Cost Inflation Indices

The cost inflation indices as notified by the Central Government are as follows:

F. Y. CII F.Y. CII F.Y. CII F. Y. CII

1981-82 100 1988-89 161 1995-96 281 2002-03 447
1982-83 109 1989-90 172 1996-97 305 2003-04 463
1983-84 116 1990-91 182 1997-98 331 2004-05 480
1984-85 125 1991-92 199 1998-99 351 2005-06 497
1985-86 133 1992-93 223 1999-2000 389 2006-07 519
1986-87 140 1993-94 244 2000-01 406 2007-08 551
1987-88 150 1994-95 259 2001-02 426 2008-09 582
 Computation of Capital Gains short
term and long term
Short term capital gains [S. 2(42B)] means capital gains arising from transfer
of a short-term capital asset. Long term capital gains [S. 2(29B)] means
capital gains arising from transfer of a long-term capital asset.
Mode of Computation of Capital Gains [Section 48]
Short Term Capital Gains Long Term Capital Gains
Full Value of Consideration XX Full Value of Consideration XX
Less : Exp incurred wholly and Less : Expenses incurred wholly and XX
exclusively for such transfer XX exclusively for such transfer
Net Consideration XX Net Consideration XX
Less : *C.O.A. XX Less : Indexed * C.O.A. XX XX
**C.O.I. XX XX Indexed**C.O.I. XX
Short term capital gain XX Long term capital gain XX
Less : Exemption u/s 54B, 54D, Less : Exemptions u/s 54, 54B, 54D,
54G, 54GA XX 54EC, 54F, 54G, 54GA XX

Taxable Short Term Capital XX Taxable Long Term Capital Gain XX

*Cost of Acquisition (C.O.A) ** Cost of Improvement (C.O.I)
Gain
 Notes:
1. Any sum paid on account of Securities Transaction Tax
(STT) is not deductible in computing Capital Gains.
2. Indexed cost of acquisition or improvement shall be
computed as follows :
Actual cost of acquisition CII for the year of
Indexed transfer
Cost of = CII for the year of acquisition by assessee
Acquisition

Actual cost of improvement CII for the year of

Indexed transfer
Cost of
= CII for the year of improvement
Improvement
 If assessee acquires capital asset before 1.4.81

Higher of FMV as on 1.4.81 or Actual cost of

Indexed acquisition CII for the year of transfer
Cost of = 100
Acquisition

Actual cost of improvement CII for the year of

Indexed transfer
Cost of
= CII for the year of improvement
Improvement

Note: COI before 1.4.81 is ignored.

 Special Assets:

(a) Equity or Preference Shares in a company

(b) Other securities like Debentures and

Govt.Securities in listed stock exchange in
India in recognized

(c) Units of UTI or Units of mutual fund

specified u/s 10(23D)

(d) Zero Coupon Bonds

 Summary

Capital assets

Short term capital assets Long term capital assets

Period of holding is 36 months or less Period of holding is more than 36 months

Special cases: period of holding Special cases: period of holding

is 12 months or less is more than 12 months
1. For computing the period of 36 months or 12 months, as the case may be,
the date on which the asset was acquired is to be included
while the date on which the asset is transferred is to be excluded.

2. Indexation on long term capital assets will not be allowed for bonds
and debentures other than capital indexed bonds issued by the Government
 Question- short term or long term capital
asset
Y purchases Debentures of a company on Mar 10,
2006.Debentures are listed on Cochin Stock Exchange with effect
from Jan 1, 2008. Y transferred these debentures on Jan 5, 2009.

We have to see the nature of capital asset on the date of

transfer.
As the debentures were listed on the date of transfer, the
criteria of 12 months will be applicable.

Hence it is a long term capital asset as the period of holding is

more than 12 months.
 Charge under the head Capital Gains
[section 45(1)]
Any profits or gains arising from the transfer of a capital asset is
chargeable to tax as income of the previous year in which
the transfer took place.

Two important conditions.

1. There is a capital asset. [The asset must be a capital asset
at the time of transfer]
2. There is a transfer of such capital asset.
 Capital Asset [section 2(14)]
According to Section 2(14), capital asset means
property of any kind held by an assessee, whether or not
connected with his business or profession, but does not
include
1. Any stock-in-trade, consumable stores or raw materials held
for purpose of his business or profession.

