Understanding Capital Gains Tax

• Any gain arising from the transfer of a capital asset during a previous year is taxable under the “Capital Gains” head in the immediately following assessment year, if it’s not eligible for exemption under sections 54, 54B, 54D, 54EC, 54F, 54G, 54GA, and 54GB.
• Capital gain's tax liability arises only when there’s a capital asset.
• The capital asset is transferred by the assessee.
• The transfer takes place during the previous year.
• Any profit or gains arise as a result of transfer.
• Such profit or gains are not exempt from tax under sections 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA, and 54GB.
• Section 2(14) defines "Capital asset".

Definition of "Capital Asset"

• "Capital asset" means property of any kind, whether fixed or circulating, movable or immovable, tangible or intangible.
• It includes any rights in or relation to an Indian company, including management or control rights.
• It includes property of any kind held by an assessee, whether or not connected with business or profession.
• It includes any securities held by a Foreign Institutional Investor who has invested according to SEBI regulations.
• It includes any unit-linked insurance plan (ULIP) policy issued on or after February 1, 2021, if the insurance premium payable exceeds ₹2.50 lakh in any previous year, and exemption under section 10(10D) does not apply.
• Stock-in-trade (other than certain securities), personal effects (movable assets), agricultural land in a rural area in India, a few gold bonds, and Gold Deposit Bonds are excluded from the definition of "capital assets".

Stock-in-trade

• Stock-in-trade (not being securities held by a Foreign Institutional Investor), consumable stores, or raw material held for the purpose of business or profession is not a capital asset.
• Any surplus arising on sale or transfer of stock-in-trade is chargeable to tax as business income under section 28.

Personal Effects

• Any movable property held for personal use of the owner or their dependent family members is not a "capital asset".
• This excludes jewellery, archaeological collections, drawings, paintings, sculptures, or any work of art, which are considered capital assets even if for personal use.

Agricultural Land

• Agricultural land in a rural area in India is not a capital asset.
• Rural area is defined as an area outside the jurisdiction of a municipality or cantonment board with a population of 10,000 or more which also does not fall within specified distances from the local limits of any municipality or cantonment board.
• If the population of the municipality/cantonment board is more than 10,000 but not more than 1 lakh the distance is 2 kilometers.
• If the population of the municipality/cantonment board is more than 1 lakh but not more than 10 lakh the distance is 6 kilometers.
• If the population of the municipality/cantonment board is more than 10 lakh the distance is 8 kilometers.

Short-term and Long-term Capital Assets

• "Short-term capital asset" means a capital asset held by an assessee for not more than 36 months immediately prior to its date of transfer. Otherwise, it is a "long-term capital asset".
• For equity or preference shares in a company (listed in a recognised stock exchange in India), securities (like debentures, bonds, Government securities, derivatives, etc.) listed in a recognised stock exchange in India, units of UTI (whether quoted or not), units of an equity-oriented mutual fund (whether quoted or not), and zero-coupon bonds (whether quoted or not) it is 12 months +
• For equity or preference shares in a company (unlisted) (if transfer takes place on or after April 1, 2016) and immovable property (being land or building or both) (if transfer takes place on or after April 1, 2017) it is 24 months +
• Tax incidence depends on whether the capital gain is short-term or long-term; long-term capital gain is generally taxable at a lower rate.

Transfer of Capital Asset

• Transfer includes the sale, exchange, or relinquishment of the asset, the extinguishment of any rights therein, or the compulsory acquisition thereof.
• Relinquishment takes place when the owner withdraws from the property and abandons his rights thereto.
• Redemption of preference shares is a transfer.

Transactions Not Included in Transfer

• Distribution of assets in kind by a company to its shareholders on its liquidation.
• Any distribution of capital assets in kind by a Hindu undivided family to its members at the time of total or partial partition.
• Any transfer of capital asset under a gift or a will or an irrevocable trust (exception - gift of ESOP shares is chargeable to tax).
• Transfer of capital asset between holding company and its 100 per cent subsidiary company if the transferee-company is an Indian company.
• Transfer of capital asset in the scheme of amalgamation/demerger if the transferee-company is an Indian company.
• Transfer of shares in amalgamating company demerged company in lieu of allotment of shares in amalgamated company/resulting company in the above case.
• Transfer of capital asset in a scheme of amalgamation of a banking company with a banking institution.
• Any transfer in a business reorganization of a capital asset by the predecessor co-operative bank to the successor co-operative bank or the converted banking company.
• Transfer of shares in an Indian company held by a foreign company to another foreign company in a scheme of amalgamation/demerger of the two foreign companies, if a few conditions are satisfied.
• Transfer of a capital asset by a non-resident of foreign currency convertible bonds or Global Depository.
• Receipts to another non-resident if the transfer is made outside India and if a few conditions are satisfied.
• Transfer by an individual of Sovereign Gold Bond (issued by RBI under the Sovereign Gold Bond Scheme, 2015) by way of redemption.
• Transfer of a capital asset, being conversion of gold into Electronic Gold Receipt issued by a Vault Manager, or conversion of Electronic Gold Receipt into gold.
• Transfer of 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 other notified public museum or institution.
• Any transfer by way of conversion of bonds or debentures, debenture-stock or deposit certificate in any form of a company into shares or debentures of that company.
• Transfer by way of conversion of preference shares of a company into equity shares of that company.
• Land transferred by a sick industrial company, if a few conditions are satisfied.
• Transfer of a capital asset by a private company/unlisted public company to a limited liability partnership in the case of conversion of company into LLP, if a few conditions are satisfied.
• Transfer of capital assets at the time of conversion of a firm/sole proprietary concern in a company if a few conditions are satisfied.

