This document provides an overview of capital gains taxes in India. It defines key terms like capital asset, transfer, and capital gains. A capital asset is any property held by a taxpayer, excluding some business-related assets. A transfer involves the sale, exchange, or relinquishment of a capital asset. Capital gains are profits made from the transfer of a capital asset. The document discusses the different types of capital assets, what qualifies as a transfer, and how to compute capital gains and losses. It provides examples to illustrate capital gains tax calculations.
direct tax project - income from capital gains detailed study with illustrations and theory
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UNIVRSITY OF MUMBAI
PROJECT REPORT
ON
DIRECT TAX
CAPITAL GAINS
BY
MISS YOGITA SAVARMAL VARMA
M.COM (Part II) (SEM III) (Roll No. 64)
ACADEMIC YEAR 2016-2017.
PROJECT GUIDE
PROF. PRASHANT KANVINDE
PARLE TILAK VIDYALAYA ASSOCIATION’S
M.L.DAHANUKAR COLLEGE OF COMMERCE
DIXIT ROAD, VILE PARLE (EAST)
MUMBAI - 400057.
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DECLARATION
I, Miss Varma Yogita Savarmal of PARLE TILAK VIDYALAYA
ASSOCIATION’S M.L.DAHANUKAR COLLEGE OF COMMERCE OF
MCOM (PART II) (Roll no. 64) (Semester III) hereby declare that I have
completed this project on DIRECT TAX-CAPITAL GAINS in academic year
2016-17. The information submitted is true and original in the best of my
knowledge.
(Signature of student)
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ACKNOWLEDGEMENT
To list who all helped me is difficult because they are so numerous and the depth is so
enormous.
I would like to acknowledge the following as being idealistic channels and fresh
dimensions in the completion of this project.
I would firstly thank the Universityof Mumbai for giving me chance to do this project.
I would like to thank my principal, Dr. Madhavi Pethe for providing the necessary
facilities required for completion of this project.
I even will like to thank our coordinator, for the moral support that we received.
I would like to thank our college library, for providing various books and magazines
related to my project.
Finally, I proudly thank my parents and friends for their support throughout the project.
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TABLE OF CONTENTS
SR NO. CONTENTS PAGE NO.
1 TAX – INTRODUCTION 5-8
2 DIRECT TAX 9
3 CAPITAL GAINS – INTRODUCTION 10-16
4 TYPE OF CAPITAL ASSETS 17
5 PERIOD OF HOLDING 18-20
6 COMPUTATION OF CAPITAL GAINS 21-34
7 ILLUSTRATIONS 35-36
8 CONCLUSION 37
9 BIBLIOGRAPHY 38
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TAX
A tax (from the Latin taxo) is a financial charge or other levy imposed upon a taxpayer (an
individual or legal entity) by astate or the functional equivalent of a state to fund various public
expenditures. A failure to pay, or evasion of or resistance to taxation, is usually punishable by
law. Taxes consist of direct or indirect taxes and may be paid in money or as its labour
equivalent. Some countries impose almost no taxation at all, or a very low tax rate for a certain
area of taxation.
Every one of us, have heard about the tax, it is a compulsory financial obligation, payable to the
government. But this definition is not sufficient to understand the complete tax system. It has
been mainly divided into two broad categories Direct Tax and Indirect Tax, comprising of the
different nature of taxes. Let’s understand the meaning and the difference between Direct Tax
and Indirect Tax.
Definition of Direct Tax
A direct tax is referred to as a tax levied on person’s income and wealth and is paid directly to
the government, the burden of such tax cannot be shifted. The tax is progressive in nature i.e. it
increases with an increase in the income or wealth and vice versa. It levies according to the
paying capacity of the person, i.e. the tax is collected more from the rich and less from the poor
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people. The tax is levied and collected either by the Central government or State government or
the local bodies.
The plans and policies of the Direct Taxes are being recommended by the Central Board of
Direct Taxes (CBDT) which is under the Ministry of Finance, Government of India.
There are several types of Direct Taxes, such as:
Income Tax
Wealth Tax
Property Tax
Corporate Tax
Import and Export Duties
Definition of Indirect Tax
Indirect Tax is referred to as a tax charged on a person who consumes the goods and services and
is paid indirectly to the government. The burden of tax can be easily shifted to the another
person. The tax is regressive in nature, i.e. as the amount of tax increases the demand for the
goods and services decreases and vice versa. It levies on every person equally whether he is rich
or poor. The administration of tax is done either by the Central Government or the State
government.
There are several types of Indirect Taxes, such as:
Central Sales Tax
VAT (Value Added Tax)
Service Tax
STT (Security Transaction Tax)
Excise Duty
Custom Duty
Agricultural Income Tax
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Comparison Chart
BASIS FOR
COMPARISON
DIRECT TAX INDIRECT TAX
Meaning Direct tax is referred to as the tax,
levied on person's income and wealth
and is paid directly to the
government.
Indirect Tax is referred to as the tax,
levied on a person who consumes the
goods and services and is paid indirectly
to the government.
Burden The person on whom it is levied
bears its burden.
The burden of tax can be shifted to
another person.
Types Wealth Tax, Income Tax, Property
Tax, Corporate Tax, Import and
Export Duties.
Central Sales tax, VAT (Value Added
Tax), Service Tax, STT (Security
Transaction Tax), Excise Duty, Custom
Duty.
Evasion Tax evasion is possible. Tax evasion is hardly possible because it
is included in the price of the goods and
services.
