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NOTE-4 TAX ON CAPITAL GAINS PART- I

CHARGEABILITY Any profits or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to income-tax under the head Capital Gains. And shall be deemed to be the income of the previous year in which the transfer took place. Capital gain is chargeable to tax on accrual basis. CAPITAL ASSET Capital asset means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include (i)any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession ; (ii) personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, but excludes (a) jewellery; (b) archaeological collections; (c) drawings; (d) paintings; (e) sculptures; or (f) any work of art. Explanation.For the purposes of this sub-clause, jewellery includes (a) ornaments made 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 stone, and whether or not worked or sewn into any wearing apparel; (b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel;] (iii) agricultural land in India, not being land situate (a) in any area which is comprised within the jurisdiction of a municipality(whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year ; or (b) in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette;]

(iv) 6 per cent Gold Bonds, 1977,[or 7 per cent Gold Bonds, 1980,] [or National Defence Gold Bonds, 1980,] issued by the Central Government ;] (v) Special Bearer Bonds, 1991, issued by the Central Government ;] (vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government

KINDS OF CAPITAL GAINS


Capital asset has been classified into long term and short term. short-term capital asset means a capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer However in following cases, the period of 36 months shall be replaced by 12 months. (Up to 36/12 months is short term)

Equity or preference shares (whether listed or not) a unit of the Unit Trust of India established under the Unit Trust of India or a unit of a Mutual Fund specified under 10(23D) (whether listed or not) or a zero coupon bond, (whether listed or not)

Exclusions of certain period in counting 36 or 12 months


In determining the period for which any capital asset is held by the assessee Period subsequent to liquidation In the case of a share held in a company in liquidation, there shall be excluded the period subsequent to the date on which the company goes into liquidation; Asset acquired by way of gift, will, irrevocable trust ,49(1) In the case of a capital asset which becomes the property of the assessee in the circumstances mentioned in sub-section (1) of section 49, there shall be included the period for which the asset was held by the previous owner referred to in the said section Shares held in an Indian company in the case of a capital asset being a share or shares in an Indian company, which becomes the property of the assessee in consideration of a transfer referred to in clause (vii) of section 47, there shall be included the period for which the share or shares in the amalgamating company were held by the assessee

Period of holding of right shares

in the case of a capital asset, being a share or any other security (hereafter in this clause referred to as the financial asset) subscribed to by the assessee on the basis of his right to subscribe to such financial asset or subscribed to by the person in whose favour the assessee has renounced his right to subscribe to such financial asset, the period shall be reckoned from the date of allotment of such financial asset Period of right when it is renounced In the case of a capital asset, being the right to subscribe to any financial asset, which is renounced in favour of any other person, the period shall be reckoned from the date of the offer of such right by the company or institution, as the case may be, making such offer Period of holding for Bonus shares In the case of a capital asset, being a financial asset, allotted without any payment and on the basis of holding of any other financial asset, the period shall be reckoned from the date of the allotment of such financial asset Period of holding for D-merger in the case of a capital asset, being a share or shares in an Indian company, which becomes the property of the assessee in consideration of a demerger, there shall be included the period for which the share or shares held in the demerged company were held by the assessee Trading or clearing rights in case of recognized stock Exchange in the case of a capital asset, being trading or clearing rights of a recognised stock exchange in India acquired by a person pursuant to demutualisation or corporatisation of the recognised stock exchange in India as referred to in clause (xiii) of section 47, there shall be included the period for which the person was a member of the recognised stock exchange in India immediately prior to such demutualisation or corporatisation; in the case of a capital asset, being equity share or shares in a company allotted pursuant to demutualisation or corporatisation of a recognised stock exchange in India as referred to in clause (xiii) of section 47, there shall be included the period for which the person was a member of the recognised stock exchange in India immediately prior to such demutualisation or corporatization Sweat equity Shares In the case of a capital asset, being any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at concessional rate to his employees (including former employee or employees), the period shall be reckoned from the date of allotment or transfer of such specified security or sweat equity shares.

COMPUTATION OF CAPITAL GAINS

Short- term capital gains tax calculation Take full value of considerations (in simple words; Sale Value of Capital Asset) Less: expenditure incurred wholly and exclusively in connection with transfer. (includes the brokerage or commission paid, cost of stamp fee and registrations fee, traveling expenses etc.) 2. Less: the cost of acquisition of the asset (Normally the purchase value of the capital asset) 3. Less: the cost of improvement of the asset, if any.
1.

