Capital gain are the profits or gains arising from the sale of any ‘capital asset’ or any profits or gains arising from receipt of the insurance money from the insurer on account of flood, earthquake, riot, accidental fire, explosion etc. The gain arising shall be taxed under the head ‘Income from Capital Gains’ in the year capital asset is transferred. Some transfers are exempted from the computation of capital gain like property inherited from a will, property transferred as gift, transfer from holding company to subsidiary company, any transfer in scheme of amalgamation and transfer by way of conversion of bonds or debentures.
Capital Asset is an asset that has a longer life than a year and is not meant to be sold in the usual course of business. As per Section 2(14) of the Income Tax Act, 1961, property of any kind held by an assessee, irrespective of whether it is connected with his business or profession and any securities held by a Foreign Institutional Investor in accordance with the Securities and Exchange Board of India Act, 1992 are the capital assets. It does not include any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession. For example: A ‘a property dealer’ bought a land for the resale purpose. Hence, the land is a stock-in-trade of A and not a capital asset. The income from the sale of the land will be taxed under the head ‘Profits and Gains of Business and Profession’. Capital Asset does not include property of personal effects which is movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, but exclude jewellery; archaeological collections; drawings; paintings; sculptures; or any work of art. The high values of these items compel them to be included in capital asset. It also does not include agricultural land in India, 6½ % Gold Bonds, 1977, or 7% Gold Bonds, 1980, or National Defence Gold Bonds, 1980, issued by the Central Government; Special Bearer Bonds, 1991, issued by the Central Government; Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under the Gold Monetisation Scheme, 2015 notified by the Central Government.
Types of Capital Assets
The types of capital assets depend on the holding period. Taxpayers must identify the sort of asset they own and how they will be taxed based on the length of time they have owned it.
There are two types of capital assets:
1. Short Term Capital Asset
A short-term capital asset is one that has been held for less than 36 months. From FY 2017-18, the 36-month requirement for Unlisted Shares, immovable property (land, building, and home property), has been lowered to 24 months.
A few assets are classified as short-term capital assets if they are held for less than a year. The following is a list of assets that fall under the above-mentioned rule:
• Equity shares of any organization listed on a recognized Indian stock exchange.
• Securities like bonds, debentures, etc. that are listed on any Indian stock exchange.
• UTI units, regardless of being quoted or unquoted.
• Capital gain on Mutual Funds that are equity-oriented, whether they are quoted or not.
• Zero-coupon bonds The capital assets mentioned above will be considered as long-term capital assets if they are being held for more than 12 months.
2. Long Term Capital Asset
Long-term capital assets are those that have been held for longer than 36 months, 24 months, or 12 months, as the case may be, immediately before the date of transfer.
Computation of Capital Gains
Section 48 of Income Tax Act states that the income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely:
(i) expenditure incurred wholly and exclusively in connection with such transfer.
(ii) the cost of acquisition of the asset and the cost of any improvement thereto.
Computation of Short-Term Capital Gains on Sale of Property
Gains arising at the time of sale of Short-Term Capital Asset shall be computed in the following manner: -
Full Value of Consideration xxx
(Less) Expenditure incurred wholly and exclusively xxx
in connection with transfer of capital asset
(Less) Cost of Acquisition xxx
(Less) Cost of Improvement xxx
Gross Short Term Capital Gain xxx
(Less) Exemption (if any) available u/s 54B/54D/54G/54GA
Net Short Term Capital Gain on Sale of Property xxx
A is a salaried employee. He purchased land in April 2018 for ?10,00,000, spent additional of ?1,50,000 for the boundary wall. He sold the land for ?15,00,000 and paid brokerage of ?2,00,000 on December 2020. The capital asset was with him for less than 36 months. Hence, it is a short-term capital asset.
Full Value of Consideration 15,00,000
(Less) Expenses incurred wholly and exclusively 2,00,000
in connection with such transfer and sale
(Less) Cost of Acquisition 10,00,000
(Less) Cost of Improvement 1,50,000
Net Taxable Amount 1,50,000
Computation of Long-Term Capital Gains on Sale of Property
Gains arising at the time of sale of Long-Term Capital Asset shall be computed in the following manner:
Full Value of Consideration xxx
(Less) Expenditure incurred wholly and exclusively in connection with xxx
(Less) Indexed Cost of Acquisitionxxx
(Less) Indexed Cost of Improvementxxx
Gross Long Term Capital Gain xxx
(Less) Exemption available u/s 54/54B/54D/54EC/54ED/54F/54G xxx
Net Long Term Capital Gain on Sale of Property xxx
A bought a land of ?20,00,000 in January 2015. He spent ?5,00,000 on plant and machinery. In December 2020, he sold the land for ?35,00,000 and paid commission of ?2,00,000. The capital asset was with him for more than 36 months. Hence, it is a longterm asset.
Full Value of Consideration 35,00,000
(Less) Expenditure incurred wholly and exclusively in connection 2,00,000
with such Transfer/Sale
(Less) Indexed Cost of Acquisition* 23,70,079
(Less) Indexed Cost of Improvement* 5,92,520
Net Taxable Amount 3,37,401
*Indexed Cost of Acquisition-
(Cost Inflation Index for the year 2020-2021/ Index for the year 2015-2016) x Cost of Acquisition.
301/254 x 2000000 = 23,70,079
*Indexed Cost of Improvement
(Cost inflation index of the year of 2020-2021/ Index of the year of 2015-2016) x Cost of Improvement
301/254 x 500000 =5,92,520
The computation of capital gain can be understood by explaining the following terms.
• Full Value Consideration-
The full value of consideration is the amount of money received or payable by the transferor in exchange for the assets he has transferred. This sort of payment might be made in cash or in kind. If it is given in kind, the entire amount of the consideration is determined by the fair market value (‘FMV') of the assets.
• Cost of Acquisition-
The term "cost of acquisition" refers to any capital expense incurred at the time of acquiring the capital asset under transfer, including the purchase price, expenses incurred prior to the acquisition date in the form of registration, storage, and other expenses, as well as expenses incurred after the transfer is completed.
• Cost of Improvement-
The capital expenditure incurred by an assessee for any addition or upgrade to a capital asset is known as the cost of improvement. It also covers any costs associated with safeguarding or curing the title.
• Indexed Cost of Acquisition-
Indexation is the process of adjusting the cost of acquisition to account for inflationary increases in the asset's value. The Central Government has issued a cost inflation index for this purpose. (Refer https://www.incometaxindia.gov.in/Pages/utilities/cost-Inflation-Index.aspx ) Long-term capital assets are the only assets that benefit from indexation. Formula for Computation- (Cost inflation index of the year of transfer/ Index in the year of acquisition) x Cost of Acquisition.
• Indexed Cost of Improvement-
Formula for Computation- (Cost inflation index of the year of transfer/cost inflation index of the year of improvement) x Cost of Improvement
Tax on Capital Gains
The Short-Term Capital Gain estimated above will be subject to tax at the Income Tax Slab Rates. (Refer https://www.incometaxindia.gov.in/Pages/utilities/cost-Inflation-Index.aspx ) The Long-Term Capital Gain estimated above will be subject to tax at a rate of 20%, as well as Advance Tax. If a capital loss occurs on the sale of a property, the loss can be setoff against other capital gains in the same year. If the loss cannot be set-off against capital gain in the current year, it can be carried forward for the next eight years and set-off in subsequent years. Losses, on the other hand, can only be carried forward if the return was submitted before the deadline.