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Capital gain taxation including exemption us 54 & 54 ec
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PROJECT REPORT ON
“Capital Gain taxation including exemption u/s 54 & 54EC”
Submitted to
University of Mumbai
In Partial Fulfillment of the Requirement
For
M.Com (Accountancy) Semester III
In the subject
Direct Tax
By
Name of the student : - Vivek ShriramMahajan
Roll No. : - 15 -9672
Name and address of the college
K. V. Pendharkar College
Of Arts, Science & Commerce
Dombivli (E), 421203
NOVEMBER 2015
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DECLARATION
I VIVEK SHRIRAM MAHAJAN Roll No. 15 – 9672, the student of
M.Com (Accountancy) Semester III (2015), K. V. Pendharkar College,
Dombivli, Affiliated to University of Mumbai, hereby declare that the
project for the subject Direct Tax of Project report on “Capital Gain
taxation including exemption u/s 54 & 54EC” submitted by me to
University of Mumbai, for semester III examination is based on actual work
carried by me.
I further state that this work is original and not submitted anywhere else for
any examination.
Place:Dombivli
Date:
Signature of the Student
Name: - Vivek Shriram Mahajan
Roll No: - 15 -9672
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ACKNOWLEDGEMENT
It is a pleasure to thank all those who made this project work
possible.
I Thank the Almighty God for his blessings in completing this task.
The successful completion of this project is possible only due to
support and cooperation of my teachers, relatives, friends and well-
wishers. I would like to extend my sincere gratitude to all of them.
I am highly indebted to Principal A.K.Ranade, Co-ordinater
P.V.Limaye, and my subject teacher Prajakta Karmarkar for
their encouragement, guidance and support.
I also take this opportunity to express sense of gratitude to my
parents for their support and co-operation in completing this
project.
Finally I would express my gratitude to all those who directly and
indirectly helped me in completing this project.
Name of the student
Vivek Shriram Mahajan
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Table of Contents:
CHAPTER No Topic Page no
CHAPTER 1 Introduction
Introduction to Subject………………………. 5
CHAPTER 2 Types of Taxes
Direct Tax......................
Indirect Tax …................................
7
10
CHAPTER 3 Capital Gain
Definitions ……………………...............
Section 54..................................................
Section 54 EC...........................................
Income Tax Return – 4...............................
13
16
20
22
CHAPTER 5 Conclusion
Conclusion………………………………….. 26
Webiliography………………………………. 27
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CHAPTER 1: Introduction
Introduction to Subject
A fee charged ("levied") by a government on a product, income, or activity.
If tax is levied directly on personal or corporateincome, then it is a direct
tax. If tax is levied on the price of a good or service, then it is called an
indirect tax. The purposeof taxation is to finance government expenditure.
One of the most important uses of taxes is to finance public goods and
services, such as street lighting and street cleaning. Since public goods and
services do not allow a non-payer to be excluded, or allow exclusion by a
consumer, there cannot be a market in the good or service, and so they need
to be provided by the government or a quasi-government agency, which tend
to finance themselves largely through taxes.
DEFINITION of 'Taxes'
An involuntary fee levied on corporations or individuals that is enforced by
a level of government in order to finance government activities
BREAKING DOWN 'Taxes'
In the investing world, this is one of the most important types of taxes and,
therefore, one of the most highly debated types of tax is capital gains tax.
Capital gains tax represents the tax paid on the increase in value made on an
investment.
DEFINITION of 'Income Tax'
A tax that governments impose on financial income generated by all entities
within their jurisdiction. By law, businesses and individuals must file an
income tax return every year to determine whether they owe any taxes or are
eligible for a tax refund. Income tax is a key sourceof funds that the
government uses to fund its activities and serve the public.
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Objectives of the study:
1) To understand the conceptof Tax.
2) To study about Capital Gain.
3) To study the Capital Gain taxation including exemption us 54 &54EC.
