CAPITAL GAINS
Applicable for A.Y.2014-2015
Today very
few people might have not known the word Capital Gains Tax. Section 45 of the
Income Tax Act, 1961 deals with taxability of capital gains. Section 45 says
that any profits & gains arising from the transfer of capital asset
effected in the previous year is taxable as capital gain. In this topic, two
terms are important, one is capital gain and other is transfer. This capital
gain is nothing but the income of person who transfers his asset in any previous
year.
Definition
–Capital Asset :-
A capital
asset means property of any type which is held by assessee whether or not
connected with his business or profession, but does not include-
a)
Any
stock-in-trade, consumable stores or raw materials held for the purpose of the
business or profession of the assessee,
b)
Personal
effects, i.e.movable property (including wearing apparel and furniture ) held
for personal use by the assessee or any member of his family dependent on him,
but excluding-jewellery, archaeological collections, drawings, paintings,
sculptures or any work of art.
c)
Rural
agricultural land in India
d)
6
½% Gold Bonds, 1977, or 7% Gold Bonds 1980, or National Defence Gold Bonds,1980
issued by the Centra Government.
e)
Special
Bearer Bonds 1991 issued by the Central Government.
f)
Gold
Deposit Bonds issued under the Gold Deposit Scheme,1999 notified by CG.
Rural Agricultural Land In India-
Only rural agricultural land in India are excluded from taxability. It
means land which is in urban area is taxable on transfer. So any land situated
within the limits of any municipality or cantonment board having a population
of 10,000 or more as per latest census will be held as urban land and hence
capital assets. Further agri land situated in areas within a distance of 8 kms
from the local limits of such municipality or cantonment board will also be
capital asset. Such areas shall be notified by the CG.
Jewellery- 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
stones and whether or not worked or sewn into any wearing apparel. This is a
capital asset and profit on sale of jewellery is charged to tax.
Zero Coupon Bond-
Zero Coupon Bond means a bond issued by any infrastructure capital
company or infrastructure capital fund or a public sector company or a
scheduled bank on or after 1st june 2005, in respect of which no
payment and benefit is received or receivable before maturity or redemption
from such issuing entity and which the CG may notify in this behalf. CG has
specified some bonds issued on or before 31.3.2009 as ZCB- like 10 year ZCB of
HUDCO,SIDBI,NABARD, IDFC,National Housing bank, 15 year ZCB of HUDCO, Power
Finance Corporation. New bonds issued by CG are (issued on or before 31.3.2011)
10 years Bhavishya Nirman Bond of NABARD and 10 years Deep Discout Bond of
Rural Electrification Corporation Ltd.
The income on transfer of ZCB(not held as stock in trade) is treated as
capital gains. For this purpose maturity or redemption of ZCB is treated as
transfer. ZCBs held for more than
12 months are treated as long term capital gains. Where tax payable in respect
of any income arising from transfer of ZCBs exceeds 10% of the amount of
capital gains before giving effect to indexation,then such excess shall be
ignored for the purpose of computing tax payable.
Short term capital asset-It is a capital asset held by the assessee for
not more than 36 months immediately preceding the date of transfer.
Long term capital asset-It is a capital asset held by the assessee for
more than 36 months immediately preceding the date of transfer.
But in case of company shares, securities, units of Unit Trust of India
and of Mutual Fund, ZCBs if these are held for more than 12 months, these will
be treated as long term capital asset.
Transfer [Section 2(47)] :-
The act contains an inclusive definition of the term Transfer. It
includes-
1.
The
sale, exchange or relinquishment of the asset; or
2.
The
extinguishment of any rights therein; or
3.
The
compulsory acquisition under any law;
4.
Conversion
thereof into stock-in-trade of a business;
5.
The
maturity or redemption of zero coupon bonds;
6.
Part
performance of the contract; i.e. handing over of possession of immovable property
on receipt of consideration. Even if conveyance/deed is not registered.
Receipts from Insurance parties [sec
45(1A)]
When any
person receives any money or other assets under insurance from insurance
company for damage to or destruction of any capital asset, as a result of
flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature,
riot or civil disturbance, accidental fire or because of action of enemy or
action taken in combating an enemy, then any profits or gains arising from
receipt of such money shall be taxable as capital gains.
