1. Basis of Charge in case of Capital Gain [Section 45(1)]
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 unless such capital gain is exempt under section 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA or 54GB.
The following are the essential conditions for Taxing Capital Gains:
- there must be a capital asset;
- the capital asset must have been transferred;
- there must be profits or gains on such transfer, which will be known as capital gain;
- such capital gain should not be exempt under section 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA or 54GB.
If the above conditions are satisfied, the capital gain shall arise and taxed in the previous year in which the asset is transferred, subject to certain exceptions..
|Note : In case of profit or gain from insurance claim, due to damage or destruction of property, there will be capital gain, although no asset has been transferred in such case.|
2. Type of Capital Gains:
Since there are two types of capital assets, there will be two types of Capital Gains i.e.—
1. Section 2(42B) Short-Term Capital Gain —
Gain arising on the transfer of short-term capital asset.
2. Section 2(29B) Long-Term Capital Gain —
Gain arising on the transfer of long-term capital asset.
|There is a need to make the distinction between short-term and long-term capital gain as short-term capital gain like any other incomes is taxable at normal rate of income-tax, whereas long-term capital gain is taxed at a concessional rate.|
3. Computation of Tax on Short-Term Capital Gain if Security Transaction Tax (STT) is applicable (Section 111A).
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 shares in a company or
- a unit of an equity-oriented fund or
- a unit of a business trust
(a). the transaction of sale of such equity share or unit is entered into on or after 1.10.2004;
(b). such transaction is chargeable to Securities Transaction Tax (STT) ;
the tax payable by the assessee on the total income shall be computed as under—
- On such Short-Term Capital Gains — 15% [+SC+HEC]; and
- On the balance amount of the total income — Special Rates or Normal as applicable.
|For the purpose of short-term capital gain, the period of holding in this case of a unit of a business trust shall be 36 months instead of 12 months.|
(A) Deductions Under Section 80C to 80U are NOT available –
(B) Exemption Limit in some Cases [Proviso to Section111A] –
Short-term capital gain (where securities transaction tax is applicable) is taxable at the rate of 15%. The entire amount is taxable at 15% (no exemption limit).
However, in the case of a resident individual/HUF, the benefit of exemption limit is available if taxable income (minus short-term capital gain, which is subject to securities transaction tax) is less than exemption limit. In such a case, the following shall be deducted from the short-term capital gain –
|Exemption limit—(Net income or taxable income–Short-term capital gain, where securities transaction tax is applicable)|
After deducting the aforesaid amount, the balance amount of short-term capital gain is chargeable to tax at the rate of 15% [+ SC + HEC].
Mr. Clean (58 years) is a resident individual. For the assessment year 2019-20, she has the following incomes—
|Short-term capital gain on transfer of shares (securities transaction tax is applicable) (ST)||24,000|
|Short-term capital gain on transfer of Gold||45,000|
|Salary Income (After Standard Deduction)||1,62,000|
|Net Income (NI)||2,67,000|
In this case, Mr. Clean is a resident individual. His exemption limit is Rs. 2,50,000. Taxable income (minus short-term capital gain subject to securities transaction tax) is Rs. 2,43,000. It is less than exemption limit.
Consequently, from the short-term capital gain the following shall be deducted—
|Rs. 2,50,000 (exemption limit)—[Rs. 2,67,000 (NI)—Rs. 24,000 (ST)] = Rs. 7,000|
In this case, the short-term capital gain chargeable to tax will be Rs. 17,000 (i.e., Rs. 24,000 – Rs. 7,000).
|Note : – If Securities Transaction Tax is not applicable, short-term capital gain is taxable like any other income (no special rate).|
(C) Computation of Short-Term Capital Gain :
|Full Value of Consideration||—|
|Less : (a) Expenditure incurred wholly and exclusively in connection with such a Transfer,||—|
|(b) Cost of acquisition||—|
|(c) Cost of improvement||—||—|
|Gross short-term capital gains||—|
|Less: Exemption, if available, uls 54B/54D154G/S4GA||—|
|Taxable Short-term capital gains.||—|
4. Computation of Tax on Long-Term Capital Gain
- Long-Term Capital Gain is Taxable at a Flat Rate of 20% [+ SC + HEC].
- However, Long-Term Capital Gain in the hands of Non-Residents under Section 115AB, 115AC, 115AD or 115E is Taxable at the Rate of 10% [+ SC + HEC].
Deductions Under Sections 80C to 80U are Not Available –
Exemption Limit in some Cases [Proviso to Section 112(1)(a)] –
Long-term capital gain is taxable at the rate of 20% (in some cases 10%). The entire amount is taxable at these rates (no exemption limit).