2. Personal effects i.e. movable property held for personal use by

assessee or his family member dependent on him.

Exception of personal effects:(i.e following are capital assets)

Jewellery
Archaeological collections,
Drawings, Paintings, Sculptures and any work of art
 Capital Asset [section 2(14)]
(contd)
3. Rural agricultural land i.e. Agricultural land in India not being
a land situated
_ Within the jurisdiction of a municipality or a
cantonment board having a population of 10,000 or
more according to the last preceding census; or
_ In any notified area within 8 kms from the local
limits of any municipality or cantonment board.
4. Gold Bonds issued by Central Government including the
Gold Deposit Bonds issued under the Gold Deposit Scheme,
1999.
5. Special Bearer Bonds, 1991.
 Question- Capital asset or not
A.C installed at assessees residence
not a CA because it is personal and moveable
A.C installed at business premises
CA because though it is moveable, it is not personal.

A.C for a dealer in AC

not a CA because it is a stock in trade for the assessee.
 Transfer [section 2(47)]:
Transfer, in relation to capital asset, includes
a. sale, exchange or relinquishment of the asset;
b. extinguishment of any rights therein;
c. compulsory acquisition thereof under any law;
d. maturity or redemption of zero coupon bond;
e. conversion or treatment of such asset by the owner into stock
in trade of business carried on by him;
f. Any transaction involving allowing of possession of an
immovable property to be taken or retained in part performance
of a contract of the nature referred u/s 53A of Transfer of
Property Act, 1882.
g. any transaction (whether by way of acquiring shares in, or by
way of becoming a member of, a co-operative society,
company or other AOP or by way of any arrangement or
agreement or in any other manner) that has the effect of
transferring or enabling the enjoyment of, any immovable
property.
 Transfer [section 2(47)]
(contd)
-:Case Laws:-

1. Reduction in face value of shares and consequent payment

to the shareholder towards such reduction amounts to
transfer, as it results in extinguishment of right in the
shares held by the shareholder. Kartikeya Sarabhai v. CIT
[1997] 228 ITR 163 (SC).
2. Surrender of Preference Shares on redemption thereof
amounts to transfer as there is relinquishment by the
shareholder of his rights in Preference Shares. Anarkali
Sarabhai v. CIT [1997] 224 ITR 422 (SC).
 Transactions not regarded as transfer
(sec 47)

1. Transfer of capital asset by way of gift

or under a will or irrevocable trust.
2. Transfer of capital asset in total or
partial partition of HUF.
 Transactions not regarded as transfer
(contd 1)
1Lakh 1.10.06 Cost=0 1.1.09 5 Lakh
A B C
Gift Sell
1.10.90

Capital gains for B:

FVC = 5,00,000
(-) Indexed COA = 1,12,139 1,00,000 * 582 (08-09)
519 (06-07)

3,87,861
Option of taking FMV as on 1.4.81 is available if the previous owner
acquired capital asset before 1.4.81
 Transactions not regarded as transfer
(contd 2)
Cost=0 Cost=0
A B C D
Gift Gift Sell

Who is the previous owner for C?

Previous owner means the last previous owner who
actually paid for the asset.
Hence Previous owner for C will be A from where cost and period
Of holding will be taken.
 Transactions not regarded as transfer
sec 47 (contd 4)

3.Transfer of capital asset by holding company

to its 100% subsidiary company or vice versa
provided the transferee company is an Indian
company.
 Withdrawal of exemption sec 47A

If any of the following events occur within 8 years from the date
of transfer, the capital gains so exempted will be chargeable to tax
in the year in which transfer took place

1. The holding company does not continue to hold the

whole of the share capital of the subsidiary company.
2. The transferee company converts the capital asset into
stock in trade.
 Section 47 read with section 47A