Inflation Direct tax helps in reducing the
inflation.
Indirect taxes promote the inflation.
Levied on Persons, i.e. Individual, HUF (Hindu
Undivided Family), Company, Firm
etc.
Consumers of goods and services.
Nature Progressive Regressive
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Key Differences between Direct and Indirect Taxes
1. The tax, which is paid by the person on whom it is levied, is known as the Direct tax while the
tax, which is paid by the taxpayer indirectly, is known as the Indirect tax. The direct tax is levied
on person’s income and wealth whereas the indirect tax is levied on a person who consumes the
goods and services.
2. The main difference between the direct and indirect tax is that the burden of direct tax cannot be
shifted whereas the burden of indirect tax can be shifted.
3. The evasion of tax is possible in case of a direct tax if the proper administration of the collection
is not done, but in the case of indirect tax, the evasion of tax is not possible since the amount of
tax is charged on the goods and services.
4. The direct tax is levied on Persons, i.e. Individual, HUF (Hindu Undivided Family), Company,
Firm, etc. On the other hand, the indirect tax is levied on the consumer of goods and services.
5. The nature of a direct tax is progressive, but the nature of the indirect tax is regressive.
6. Direct tax helps in reducing the inflation, but the indirect tax sometimes helps in promoting the
inflation.
Similarities
Payable to the government.
Penalty for the non-payment.
Interest on Delayed Payment.
Improper administration can lead to tax avoidance or tax evasion.
Conclusion
Both the direct and indirect tax has its own merits and demerits. If we talk about the direct taxes
they are equitable because they are charged on person, according to their paying ability. The
direct tax is economical because its cost of collection is less but however, it doesn’t cover every
section of the society.
On the other hand, if we talk about the indirect tax, they are easy to realize as they are included
in the price of the product and services, and along with that, it has an excellent coverage of every
section of the society. One of the best advantages of the indirect tax is, the rate of tax is high for
harmful products as compared to the other goods which are necessary for life.
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DIRECT TAX
INCOME TAX
An income tax is 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
source of funds that the government uses to fund its activities and serve the public.
HEADS OF INCOME
Under chapter 4 of Income Tax Act, 1961 (Section 14), income of a person is calculated under
various defined heads of income. The total income is first assessed under heads of income and
then it is charged for Income Tax as under rules of Income Tax Act. According to Section 14 of
Income Tax Act, 1961 there are following heads of income under which total income of a person
is calculated:
» Heads of Income: Salary
» Heads of Income: House Property
» Heads of Income: Profit in Business/ Profession
» Heads of Income: Capital Gains
» Heads of Income: Other Sources
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CAPITAL GAINS
A capital gain is a profit that results from a sale of a capital asset, such as stock, bond or real
estate, where the sale price exceeds the purchase price. The gain is the difference between a
higher selling price and a lower purchase price. Conversely, a capital loss arises if the proceeds
from the sale of a capital asset are less than the purchase price.
Capital gains may refer to "investment income" that arises in relation to real assets, such
as property; financial assets, such as shares/stocks or bonds; and intangible assets.
When we buy any kind of property for a lower price and then subsequently sell it at a higher
price, we make a gain. The gain on sale of a capital asset is called capital gain. This gain is not a
regular income like salary, or house rent. It is a one-time gain; in other words the capital gain is
not recurring, i.e., not occur again and again periodically.
Opposite of gain is called loss; therefore, there can be a loss under the head capital gain. We are
not using the term capital loss, as it is incorrect. Capital Loss means the loss on account of
destruction or damage of capital asset. Thus, whenever there is a loss on sale of any capital asset
it will be termed as loss under the head capital gain.
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OBJECTIVE
After going through this lesson you will be able to understand the meaning of capital asset, types
of capital asset, what is not capital asset, computation of capital gain, types of capital gains etc.
You will also be learning how to calculate the capital gain of simple problems. The capital gain
is also an income and it is taxable too, at the end of the chapter you will also learn the tax
treatment of the capital gain.
BASIS OF CHARGE
The capital gain is chargeable to income tax if the following conditions are satisfied:
1. There is a capital asset.
2. Assessee should transfer the capital asset.
3. Transfer of capital assets should take place during the previous year.
4. There should be gain or loss on account of such transfer of capital asset.
DEFINITION OF ‘CAPITAL ASSET’
As per S.2 (14) of the Income Tax Act, 1961, unless the context otherwise requires, the term
“capital asset” means:
(a) Property of any kind held by an assessee, whether or not connected with his business or
profession;
(b) Any securities held by a Foreign Institutional Investor which has invested in such securities
in accordance with the regulations made under the Securities and Exchange Board of India Act,
1992; but does not include:
(i) Any stock-in-trade, other than the securities referred to in sub-clause (b), 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:
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(a) jewellery;
(b) archaeological collections;
(c) drawings;
(d) paintings;
(e) sculptures; or
(f) any work of art.
Explanations:
1. 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.
2. For the purposes of this clause:
(a) the expression “Foreign Institutional Investor” shall have the meaning assigned to it in clause
(a) of the Explanation to section 115AD;
(b) the expression “securities” shall have the meaning assigned to it in clause (h) of section 2 of
the Securities Contracts (Regulation) Act, 1956;
(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
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committee, or by any other name) or a cantonment board and which has a population of not less
than ten thousand; or
(b) in any area within the distance, measured aerially:
(I) not being more than two kilometres, from the local limits of any municipality or cantonment
board referred to in item (a) and which has a population of more than ten thousand but not
exceeding one lakh; or
(II) not being more than six kilometres, from the local limits of any municipality or cantonment
board referred to in item (a) and which has a population of more than one lakh but not exceeding
ten lakh; or
(III) not being more than eight kilometres, from the local limits of any municipality or
cantonment board referred to in item (a) and which has a population of more than ten lakh.
