Capital Gain

Presentation

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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,

● any stock in trade use for the purpose of business of the assessee.
● any personal effect i.e, movable property for personal use, however jewellery is
considered to be a capital asset
● agricultural land situated is rural india
● 6.5% gold bond (1977)
● special bearer bond (1991)
● gold development bond (1999)
● 7% gold bond (1980)
● national defence gold bonds (1980)

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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 into 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 listed share, deb, units of uti or any mutual funds is transferred within 12 months (24 months
in case of unlisted shares) then it is treated as STCA otherwise LTCA.

b) Long term capital asset :

If any capital asset beside share, deb, units are transferred within 36 months then they are
charged as STCA otherwise LTCA.

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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
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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 on 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)
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8. Cost of acquisition :-

A) Cost inflation index (CII) :-

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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 Deb. Before Conversion XX

Less : Value Of Deb. After Conversion (XX)
Cost Of Acquisition Of Shares XX

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D) Cost Of Acquisition In Case Of Depreciable Assets Under Block Method :-

Case I – All assets in a block are sold u/s 50(2)

STCG = sale revenue > combined wdv
STCL = sale revenue < combined wdv

Case II – All assets in a block are not sold u/s 50(1)

STCG = sale revenue of part of the block > combined wdv of full block
STCL = does not arise in this case

E) Fair Market Value As On 1-4-81 U/S 55(2)(b) :-

When a asset has been acquired before 1-4-81(except A depreciable or an intangible asset)
then the cost to the owner will be the higher of
A) actual cost of acquisition
B) FMV as on 1-4-81
Even if the asset is acquired by any method as specified U/S 49(1) then also 55(2)(b) is
applicable
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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. Short Term Asset
2. Depreciable Asset (Always Short Term)
3. Share & 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

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I) Different Cases Of Indexation :-
1. Asset Acquired By Assessee 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 1981-1982

ICOI = ACOI X Index Of Year Of Transfer

(After 1-4-81) Index Of Year Of Improvement

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3. Asset Acquired By Assessee U/S 49(1), Before 1-4-81

ICOA = ACOA Of P.Owner Or X Index Of Year Of Transfer

Fmv On 1-4-81 Index Of Year Of 81-82

ICOI = ACOI X Index Of Year Of Transfer

(After 1-4-81) Index Of Year Of Improvement

4. Asset Acquired By Assessee U/S 49(1) After 1-4-81, Previous Owner Before 1-4-1981.

ICOA = ACOA Of P.Owner Or X Index Of Year Of Transfer

Fmv On 1-4-81 Index Of Year In Which Assessee Got The Asset

ICOI = ACOI X Index Of Year Of Transfer

(After 1-4-81) Index Of Year Of Improvement

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5. Asset Acquired By Assessee u/s 49(1) After 1-4-81, Previous Owner After 1-4-81

ICOA = ACOA Of P.Owner X Index Of Year Of Transfer

Index Of Year In Which Assessee Got The Asset

ICOI = ACOI X Index Of Year Of Transfer

Index Of Year Of Improvement

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Q.1) Y furnishes the following particulars and requests your advice as to the
liability to capital gains for the Assessment Year 2017-18.

Jewellery purchased by him on March 10, 1995 for Rs. 1,05,000 was sold by him
for a consideration of Rs.4,85,000 on November 2, 2016. He incurred following
expenses:

- At the time of purchase Rs.2,000

- At the time of sale (for brokerage) Rs.4,000

On the facts given above compute the capital gains chargeable to tax.
{CII:1994-95=259, 2016-17=1125}

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Solution:

Name of Assessee : Mr.Y

Assessment Year : 2017-18
Previous Year : 2016-17
Status : Individual
Residential Status : R & OR
PAN NO : ______________

Computation of Income from Capital Gain

Particular Amount(Rs.)