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CHAPTER 2: Types of Taxes
Type of Taxes:
It mainly consistof two types
DirectTaxes
Indirect Taxes
DirectTaxes:
A Direct tax is a kind of charge, which is imposed directly on the
taxpayer and paid directly to the government by the persons (juristic or
natural) on whom it is imposed. A direct tax is one that cannot be shifted
by the taxpayer to someone else. The some important direct taxes imposed
in India are as under:
Income Tax:
Income Tax Act, 1961 imposes tax on the income of the individuals or
Hindu undivided families or firms or co-operative societies (other tan
companies) and trusts (identified as bodies of individuals associations of
persons) or every artificial juridical person. The inclusion of a particular
income in the total incomes of a person for income-tax in India is based
on his residential status. There are three residential status, viz.,
(i) Resident & Ordinarily Residents (Residents)
(ii) Resident but not Ordinarily Residents and
(iii) Non Residents.
There are several steps involved in determining the residential status
of a person. All residents are taxable for all their income, including
income outside India. Non residents are taxable only for the income
received in India or Income accrued in India. Not ordinarily residents are
taxable in relation to income received in India or income accrued in India
and income from business or profession controlled from India.
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CorporationTax:
The companies and business organizations in India are taxed on the
income from their worldwide transactions under the provision of Income
Tax Act, 1961. A corporation is deemed to be resident in India if it is
incorporated in India or if it’s control and management is situated entirely
in India. In case of non resident corporations, tax is levied on the income
which is earned from their business transactions in India or any other
Indian sources depending on bilateral agreement of that country.
Property Tax:
Property tax or 'house tax' is a local tax on buildings, along with
appurtenant land, and imposed on owners. The tax power is vested in the
states and it is delegated by law to the local bodies, specifying the valuation
method, rate band, and collection procedures. The tax base is the annual
ratable value (ARV) or area-based rating. Owner-occupied and other
properties not producing rent are assessed on costand then converted into
ARV by applying a percentage of cost, usually six percent. Vacant land is
generally exempted from the assessment. The properties lying under control
of Central are exempted from the taxation. Instead a 'service charge' is
permissible under executive order. Properties of foreign missions also enjoy
tax exemption without an insistence for reciprocity.
Inheritance (Estate)Tax:
An inheritance tax (also known as an estate tax or death duty) is a tax
which arises on the death of an individual. It is a tax on the estate, or total
value of the money and property, of a personwho has died. India enforced
estate duty from 1953 to 1985. Estate Duty Act, 1953 came into existence
w.e.f. 15th October, 1953. Estate Duty on agricultural land was discontinued
under the Estate Duty (Amendment) Act, 1984. The levy of Estate Duty in
respect of property (other than agricultural land) passing on death occurring
on or after 16th March, 1985, has also been abolished under the Estate Duty
(Amendment) Act, 1985.
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Gift Tax:
Gift tax in India is regulated by the Gift Tax Act which was constituted on
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st
April, 1958. It came into effect in all parts of the country except Jammu
and Kashmir. As per the Gift Act 1958, all gifts in excess of Rs. 25,000, in
the form of cash, draft, check or others, received from one who doesn'thave
blood relations with the recipient, were taxable. However, with effect from
1
st
October, 1998, gift tax got demolished and all the gifts made on or after
the date were free from tax. But in 2004, the act was again revived partially.
A new provision was introduced in the Income Tax Act 1961 under section
56 (2). According to it, the gifts received by any individual or Hindu
Undivided Family (HUF) in excess of Rs. 50,000 in a year would be taxable.
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Indirect Taxes :
An indirect tax is a tax collected by an intermediary (such as a retail store)
from the person who bears the ultimate economic burden of the tax (such
as the customer). An indirect tax is one that can be shifted by the taxpayer
to someone else. An indirect tax may increase the price of a good so that
consumers are actually paying the tax by paying more for the products.