Explanation: For the purposes of this sub-clause, “population” means the population according to
the last preceding census of which the relevant figures have been published before the first day
of the previous year.
(iv) 6½ 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.
Explanation:
“Property” includes and shall be deemed to have always included any rights in or in relation to
an Indian company, including rights of management or control or any other rights whatsoever.
Definitions of capital asset mainly distinguish the business assets from other assets for the
purpose of taxation under the head Capital Gains.
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TRANSFER
Capital gain arises on transfer of capital asset; so it becomes important to understand what is the
meaning of word transfer. The word transfer occupy a very important place in capital gain,
because if the transaction involving movement of capital asset from one person to another person
is not covered under the definition of transfer there will be no capital gain chargeable to income
tax. Even if there is a capital asset and there is a capital gain.
The word transfer under income tax act is defined under section 2(47). As per section 2 (47)
Transfer, in relation to a capital asset, includes sale, exchange or relinquishment of the asset or
extinguishments of any right therein or the compulsory acquisition thereof under any law.
In simple words Transfer includes:
a) Sale, exchange or relinquishment of asset
b) Extinguishment of right over asset
c) Compulsory acquisition under any law
d) Personal effects converted into Stock-in-trade
e) Maturity of zero coupon bonds
f) Allowing possession under transfer of property act, 1882
g) Allowing enjoyment of immovable property
Transfer includes:
i) Sale, exchange or relinquishment of a capital asset
A sale takes place when tide in the property is transferred for a price. The sale need not be
voluntary. An involuntary sale of a property of a debtor by a court at the instance of a decree
holder is also transfer of a capital asset.
An exchange of capital asset takes place when the title in one property is passed in consideration
of the title in another property.
Relinquishment of a capital asset arises when the owner surrenders his rights in property in
favour of another person. For example, the transfer of rights to subscribe the shares in a company
under a ‘Rights Issue’ to a third person.
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ii) Extinguishment of any rights in a capital asset
This covers every possible transaction which results in destruction, annihilation, extinction,
termination, cessation or cancellation of all or any bundle of rights in a capital asset. For
example, termination of a lease or of a mortgagee interest in a property.
iii) Compulsory acquisition of a capital asset under any law
Acquisition of immovable properties under the Land Acquisition Act, acquisition of industrial
undertaking under the Industries (Development and Regulation) Act etc.., are some of the
examples of compulsory acquisition of a capital asset.
iv) Conversion of a capital asset into stock-in-trade
Normally, there can be no transfer if the ownership in an asset remains with the same person.
However, the Income tax Act provides an exception for the purpose of capital gains. When a
person converts any capital asset owned by him into stock-in- trade of a business carried on by
him, it is regarded as a transfer. For example, where an investor in shares starts a business of
dealing in shares and treats his existing investments as the stock- in-trade of the new business,
such conversion arises and is regarded as a transfer. The Fair Market Value of the asset on the
date of such conversion shall be the Full Value of Consideration for the transfer.
v) Part performance of a contract of sale
Normally transfer of an immovable property worth Rs. 100/- or more is not complete without
execution and registration of a conveyance deed. However, section 53A of the Transfer of
Property Act envisages situations where under a contract for transfer of an immovable property,
the purchaser has paid the price and has taken possession of the property, but the conveyance is
either not executed or if executed is not registered. In such cases the transferer is debarred from
agitating his title to the property against the purchaser.
The act of giving possession of an immovable property in part performance of a contract is
treated as ‘transfer’ for the purposes of capital gains. This extended meaning of transfer applies
also to cases where possession is already with the purchaser and he is allowed to retain it in part
performance of the contract.
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vi) Transfer of rights in immovable properties through the medium of co-operative
societies, companies etc.
Usually flats in multi-storeyed building and other dwelling units in group housing schemes are
registered in the name of a co-operative society formed by the individual allottees.
Sometimes companies are floated for this purpose and allottees take shares in such companies. In
such cases transfer of right to use and enjoy the flat is effected by changing the membership of
co-operative society or by transferring the shares in the company. Possession and enjoyment of
immovable property is also made by what is commonly known as ‘Power of Attorney’ transfers.
All these transactions are regarded as transfer.
vii) Transfer by a person to a firm or other Association of Persons [AOP] or Body of
Individuals [BOI]
Normally, firm/AOP/BOI is not considered a distinct legal entity from its partners or members
and so transfer of a capital asset from the partners to the firm/AOP/BOI is not considered
‘Transfer’. However, under the Capital Gains, it is specifically provided that if any capital asset
is transferred by a partner to a firm/AOP/BOI by way of capital contribution or otherwise, the
same would be construed as transfer.
viii) Distribution of capital assets onDissolution
Normally, distribution of capital assets on dissolution of a firm/AOP/BOI is also not considered
as transfer for the same reasons as mentioned in (vii) above. However, under the capital gains,
this is considered as transfer by the firm /AOP/BOl and therefore gives rise to capital gains for
the firm/AOP/BOI.
ix) Distribution of money or other assets by the Company on liquidation
If a shareholder receives any money or other assets from a Company in liquidation, the
shareholder is liable to pay capital gains as the same would have been received in lieu of the
shares held by him in the company. However, if the assets of a company are distributed to the
shareholders on its liquidation such distribution shall not be regarded as transfer by the company.