Conversion or treatment of a capital
asset into stock-in-trade [sec.45(2)]
A owner of a
capital asset may convert that asset into stock-in-trade of his business
carried on by him. Then profits and gains arising on conversion of such asset
will be charged to tax as capital gains. The profit will be considered his
income in the PY in which such stock is sold out by him. Fair market value on
the date of conversion will be treated full value of consideration. Any
conversion done of capital asset into stock in trade before 1.04.1985 will not
attract tax on capital gains in the hands of assessee.
Transfer of beneficial interest in
securities [sec.45(2A)]
Where any
person has at any time during the PY any beneficial interest in any securities,
then any profits/gains arising from the transfer made by Depository or participant of such beneficial
interest in respect of securities shall be charged to tax as capital gains in
the hands of beneficial owner in the year of transfer. It shall not be regarded
as income of the Depository who is deemed to be the registered owner of the
securities. For this purpose, cost of acquisition and period of holding of
securities shall be determined on FIFO basis.
Further, the
date of brokers note shall be treated as the date of transfer when securities
are traded through stock exchanges. And holding period shall be reckoned to
take place directly between the parties and not through stock exchanges.
Where
securities are acquired in several lots at different points of time, FIFO
method shall be used to reckon the period of the holding of securities. Indexation,
wherever applicable for long term assets shall be applied.
Here,
beneficial Owner means a person whose name is recorded as such with a
depository.
Depository
means a company formed & registered under the Companies Act, 1956 and which
has been granted a certificate of registration under SEBI Act, 1992.
Introduction of Capital asset as
Capital contribution [sec.45(3)]
When any
person transfers a capital asset to a firm, AOP or BOI in which he is
partner/member or a newly coming
partner/member, by way of capital contribution or otherwise, then the amount
recorded in the books of the firm, AOP,BOI will be chargeable to tax as capital
gains in the year of transfer.
Distribution of Capital Assets on a
firm’s dissolution [sec.45(4)]
On the
dissolution of firm, AOP,BOI, or Otherwise, profits or gains arising from
transfer of capital asset by way of distribution to members/partners, will be
taxable as capital gains. The fair market value of such assets on the date of
transfer shall be full value of consideration.
Compensation on compulsory
acquisition [sec.45(5)]
On taking
over of land & building and other capital assets by CG, by way of
compulsory acquisition, the profits/gains arises. The compensation which are
determined and paid by CG are treated as capital gains and charged to tax in
the year of Receipt after deducting cost of acquisition. The Govt. may enhance
as well as reduce the compensation previously enhanced on appeal of the
assessee or for some other reason. In this case cost of improvement and
expenditure on transfer are taken as NIL.
Repurchase of Mutual Fund units
referred to sec.80 CCB [sec.45(6)]
The
difference between repurchase price and the amount invested will be chargeable
to tax in PY in which such repurchase takes place or plan referred to sec.
80CCB is terminated.
Capital gains on distribution of
assets by Companies in liquidation [sec.46]
Where the
assets of a company are distributed to its shareholders on its liquidation, such
distribution shall not be deemed as transfer. But for this exemption, the
assets of the company must be distributed in specie to shareholders on
liquidation. If liquidator sells assets of company resulting in capital gains,
and distributes the funds so collected, then company will have to pay tax on
such gains.
When
shareholders receive money or other assets from the company, they will be
charged to tax as capital gains in respect of the market value of the assets
received on the date of liquidation. The portion of the distribution to the extent of accumulated profit is deemed
as dividend income u/s2(22)C. the same will be deducted from the amount
received /fair market value for the purpose of determining consideration for
computing capital gains.
Subsequently,
if shareholder sells such asset received on liquidation, at a price which is in
excess of his cost of acquisition determined as above will be taxable as
capital gain in his hands.
Capital gains on Buyback of shares
[sec.46A]
Any
consideration received by a shareholder or a holder of other specified
securities from any company on purchase of its own shares or securities shall
be chargeable to tax as capital gains on the difference between the
consideration and and the cost of acquisition. Such capital gains shall be
chargeable in the year in which such shares/securities were purchased by the
company.
