakhs.

Refer Note
No. 5

The amount
of gain or the
aggregate
cost of new
asset, and
shifting
expenses,
whichever is
lower

The amount
of gain or the
aggregate
cost of new
asset, and
shifting
expenses,
whichever is
lower

Capital Gains are fully

exempt, if the cost of
the new Asset
acquired by the
Company, is MORE
than the net
consideration you
received for the
transfer of the old
Long-term capital
asset; or

Exempt
Amount

Investment
should be
made within
6 months
from the
date of
transfer

54GB

If the Cost of New

Asset is LESS than the
net consideration,
then so much of the
capital gain as the
whole of the capital
gains bears to the net
consideration is

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Section

54

54B

54D

54EC

54F

54G

54GA

54GB
exempt.

Other
requireme
nts

See notes 1,
2&4

Assessee or
his parents
must have
used the
land for
agricultural
purpose
for
preceding
two years

See notes 1, 2
&4
Must have
been
used for
business of
industrial
undertaking
for preceding
2 years

See notes 1,
2&4
Rebate u/s
88 or
deduction
u/s 80C not
to be
granted for
the same
investment.
New Asset
must be
retained for
a
period of 3
years

Must not own

more than 1
residential
house other
than the new
asset on the
date of
transfer of
original asset

Must have
been shifted
to non-urban
area. See
Notes 1 & 2

See Notes 1,
2, 3 and 4

Post subscription of
the shares, the
eligible assessee u/s
54GB should hold
more than 50% of the
share capital of the
Company or should
be entitled to more
than 50% of the
voting rights in the
company.
Company should
qualify as a SME
under the Micro,
Small and Medium
Enterprises Act, 2006

NOTES
(1) In case New Asset is transferred before 3 years from date of purchase/construction, the Capital Gains exempted earlier will be chargeable to tax in year of transfer of new asset.
(2) In order to avail the exemption, gains are to be reinvested, before the due date of return u/s 139(1). If the amount is not so reinvested, it is to be deposited on or before that date
in account of specified bank/institution and it should be utilised within specified time limit for purchase/construction of new asset.
(3) U/s 54F Capital Gains exempted earlier shall be chargeable to tax if a) If the assessee purchases within 2 years or constructs within 3 years any residential house other than the
one in which reinvestment is made & b) If the new asset is transferred within a period of 3 years from the date of its purchase/construction.
(4) As per Section 54H, where the transfer is by way of compulsory acquisition, the period available for acquiring the new asset u/ss. 54, 54B, 54D, 54EC and 54F shall be computed
from the date of receipt of compensation and not the date of transfer.
(5) If cost of new house is more than the net consideration of original asset, the whole of the gains is exempt. If cost of specified asset is less than net consideration, proportionate
amount of the gains will be exempt i.e. Capital Gain X cost of New Asset/Net consideration on sale of asset.

****

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