However, in the case of a resident individual/HUF, the benefit of exemption limit is available, if taxable income (minus long-term capital gain) is less than exemption limit. In such a case, the following shall be deducted from the long-term capital gain –
|Exemption limit—(Net income or taxable income—Long-term capital gain)|
After deducting the aforesaid amount, the balance amount of long-term capital gain is chargeable to tax at the rate of 20% or 10% [+ SC + HEC].
10% Tax Rate [+ SC + HEC]
- Long-Term Capital Gain in the hands of Non-Residents under Section 115AB, 115AC, 115AD or 115E is Taxable at the Rate 10% [+SC+HEC]
- Long-term capital gain in the hands of a non-resident/foreign company is taxable at the rate of 10% [+ SC + HEC], if such gain arises on transfer of unlisted securities or unlisted shares in a company in which the public are not substantially interested.
However, this rule is applicable only if the indexation benefit is not claimed and capital gain is calculated without giving effect to the first proviso to section 48 (under this proviso capital gain is calculated in foreign currency if a few conditions are satisfied).
- Moreover, in the case of any taxpayer if listed securities (i.e., shares, bonds, debentures, Government securities) or zero coupon bonds are transferred and the taxpayer does not avail the benefit of indexation, he can pay tax at the rate of 10% [+ SC + HEC].
In other words, in the case of these securities, etc., the taxpayer has an option. He can pay tax at the rate of 20% [+ SC + HEC], if indexation benefit is claimed or at the rate of 10% [+ SC + HEC], if indexation benefit is not taken.
- In the case of debentures, indexation benefit is not otherwise available. Consequently, if debentures (long-term) are listed, one should opt for 10% Rate.
- In the case of transfer of bonus shares, cost of acquisition is generally zero. One should opt for 10% Rate if bonus shares are long-term capital assets and are listed.
Computation of Long-Term Capital Gain :
|Full value of consideration||—|
|Less: (a) Expenditure incurred wholly and exclusively in connection with such a transfer||—|
|(b) Indexed Cost of acquisition||—|
|(c) Indexed Cost of improvement||—||—|
|Long-term capital gains||—|
|Less: Exemption if available u/s 54154B/54D/54EC/54EFJ/54F/54G/54GA/ 54GB||—|
|Taxable long-term capital gains||—|
5. Capital Gain should arise in the previous year in which Transfer took place.
Normally, capital gain arises in the previous year in which the transfer of the asset takes place even if the consideration for the transfer is received or realised in a later year.
There are, however, 4 exceptional cases where capital gain is taxable not in the year of transfer of the asset, but in some other year. These exceptions are:
- damage or destruction of any capital asset by fire or other calamities
- conversion of capital asset into stock-in-trade (discussed in para 7.13c);
- compulsory acquisition of an asset (discussed in para 7.13f).
- transfer of capital asset, being land or building or both by an individual HUF under a specified agreement with the developer [Section 45(5A)]
6. Capital Asset for Computing Capital Gain [Section 2(14)]
“Capital asset” means : –
Property of any kind, whether fixed or circulating, movable or immovable, tangible or intangible. Besides,
it Includes the following –
- Any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever.
- Property of any kind held by an assessee (whether or not connected with his business or profession).
- Any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the SEBI Act.
but Does Not Include––
- any stock-in-trade [other than the securities referred to in sub-clause (b) above], consumable stores or raw materials held for the purposes of his business or profession,
- 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. However, the following assets shall not be treated as personal effects though these assets are moveable and may be held for personal use:
- archaeological collections;
- sculptures; or
- any work of art.
- Agricultural land in India, which is not an urban agricultural land. In other words, it must be a rural agricultural land;
- Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under Gold Monetisation Scheme, 2015 notified by the Central Government.
7. Types of Capital Assets:
Capital assets are of two types:
1. Short-Term Capital Asset (STCA)
2. Long-Term Capital Asset (LTCA)
(1) Short-Term Capital Asset – STCA [Section 2(42A)]:
A capital asset held by an assessee for Not more than 36 months immediately preceding the date of its transfer is known as a short term capital asset.
- The following assets shall be treated as short-term capital assets if they are held for Not more than 12 months (instead of 36 months mentioned above) immediately preceding the date of its transfer:
- a security including shares (other than unit) listed in a recognised stock exchange in India
- a unit of an equity oriented fund
- a zero coupon bond
- The following assets shall be treated as short-term capital assets if they are held for Not more than 24 months (instead of 36 months/12 months mentioned above) immediately preceding the date of its transfer:
- Share of a company (not being a share listed in a recognised stock exchange in India)
- An immovable property being land and building or both.
Hence, if unlisted share or immovable property is transferred after 24 months from the date of its acquisition, the gain arising from the transfer of share or immovable property shall be treated as long-term capital gain.