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x) The maturity or redemption of a zero coupon bond
Here, a zero coupon bond means a bond issued by any infrastructure capital company or
infrastructure firm or public sector company on or after 1st June, 2005 in respect of which no
payment or benefit is received or receivable before maturity or redemption and which has been
specifically notified by the Central Govt.
TYPE OF CAPITAL ASSETS
A. Short Term Capital Asset
Capital asset held for not more than 36 months immediately prior to the date of transfer shall be
deemed as short-term capital asset. However, following assets held for not more than 12 months
shall be treated as short-term capital assets:
a) Equity or preference shares in a company which are listed in any recognized stock exchange in
India;
b) Other listed securities;
c) Units of UTI;
d) Units of equity oriented funds; or
e) Zero Coupon Bonds.
Note: Unlisted shares held for not more than 24 months immediately prior to the date of transfer
shall be treated as short-term capital asset.
B. Long Term Capital Asset
Capital Asset that held for more than 36 months or 12 months, as the case may be, immediately
preceding the date of transfer is treated as long-term capital asset.
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PERIOD OF HOLDING
The period of holding shall be determined as follows:
Different situations How to calculate the period of holding
Shares held in a company in liquidation The period subsequent to the date on which the
company goes into liquidation shall be
excluded.
Capital asset which becomes the property of
the assessee in the circumstances mentioned in
section 49(1) read with section 47 [i.e., when
an asset is acquired by gift, will, succession,
inheritance or the asset is required at the time
of partition of family or under a revocable or
irrevocable trust or under amalgamation, etc.]
The period for which the asset was held by the
previous owner should be included (cost of
acquisition in this case shall be computed in
the manner provided in Para 10)
Allotment of shares in amalgamated Indian
company in lieu shares held in amalgamating
company
The period of holding shall be computed from
the date of acquisition of shares in the
amalgamating company.
Right shares The period of holding shall be computed from
the date of allotment of right shares.
Right entitlement The period of holding will be considered from
the date of offer to subscribe to shares to the
date when such right entitlement is renounced
by the person.
Bonus shares The period of holding shall be computed from
the date of allotment of bonus shares.
Issue of shares by the resulting company in a
scheme of demerger to the shareholders of the
demerged company
The period of holding shall be computed from
the date of acquisition of shares in the
demerged company.
Membership right held by a member of
recognised stock exchange
In case of shares as well as trading/clearing
rights, the period for which the person was a
member of the stock exchange immediately
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prior to such demutualization/corporatization
shall be included.
Flat in a co-operative society The period of holding shall be computed from
the date of allotment of shares in the society.
Sweat equity shares allotted by employer The period of holding shall be reckoned from
the date of allotment or transfer of such equity
shares (applicable from the assessment year
2008-09)
Unit of a business trust [allotted pursuant to
transfer of shares as referred to in section
47(xvii)]
The period of holding shall include the period
for which shares were held by the assessee.
Units allotted to an assessee pursuant to
consolidation of two or more scheme of a
mutual fund as referred to in Section 47(xviii)
The period of holding of such units shall
include the period for which the unit or units in
the consolidating scheme of the mutual fund
were held by the assessee.
Shares in a company acquired by the non-
resident assessee on redemption of Global
Depository Receipts referred to in Section
115AC(1)(b)
The period of holding of such shares shall be
reckoned from the date on which a request for
such redemption was made.
Transactions in shares and securities not given
above:
1) Date of purchase (through stock exchanges)
of shares and Securities
2) Date of transfer (through stock exchanges)
of shares and securities
3) Date of purchase/transfer of shares and
securities (transaction taken place directly
between parties and not through stock
exchanges)
a) Date of purchase by broker on behalf of
investor.
b) Date of broker’s note provided such
transactions are followed up by delivery of
shares and also the transfer deeds.
c) Date of contract of sale as declared by
parties provided it is followed up by actual
delivery of shares and the transfer deeds.
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4) Date of purchase/sale of shares and
securities purchased in several lots at different
points of time but delivery taken subsequently
and sold in parts
5) Transfer of a security by a depository (i.e.,
demat account)
d) The FIFO method shall be adopted to
reckon the period of the holding of the
security, in cases where the dates of purchase
and sale cannot be correlated through specific
number of scrips.
e) The period of holding shall be determined
on the basis of the first-in-first-out method.
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COMPUTATIONOF CAPITAL GAIN:
Computation of capital gain depends upon the nature of the capital asset transferred during the
previous year, vis-à-vis, short-term capital asset, long-term capital asset or depreciable asset.
Capital gain arising on transfer of short-term capital asset or depreciable asset is considered as
short-term capital gain, whereas transfer of long-term capital asset gives rise to long-term capital
gain.
The capital gains on transfer of capital asset shall be computed in the following manner: - See
more at:
Short-term capital assets
[Section 48]
Long-term capital assets
[Section 48]
Depreciable asset
[Section 50]*
Full value of consideration
Less: Cost of acquisition of
asset
Less: Cost of improvement
Less: Expenditure incurred
wholly and exclusively in
connection with such transfer
Full value of consideration
Less: Indexed Cost of
acquisition (See Note 1)
Less: Indexed Cost of
Improvement (See Note 1)
Less: Expenditure incurred
wholly and exclusively in
connection with such transfer
WDV of block of asset at the
beginning of previous year
Add: Actual cost of assets
falling within that block
acquired during the year
Less: Full value of
consideration of assets
transferred during the year
Less: Expenditure incurred
wholly and exclusively in
connection with such transfer
* Short-term capital gain or loss from sale of depreciable asset will arise only in the following
two situations:
a) When on last day of the previous year, WDV of the block of asset is nil; or
b) When on last day of the previous year, block ceases to exist.
