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General Questions on Capital Gain
 
What is meant by Capital Gains?
Any profits or gains arising from a transfer of a capital asset effected in the previous year, subject to certain exceptions, are chargeable to income tax under the head `Capital Gains'. Such profits or gains are deemed to be the income of the previous year in which the transfer takes place.
What assets are excluded from the definition of capital assets?

The following assets are excluded from the definition of capital assets:

  1. Any stock in trade, consumable stores, or raw material held for the purpose of business or profession
  2. Personal effects of the assessee, i.e., movable property excluding wearing apparel and furniture held for personal use or for use of any other member of the family dependent upon him
  3. Agricultural land in India, provided it is not situated in
    any area within the jurisdiction of a municipality or a cantonment boardhaving a population of 10000 or more
    o any notified area
  4. 6½ -percent Gold Bonds, 1977 or 7-percent Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government; and
  5. Special Bearer Bonds, 1991
What is a 'transfer' for the purposes of capital gains?
Section 2(47) of the Income Tax Act defines transfer in relation to a capital asset as including the sale, exchange or relinquishment of the asset; or the extinguishment of any rights therein; or in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment; 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(4 of 1882) ; or any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative 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.
Which transactions are not deemed to be transfers for the purposes of capital gains [section 47]?
The following transactions shall not be deemed as transfers:-

(1) any distribution of capital assets on the total or partial partition of a Hindu undivided family

(2) any transfer of a capital asset under a gift or will or an irrevocable trust

(3) any transfer of a capital asset by a company to its subsidiary company, if:

(a) the parent company or its nominees hold the whole of the share capital of the subsidiary company, and
(b) the subsidiary company is an Indian company

(4) any transfer of a capital asset by a subsidiary company to the holding company, if-

(a) the whole of the share capital of the subsidiary company is held by the holding company, and
(b) the holding company is an Indian company: Provided that nothing contained in clause (iv) or clause (v) shall apply to the transfer of a capital asset made after the 29th day of February, 1988, as stock-in-trade;

(5) 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;

(6) any transfer, in a scheme of amalgamation, of a capital asset being a share or shares held in an Indian company, by the amalgamating foreign company to the amalgamated foreign company, if-

(a) at least twenty-five per cent of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company, and
(b) such transfer does not attract tax on capital gains in the country, in which the amalgamating company is incorporated

(7) any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares held by him in the amalgamating company, if

(a) the transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company, and
(b) the amalgamated company is an Indian company:

(7a) any transfer of a capital asset being bonds or shares referred to in sub-section (1) of section 115AC, made outside India by a non-resident to another non-resident

(8) any transfer of agricultural land in India effected before the 1st day of March, 1970

(9) 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 reknown throughout any State or States.

Explanation:- For the purposes of this clause, "University" means a University established or incorporated by or under a Central, State or Provincial Act and includes an institution declared under section 3 of the University Grants Commission Act, 1956 (3 of 1956), to be a University for the purposes of that Act;

(10) 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.

(11) any transfer made on or before the 31st day of December, 1998 by a person (not being a company) of a capital asset being membership of a recognised stock exchange to a company in exchange of shares allotted by that company to the transferor.

Explanation: - For the purposes of this clause, the expression "membership of a recognised stock exchange" means the membership of a stock exchange in India which is recognised under the provisions of the Securities Contract (Regulation) Act, 1956( 42 of 1956);

(12) any transfer of a capital asset, being land of a sick industrial company, made under a scheme prepared and sanctioned under section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985( 1 of 1986) where such sick industrial company is being managed by its workers' co-operative :

Provided that such transfer is made during the period commencing from the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of that Act and ending with the previous year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses.