1 lakh
03-04 5 lakhs
H S Without attracting section 47A
1990-91 08-09
sells
Capital gains for S
FVC = 5 Lakhs
(-) COA = 1 Lakh
4 Lakhs
 Section 47 read with section 47A
(contd)
1 lakh
03-04 5 lakhs
H S After attracting section 47A
90-91 3 lakhs 08-09
sells
Capital gains for S
Capital gains for H
FVC = 5 Lakhs
FVC = 3 Lakhs
COA = 3 Lakh
COA = 1 Lakh
2 Lakhs
2 Lakhs
 Steps for computing capital gain
1) Identify whether the given asset is a capital asset or not as per
section 2(14)
2) Identify whether the given transaction is a taxable transfer or
not as per section 2(47) read with section 47.
3) Find out whether the CA is LT or ST.
4) In certain situations, while counting the POH of capital asset,
we include POH of previous owner also. Section 2(42A)
5) In certain situations, while calculating the COA of capital asset,
we consider cost to the previous owner.Section 49.
6) However indexation of COA will always start from the current
assessee.
 Intangible Assets
Cost of acquisition and cost of improvement in case of certain
intangible assets

Capital asset being - COA COI

Goodwill of business, right to If self-generated: Nil. NIL

manufacture/produce/process If purchased whether
any article/thing, or right to carry directly or from
on business previous owner:
purchase price.
Note: Option of
taking FMV as on
Trademark/brand name Expenses incurred
1.4.81is not
associated with business or by assessee or
available.
tenancy rights or route previous owner after
permits/loom hours 31.3.1981
 Bonus shares and right shares.
Mode Period of holding Cost of acquisition
Bonus shares Will start from the Cost will be nil.If the
date of allotment bonus shares are
thereof alloted before 1.4.81,
cost will be FMV as
on 1.4.81
Right shares Will start from the Cost will be purchase
purchased by the date of allotment price of right shares
existing owner thereof
Mode Period of holding COA
When existing Will start from the date of Cost will be nil.
holder renounces offer of such right till the date
his right in favour of of renouncement which will
another person. normally be less than 12
months

Right shares Will start from the date of Cost will be

purchased by allotment thereof purchase price
renouncee of right shares
+ cost of right
 Conversion of capital asset into stock in
trade sec 45(2)
1.If a capital asset is converted into stock in trade,
it is considered as a transfer as per section 2(47)
in the year of conversion.However the resulting
capital gain is taxable in the year of transfer of the
converted stock.

2. The period of holding of the converted asset

should be calculated from the actual date of
purchase of capital asset till the date of
conversion.Indexation of COA and COI will also
be till the year of conversion.
 Conversion of capital asset into stock in
trade sec 45(2)
(contd 2)

3. FMV on the date of conversion is

considered as the full value of consideration
for calculating capital gains. The same FMV
is considered as purchase price of stock for
calculating income from business.
 Compulsory acquisition of capital asset

Where asset has been compulsorily acquired under any

law or the consideration for transfer is determined by
RBI or Central Govt, it is regarded as transfer.

However the resulting capital gains will be taxable in the

year of receipt of initial compensation or part thereof

The POH will be calculated till the year of compulsory

acquisition. Further COA and COI will be indexed till the
year of transfer and not till the year of receipt of
compensation.
 Compulsory acquisition of capital asset
(contd 2)
When enhanced compensation is received capital
gains will be taxable in the year of receipt of
enhanced compensation.

Capital gains will be ST or LT depending on the

nature of original asset.

No COA and COI will be allowed as deduction as

it has already been allowed once. But litigation
expenses is allowed as expense on transfer.
 Capital Gains in case of Depreciable Assets
[section 50 & 50A]
1. 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
[Section 50] : The capital gains shall be computed as follows :
Block of assets ceases to exist or WDV becomes negative or
both[Section 50(1)]:

Full value of consideration XXX

Less :
1. Expenses on transfer XXX
2. WDV of asset on 1st day of the previous year XXX
3. Cost of assets acquired during the previous year and
falling within that block XXX
Short Term Capital Gains XXX
 Capital Gains in case of Depreciable
Assets [section 50 & 50A]