Less: Exemption, if allowed, Exemption u/s 54B/54D/54G Equal to Taxable Short-term capital gains

Long-Term Capital Gains Calculation Take the full value of consideration Less: expenditure incurred wholly and exclusively in connection with transfer. (includes the brokerage or commission paid, cost of stamp fee and registrations fee, traveling expenses etc.) 2. Less: Indexed cost of acquisition of the asset 3. Less: Indexed cost of improvement of the asset, if any.
1.

Less: Exemption if available Exemption u/s 54/54B/54D/54EA/54EB/54EC/54ED/54F/54FG

TAX ON LONG TERM CAPITAL GAINS

Long term capital gain covered by section 115AB, 115AC AND 115E (Capital gain on transfer of units, Bonds, ADRs, GDRs, investments purchased in foreign currency) 10%

Long term capital gain on securities listed on any recognized stock exchange, units UTI, units of Mutual funds, and zero coupon bonds. :10 % without indexation or 20 % after indexation whichever is less.

10(38) Exempts from tax long term capital gain on Equity shares in a company or a unit of equity oriented fund, provided security transaction tax is charged on such transaction of sell. In any other case 20%

TAX ON SHORT TERM CAPITAL GAINS

Short term capital gain on Equity shares in a company or a unit of equity oriented fund which is chargeable to security transaction tax 15%

In any other case slab wise rate as applicable to other income shall apply.

MEANING OF TRANSFER

Transfer includes:

a) Sale, exchange or relinquishment of the capital asset

b) c) d) e) f)

The extinguishment of any right therein Compulsory acquisition thereof under any law Conversion of capital asset into stock in trade Maturity or redemption of zero coupon Bond Any trasaction allowing allowing the possession of immovable property in part performance of a contract (section 53A of transfer of property act) g) Any transaction which has the effect of transferring or enabling the enjoyment of any immovable property by becoming a member of or acquiring shares in a cooperative society, company or other AOP.

TRANSACTIONS NOT REGARDED AS TRANSFER

a) Any transfer of capital assets on liquidation of a company to its shareholders b) On distribution of capital assets on total or partial partition of HUF
c) Any transfer of capital asset under gift, will or irrevocable trust

(However transfer by any company under gift or irrevocable trust of shares, debentures, bond under employee stock scheme shall be deemed as transfer) d) Any transfer of capital assets by a holding company to its 100% Indian subsidiary company, or by subsidiary company to its 100% Indian Holding company
e) Any transfer of capital assets under scheme of amalgamation by amalgamating

company to Indian amalgamated company


f) Any transfer of shares by shareholder under scheme of amalgamation to Indian

amalgamated company in consideration of allotment to him.


g) Any transfer of capital assets in a demerger by the demerged company to Indian

resulting company.
h) Any transfer or issue of shares by resulting company to the shareholders of

demerged company under scheme of demerger. i) Any transfer of shares in Indian company in scheme of amalgamation by amalgamating foreign company to amalgamated foreign company if

At least 25% of the shareholders of amalgamating foreign company continues to remain shareholders of amalgamated foreign company and Such transfer does not attract capital gain in the country in which amalgamated foreign company is situated.

j) Any transfer of capital asset being work of art, painting, drawing etc. to government or university. k) Conversion of Bonds or debentures into shares or debentures of that company. l) Transfer of capital assets on succession of firm by a company provided: All assets and liabilities of firm immediately before succession become the assets and liabilities of company All the partners of firm became shareholders in the company in the same proportion in which their capital stood in the books of the firm The partners do not receive any consideration other than shares in the company

Aggregate shareholding of the partners is not less than 50% of voting power in the company.

m) Transfer of capital assets on succession of sole proprietary concern by a company provided: All assets and liabilities of sole proprietary concern immediately before succession become the assets and liabilities of company The proprietor do not receive any consideration other than shares in the company Aggregate shareholding of the proprietor is not less than 50% of voting power in the company.

n) Transfer of any security under security lending scheme o) Any transfer of capital assets in a transaction of reverse mortgage

DEEMED COST OF ACQUISITION

1. Cost to the previous owner 49(1): in the following cases cost of acquisition shall

be taken that of previous owner. Any transfer of capital assets on liquidation of a company to its shareholders On distribution of capital assets on total or partial partition of HUF Any transfer of capital asset under gift, will or irrevocable trust Any transfer of capital assets by a holding company to its 100% Indian subsidiary company, or by subsidiary company to its 100% Indian Holding company Any transfer of capital assets under scheme of amalgamation Any transfer of capital assets under scheme of amalgamation of two foreign companies Conversion of self acquired property by a member of HUF to joint Hindu family propert