Transactions not regarded as transfer
[sec.47]
This section
contains various transactions which are not to be regarded as transfer, so
there will be no tax on transfer within the scope of this transactions.
Withdrawl of Exemption [sec.47A]-
Capital
gains arising from the transfer of a capital asset by a company/subsidiary
company to its wholly owned subsidiary company/holding company is exempt from
tax. But if at any time before the expiry of 8 years from the date of transfer
of asset,if such asset is converted by the transferee company into stock in
trade of its business, such exemption will be withdrawn. Also if before expiry
of 8 years, holding company ceases to hold the whole of capital of other
company, such exemption will not be available. So amount exempt earlier will be
deemed as capital gains by virtue of such transfer of capital assets.
Capital Gain formula-
full value
of consideration-expenditure incurred wholly and exclusively in connection with
such transfer-cost/indexed cost of acquisition-cost/indexed cost of
improvement.
Cost of Acquisition-
This is the
Actual price paid for acquiring the capital assets. In case such capital asset
is received by any mode other than purchase,(i.e. by gift, by succession, by
will, on partition of HUF by members, on amalgamation of two companies etc.)
the actual cost will be the cost to the previous owner who had beared such
cost.
Cost of
Acquisition before 1.04.1981-if an assessee or previous owner had purchased any
capital asset before 1.04.1981, then actual cost or fair market value as on
1.04.1981 whichever is more is/can be taken as cost of acquisition at the
option of the assessee.
In case of
right shares, cost of acquisition shall be actual price paid for acquiring such
shares if such right is exercised, and if it is renounced in favour of any
other person, then such cost shall be NIL. If bonus shares are allotted to the
assessee, cost shall be NIL, however, if such bonus shares are received before
1.04.1981, assessee may opt to take fair market value as on 1.04.1981 as cost
of such bonus shares.
Indexation,
wherever necessary can be provided.
Cost of Improvement-
The assessee
can claim deduction in respect of cost incurred on improvements, repairs etc.
any cost of improvement incurred before 1.04.1981 is not to be considered. It
shall be ignored.
Computation of Capital Gains in case
of Depreciable Assets [sec.50]-
Section 50 provides for computation of capital gains in
case of depreciable assets. Where the capital asset is an asset forming part of
a block of assets in respect of which depreciation has been allowed, shall be
computed as follows :
Where the
full value of consideration received/accruing for sell of asset or all assets
within the block during PY exceeds the total of the following-
1.
Expenditure
incurred wholly & exclusively for transfer of assets
2.
WDV
of the block of assets at the beginning of previous year
3.
Actual
cost of any asset within same block purchased in the same year,
Then such
excess shall be deemed short term capital gains (irrespective of the period of
holding of asset-i.e. for more than 36 months,)
Capital Gains in respect of Slump
sales [sec.50B]-
Any profits
or gains arising from the slump sale(one or more undertakings) effected in PY
shall be chargeable to income tax as capital gains (long term or short term as
appropriate).
Net worth of
the undertaking shall be deemed to be cost of acquisition and cost of
improvement for capital gain calculation purpose.
Net worth-
total value of all assets of the undertaking minus value of all liabilities as
appearing in the books of account.
In case of
depreciable assets-WDV of block of assets calculated as per sec. 43(6)(C)i.
In case of
capital assets in respect of which whole expenditure has been allowed-NIL.
For all
other assets-book value.
Every
assessee in case of slump sale shall furnish in the prescribed form along with
the return of income a report of CA indicating computation of net worth of the
undertaking and certifying that the net worth of the undertaking or division
has been correctly arrived at.
Section 50C :-
Where the
consideration received or accruing as a result of transfer of a capital asset,
being land or building or both,is less
than the value adopted or assessed or assessable by any authority of state
government (stamp valuation authority) for the purpose of payment of stamp duty
in respect of such assets such value adopted or assessed or assessable shall be
deemed as full value of consideration.
Where the
assessee claims before AO that value adopted by authority exceeds fair market
value of the property as on the date of transfer,and such value so
adopted/assessed or assessable has not been disputed in any appeal or revision
or court, then AO may refer the valuation of the capital asset to a valuation
officer as defined in sec.2(r) of the Wealth Tax Act,1957.