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Note 1: Indexed Cost of Acquisition and Improvement [Second Proviso to Section 48]
a) In case of transfer of long-term capital assets, indexed cost of acquisition and indexed cost of
improvement shall be deducted from the full value of consideration;
b) Indexed cost of acquisition and Indexed cost of improvement shall be computed with
reference to Cost Inflation Index (‘CII’) in the following manner:
Indexed Cost of
Acquisition =
[(Cost of Acquisition) × (CII for the year of transfer)]
(CII for the year of acquisition or for the Financial Year 1981-82,
whichever is later)
Indexed Cost of
Improvement =
[(Cost of Improvement) × (CII for the year of transfer)]
CII for the year of Improvement
However, there are some cases where benefit of indexation is not available, which are as under:
SECTION CAPITAL ASSET TRANSFEROR
Third
provison to
section 48
Bonds or debentures.
Note: However, indexation benefit is available on two type of
bonds, namely,-
• Capital indexed bonds (issued by the Government)
• Sovereign Gold Bond (issued by the RBI under the
Sovereign Gold Bond Scheme, 2015)
Any person
112 Capital gains arising from transfer of unlisted shares (which is
taxable at concessional rate of 10%) as calculated without
giving effect to first proviso to Section 48
Non-resident
50A Depreciable asset (other than an asset used by a power
generating unit eligible for depreciation on straight line basis)
Any person
50B Undertaking/division transferred by way of slump sale as
covered by section 50B
Any person
115AB Units purchased in foreign currency as given in section 115AB Offshore fund
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115AC Global depository receipts (GDR) purchased in foreign
currency as given in section 115AC
Non-resident
115ACA Global depository receipts (GDR) purchased in foreign
currency as given in section 115ACA
Resident
individual –
employee
115AD Securities as given in section 115AD Foreign
Institutional
Investors
CII in relation to a previous year means such index, as Central Government notifies on year to
year basis.
The Central Government has notified the following Cost Inflation Indexes:
Financial Year CII Financial Year CII Financial Year CII
1981-82 100 1993-94 244 2005-06 497
1982-83 109 1994-95 259 2006-07 519
1983-84 116 1995-96 281 2007-08 551
1984-85 125 1996-97 305 2008-09 582
1985-86 133 1997-98 331 2009-10 632
1986-87 140 1998-99 351 2010-11 711
1987-88 150 1999-00 389 2011-12 785
1988-89 161 2000-01 406 2012-13 852
1989-90 172 2001-02 426 2013-14 939
1990-91 182 2002-03 447 2014-15 1024
1991-92 199 2003-04 463 2015-16 1081
1992-93 223 2004-05 480 2016-17 1125
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Computation of capital gain in case of sale of shares or debentures of an Indian company
purchased by a non-resident in foreign currency [first provision to section 48]
In such a case, capital gain shall be determined as under:-
Full Value of
Consideration
(X)
Find out sale consideration in Indian currency and convert it into same foreign
currency, which was used to acquire the capital asset, at average exchange
rate* on the date of transfer.
Cost of
acquisition (Y)
Find out the cost of acquisition in Indian currency and convert it into foreign
currency at average exchange rate on the date of acquisition.
Expenditure on
sale (Z)
Find out the expenditure on transfer in Indian currency and convert it into same
foreign currency at average exchange rate on the date of transfer (not on the
date when expenditure is incurred).
Capital gain
(X-Y-Z)
The capital gains as computed in after reducing the cost of acquisition and
expenditure from the full value of consideration shall be reconverted into
Indian currency at buying rate** on the date of transfer.
* Average exchange rate means the average of the telegraphic transfer buying rate and
telegraphic transfer selling rate of the foreign currency initially utilized in the purchase of capital
asset.
** Buying rate is the telegraphic transfer buying rate of such currency.
Full Value of Consideration
Full value of consideration is the consideration received or receivable by the transferor in lieu of
assets, which he has transferred. Such consideration may be received in cash or in kind. If it is
received in kind, then fair market value (‘FMV’) of such assets shall be taken as full value of
consideration.
However, in the following cases “full value of the consideration” shall be determined on notional
basis as per the relevant provisions of the Income-tax Act, 1961:
25. 25
S.
No.
Nature of transaction Section Full Value of Consideration
1 Money or other asset received
under any insurance from an
insurer due to damage or
destruction of a capital asset
45(1A) Value of money or the FMV of the asset (on
the date of receipt)
2 Conversion of capital asset into
stock-in-trade
45(2) FMV of the capital asset on the date of
conversion
3 Transfer of capital asset by a
partner or member to firm or
AOP/BOI, as the case may be,
as his capital contribution
45(3) Amount recorded in the books of accounts of
the firm or AOP/BOI as the value of the
capital asset received as capital contribution
4 Distribution of capital asset by
Firm or AOP/BOI to its partners
or members, as the case may be,
on its dissolution
45(4) FMV of such asset on the date of transfer
5 Money or other assets received
by share- holders at the time of
liquidation of the company
46(2) Total money plus FMV of assets received on
the date of distribution less amount assessed
as deemed dividend under section 2(22)(c)
6 Buy-back of shares and other
specified securities by a
company
46A Consideration paid by company on buyback
of shares or other securities would be deemed
as full value of consideration. The difference
between the cost of acquisition and buy-back
price (full value of consideration) would be
taxed as capital gain in the hands of the
shareholder.