Transfer Completion

• Capital gain is taxable in the year in which the capital asset is transferred.
• Ownership of immovable property is transferred when the sale deed is registered and not only from the date of conveyance deeed.
• Even if the sale deed is not registered ownership of an immovable property is transferred when the three conditions of section 53A of the Transfer of Property Act are satisfied.
• Title to a movable property passes at the time when property is delivered pursuant to a contract to sell.

Capital Gains Computation

• Computation of capital gain depends on the nature of capital asset transferred, viz., short-term capital asset or long-term capital asset.
• Indexed cost of improvement is calculated as Cost of improvement / CII for the year in which improvement took place * Cost inflation index for the year in which the asset is transferred
• Cost inflation index (CII) for the year in which asset was first held / Cost of acquisition (*see note) * Cost inflation index for the year in which the asset is transferred, the following formula is used for Indexed cost of acquisition
• Securities transaction tax is not deductible while computing income under the head "Capital gains".

When Indexation is Not Available

• Bonds or debentures (other than capital indexed bonds issued by the Government or Sovereign Gold Bond issued by RBI).
• Shares in, or debentures of, an Indian company acquired by utilizing convertible foreign exchange.
• Debt-oriented mutual fund (where not more than 35 per cent of total proceeds is invested in equity shares in domestic companies) acquired by an assessee on or after April 1, 2023.
• Undertaking/division transferred by the way of slump sale as covered by section 50B.
• Units, GDR, securities purchased in foreign currency as given in sections 115AB, 115AC, 115ACA and 115AD.

Tax Exemptions

• In the cases given below, capital gains are not chargeable to tax conversely, in the cases given below assets are transferred at a loss, such capital loss is not taken into consideration.
• Any income arising from the transfer of a capital asset being a unit of US 64 is not chargeable to tax where the transfer of such assets takes place on or after April 1, 2002.
• If the following conditions are satisfied long-term capital gain on transfer of BSE-500 equity shares this exemption is available preference shares (redeemable or non-redeemable) are not bonds or debentures and indexation benefit is available.
• The assessee is an individual or a Hindu undivided family.
• He or it owns an agriculture land situated in urban area mentioned in section 2(14)(iii)(a)/(b).
• There is transfer of the agriculture land by way of compulsory acquisition or the transfer is approved or determined by the Central Government.
• The above is applicable if any part is capital in nature.

Full Value of Consideration and Expenditure on Transfer

• Full value of consideration is the consideration received or receivable by the transferor in lieu of assets which he has transferred .If it is revived in kind than fair market value of such assets is taken as full value of consideration.
• Expenditure incurred wholly and exclusively in connection with transfer or capital assets is deductible from full value of consideration.

Cost of Acquisition and Improvement

• Cost of acquisition -If the mortgage we not created by the transferor.
• The amount paid for discharge-of A mortgage ispart of "cost of acquisition".

When Benefit of Indexation is Not Available for Capital Assets

• if the following cases the benefit of Indexation is not available even if a long-term capital asses is transferred 50(8) covered by section 58].50].
• Bonds or debentures [then: @capital debentures capital indexed bonds] acquired by the or (b) soveneign gold bund issued by RPI under the soverign sold Bond schemes, exchange using converible form exchange shares: on for the case or Power generating units with claims to use a depreciation in the Straightline basis: BSEC: If A partner transters Capital Assets is not applicable it cannot charge tax

Capital Gains - In Special Cases

• If a person has acquired a capital asset. In the following cases, the method of computation is different from what is discussed if section 49(1)(2) and then to calculate capital gain at the time of transier of such asset is taken as cost of acquisition.

Cost of Acquistion

• In order to ind whether the capital asset is short term or longterm in the above cases, thepennd of holding of the previous owner shall the taken into considerabons-
• 4 Indexation the benefit on the and cation will be available from the year. in where' the asset was first held by the frevious owners Cost of acquisition being the fair market value as on April 1, 2001 is an asset became the property of the accesse before April 1, 2001.
• Withe capital asset becomes the property of the accesse by an mode be for cost and the asset become the property of the previous owner