2. Transfer of capital assets of Power sector units on which

depreciation allowed u/s 32(1) (i) [Section 50A]:
(a) If WDV of the asset exceeds Moneys Payable on transfer
of such assets:
Terminal depreciation under Section 32(1) (iii) = WDV of such
asset Moneys Payable
(b) If Moneys Payable exceeds WDV of the asset: Then, if -
Moneys payable doesnt exceed actual cost : Balancing charge
u/s 41(2) = Money Payable WDV
Moneys payable exceeds Actual Cost : Balancing Charge u/s
41(2) = Actual Cost WDV; and Short-term/Long-term Capital
Gains = Moneys Payable Actual Cost
 CASES WHERE BENEFIT OF INDEXATION IS NOT
AVAILABLE EVEN IN CASE OF LONG-TERM CAPITAL
ASSETS:
1. Transfer of a bond or a debenture other than capital indexed bonds issued by the
Government.
2. Transfer of undertaking or division in a slump sale under Section 50B.
3. Transfer of shares/debentures of an Indian company purchased by a non -
resident in foreign currency.
4. Transfer of units purchased in foreign currency by an assessee covered
under Section 115AB.
5. Transfer of bonds or shares purchased in foreign currency by an assessee
covered u/s 115AC.
6. Transfer of global depository receipts by a resident employee of an
Indian company u/s 115ACA.
7. Transfer of securities by foreign institutional investors under Section
115AD.
8. Transfer of a foreign exchange asset by a non-resident Indian under Section
115D.
Cases where Fair market Value shall be treated as full value
of consideration
1.In case of conversion of capital asset into stock in trade.

2.Transfer by way of distribution of capital assets by a firm or

AOP

3.In case of barter exchange

4. Assets distributed in kind in case of liquidation of a

company.It is taxable in the hands of shareholder as sale
consideration.
 EXEMPTIONS IN RESPECT OF CAPITAL GAINS
AVAILABLE ONLY TO INDIVIDUAL AND/OR HUF
ASSESSEES [Section 54, 54B and 54F]
Provisions Section 54 Section 54B Section 54F
1. Assessee Individual/HUF Individual Individual/HUF
2. Asset Residential house Agricultural land Any capital asset not
transferred property being used by individual or being residential
buildings or lands his parent for house property. [Note :
appurtenant thereto. agricultural purposes Exemption is not
during 2 years available if assessee
preceding date of owns more than 1
transfer. residential house
(other than new) on
date of transfer of
original asset;
Provisions Section 54 Section 54B Section 54F

3. Nature of Long Term Short/Long Term Long Term

Asset
4. New asset Residential house Agricultural land Residential house
to be property i.e. (urban or rural) property i.e. buildings
purchased/ buildings or lands or lands appurtenant
constructed appurtenant thereto thereto
5. Time-limit Purchase : Within 1 Purchase within 2 Purchase : Within 1
for purchase/ year before or 2 years from the date year before or 2 years
construction years after the date of transfer after date of transfer;
of transfer and
Construction : Within Construction : Within
3 years from date of 3 years from date of
transfer transfer

6. Deposit Applicable Applicable Applicable

Scheme
(discussed
later)
Provisions Section 54 Section 54B Section 54F
7. Amount of Lower of Capital Lower of Capital Long term capital
Exemption Gains or Investment gains or cost of new gains Cost of
in new asset asset new house Net
consideration
8. Withdrawal Transfer of the new Transfer of the new (a) Assessee
of exemption asset within 3 years asset within 3 years purchases within 2
on from its purchase/ from its purchase years or constructs
construction within 3 years from
date of transfer of
original asset, a
residential house
other than new
house; or
(b) Transfers new
asset within 3 years
from date of its
purchase/
construction.
Provisions Section 54 Section 54B Section 54F

9. Taxability Amount of exemption Exemption claimed Amount exempted

on withdrawal claimed earlier shall earlier shall be earlier shall be
be reduced from the reduced from cost of taxable as long-term
cost of acquisition of acquisition of new capital gains in
new asset asset previous year in
which (a) another
residential house is
purchased or
constructed; or (b)
the new asset is
transferred.
 Exemptions in respect of capital gains available
only to individual and/or HUF assessees [section
54, 54B and 54F]
Note: Important points on exemption under Section 54 and 54F
Purchase/Construction of a Portion: Purchase or consideration of a portion of
the house is eligible for exemption CIT v. Chandanben Maganlal [2000]
245 ITR 182 (Guj.). E.g. If an assessee purchases 15% undivided share in a
house property, exemption will be available.
However, mere construction by way of extension of old existing house is not
eligible for exemption. CIT v. Pradeep Kumar [2006] 153 Taxman 138
(Mad.)
Purchase of co-owners interest : In case of property owned by co-owners, the
payment made by one co-owner to get the full ownership by release of the
interest of other co-owners amounts to purchase by such co-owner and is
eligible for exemption. CIT v. Aravinda Reddy [1979] 120 ITR 46 (SC).
Registration not pre-condition: If assessee has purchased house and acquired
its possession and control, he will be eligible for exemption even if such
purchase is not registered as per Registration Act, 1908.
 Exemptions in respect of capital gains available to
all assessees [section 54D, 54EC, 54G and 54GA]