The some important indirect taxes imposed in India are as under:
Service Tax:
The service providers in India except those in the state of Jammu and
Kashmir are required to pay a Service Tax under the provisions of the
Finance Act of 1994. The provisions related to Service Tax came into
effect on 1st July, 1994. Under Section 67 of this Act, the Service Tax is
levied on the gross or aggregate amount charged by the service provider
on the receiver. However, in terms of Rule 6 of Service Tax Rules, 1994,
the tax is permitted to be paid on the value received. The interesting thing
about Service Tax in India is that the Government depends heavily on the
voluntary compliance of the service providers for collecting Service Tax
in India.
Sales Tax:
Sales Tax in India is a form of tax that is imposed by the Government on
the sale or purchase of a particular commodity within the country. Sales
Tax is imposed under both, Central Government (Central Sales Tax) and
State Government (Sales Tax) Legislation. Generally, each State follows
its own Sales Tax Act and levies tax at various rates. Apart from sales tax,
certain States also imposes additional charges like works contracts tax,
turnover tax and purchaser tax. Thus, Sales Tax Acts as a major revenue-
generator for the various State Governments. From 10th April, 2005, most
of the States in India have supplemented sales tax with a new Value
Added Tax (VAT).
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Value Added Tax (VAT):
The practice of VAT executed by State Governments is applied on each
stage of sale, with a particular apparatus of credit for the input VAT paid.
VAT in India classified under the tax slabs are 0% for essential
commodities, 1% on gold ingots and expensive stones, 4% on industrial
inputs, capital merchandise and commodities of mass consumption, and
12.5% on other items. Variable rates (State-dependent) are applicable for
petroleum products, tobacco, liquor, etc. VAT levy will be administered
by the Value Added Tax Act and the rules made there-under and similar
to a sales tax. It is a tax on the estimated market value added to a product
or material at each stage of its manufacture or distribution, ultimately
passed on to the consumer. Under the current single-point system of tax
levy, the manufacturer or importer of goods into a State is liable to sales
tax. There is no sales tax on the further distribution channel. VAT, in
simple terms, is a multi-point levy on each of the entities in the supply
chain.
Central Excise Duty:
The Central Government levies excise duty under the Central Excise Act,
1944 and the Central Excise Tariff Act, 1985. Central excise duty is tax
which is charged on such excisable goods that are manufactured in India
and are meant for domestic consumption. The term "excisable goods"
means the goods which are specified in the First Schedule and the Second
Schedule to the Central Excise Tariff Act 1985. It is mandatory to pay
Central Excise duty payable on the goods manufactured, unless exempted
e.g.; duty is not payable on the goods exported out of India.
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Customs Duty:
The Customs Act was formulated in 1962 to prevent illegal imports and
exports of goods. Besides, all imports are sought to be subject to a duty with
a view to affording protection to indigenous industries as well as to keep the
imports to the minimum in the interests of securing the exchange rate of
Indian currency. Duties of customs are levied on goods imported or exported
from India at the rate specified under the customs Tariff Act, 1975 as
amended from time to time or any other law for the time being in force.
Under the customlaws, the various types of duties are levy able. (1) Basic
Duty: This duty is levied on imported goods under the Customs Act, 1962.
(2) Additional Duty (Countervailing Duty) (CVD).
Securities TransactionTax(STT):
STT is a tax being levied on all transactions done on the stockexchanges.
STT is applicable on purchase or sale of equity shares, derivatives, equity
oriented funds and equity oriented Mutual Funds. Current STT on purchase
or sell of an equity share is 0.075%. A personbecomes investor after
payment of STT at the time of selling securities (shares). Selling the shares
after 12 months comes under long term capital gains and one need not have
to pay any tax on that gain. In the case of selling the shares before 12
months, one has to pay short term capital gains @10% flat on the gain.
However, for a trader, all his gains will be treated as trading (Business) and
he has to pay tax as per tax sables. In this case the transaction tax paid by
him can be claimed back/adjusted in tax to be paid.