Where such
value ascertained by such valuation officer exceeds the value adopted or
assessed by the stamp authority,the value adopted or assessed or assessable
shall be taken as the full value of consideration received as a result of the
transfer.
Section 50D (New Section) :-
In a case,
where the consideration received or accruing as a result of the transfer of a
capital asset by an assessee is not ascertainable or cannot be determined, then
for the purpose of computing income, the fair market value of the said asset on
the date of transfer shall be deemed as full value of consideration received or
accruing as a result of the transfer.
Section 51 (Advance money received ):-
When the
assessee receives some advance money or deposit and due to break down of
negotiation the assessee retains such advance money, then while calculating tax
on capital gain, such advance must go to reduce the cost of acquisition. Cost
of acquisition shall be reduced by the amount of advance.
Exemption of Capital Gains :-
|
Section
|
54
|
54B
|
54D
|
54EC
|
54F
|
54G
|
54GA
|
|
Eligible Assessee
|
Individual & HUF
|
Individual & HUF
|
Any Assessee
|
Any Assessee
|
Individual & HUF
|
Any assessee
|
Any assessee
|
|
Long Term/Short Term asset
|
Long term
|
Any
|
Any
|
Long Term
|
Long Term
|
Any
|
Any
|
|
Item to transfer
|
Residential House
|
Urban Agricultural Land
|
Compulsory acquisition of land & building
|
Any capital/ deprecia-ble
asset
|
Any asset not being Residential House
|
Shifting of industrial under-taking from urban area to any other
area.
|
Shifting of industrial under-taking from urban area to any SEZ.
|
|
Condition of Transfer
|
A new Resi House should be purchased within 1 yr before or 2 yrs
after the date of transfer or constructed within 3 yrs
|
Must have been used for Agri. purpose in immediately preceding 2 yrs
by HUF assessee or his parents+ purchase other Agri. land within 2 yrs (urban
or rural ).
|
Land & B. forming part of an industrial undertaking must be used
by assessee for previous 2 years in business of industrial undertaking+
purchase of other L & B or construct
within 3 yrs(for same purpose)
|
Invest in specified bonds of National Highways Authority of India and
Rural Electrifica-tion corp Ltd. redeema-ble after 3 yrs+ not to encash or
trf such bonds
|
Pur Resi house within 1 yr before or 2 yrs or construct within 3 yrs
after the date of trf+ assessee should not own,pur within 1 yr or construct any other Resi house for 3 yrs
frm date of trf
|
Pur new plant & mach, or L & B, within 1 yr before or 3 yrs
after the date of trf, +cap. Gain can be used for expenses on shifting.+ such
other exp. as CG may specify.
|
Pur new plant & mach, or L & B, within 1 yr before or 3 yrs
after the date of trf, +cap. Gain can be used for expenses on shifting.+ such
other exp. as CG may specify.
|
|
How much is Exempt
|
Cost of New Resi House or Capital gain whichever is lower.
|
Cost of New Agri. Land or Capital Gains whichever is lower.
|
Cost of New L & B or Capital Gains whichever is lower.
|
Capital Gains or investment amt whichever is lower
|
LTCG*amt invested in new Resi House/net sale conside-ration
|
Capital gains or cost of new asset+ exp. On shifting whichever is
lower
|
Capital gains or cost of new asset+ exp. On shifting whichever is
lower
|
|
If New Asset is transferred
within 3 years
|
Capital gains exempted earlier will be taxable in the year of sale
|
Capital gains exempted earlier will be taxable in the year of
sale(except rural Agri. land )
|
Capital gains exempted earlier will be taxable in the year of sale.
|
Capital gains exempted earlier will be taxable in the year of
sale.(inclu-ding taking loan on security of bonds ).
|
Capital gains exempted earlier will be taxable in the year of
sale.+short term cap. gain on sale of new house
|
Capital gains exempted earlier will be taxable in the year of sale.
|
Capital gains exempted earlier will be taxable in the year of sale.
|
|
Capital
Gain A/c Scheme
|
Applicable
|
Applicable
|
Applicable
|
Not
Applicable
|
Applicable
|
Applicable
|
Applicable
|
New Exemption Section (54GB)-
Sec 54GB has
been inserted to exempt long term capital gains on sale of a Residential
Property (house or plot of land) owned by an Individual or HUF in case of
re-investment of sale consideration in the equity shares of an eligible company
being a newly incorporated SME company engaged in the manufacturing sector,
which is utilized by the company for the purchase of new plant & machinery.