Explanation:- For the purposes of this clause, "net worth" shall have the meaning assigned to it in clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985( 1 of 1986).
What is the basis of classifying a capital asset as a short-term and long-term asset?
A short-term capital asset is that which is held by an assessee for not more than 36 months immediately preceding the date of its transfer. However, equity/preference shares of a company or units of UTI, debentures, etc. held for not more than 12 months are treated as short-term capital assets. A capital asset which is held by an assessee for more than 36 months (12 months in case of equity / preference shares of a company, units of UTI, debentures, etc) is a long-term capital asset.
Can the expenditure incurred on transfers be claimed as a deduction?
Expenditures incurred wholly and exclusively in connection with the transfer of a capital asset are deductible from full value of consideration. The expenditure should be incurred to effect the transfer.
What is the procedure to calculate short-term capital gains?
The computation of capital gains depends upon the nature of capital asset transferred, i.e., short-term or long-term capital asset. Tax incidence is higher in case of short-term capital gains as compared to long-term capital gains. The procedure for computation of short-term capital gains from the assessment year 1993-94 is as follows:

Step 1: Find out the full value of consideration. The expression full value means the whole price without any deduction whatsoever and it cannot refer to the adequacy or inadequacy of the price bargained for, nor has it any reference to the market value of the capital asset, which is subject matter of the transfer. The consideration for the transfer of the capital asset is what the transferor receives in lieu of the asset he parts with, namely money or money's worth.

Step 2: Deduct the following:

a. expenditure incurred wholly and exclusively in connection with such a transfer
b. cost of acquisition
c. cost of improvement

Step 3: From the resulting sum deduct the exemption provided by sections 54B, 54D and 54G

Step 4: The balance amount is the short-term capital gain
What options does an assessee have in calculating the cost of acquisition of a capital asset?
The assessee may, at his option, take either the actual cost or the market value of the capital asset (other than a depreciable asset), as on April 1, 1981 as cost of acquisition provided:

a. where the capital asset became property of the assessee before April 1, 1981; or
b. where the capital asset became the property of the assessee by mode referred to in section 49(1) of the Act and the capital asset became the property of the previous owner before April 1, 1981.
What will the cost of improvement be, in case an assessee opts for the market value of the asset as on April 1, 1981?
Where the capital asset becomes the property of the assessee (or the previous owner) before April 1, 1981, all expenditure of capital nature incurred in making any alterations or additions to the capital asset on or after April 1, 1981. All capital expenditure incurred prior to April 1, 1981 shall be ignored in calculating the total cost of capital asset.
What is indexed cost of acquistion?
Explanation (iii) to section 48 defines the term "indexed cost of acquisition" as the amount which bears to the cost of acquisition, the same proportion as the cost of inflation index for the year in which the asset is transferred bears to the cost inflation index for the first year in which the asset was held by the assessee or for the year beginning on April 1, 1981, whichever is later.

Financial Year Cost inflation index
1981-82 100
1982-83 109
1983-84 116
1984-85 125
1985-86 133
1986-87 140
1987-88 150
1988-89 161
1989-90 172
1990-91 182
1991-92 199
1992-93 223
1993-94 244
1994-95 259
1995-96 281
1996-97 305
1997-98 331
1998-99 351
1999-00 389
2000-01 406
How can I use the cost inflation index?
a) Indexed cost of acquisition is determined as under:
Cost of Acquisition (as explained previously)
Cost inflation index for the first year in which the asset is acquired or for 1981-82 whichever is later 		X Cost inflation index for the year in which the asset is transferred
 
b) Indexed cost of improvement is determined as under
Cost of improvement
Cost inflation index for the first year in which improvement took place		 X Cost inflation index for the year in which the asset is transferred
What is the cost of acquisition of bonus shares?
Section 55 of the Income Tax Act has been amended w.e.f. A.Y. 96-97 so that the cost of acquisition of bonus shares or security which is received without payment by the assessee on the basis of its holding any financial asset is taken to be nil.
What are the provisions of section 54 relating to an assessee buying or constructing a residential house property?
An individual or a Hindu undivided family can claim a deduction under this section in case a residential property is transferred by them after a period of 36 months from first acquiring it, and the sale proceeds are invested in purchasing a house within a period of one year prior to the transfer (or within 2 years from the date of transfer), or has constructed a residential property within a period of three years after the date of transfer.

The amount of exemption is restricted to the cost of the new house property. In case the amount of capital gain is less than the cost of the new house property, the entire amount of capital gain is exempt from tax. On the other hand, if the amount of capital gain is more than the cost of the new house property, the difference between the amount of capital gain and the cost of the new house property is chargeable to tax as long-term capital gains.
What are the provisions of section 54B relating to an assessee for capital gains arising from sale of land used for agricultural purposes?
If an assessee purchases a plot of land for agricultural purposes within 2 years from the date of transfer of land being used by the assessee or his parents for agricultural purposes, the assessee can claim a deduction under this section.