Note: if shares are not listed on a recognized
stock exchange, domestic companies would
liable to pay additional tax at 20% under
section 115QA on the distributed income (i.e.
buy-back price as reduced by the amount
26. 26
received by the company for issue of such
shares)
7 Shares, debentures, warrants
(‘securities’) allotted by an
employer to an employee under
notified Employees Stock
Option Scheme and such
securities are gifted by the
concerned employee to any
person
Fourth
Proviso
to
Section
48
Fair Market value of securities at the time of
gift
8 In case of transfer of land or
building, if sale consideration
declared in the conveyance deed
is less than the stamp duty value
50C The value adopted or assessed or assessable
by the Stamp Valuation Authority shall be
deemed to be the full value of consideration
Note: Where the date of agreement (fixing the
amount of consideration) and the date of
registration for the transfer of property are not
the same, the value adopted or assessed or
assessable by Stamp Valuation Authority on
the date of agreement may be taken as full
value of consideration.
9 If consideration received or
accruing as a result of transfer
of a capital asset is not
ascertainable or cannot be
determined
50D FMV of asset on the date of transfer
(applicable from the assessment year 2013-
14)
27. 27
Cost of Acquisition
Cost of acquisition of an asset is the amount for which it was originally acquired by the assessee.
It includes expenses of capital nature incurred in connection with such purchase or for
completing the title of the property.
However, in cases given below, cost of acquisition shall be computed on notional basis:
S.
No.
Particulars Notional Cost of Acquisition
1 Additional compensation in the case of
compulsory acquisition of capital assets
Nil
2 Assets received by a shareholder on liquidation of
the company
FMV of such asset on the date of
distribution of assets to the
shareholders
3 Stock or shares becomes property of taxpayer on
consolidation, conversion, etc.
Cost of acquisition of such stock or
shares from which such asset is
derived
4 Allotment of shares in an amalgamated Indian co.
to the shareholders of amalgamating co. in a
scheme of amalgamation
Cost of acquisition of shares in the
amalgamating co.
5 Conversion of debentures into shares That part of the cost of debentures in
relation to which such asset is acquired
by the assessee
6 Allotment of shares/securities by a co. to its
employees under ESOP Scheme approved by the
Central Government
a) If shares are allotted during 1999-
2000 or on or after April 1, 2009,
FMV of securities on the date of
exercise of option
b) If shares are allotted before April 1,
2007 (not being during 1999-2000),
the amount actually paid to acquire the
securities
c) If shares are allotted on or after
April 1, 2007 but before April 1, 2009,
28. 28
FMV of securities on the date of
vesting of option (purchase price paid
to the employer or FBT paid to
employer shall not be considered)
7 Property covered by section 56(2)(vii) or (viia) The value which has been considered
for the purpose of Section 56(2)(vii) or
(viia)
8 Allotment of shares in Indian resulting company
to the existing shareholders of the demerger
company in a scheme of demerger
Cost of acquisition of shares in
demerged company ? Net book value
of assets transferred in demerger ? Net
worth of the demerged company
immediately before demerger
9 Cost of acquisition of original shares in demerged
company after demerger
Cost of acquisition of such shares
minus amount calculated above in
point 8.
10 Cost of acquisition of assets acquired by
successor LLP from predecessor private company
or unlisted public company at the time of
conversion of the company into LLP in
compliance with conditions of Section 47(xiiib)
Cost of acquisition of the assets to the
predecessor private company or
unlisted public company
11 Cost of acquisition of rights of a partner in a LLP
which became the property of the taxpayer due to
conversion of a private company or unlisted
public company into the LLP
Cost of acquisition of the shares in the
co. immediately before conversion
12 Depreciable assets covered under Section 50 Opening WDV of block of assets on
the first day of the previous year plus
actual cost of assets acquired during
the year which fall within the same
block of assets
13 Depreciable assets of a power generating unit as
covered under Section 50A*
WDV of the asset minus terminal
depreciation plus balancing charge
29. 29
14 Undertaking/division acquired by way of slump
sale as covered under section 50B
Net worth of such undertaking
15 New asset acquired for claiming exemptions
under sections 54, 54B, 54D, 54G or 54GA if it is
transferred within three years
Actual cost of acquisition minus
exemption claimed under these
sections
16 Goodwill of business or trade mark or brand
name associated with business or right to
manufacture, produce or process any article or
thing or right to carry on any business or
profession, tenancy right, stage permits or loom
hours
a) If these assets were acquired by gift,
will, etc., under section 49(1) and the
previous owner had purchased these
assets: Cost of acquisition to the
previous owner
b) If the owner has purchased these
assets: Actual cost of acquisition
c) If these assets are self-generated:
Nil
17 Right shares Amount actually paid by assessee
18 Right to subscribe to shares (i.e., right
entitlement)
Nil
19 Bonus shares a) If allotted to the assessee before
April 1, 1981: Fair market value on
that date
b) In any other case: Nil
20 Allotment of equity shares and right to trade in
stock exchange, allotted to members of stock
exchange under a scheme of demutualization or
corporatization of stock exchanges as approved
by SEBI
a) Cost of acquisition of shares: Cost
of acquisition of original membership
of the stock exchange
b) Cost of acquisition of trading or
clearing rights of the stock exchange:
Nil
21 Capital asset, being a unit of business trust,
acquired in consideration of transfer as referred to
in section 47(xvii)
Cost of acquisition of shares as
referred to in section 47(xvii)
[applicable from AY 2015-16]
22 Units allotted to an assessee pursuant to Cost of acquisition of such units shall
30. 30
consolidation of two or more scheme of a mutual
fund as referred to in Section 47(xviii)
be the cost of acquisition of units in
the consolidating scheme of the
mutual fund
23 Shares in a company acquired by the non-resident
assessee on redemption of Global Depository
Receipts referred to in Section 115AC(1)(b)
Cost of acquisition of such shares shall
be calculated on the basis of the price
prevailing on any recognized stock
exchange on the date on which a
request for such redemption was made.