2. Cost of shares of amalgamated company 49(2): where the shareholder of the

amalgamating company gets shares of amalgamated company, cost of acquisition of shares shall be deemed to be the cost of acquisition to him of the shares of amalgamating company
3. Cost of acquisition of shares, debentures acquired on conversion of debentures

49(2A): Here cost of acquisition of such shares or debentures shall be amount actually paid to acquire those debentures. 4. Cost of specified security or sweat equity shares given by employer at free or concessional rate shall be fair market value which has been taken for the purpose of computing the value of perquisites.
5. In case of demerger, cost of acquisition of shares in resulting company shall be:

Cost of acquisition of shares in demerged company

COST OF ACQUISITION OF ASSETS ACQUIRED BEFORE 1-4-1981

In this case option is available to Assessee to opt either actual cost of acquisition or fair market value on 1-4-1981( Assessee should opt higher of cost or market price) This option is available even if property acquired under mode referred to in section 49(1)

However, this option is not available in two cases: Depreciable assets Goodwill of a business, brand or trade mark right, tenancy rights, route permits and right to manufacture whether self generated or purchased.

COST OF ACQUISITION OF GOODWILL OF A BUSINESS, TRADE MARK OR BRAND NAME, RIGHT TO MANUFACTURE, TENANCY RIGHTS AND LOOM HOURS If these are purchased then actual purchase price If these are self generated than Nil

COST OF ACQUISITION OF RIGHT SHARES

If shares held by existing share holder and rights not renounced, then amount actually paid by him for acquiring those shares If rights renounced then cost of acquisition in the hands of existing share holder who renounced the right shall be Nil. However, cost of acquisition in the hands of new share holder who purchased the right shall be amount paid by him to existing shareholder for purchasing rights plus amount paid him to company for purchasing those shares

COST OF ACQUISITION OF BONUS SHARES It shall be taken to be Nil, however if these bonus shares were acquired before 1-41981 then Assessee may opt market value on 1-4-1981 COST OF ACQUISITION OF DEPRECIABLE ASSETS Option to opt market value on 1-4-1981 not available, if acquired before 1-41981 This provision does not acquire to Electricity Company Cost of acquisition of depreciable assets means W.D.V of Block at the beginning of previous year plus cost of new shares acquired during the year. Sale consideration means amount receivable by the assessee together with scrap value There will always be short term capital gain

TREATMENT OF ADVANCE MONEY RECEIVED AND FORFEITED

In this case cost of acquisition of capital asset shall be reduced by the amount of advance money. However if advance money is more than cost of acquisition then surplus is capital receipts and never taxable.

COST OF IMPROVEMENT

Cost of improvement of goodwill (self generated or purchased), right to manufacture, right to carry Business shall be Nil In other cases it will be allowed if incurred after 1-4-1981 either by current or previous owner However, it shall be ignored if incurred by either by current or previous owner on or before 1-4-1981.

INDEXATION OF COST OF ACQUISITION Indexation shall be done only in case of long term capital gain If assets acquired by assessee himself, then indexation shall be done from the year of acquisition to year of transfer If assets acquired under mode 49(1), then indexation shall be done from the year asset first held by assessee to year of transfer In case of damage or destruction of capital assets referred to section 45(1A), then indexation shall be done from the year of damage or destruction to year of transfer Where capital assets are converted into stock in trade, then indexation shall be done from the year of conversion into stock in trade to year of transfer In case of compulsory acquisition, then indexation shall be done from the year of compulsory acquisition to year of transfer

INDEXATION NOT ALLOWED

Transfer of Bonds and debenture other than capital indexed bonds Transfer of division by Slumpsale Any share or security etc purchased in foreign currency

INDEXATION OF COST OF IMPROVEMENT

Indexation of cost of improvement shall be allowed only if these are incurred after 1-4-1981. Indexation of cost of improvement shall not be allowed in case of goodwill of business (purchased or self generated), right to manufacture or right to carry on business It will be allowed from the year it is actually incurred It will be done till the year of transfer

COST INFLATION INDEX

1981 - 1982 1982 - 1983 1983 - 1984 1984 - 1985 1985 - 1986 1986 - 1987 1987 - 1988 1988 - 1989 1989 1990 1990 - 1991 1991 - 1992 1992 - 1993 1993 - 1994 1994 - 1995 1995 - 1996