(2) Long-Term Capital Asset – LTCA [Section 2(29A)]:
It means a capital asset which is not a short-term capital asset.
In other words, if the asset is held by the assessee for more than 36 months/24 months/12 months, as the case may be, such an asset will be treated as a long-term capital asset
(3) Meaning of Capital Assets in Graphical Chat (Section 2(14) :
8. Transfer of Capital Assets to arise Capital Gain
Capital gain arises only when there is a transfer of capital asset. If the capital asset is not transferred or if there is any transaction which is not regarded as transfer , there will not be any capital gain. However, in case of profits or gains from insurance claim due to damage or destruction of property, there will be capital gain although no asset has been transferred in such case.
1. What is Transfer of Capital Assets [Section 2(47)]:
Transfer, in relation to capital asset, includes:
- the sale, exchange or relinquishment of the asset; or
- the extinguishment of any rights therein; or
- the compulsory acquisition thereof under any law; or
- in a case where the asset is converted by the owner thereof into, or is treated by him, as stockin-trade of a business carried on by him, such conversion or treatment; or
- the maturity or redemption of zero coupon bonds; 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
- any transaction (whether by way of becoming a member of, or acquiring shares in a cooperative 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 enabling the enjoyment of any immovable property.
2. Transactions Not regarded as Transfer of Capital Assets [Sections 46 and 47]:
The meaning of transfer is given in section 2(47), whereas transactions not regarded as transfer are covered u/ss 46 and 47. In many transactions although there is a transfer, but these are not considered to be transfer for purposes of capital gains.
Some of the relevant transactions which are not regarded as transfer are:
- where the assets of a company are distributed to its shareholders on liquidation of a company, such distribution shall not be regarded as transfer in the hands of the company [Section 46(1)];
- any distribution of capital assets on the total or partial partition of Hindu Undivided Family [Section 47(i)];
- any transfer of a capital asset under a gift or will or an irrevocable trust [Section 47(iii)];
- any transfer of a capital asset by a company to its 100% subsidiary company provided the subsidiary company is an Indian company [Section 47(iv)];
- any transfer of a capital asset by a 100% subsidiary company to its holding company, if the holding company is an Indian company [Section 47(v)];
- any transfer in a scheme of amalgamation of a capital asset by the amalgamating company to the amalgamated company, if the amalgamated company is an Indian company [Section 47(vi)];
- any transfer in a scheme of amalgamation of shares held in an Indian company by the amalgamating foreign company to the amalgamated foreign company if certain conditions are satisfied.
- any transfer, in a demerger, of a capital asset by the demerged company to the resulting company, if the resulting company is an Indian company [Section 47(vib)];
- any transfer in a demerger, of a capital asset, being a share or shares held in an Indian company, by the demerged foreign company to the resulting foreign company, if certain conditions are satisfied.
- any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company if the transfer or issue is made in consideration of demerger of the undertaking [Section 47(vid)];
- any transfer by a shareholder, in a scheme of amalgamation, of shares held by him in the amalgamating company if certain conditions are satisfied:
- any transfer, made outside India, of a capital asset being rupee denominated bond of an Indian company issued outside India, by a non-resident to another non-resident; [Section 47(viiaa)]
- Any transfer of Sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme, 2015, by way of redemption, by an assessee being an individual.
- any transfer of a capital asset, being any work of art, archaeological, scientific or art collection, book, manuscript, drawing, painting, photograph or print, to the Government or a University or the National Museum, National Art Gallery, National Archives or any such other public museum or institution, as may be notified by the Central Government in the Official Gazette to be of national importance, or to be of renown throughout any State or States [Section 47(ix)];
- 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 [Section 47(x)];
- any transfer by way of conversion of preference shares of a company into equity shares of that company [Section 47(xb) inserted by the Finance Act, 2017, w.e.f. A.Y. 2018-19];
- any transfer of a capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm.
- any transfer of a capital asset or intangible asset by a private company or unlisted public company (hereafter in this clause referred to as the company) to a limited liability partnership or any transfer of a share or shares held in the company by a shareholder as a result of conversion of the company into a limited liability partner-ship in accordance with the provisions of section 56 or section 57 of the Limited Liability Partnership Act, 2008
- where a sole proprietary concern is succeeded by a company in the business carried on by it as a result of which the sole proprietary concern sells or otherwise transfers any capital asset or intangible asset to the company. any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the Central Government [Section47(xvi)];
- any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating scheme of a mutual fund, made in consideration of the allotment to him of a capital asset, being a unit or units, in the consolidated scheme of the mutual fund shall not be regarded as transfer. Provided that the consolidation is of two or more schemes of equity oriented fund or of two or more schemes of a fund other than equity oriented fund [Section 47(xviii)];
- any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating plan of a mutual fund scheme, made in consideration of the allotment to him of a capital asset, being a unit or units, in the consolidated plan of that scheme of the mutual fund. [Section 47(xix)] It may be observed that the above transactions are not treated as transfer for purposes of capital gains.