24 Any other capital asset a) If it became property of taxpayer
before April 1, 1981 by gift, will, etc.,
in modes specified in section 49(1):
Cost of acquisition to the previous
owner or FMV as on April 1,1981,
whichever is higher
b) If it became property of taxpayer
before April 1, 1981: Cost of
acquisition or FMV as on April 1,
1981, whichever is more
c) If it became property of taxpayer
after April 1, 1981 by gift, will, etc., in
modes specified in section 49(1): Cost
of acquisition to the previous owner
d) If it became property of taxpayer
after April 1, 1981: Actual cost of
acquisition
* Terminal Depreciation/Balancing Charge:
a) Balancing Charge = Sales Consideration – WDV of the depreciable asset
b) Terminal Depreciation = WDV – Sales Consideration
When a depreciable asset (which was subject to depreciation on straight line basis) of a power
generating units is sold, discarded, demolished or destroyed then terminal depreciation shall be
31. 31
deductible from sale consideration while computing capital gains, or balancing charge is taxable
in the relevant year, as the case may be.
Cost to the Previous Owner [sec. 49(1)]
Cost to the previous owner shall be deemed to be the cost of acquisition in the hands of the
taxpayer in cases where a capital asset becomes the property of the assessee under any of the
modes given below:
a) On any distribution of assets on the total or partial partition of a HUF
b) Under a Gift or Will;
c) By Succession, Inheritance or Devolution;
d) On any distribution of assets on dissolution of a firm, BOI or AOP (where such dissolution
had taken place at any time before the 01-04-1987);
e) On any distribution of assets on liquidation of a company;
f) Under a transfer to a revocable or an irrevocable trust;
g) On any transfer by a holding company to its wholly owned Indian subsidiary company;
h) On any transfer by a wholly owned subsidiary company to its Indian holding company;
i) On any transfer by the amalgamating company to the Indian amalgamated company;
j) In a scheme of amalgamation, any transfer of shares held in a Indian company by a
amalgamating foreign company to the amalgamated Foreign company;
k) Consequent to transfer of share(in a scheme of amalgamation as referred to in Section
47(viab) of a foreign company which derives, directly or indirectly, its value substantially from
the share or shares of an Indian company held by amalgamating foreign company to the
amalgamated foreign company.
32. 32
l) Consequent to transfer of capital asset by the demerged company to the resulting Indian
company. (in case of demerger)
m) Consequent to transfer of share (in case of demerger as referred to in Section 47(vic) of a
foreign company which derives, directly or indirectly, its value substantially from the share or
shares of an Indian company held by a demerged foreign company to resulting foreign company.
n) Any transfer, in a scheme of amalgamation of a banking company with a banking institution;
o) On any transfer in a scheme of business reorganization of a cooperative bank;
p) On any transfer in a scheme of conversion of private company or unlisted company into LLP;
q) On any transfer in case of conversion of Firm or Sole proprietary concern into Company;
r) By HUF where one of its members has converted his self-acquired property into joint family
property.
Note:
Where previous owner has also acquired the property in the aforesaid manner the ‘previous
owner’ of the property shall be construed as the last previous owner who acquired the property
by means other than those stated above.
33. 33
Cost of Improvement [Sec. 55(1)(b)]
Cost of improvement, in relation to the capital assets shall include all capital expenditure
incurred in making addition or alteration to the capital assets by the assessee or the previous
owner. However, cost of improvement does not include any expenditure incurred prior to 01-04-
1981.
Cost of improvement shall be computed in the following manner:
S.
No
Particular Cost of Improvement
1 In relation to goodwill of a business, right to
manufacture, produce any article or thing or right to
carry on business or profession
NIL
2 In relation to capital asset which becomes property of the
assessee or previous owner before 01-04-1981
Any expenditure of capital
nature incurred on or after 01-
04-1981
3 In relation to capital asset which becomes property of the
assessee or previous owner before 01.04.1981 by way of
any mode specified under Section 49(1)
Any expenditure of capital
nature incurred on or after 01-
04-1981 by the assessee or the
previous owner
4 In relation to capital asset which becomes property of the
assessee or previous owner on or after 01.04.1981
Any expenditure of capital
nature incurred by the assessee
or the previous owner
5 In relation to capital asset which becomes property of the
assessee or previous owner on or after 01-04-1981 by
way of any mode specified under Section 49(1)
Any expenditure of capital
nature incurred by the assessee
or the previous owner
34. 34
RATES OF TAXON CAPITAL GAINS:
1. Short Term Capital Gains
a) Short-term capital gains shall be included in the gross total income of the taxpayer and will be
taxed at the normal rates;
b) Short-term capital gains arising from transfer of Equity Shares, Units of an Equity Oriented
Funds or a unit of a business trust which is chargeable to securities transaction tax shall be taxed
at 15% under Section 111A;
Note:-
Now benefit of reduced rate of tax (i.e., 15%) shall be available w.e.f. 1-4-2016 even in respect
of income arising from transfer of units of a business trust which were acquired by assessee in
lieu of shares of special purpose vehicle as referred to in section 47(xvii).
