Capital Gain and its Taxation
/ Taxation

Capital Gain and its Taxation

If the aforementioned requirements are met, capital gains will be subject to tax.

  • There should be a capital asset. In other words, the transferred asset should qualify as a capital asset as of the transfer date;
  • The transfer must have been made by the taxpayer within the prior year;
  • There should be profits or gain as a result of transfer.

Meaning of Capital Asset
Capital Asset is defined to include:

  • Any type of property that the assessee owns, whether or not it is related to their profession or place of business.
  • Any securities held by a Foreign Institutional Investors (FII) which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992.

However, the term ‘Capital asset’ shall exclude the following: –

  • Stocks of consumables, raw materials, and other assets kept for trade, commerce, or vocation;
  • Mobile property kept for the taxpayer’s own use or for any dependent family members. However, even if used for personal reasons, jewellery, expensive stones, and decorations made of silver, gold, platinum, or any other precious metal, archaeological collections, drawings, paintings, sculptures, or any other work of art will be regarded as capital assets;
  • Specified Gold Bonds and Special Bearer Bonds;
  • Not being a land located, Agricultural land in India:
    1. Having a population of at least 10,000 and falling within the purview of the municipality, the notified area committee, the town area committee, and the cantonment board;
    2. Within the following range, as defined by aerial distance from any municipality’s or cantonment board’s local limits:
      1. not being more than 2kms, if population of such area is more than 10,000 but not exceeding 1 lakh;
      2. not being more than 6kms, if population of such area is more than 1 lakh but not exceeding 10 lakhs; or
      3. not being more than 8kms, if population of such area is more than 10 lakhs.
  • Deposit certificates released in 2015 as part of the Gold Monetization Scheme

Transactions not regarded as transfer [Section 47]

  • Capital asset allocation on a HUF’s full or partial division
  • Any transfer of capital asset under a gift or will or an irrevocable trust
  • Any transfer of capital asset by a holding company to its 100% subsidiary Indian company or by a subsidiary company to its 100% holding Indian company.
  • Any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company.
  • Any transfer by a shareholder in a scheme of amalgamation of shares held by him in the amalgamating company.
  • Any transfer by an individual of sovereign gold bonds issued by RBI by way of Redemption.
  • Any transfer by way of conversion of bonds, debentures, debenture stock, deposit certificates of company, into shares or debentures of that company.
  • Any transfer by way of conversion of preference shares of company into equity shares of that company.
  • Any transfer of a capital asset in a transaction of a reverse mortgage under a scheme made and notified by the Central Government.

Short Term Capital Gain (STCG)

Short-term capital assets are those that have been held for no longer than 36 months as of the transfer date. However, the following assets must be classified as short-term capital assets if they have been held for less than a year:

  • Equity or preference shares of a business that is listed on any reputable Indian stock market;
  • Other listed securities;
  • Units of UTI;
  • Units of equity oriented funds; or
  • Zero Coupon Bonds.

Note: Short-term capital assets include unlisted shares and immovable property (land, a building, or both) held for no longer than 24 months previous to the transfer date.

Long term Capital Gain (LTCG)

Long-term capital assets are those that were held for longer than 36, 24 or 12 months, as appropriate, immediately before the date of transfer.

Asset Period of holding to be treated as LTCG
A security (other than a unit) listed in a recognized stock exchange in India, a unit of UTI or a unit of an equity oriented fund or a zero coupon bond More than 12 months immediately preceding the date of transfer
A share of company (not being a share listed in a recognized stock exchange in India) More than 24 months immediately preceding the date of transfer
An immovable property, being land or building or both More than 24 months immediately preceding the date of transfer
Any other capital Asset More than 36 months immediately preceding the date of transfer.

Computation of Capital Gain

The type of capital asset transferred during the previous year—a short-term capital asset, a long-term capital asset, or a depreciable asset—determines how the capital gain is calculated. Short-term capital gains are those that result from the transfer of short-term capital assets or depreciable assets, whereas long-term capital gains are those that result from the transfer of long-term capital assets.

The following formula must be used to calculate capital gains on the transfer of capital assets: –

Short term Capital Assets [Section 48]
Full value of consideration
Less: Cost of acquisition of asset   
Less: Cost of improvement 
Less: The cost of the transfer itself, which was the only cost involved.

Long term Capital Assets [Section 48]
Full value of consideration
Less: Indexed Cost of acquisition
Less: Indexed Cost of Improvement
Less: The cost of the transfer itself, which was the only cost involved.        

*Only one of the following two circumstances will result in a short-term capital gain or loss from the sale of a depreciable asset:

  1. When the block of assets’ WDV on the final day of the prior year is zero; or
  2. Block stops existing on the final day of the preceding year.

Second Proviso to Section 48: Indexed Cost of Acquisition and Improvement

  1. If long-term capital assets are transferred, the whole value of consideration must be reduced by the indexed costs of purchase and improvements;
  2. The following method must be used to calculate the Indexed Cost of Acquisition and the Indexed Cost of Improvement with reference to the Cost Inflation Index (‘CII’).
Calculate the Indexed Cost Acquisition

Capital Gain Exemptions
The following principal categories of capital gain exemptions are provided under the Income Tax Act, section by section:

Exemption of Capital Gains [Section 54 to 54F]
Sr No. Particulars Section 54 Section 54 B Section 54 D Section 54EC Section 54F
1. Eligible Assesse Individual/HUF Individual/HUF Any Assessee Any Assessee Individual/HUF
2. Asset transferred Residential House (LTCA) Urban Agricultural land Land building forming part of an industrial undertaking Land or building or both Any LTCA other than residential House.
3. Other Conditions Income from such house should be chargeable under the Head “Income from House property” Assessee, parents, or HUF must use land for agricultural purposes for 2 years. Land and building used for business for 2 years before transfer; compulsory acquisition of industrial undertaking. – Assessee must not own multiple residential houses, purchase or construct within 2 or 3 years of transfer.
4. Qualifying asset i.e., asset in which capital gains has to be invested Assesse may choose one or two residential houses in India with no capital gain exceeding Rs.2 crore. Land for being used for agricultural purpose (Urban/Rural) Land or building or right in land or building Bonds of NHAI or RECL or any other bond notified by Central Government (Redeemable after 5 years) One residential house situated in India.
5. Time limit for purchase/ construction Purchase within 1 year before or 2 year after the date of transfer Or construct within 3 years after the date of transfer, Purchase within a period of 2 years after the date of transfer Purchase or construct within 3 years for shifting, re-establishing, or setting up new industrial undertakings. Purchase within a period of 6 months after the date of transfer Purchase within 1 year before or 2 year after the date of transfer Or construct within 3 years after the date of transfer,
6. Amount of Exemption Cost of new residential house or two houses, as the case may be or Capital gain, whichever is lower, is exempt. Cost of new Agricultural Land or Capital gain, whichever is lower, is exempt. Cost of new asset or Capital gain, whichever is lower, is exempt Maximum investment allowed from capital gains in a financial year is Rs.50 lacs, including bonds. Cost of new residential house > Net sale consideration of original asset, proportionate capital gain is exempt.

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