The amount of exemption is restricted to the cost of the land purchased for agricultural purposes. In case the amount of capital gain is less than the cost of new agricultural land, the entire amount of capital gain is exempt from tax. On the other hand, if the amount of capital gain is more than the cost of new agricultural land, the difference between the amount of capital gain and the cost of new agricultural land is chargeable to tax as long-term capital gains.
What are the provisions of Section 54EA relating to investment in specified assets?
A long-term asset when transferred by an assessee during the previous year results into receipt of consideration. Within six months from the date of transfer, the assessee should invest the whole or any part of the net consideration (full value of the consideration minus expenses on transfer) in specified bonds, debentures, and shares of a public company or unit of mutual fund to be notified by the Board. Upon investment in such specified assets, of the entire sale proceeds, the whole of capital gains shall be exempt from tax. These investments are to be locked in for a period of 3 years.
What are the provisions of Section 54EB relating to investment in specified assets?
A long-term asset when transferred by an assessee during the previous year results into receipt of consideration. Within six months from the date of transfer, the assessee should invest the whole or any part of the capital gains in specified bonds, debentures, share of a public company or unit of mutual fund to be notified by the Board. Upon investment in such specified assets, of the entire capital gain, the whole of capital gains shall be exempt from tax. These investments are to be locked in for a period of 7 years.
What are the provisions of Section 54F relating to transfer of a long-term capital asset other than house property?
An assessee or a Hindu undivided family can claim deduction under section 54F if a long-term capital asset, other than a house property, is transferred and the assessee purchases, within one year before the date of transfer or 2 years after the date of transfer or constructed within 3 years after the date of transfer, a residential house. If the cost of new house property is not less than the net consideration in respect of the capital asset transferred, the entire capital gain arising from the transfer will be exempt from tax. If the cost of the new house property is less than the net consideration in respect of the asset transferred, the exemption from long-term capital gain will be proportionate to the investment and the net consideration received, i.e.,

Cost of new house property
Net consideration received on transfer of long-term asset other than house property		 X Capital gain
Does an assessee have a choice in the calculation of tax liability for long-term capital gains under section 112?
The assessee will have an option from the assessment year 2000-01 to pay tax under any of the two options, as detailed below, whichever is lower. The assessee has this option only if the asset transferred is a long-term capital asset being a security listed in a recognised stock exchange in India, or a unit of UTI / Mutual Fund ( whether listed in a recognised stock exchange or not ).
Option 1 Option 2
Find out the sale consideration Find out the sale consideration
Deduct: Indexed cost of acquisition/improvement and expenses on transfer Deduct: Cost of acquisition/improvement and expenses on transfer
The balance amount [1-2] is long-term capital gain The balance amount [1-2] is long-term capital gain
20% of [3] is the amount of tax liability 10 % of [3] is the amount of tax liability
In what circumstances will the cost of the previous owner be taken as the cost of acquisition to the assessee?
Cost to the previous owner is deemed to be the cost of acquisition to the assessee in cases where a capital asset became the property of the assessee under any of the modes of transfer described below -

(a) Property acquired upon distribution of assets on the total or partial partition of Hindu Univided Family;
(b) Property acquired under a gift or will;
(c) acquisition of property-

i. by succession, inheritance or devolution, or
ii. on any distribution of assets on the dissolution of a firm, body of individuals or other association of persons,where such dissolution had taken place at any time before the 1st day of April, 1987, or
iii. on any distribution of assets on the liquidation of a company, or
iv. under a transfer to a revocable or irrevocable trust, or
v. on any transfer, by a wholly-owned Indian subsidiary company from its holding company, or
vi. on any transfer, by an Indian holding company from its wholly-owned subsidiary company, or
vii. on any transfer, in a scheme of amalgamation, by the amalgamated company from the amalgamating company satisfying conditions of section 47(vi)/(via), or
(d) acquisition of property, by Hindu Undivided Family where one of its members has converted his self-acquired property into joint family property after Dec 31, 1969.

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