Provisions Section 54D Section Section 54G Section

54EC 54GA
1. Assessee Any person Any person Any person Any person
2. Asset Compulsory Any long term Transfer of Transfer of
transferred acquisition of capital plant, plant,
land or asset. machinery or machinery or
building which land or land or
was used in building for building for
the business of shifting shifting
industrial industrial industrial
undertaking undertaking undertaking
during 2 years from urban from urban
prior to date of area to rural area to Special
transfer. area. Economic
Zone.
 Provisions Section 54D Section Section 54G Section
54EC 54GA
3. Nature of Short term/ Long term Short term/ Short term/
Asset Long term Long term Long term
4. New asset New land or Bonds, (a)Purchase/ (a)Purchase/
to be building for the redeemable Construction of construction of
purchased/ industrial after 3 years plant, plant,
constructed undertaking issued machinery, machinery,
(a)by National land or land or
Highway building in building in
Authority of such rural area such SEZ, or
India; or or, (b)Shifting the
(b)By Rural (b)Shifting original assets
Electrification original assets to SEZ, or
Corp. to that area, or (c)Incurring
(Amendment (c)Incurring notified
by the Finance notified expenses
Act, 2006) expenses
 Provisions Section 54D Section Section 54G Section
54EC 54GA
5. Time-limit Within 3 years Within 6 Within 1 year Within 1 year
for from date months before or 3 before or 3
purchase/ of receipt from the years after years after
constructio of initial date of the date of the date of
n of new compensati transfer of transfer transfer
asset original
on
asset

6. Deposit Applicable -- Applicable Applicable

Scheme
7. Amount of Lower of Lower of Lower of Lower of
exemption capital gains or Capital gains Capital gains Capital gains
investment in or investment or cost or cost
new asset in new asset or incurred for (a) incurred for (a)
Rs.50 lacs to (c) of point to (c) of point
4. 4.
Provisions Section Section Section Section
54D 54EC 54G 54GA
8. Withdrawal Transfer of Transfer of Transfer of Transfer of
of Exemption new asset new asset, new or shifted new or shifted
within a conversion asset within a asset within a
period of 3 thereof in period of 3 period of 3
years from money or years from years from
the date of its taking loan or the date of its the date of its
acquisition or advance on acquisition or acquisition or
construction its security construction construction
within 3 years or shifting. or shifting.
from date of
its acquisition.
 Provisions Section 54D Section Section 54G Section
54EC 54GA
9. Taxability on Amount of Exempted Amount of Amount of
withdrawal of exemption capital gain will exemption exemption
exemption claimed earlier be taxable as claimed earlier claimed earlier
shall be long-term shall be shall be
reduced from capital gains in reduced from reduced from
the cost of previous year the cost of the cost of
acquisition of in which such acquisition of acquisition of
new asset. transfer/ new or shifted new or shifted
conversion asset. asset.
takes place.

Note: If exemption has been claimed u/s 54EC in respect of investment in a new
asset, no deduction shall be allowed u/s 80C with reference to the amount of
investment for which exemption has been claimed.
Transfer of depreciable assets held for more than 36 months Exemption
u/s 54EC available: Section 50 nowhere mentions that the depreciable assets
are short term capital assets but only states that capital gains arising from
transfer of depreciable asset shall be deemed to be arising out of transfer of
short term capital asset. Section 54EC is independent section and exemption
therein is available if there is a transfer of long term capital asset and
consideration is invested in specified assets within time limit. Therefore,
depreciable assets held for more than 36 months are long-term capital assets
and capital gains arising therefrom will be eligible for the benefit envisaged
u/s 54EC CIT v. Assam Petroleum Industries P. Ltd. [2003] 131 Taxman 699
(Gau.)

Extension of time in case of compulsory acquisition [Section 54H] : Where

transfer of original assets referred to in Sections 54, 54B, 54D, 54EC and 54F,
is by way of compulsory acquisition under any law, the period for acquiring
new asset referred to in those sections or the period available under those
sections for depositing or investing the amount of capital gain in relation to
such compensation, which is not received on the date of the transfer, shall be
reckoned from the date of receipt of such compensation.
Thank You