2. Long Term Capital Gains
a) Long-term capital gains are subject to tax at 20%;
b) Long-term capital gains arising from transfer of listed securities, units or a zero coupon bonds
shall be taxable at lower of following:
i.20% after taking benefit of indexation; or
ii.10% without taking benefit of indexation.
c) Long-term capital gains arising to a non-residents or foreign company from transfer of
unlisted securities shall be taxed at without giving benefit for indexation;
d) Long-term capital gains arising from transfer of listed securities, units of equity oriented or a
unit of business trust which is chargeable to STT shall be exempt from tax under Section 10(38).
Note:
1. Now exemption from capital gains under Section 10(38) shall be available w.e.f. 1-4-2016
even in respect of long-term capital gains arising from transfer of units of a business trust which
were acquired in lieu of shares of special purpose vehicle as referred to in section 47(xvii) and on
which securities transaction tax has been paid.
2. Now exemption from long term capital gains under section 10(38) shall be available w.e.f
April 1, 2017 even where STT is not paid, provided that –
– transaction is undertaken on a recognised stock exchange located in any International
Financial Service Centre, and
– consideration is paid or payable in foreign currency
35. 35
Illustration (Short term capital gains)
Mr. Punit purchased a residential flat on 02-05-2014 for Rs. 1000000. He paid on the same day
the stamp duty and registration charges of Rs. 48750 on purchase of flat. He sold the said flat on
17-03-2016 for Rs. 1200000. The cost inflation index for F.Y. 2013-14 is 939 and for F.Y. 2015-
16 is 1081. Compute his capital gain chargeable to tax for assessment year 2016-17.
Solution:
NAME OF ASSESSEE: MR. PUNIT STATUS: INDIVIDUAL
PREVIOUS YEAR: 2015-16 ASSESSMENT YEAR: 2016-17
RESIDENTIAL STATUS: R& OR
Particulars Rs. Rs.
INCOME FROM CAPITAL GAINS
Full value of flat sold 1200000
Less: purchase price of flat 1000000
Stamp duty & registration 48750 1048750
SHORT TERM CAPITAL GAINS 151250
NOTE:
Since the capital asset is held for less than 36 months, it is short term capital asset hence cost
inflation index is not applicable.
36. 36
Illustration (long term capital gains)
Krishna purchased a vacant site for Rs. 300000 in April 1990. He constructed a residential
building during the year 2004-05 in the said site for Rs. 1500000. He carried out some further
extension of a construction in the year 2007-08 for Rs. 500000. Krishna sold the residential
building for Rs. 6500000 in January 2016. Compute his long term capital gain, for the
assessment year 2016-17 based on the above information. The cost inflation index are as follows:
Financial Year Cost Inflation Index
1990-91 182
2002-03 447
2004-05 480
2007-08 551
2015-16 1081
Solution:
NAME: KRISHNA STATUS: INDIVIDUAL- R & OR
PREVIOUS YEAR: 2015-16 ASSESSMENT YEAR: 2016-17
Particulars Rs. Rs.
Full value of consideration 6500000
Less: indexed cost of acquisition
(300000/index of 90-91*index of 15-16)
(300000/182*1081)
1781868
Less: indexed cost of improvement
(1500000/index of 04-05*index of 15-16)
(1500000/480*1081)
3378125
Less: indexed cost of improvement
(500000/index of 07-08*index of 15-16)
(500000/551*1081)
980944 6140937
Long term capital gain 359063
37. 37
CONCLUSION:
The general misconception is that there is no advantage in earning short-term gain, since it
is taxed at the normal rates. However, what may be lost sight of is that the advantage flows from
the fact that a large portion of withdrawals is capital and, simultaneously, an equal amount from
the income gets converted into capital. In other words, you are consuming capital and investing
income.
Obviously, this principle would work only for the long-term investor. If you have a short-
term view and were to sell your entire holdings at one go, this investing strategy will not work.
Look at it any which way, the only way to make the dividend truly tax-free is to avoid it
altogether. The rule is simple - no dividend, no tax.
A capital gain is the difference between what an individual purchases an item for and
what they sell the item for. For instance, if you buy a stock for 45 dollars a share, but sell that
same stock a few years later for 60 dollars a share, then your capital gain on that stock is 15
dollars.
Capital gains do not apply to all items that an individual purchases. For instance,
disposable goods or food do not accumulate capital gains, even if you are able to sell them for
more than you originally paid for them. Rather, capital gains are limited to capital assets, which
are items that an individual buys for personal or investment purposes. Although stocks are the
most common example, this can also include real estate, jewelry, art, or fine goods.
When an individual inherits a capital asset, or is given a capital asset as a gift, this is also
subject to capital gains, even though the transaction is not precisely one of buyer-seller. In such
instances, the capital gain is the difference between the values of the item when purchased by the
gift-giver and when received by the gift-receiver.