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CHAPTER 3: Capital Gains Taxation
DEFINITION of 'Capital Gains Tax'
A type of tax levied on capital gains incurred by individuals and
corporations. Capital gains are the profits that an investor realizes when he
or she sells the capital asset for a price that is higher than the purchase price.
Capital gains taxes are only triggered when an asset is realized, not while it
is held by an investor. An investor can own shares that appreciate every
year, but the investor does not incur a capital gains tax on the shares until
they are sold.
BREAKING DOWN 'Capital Gains Tax'
Most countries' tax laws provide for some form of capital gains taxes on
investors' capital gains, although capital gains tax laws vary from country to
country. In the U.S., individuals and corporations are subject to capital gains
taxes on their annual net capital gains.
It is important to note that it is net capital gains that are subject to tax
because if an investor sells two stocks during the year, one for a profit and
an equal one for a loss, the amount of the capital loss incurred on the losing
investment will counteract the capital gains from the winning investment.
A capital gains tax (CGT) is a tax on capital gains, the profit realized on the
sale of a non-inventory asset that was purchased at a costamount that was
lower than the amount realized on the sale. The most common capital gains
are realized from the sale of stocks, bonds, precious metals and property.
Not all countries implement a capital gains tax and most have different rates
of taxation for individuals and corporations.
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As of 2008, equities are considered long term capital if the holding period is
one year or more. Long term capital gains from equities are not taxed if
shares are sold through recognized stockexchange and Securities
Transaction Tax (STT)is paid on the sale.STT in India is currently between
0.017% and 0.1% of total amount received on sale of securities through a
recognized Indian stockexchange like the NSE or BSE. However short term
capital gain from equities held for less than one year, is sold through
recognised stockexchange and STT paid should not be considered and it is
taxable at a flat rate of 15% and other surcharges, educational cess are
imposed. 15 %( w.e.f. 1 April 2009).
Many other capital investments (house, buildings, real estate, bank deposits)
are considered long term if the holding period is 3 or more years.
The Central Government has been empowered by Entry 82 of the Union List
of Schedule VII of the Constitution of India to levy tax on all income other
than agricultural income (subject to Section 10(1)). The Income Tax Law
comprises The Income Tax Act 1961, Income Tax Rules 1962, Notifications
and Circulars issued by Central Board of Direct Taxes (CBDT), Annual
Finance Acts and Judicial pronouncements by Supreme Court and High
Courts.
The government of on taxable income of allpersons including individuals,
Hindu Undivided Families (HUFs), companies, firms, association of
persons, bodyof individuals, local authority and any other artificial judicial
person. Levy of tax is separate on each of the persons. The levy is governed
by the Indian Income Tax Act, 1961. The Indian Income Tax Department is
governed by CBDT and is part of the Department of Revenue under
theMinistry of Finance, Govt. of India. Income tax is a key sourceof funds
that the government uses to fund its activities and serve the public.
The Income Tax Department is the biggest revenue mobilizer for the
Government.
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Guide to Short-term vs. Long-term Capital Gains Taxes
Short-term capitalgains
Short Term capital gains do not benefit from any special tax rate – they are
taxed at the same rate as your ordinary income. For2015, ordinary tax rates
range from 10 percent to 39.6 percent, depending on your total taxable
income.
If you sell an asset you have held for one year or less, any profit you make is
considered a short-term capital gain. The clock begins ticking from the day
after you acquire the asset up to and including the day you sell it.
Long-term capitalgains
If you can manage to hold your assets for longer than a year, you can benefit
from a reduced tax rate on your profits. For 2015, the long-term capital gains
tax rates are 0, 15, and 20 percent for most taxpayers. If your ordinary tax
rate is already less than 15 percent, you could qualify for the zero percent
long-term capital gains rate. For high-income taxpayers, the capital gains
rate could save as much as 19.6 percent off the ordinary income rate.