100 109 116 125 133 140 150 161 172 182 199 223 244 259 281

1996 - 1997 1997 - 1998 1998 - 1999 1999 - 2000 2000 - 2001 2001- 2002 2002 - 2003 2003 - 2004 2004 - 2005 2005 - 2006 2006 - 2007 2007 - 2008 2008 - 2009 2009 - 2010

305 331 351 389 406 426 447 463 480 497 519 551 582 632

FOR YOUR READING

112. (1) -Tax on long-term capital gains: Where the total income of an assessee,
in the case of an individual or a Hindu undivided family includes any income, arising from the transfer of a long-term capital asset, which is chargeable under the head Capital gains, the tax payable by the Assessee on the total income shall be the aggregate of, (i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been his total income ; and (ii) the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent : Provided that where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such long-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such longterm capital gains shall be computed at the rate of twenty per cent.

115BB - Tax on winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or gambling or betting of any form or nature whatsoever.
Where the total income of an Assessee includes any income by way of winnings from any lottery or crossword puzzle or race including horse race (not being income from the activity of owning and maintaining race horses) or card game and other game of any sort or from gambling or betting of any form or nature whatsoever, the income-tax payable shall be the aggregate of (i) the amount of income-tax calculated on income by way of winnings from such lottery or crossword puzzle or race including horse race or card game and other game of any sort or from gambling or betting of any form or nature whatsoever, at the rate of 32[thirty] per cent; and (ii) the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (i)

111A. Tax on short-term capital gains in certain cases.


(1) Where the total income of an assessee includes any income chargeable under the head Capital gains, arising from the transfer of a short-term capital asset, being an equity share in a company or a unit of an equity oriented fund and

(a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force; and (b) such transaction is chargeable to securities transaction tax under that Chapter, the tax payable by the assessee on the total income shall be the aggregate of (i) the amount of income-tax calculated on such short-term capital gains at the rate of 60[fifteen] per cent; and (ii) the amount of income-tax payable on the balance amount of the total income as if such balance amount were the total income of the assessee: Provided that in the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such short-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such short-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to incometax and the tax on the balance of such short-term capital gains shall be computed at the rate of ten* per cent. (2) Where the gross total income of an assessee includes any short term capital gains referred to in sub-section (1), the deduction under Chapter VI-A shall be allowed from the gross total income as reduced by such capital gains. (3) Where the total income of an assessee includes any short-term capital gains referred to in subsection (1), the rebate under section 88 shall be allowed from the income-tax on the total income as reduced by such capital gains. Explanation.For the purposes of this section, the expression equity oriented fund shall have the meaning assigned to it in the Explanation to clause (38) of section 10.]

10(38): Exemptions for long term capital gain:


Any income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund where (a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force; and (b) such transaction is chargeable to securities transaction tax under that Chapter

PROBLEMS
1) R purchased a house in Delhi in December 2007 for Rs 120,000. In march 2009, he entered into an agreement to sell the property to X for Rs. 2,00,000 and received earnest money of Rs. 20,000. However X could not make his payment within time and hence his earnest money was forfeited. Subsequently on 15-5-2009, R sold house to M for Rs. 250,000. He paid brokerage at 2% on sale of house. Compute capital gain for the assessment year 2010 2011.

2) X acquired a property in previous year 1982 1983 for Rs. 5,00,000 and paid Rs.

18,000 as registration charges. X died on 15-09-2006 and property was transferred to his son through inheritance. The market value of property on 15-09-2006 is Rs. 10,00,000. Y sold this property on 31-05-2009 for Rs. 12,00,000. Compute capital gain for the assessment year 2010 2011.

3) X purchased a land for Rs. 50,000 on 4-1-1978. This land was sold by him on 2-09-

2009 for Rs. 8,00,000. The market value of land on 1-4-1981 was Rs 120,000. Expenses on transfer were 2%. Compute capital gain for the assessment year 2010 2011.

4) X acquired a land in 1977-78 for Rs. 2,00,000 and gifted to his son on 15-5-1995. When market value of land was Rs. 5,00,000. The market value of land on 1-4-1981 was Rs. 3,00,000. Y sold the land on 15-9-2009 for Rs 25,00,000. Expenses on transfer were Rs. 1,00,000. Compute capital gain for the assessment year 2010 2011.