Eligible
Company- the company should be-
1.
Incorporated
in the FY in which the capital gain arises or in the following year on or
before the due date of filing return of income by the individual or HUF;
2.
Engaged
in the business of manufacture of an article or thing ;
3.
A
company in which the individual/HUF holds more than 50% of the share capital or
50% of the voting rights after the subscription in shares by the
individual/HUf;
4.
A
Company which qualifies to be a SME (small or medium enterprise), under the
Micro, Small and Medium Enterprises Development Act, 2006, i.e.investment in
the equipment is more than Rs.25 lakhs but less than Rs.10 crore.
Conditions
to be satisfied to claim exemption under this new section-
1.
The
amount of net consideration should be
used by the individual or HUF before due date of furnishing return of income,
for subscription in in shares
2.
The
amount of subscription as share capital is to be utilized by the eligible
company for the purchase of new plant & machinery within 1 yr from the date
of subscription in equity shares.
3.
If
the amount of net consideration subscribed as equity shares is not utilized by
the company for purchase of new P&M before the due date of filing the
return by the assessee, then unutilized amount shall be deposited in any a/c
with specified bank or institution before such due date of filing return of
income. The return of income filed by assessee shall be accompanied by such
proof of deposit.
4.
The
said amount is to be utilized in accordance with any scheme notified by CG.
The Plant
and Machinery shall be new in all respects and shall not be pre-utilized by any
other person as well as it shall be for only manufacturing of articles purpose.
How much is exempt-
amount invested in new plant & machinery
LTCG * ------------------------------------------------------------------
Net consideration
The
exemption under this section would not be available for transfer of Residential
Property made after 31.03.2017.
If the
amount deposited by the company in banks etc. is not utilized wholly/partly for
purchase of new P & M, within the period specified, then the capital gains
not charged to tax on a/c of such deposit shall be charged to tax as income of
assessee.
If equity
shares of the company acquired by the individual/HUf or plant and machinery
acquired by the company are sold out within 5 yrs from the date of acquisition,
the amount of capital gains exempted earlier shall be deemed to be income of
the assessee in the year in which such assets are sold.
Capital
Gains Account Scheme-
Capital
gains are exempt to the extent of investment of such gains/considerations in
specified assets within the specified time. If such investment is not made
before the date of filing of return of income, then capital gains shall be
deposited in CGAS. Such deposit should be made before filing return of income
or on or before the due date of filing return of income. Unutilized deposit
amount shall be taxable in the year in which specified period expires.
Section 111A-short term capital gains
in respect of equity shares/units of an equity oriented fund :-
Rate of
tax-15%, subject to conditions-
1.
Such
Transaction shall be entered into on or after 1.10.2004;
2.
It
shall be chargeable to securities transaction tax ;
3.
In
case of resident individuals/HUFs, if the basic exemption limit is not fully
exhausted by any other income ,then STCG will be reduced by the unexhausted
basic exemption limit and only the balance would be taxed @ 15%. (except-non
residents).
Section 112-Tax on long term capital
gains
Rate of tax-20%.
Where the
total income as reduced by long term capital gains is below taxable limit, then
such LTCG shall be reduced by the amount by which total income falls short to
the maximum taxable limit/exemption limit. Then balance amount shall be taxed @
20%.
LTCG on non corporate non
resident/foreign company-(new section)-
LTCG on
transfer of unlisted securities would be taxable at 10% on the capital gains
calculated such amount without giving effect to indexation provisions. In
respect of other LTCG rate of tax will be 20%.
Domestic
company-LTCG rate-20%.
Section 10(38)- there is exemption on long term
capital gains on sale of equity shares/units of an equity oriented fund subject
to such transaction shall be charged to STT and and sold through stock
exchange.
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