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Section54:Old Asset: ResidentialProperty, New Asset: Residential
Property
Introduction
A person wanted to shift his residence due to certain reason, hence, he sold
his old house and from the sale proceeds he purchased another house. In this
case the objective of the seller was not to earn income by sale of old house
but to acquire another suitable house. If in this casethe seller was liable to
pay income-tax on capital gains arising on sale of old house, then it would
be a hardship on him. Section 54 gives relief from such a hardship. Section
54 gives relief to a taxpayer who sells his residential house and from the sale
proceeds he acquires another residential house. The detailed provisions in
this regard are discussed in this part.
Basic conditions
Following conditions should be satisfied to claim the benefit of section 54.
• The benefit of section 54 is available only to an individual or HUF.
• The asset transferred should be a long-term capital asset, being a
residential house property.
• Within a period of one year before or two years after the date of transfer of
old house, the taxpayer should acquire another residential house or should
constructa residential house within a period of three years from the date of
transfer of the old house. In case of compulsory acquisition the period of
acquisition or construction will be determined from the date of receipt of
compensation (whether original or additional). With effect from assessment
year 2015-16 exemption can be claimed only in respect of one residential
house property purchased/constructed in India. If more than one house is
purchased or constructed, then exemption under section 54 will be available
in respect of one house only. No exemption can be claimed in respect of
house purchased outside India.
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Under Section 54 – Any Long Term Capital Gain, arising to an Individual or
HUF, from the Sale of a Residential Property (whether Self- Occupied or on
Rent) shall be exempt to the extent such capital gains is invested in the
1. Purchase of another Residential Property within 1 year before or 2 years
after the due date of transfer of the Property sold and/or
2. Construction of Residential house Property within a period of 3 years
from the date of acquisition
Provided that the new Residential House Property purchased or constructed
is not transferred within a period of 3 years from the date of acquisition .
If the new property is sold within a period of 3 years from the date of its
acquisition, then, for the purposeof computing the capital gains on this
transfer, the costof acquisition of this house property shall be reduced by the
amount of capital gain exempt under section 54 earlier. The capital gain
arising from this transfer will always be a short term capital gain.
QUANTUM OF DEDUCTION UNDER SECTION 54
Capital Gains shall be exempt to the extent it is invested in the purchase
and/or construction of another house i.e.
1. If the entire amount is equal to or less than the costof the new house, then
the entire capital gain shall be exempt
2. If the amount of Capital Gain is greater than the costof the new house,
then the costof the new house shall be allowed as an exemption
RELEVANT POINTS REGARDING SECTION54
1. Budget 2014 has introduced an amendment to Section 54 and from
Financial Year 2014-15 i.e. AssessmentYear 2015-16, exemption under
Section 54 is available if the amount is re-invested in 1 Residential House
situated in India.
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2. The exemption under Section 54 would also be available if the amount is
invested in an under construction residential house. However, Service Tax is
levied on purchase of under construction property.
Capital Gains Account Scheme
Although as per Section 54, the assesseeis given 2 years to purchase the
house property or 3 years for the construction of the house property, but the
capital gains on the transfer of the original house property is taxable in the
year in which it was sold. The Income Tax Return of that year is required to
be submitted in the relevant assessment year on or before the specified due
date for filing the Income Tax Return. Hence, the assesseewill have to take
a decision for the purchase/constructionof the house property till the date of
furnishing of the income tax return otherwise, the capital gain would become
taxable.
To avoid the above situation, the Income Tax Act specifies an alternative in
the form of depositunder the Capital Gains Account Scheme. The Amount
of Capital Gain which is not utilised by the Assesseefor the purchase or
construction of the new house before the date of furnishing of the Income
Tax Return should be deposited by him under the Capital Gains Account
Scheme, before the due date of furnishing the return. The proof of such a
deposit shall be attached with the Income Tax Return. In this case, the
amount already utilised by the assesseefor the purchase/constructionof the
new house shall be eligible for exemption In case, the assesseedeposits the
amount in the Capital Gains Account Scheme but does not utilise the amount
deposited for the purchase or construction of a residential house within the
specified period, the amount not so utilised shall be charged as Capital Gains
of the year in which the period of 3 years is completed from the date of sale
of the Original Asset and it will be long term capital gain of that financial
year.