5) R acquired a residential house on 1-9-1978 for Rs 1,00,000. He spent Rs 25,000 on 1-

7-1980 for improvement. A further amount of Rs. 50,000 was spent by him on 15-111985 on improvement of house. R gifted the said property to his son on 12-10-94. B also spent Rs 60,000 on 15-7 -1995 and Rs 40,000 on 15-6-2009 on improvement. B sold the house on 30-11-2009 for Rs 15,00,000. Expenses on transfer were 2%. Compute capital gain for the assessment year 2010 2011 assuming that fair market value of property on 1-4-1981 was Rs. 3,00,000

6) State giving reasons whether capital gain is taxable in the following cases a) Y purchased gold in 1974-75 for Rs. 10,000. In 2009-10, he gifted it to his son at the time of his marriage.
b) A house property is purchased by an HUF in 1950 for Rs. 50,000. And it is given

one of family member on partition of HUF on 1-05-2009. The market value of property on 1-4-81 is Rs. 2,00,000 and on 1-05-2009 is Rs. 10,00,000. The member sells that property on 1-06-2009 for Rs. 11,00,000.

7) X Ltd owns the following assets on April 1 , 2009:, all having rate of depreciation 25% Asset Plant A Plant B Plant C Plant D Cost of acquisition 3,15,000 2,30,000 5,10,000 1,00,000 Date of acquisition April 1, 1975 April 10, 1965 May 5, 1971 May 21, 1949 W.D.V. on April, 1, 2009 20,000 30,000 25,000 15,000

On 10th March 2010 ,it acquires Plant E for Rs. 22,000 having rate of depreciation 25% , however sold Plant B on the same date for Rs. 2,00,000 with expenses on transfer Rs. 1,000. Determine the amount of depreciation and capital gains.

8) X Ltd owns the following assets : Assets Cost of acquisition Date of acquisition Goodwill generated) ----(self Shares (non-listed) 1,38,600 10th March, 1999 House property 96,000 10th March, 1999

The capital assets are transferred by X Ltd to its wholly owned Indian subsidiary company S Ltd on April 1, 2009.. on July 7,2009, these assets are transferred by S Ltd for the consideration as follows :goodwill : 6,00,000, shares : 2,15,700, house property : 2,34,800. Compute capital gain of S Ltd .

9) Mr. Y converts his jewellery (acquired on 10th June, 1967 for Rs. 70,000 having fair

market value on 1st April 1981 Rs.1,80,000) into stock in trade on May 10, 1984 on which date the fair market value of jewellery was Rs. 4,80,000. He sold the stock in trade on June, 10, 2009 for Rs. 7,30,000. Determine his capital gain and business profits.

10) X purchases 1000 Equity shares of A Ltd. @ Rs. 16 per share ( Brokerage 1%) on

December, 10, 1979. He gets 500 bonus shares on Jan 10, 1984. Fair market value of shares of A Ltd. On April 1, 1981 is Rs 24. On March 13, 2010 he transfers his original

shares @ Rs 81 per share (Brokerage 1.5%). On March15, 2010 he transfers his 500 Bonus shares @ Rs. 87 per share (Brokerage 1.5%). Compute his capital gains.

11)X Ltd holds 1000 Equity shares in A Ltd since 1978 ( cost of acquisition Rs10,000, fair

market value on April 1, 1981 : Rs 16,000). A Ltd offers 2000 right shares of Rs 10 each to X on May 1, 2001 at a predetermined premium of Rs 50. X subscribes for 800 right shares and renounces 1200 shares in favour of Cfor Rs 4,800. X sells his 1800 shares on March 30, 2010 @ Rs 70 per share. C also transfers his 1200 shares @ Rs 71 each on March 31, 2010. Compute his capital gains.

12) R, a non resident Indian , remits US $ 40,000 to India on 16-09-1989. The amount is

partly utilized on 3-10-1989 for purchasing 10,000 shares in A Ltd, an Indian company at the rate of Rs 12 per share. These shares are sold for Rs 36 per share on 30-3-2010. The telegraphic transfer buying and selling rate of US dollar by SBI is as follows:

16-9-1989 3-10-1989 30-3-2010

Buying 1 US Dollar TTBR 18 19 44

Selling 1 US Dollar TTSR 20 21 46

Compute capital gain assuming that: a) These shares have not been sold through recognized stock exchange
b) These shares have been sold through recognized stock exchange and a security

transaction tax of Rs 704 was paid.