3. Transfer in case of Immovable and Movable Property
Different rules are applicable in case of movable/immovable assets to find out when a capital asset is “transferred”.
1. Transfer in case of Immovable property when documents are registered –
Title to immovable assets will not pass till the conveyance deed is executed or registered.
2. Transfer in case of Immovable Property when documents are not registered –
Even if the documents are not registered but the following conditions of section 53A of the Transfer of Property Act are satisfied, ownership in an immovable property is “transferred”—
- there should be a contract in writing;
- the transferee has paid consideration or is willing to perform his part of the contract; and
- the transferee should have taken possession of the property.
When these conditions are satisfied, the transaction will constitute “transfer” for the purpose of capital gains.
3. Transfer in case of Movable Property –
Title to a movable property passes at the time when property is delivered pursuant to a contract to sell. Entries in the books of account are not relevant for determining date of transfer.
9. The period of Holding of an Asset under Capital Gain [Explanation 1(i) to Section 2(42A)] :
|Case||Exclusion / Inclusion of Period|
|(i) Shares held in a company in liquidation||Exclude the period subsequent to the date of liquidation|
|(ii) Property acquired in any mode given under section 49(1) (e.g. by way of gift will, etc.)||Include the holding period of previous owner also.|
|(iii) Shares in an Indian Amalgamated Company acquired in a scheme of Amalgamation||Include the holding period of shares in the Amalgamating Company by the Assessee.|
|(iv) Shares in Indian Resulting company acquired in case of demerger||include the holding period of shares in the Demerged Company by the Assessee|
|(v) (a) Trading or clearing rights of recognised stock exchange pursuant to its demutualisation or corporatisation||Include the period for which the person was a member of the recognised stock exchange in India|
|(b) equity shares in a company acquired by a person pursuant to the demutualisation or corporatisation of recognised stock exchange||Include the period for which the person was a member of the recognised stock exchange in India|
|(vi) Capital asset, being a unit of a business trust, allotted pursuant to transfer of share or shares as referred to in section 47(xvii)||Include the period for which the share or shares were held by the assessee.|
|(vii) Unit or units, which becomes the property of the assessee in consideration of a transfer referred to in section 47(xviii)||Include the period for which the unit or units in the consolidating scheme of the mutual fund were held by the assessee|
|(ix) Share or debenture of a company, which becomes the property of the assessee in the circumstances mentioned in section 47(x) of the Act. (le. conversion of bonds or debentures into shares or debentures of the same_company)||Include the period for which the bond, debenture, debenture-stock or deposit certificate, as the case may be, was held by the assessee prior to the conversion.|
|(x) In the case of a capital asset, being equity shares in a company, which becomes the property of the assessee in consideration of a transfer referred to in section 47(xb) (i.e. conversion of preference share into equity share)||Include the period for which the preference shares were held by the assessee|
|(xi) In the case of a capital asset, being a unit or units, which becomes the property of the assessee in consideration of a transfer referred to in section 47(xix) (i.e. transfer of units held in the consolidating plan of a mutual fund scheme to consolidated plan of the scheme).||Include the period for which the unit or units in the consolidating plan of a mutual fund scheme were held by the assessee|
10. Holding Period in case of Shares or any other Security under Capital Gain [Explanation 1(i)(e) and (f)]
The period of Holding , in the following circumstances will be computed as under :
|1.||Right to subscribe to shares or any other securities(may be called as financial assets subscribed to by the assessee on the basis of right to subscribe to such financial assets.||The period shall be reckoned from the date of allotment of such financial asset.|
|2||Right to subscribe to share or any other securities acquired by a person in whose favour the right has been renounced by the existing holder.||—do——|
|3||Period of holding of the right by a person who has renounced the right,||The period shall be reckoned from the date of offer of such right by the company or institution to the date of renouncemern, which in normal circumstances will be short-term.|
|4||Period of holding of a financial asset allotted without any payment and on the basis of holding of any other financial asset e.g. bonus shares.||The period will be reckoned from the dare of allotment of such financial asset (not from the date of allotment of the original shares).|
|5.||Period of holding of specific security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at a concessional rate to his employees (including former employees).||The period shall be reckoned from the date of allotment or transfer of such specific security or sweat equity share.|
|6.||Share or shares of a company, which is acquired by the non-resident assessee on redemption of Global Depository Receipts referred to in section 11 5AC(1 )(b)||The period shall be recknoned from the date on which a request for such redemption was made|