Jewellery (Long Term Capital Asset)

Full value of consideration 4,85,000
Less: Expenses on transfer (Brokerage) (4,000)
Less: Index Cost of Acquisition
ICOA = ACOA x Index of year of transfer / Index of year of acquisition
= 1,07,000 X 1125 / 259 (4,64,768)
Long Term Capital Gain 16,232

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Q.2) Mr. A purchased 1,000 square metres of land at Rs.100 per square metres
in 1970 and sold the same at Rs.1,800 per square metres in December, 2016.
The fair market value of the said plot of land as on 1/4/1981 was Rs.150 per
square metres. Expenditure incurred in connection with the sale on account of
brokerage, etc is Rs.20,000.

Compute the long-term capital gain for the Assessment year 2017-18.
{CII: 1981-82 = 100, 2016-17=1125}

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Solution:

Name of Assessee : Mr.A

Assessment Year : 2017-18
Previous Year : 2016-17
Status : Individual
Residential Status : R & OR
PAN NO : ______________

Computation of Income from Capital Gain

Particular Amount(Rs.)
Land (Long Term Capital Asset)
Full value of consideration (1,000 x 1,800) 18,00,000
Less: Expenses on transfer (Brokerage) (20,000)
Less: Indexed Cost of Acquisition u/s 55(2)(b)
ICOA = (ACOA or FMV) x Index of year of transfer / Index of year of 81-82
= (1000x150) X 1125 / 100 (16,87,500)
Long Term Capital Gain 92,500

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Exemption u/s 54 - Purchase of New House
Condition for exemption:

1. Applicable only for Individual and HUF.

2. The new house must be used for residential purpose.
3. It must be Long Term Capital Asset
4. It must have purchased within a period of one year before or two years after
the date of transfer.
5. It must have constructed within a period of three years after the date of
transfer.

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Exemption u/s 54EC - Investment in Bonds
Condition for exemption:

1. Applicable to any assessee.

2. Investment in long term bonds (ie., 3 years) within six month from the date of
transfer.
3. Bonds must be issued by the National Highways Authority of India (NHAI) or
the Rural Electrification Corporation Limited (RECL).
4. Maximum amount of exemption is Rs. 50 lakhs in the two consecutive year
(ie., year of transfer + subsequent year).

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Q.3) Mr. Martin sold his Residential House Property on 8-6-2016 for Rs. 80 lakhs
which was purchased by him for Rs. 20 lakhs on 5-5-2005. He paid Rs. 1 lakh as
brokerage for the sale of said property.
He bought another House Property on 25-12-2016 for Rs. 10 lakhs.
He deposited Rs. 10 lakhs on 10-11-2016 in the Capital Gain Bond of National
Highway Authority of India (NHAI).
Compute Income under the head “Capital Gain” for the Assessment year 2017-18 as
per Income Tax Act 1961.
{CII: 2005-06=497, 2016-17=1125}

Solution:
Name of Assessee : Mr. Martin
Assessment Year : 2017-18
Previous Year : 2016-17
Status : Individual
Residential Status : R & OR
PAN NO : ______________
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 Computation of Income from Capital Gain

Particular Amount(Rs.)

House Property (Long Term Capital Asset)

Full value of consideration 80,00,000
Less: Expenses on transfer (Brokerage) (1,00,000)
Less: Indexed Cost of Acquisition
ICOA = ACOA x Index of year of transfer / Index of year of acquisition
= 20,00,000 X 1125 / 497 (45,27,163)
33,72,837
Less: Exempted u/s 54 - Purchase of New House 10,00,000
Less: Exempted u/s 54EC - Investment in REC Bond 10,00,000
(Eligible, made within 6 months from the date of transfer) ________
Long Term Capital Gain 13,72,837

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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 into
Stock in trade (2005-06)
BP = Sales Price–FMV on
date on conversion
Sale (2016-17)
1. Conversion of capital asset into stock in trade is treated as transfer for the purpose of
capital gain.
2. For this purpose the fmv on the date of conversion is taken as sales consideration.
3. Thus Capital Gain = FMV on date of conversion – Purchase Cost.
4. However such capital gain will be charged to tax in the year of actual sale & not in the
year of conversion.
5. In the year of sale,
Business Profit = Actual Sales Price – FMV on date of conversion.
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Thank You!

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