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Allotment of Flats
Allotment of a flat by DDA under the Self-Financing Scheme shall be
treated as construction of the house (Circular No. 471, dated 15-10- 1986).
Similarly, allotment of a flat or a house by a co-operative society, of which
the asseessee is the member, is also treated as construction of the house
(Circular No. 672, dated 16-12-1983). Further I these cases, the assessee
shall be entitled to claim exemption in respect of capital gains even though
the construction is not completed within the statutory time limit [Shashi
Verma v CIT (1997) 224 ITR 106 (MP)]
Delhi High Court has applied the same analogy where the assesseemade
substantial payment within the prescribed time limit and thus acquired
substantial domain over the property, although the builder failed to hand
over the possessionwithin the stipulated period [CIT v R.C. Sood (2000)
108 Taxman 227 (Del)]
Judicial Decisions
1. House Property does not mean a complete Independent House. It includes
residential units also, like flats in a multi-storeyed complex. [CIT (Addl.) v
Vidya Prakash Talwar (1981) 132 ITR 661 (Del)].
2. Where a Property is owned by more than one person and the other co-
owner or co-owners release his or their share respective share or interest in
the property in favour of one of the co-owners, it will be deemed that the
property has been purchased by the release. Such release also fulfils the
condition of Section 54 as to purchase. [CIT v T.N. Aravinda Reddy(1979)
120 ITR 46 (SC)]
3. The unutilised depositamount in the Capital Gains AccountSaving
Scheme in the case of an individual who dies before the expiry of the 2/3
years stipulated period under section 54, 54B, 54D, 54F and 54G, cannot be
taxed in the hands of the deceased. This amount is not taxable in the hands
of the legal heirs also as the unutilised portion of the depositdoes not
partake the character of income in their hands but is only a part of the estate.
(Circular No. 743, dated 06-05-1996).
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Section54EC:Old Asset:Any Asset, New Asset: SpecifiedBonds
Gains arising from the transfer of any long term capital asset are exempt
under section 54EC if the assesseehas within a period of 6 months after the
due date of such transfer invested the capital gain in long term specified
bonds as notified by the Govt. for a minimum period of 3 years.
In case where the long term specified asset is transferred or converted into
money at any time within a period of 3 years from the date of its acquisition,
the amount of capital gain exempt u/s 54EC, shall be deemed to be long term
capital gain of the previous year in which the long term specified asset is
transferred or converted into money If the Assesseeeven takes a loan or
advance on the security of such long term specified asset, he shall be
deemed to have converted such long term specified asset into money on the
date on which such loan or advance is taken These specified binds are
usually issued by REC and NHAI and the Interest Rate offered is 6%T. ax
on the Interest earned is also liable to be paid as the Interest is not tax-free.
QUANTUM OF DEDUCTION UNDER SECTION 54EC
1. Capital Gains shall be exempt to the extent it is invested in the long term
specified assets (subject to a maximum limit of Rs. 50 Lakhs) within a
period of 6 Months from the date of such transfer.
2. Budget 2014 has also introduced an amendment to Section 54EC and
from FY 14-15 i.e. AY 15-16 onwards, the investment made by an assessee
in the long term specified asset, out of capital gains arising from the transfer
of one or more original asset or assets are transferred and in the subsequent
financial year does not exceed Rs. 50 Lakhs.
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CHAPTER 4: Conclusion
1. Capital gains will be taxed upon realisation.
2. Primary residences will be exempt from capital gains taxation.
3. The capital gains tax will be indexed to inflation from date of
implementation.
4. To save long term capital gain the seller has to buy a house property
within two years of sale of capital asset or constructa house within three
years. If seller is not able to identify a property he/she can open a capital
gain accounting scheme’s special account and park the money until he
finds the property(with limit of 3 years). Seller also can invest money in
specific bond up to limit of Rs 50 Lakhs to save LTCG tax.
