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INCOME FROM CAPITAL GAINS

CHARGEABILITY [SECTION 45]


Income will be chargeable as Capital gains if there is a capital asset and there is transfer
of the capital asset during relevant previous year. (Section 45)
Capital Asset [Section 2(14)]: It means all assets except the following assets
Stock in Trade
Personal movable assets including wearing apparel and furniture, held for
personal use by the assesse or any member of his family (excluding jewellery,
archaeological collections, drawings, painting, antiques paintings, sculpture
or work of art)
Rural agricultural land in India
Gold Bonds and Gold deposit bonds
Special bearer bonds

Rural Agriculture Land We can infer from above that only rural agriculture lands are
excluded from purview of the term capital asset Hence only urban agricultural lands
constitute capital assets.
Accordingly, the agricultural land described in (a) and (b) below, being land situated
within the specified urban limits, would fall within the definition of capital asset, and
transfer of such land would attract capital gain tax
(a) in any area within the jurisdiction of a municipality or a cantonment board,
having a population of 10,000 or more according to last preceding census; or
(b) agricultural land situated in any area within such distance, measured aerially, in
relation to the range of population according to the last preceding census as
shown hereunder
shortest aerial distance from the population according to the last
local limits of any municipality or preceding census of which
cantonment board to in item (a) relevant figures have been
published before the first day of
the previous year
(i) < 2 kilometres > 10000 < 1,00,000
(ii) < 6 kilometres > 1,00,000 < 10,00,000
(iii) < 8 kilometres > 10,00,000
Transfer
Section 2(47) defined the word Transfer. Transfer includes:
- Sale, Exchange or Relinquishment of the asset or
- Extinguishment of any right therein or
- Compulsory Acquisition thereof under any law or
- Conversion of Capital asset into Stock in Trade or
- The maturity or redemption of Zero Coupon bonds

Section 47 of the income tax Act provide exceptions for the transactions which are not
treated as transfer.

Year of Chargeability
Capital gain arising on transfer of a capital asset is chargeable to tax in the year of
transfer. However, in following cases, capital gain will be charged to tax in the year of
receipt:
- Insurance compensation
- Conversion of Capital Asset into Stock in Trade
- Compulsory acquisition of the property

Type of Capital Asset and Capital Gain


Capital asset can be short term or long term depending upon the period of holding (i.e.
date of acquisition to one day prior to date of transfer)

Short term Capital asset


A capital asset will be a short term capital asset if period of holding of such capital asset
is 36 months or less.
However, in case of financial assets, a capital asset is short term capital asset if its period
of holding is 12 months or less.
Financial assets are Shares, Units of Mutual Funds, Listed securities, Govt securities
and zero coupon bonds
Note: Depreciable assets will always be Short term capital assets.
Gain arising on transfer of Short term capital assets is known as short term capital gain.

Long term Capital asset


A capital asset is a long term capital asset if Period of holding is more than 36 months.
However, in case of financial assets, an asset will be long term capital asset if its period
of holding is more than 12 months.
Note: Gain arising on transfer of Long term capital asset is Long term capital gains.

Computation of STCG

Particulars Amount
Gross Sale consideration XXX
Less: Eexpenditure incurred wholly and exclusively in connection (XXX)
with such transfer (for example : Brokerage on sale)
Net Sale Consideration XXX
Less: Cost of Acquisition (COA) (XXX)
Less: Cost of Improvement (COI) (XXX)
Less: Exemption u/s 54B/54D/54G etc. (XXX)
Taxable STCG XXX

Computation of LTCG

Particulars Amount
Gross Sale consideration XXX
Less: Eexpenditure incurred wholly and exclusively in connection (XXX)
with such transfer (for example : Brokerage on sale)
Net Sale Consideration XXX
Less: Indexed Cost of Acquisition (COA) (XXX)
Less: Indexed Cost of Improvement (COI) (XXX)
Less: Exemption u/s 54/54B/5EC/54F/54G etc. (XXX)
Taxable LTCG XXX

Indexed Cost of Acquisition = (Actual cost of acquisition or purchase) * (CII for the
Year in which the asset is transferred) / (CII for the year in which asset was first held
by the assessee or 1981-82, whichever is later).
Indexed Cost of Improvement= (cost of improvement) * (CII for the Year in which
the asset is transferred) / (CII for the year in which the improvement took place).
Deductions available against Capital Gains
Section Particular Who can claim
48(i) Expenditure incurred wholly and exclusively in All assessees
connection with transfer of capital asset
48(ii) Cost of acquisition of capital asset and of any All assessees
improvement thereto (indexed cost of acquisition and
indexed cost of improvement, in case of long-term capital
assets)
54 Long-term capital gains on sale of residential house and Individual/HUF
land appurtenant thereto invested in
purchase/construction of another residential house8
(subject to certain conditions and limits)
54B Capital gains on transfer of land used for agricultural Individual/HUF
purposes, by an individual or his parents or a HUF,
invested in other land for agricultural purposes (subject to
certain conditions and limits)
54D Capital gains on compulsory acquisition of land or Any assessee
building forming part of an industrial undertaking
invested in purchase/construction of other land/building
for shifting/re-establishing said undertaking or setting up
new industrial undertaking (subject to certain conditions
and limits)
54EA Net consideration on transfer of long-term capital asset Any assessee
made before 1-4-2000 invested in specified bonds,
debentures, shares of a public comp-any or units of
notified mutual funds (subject to certain conditions and
limits)
54EB Long-term capital gains on transfer of any long-term Any assessee
capital asset made be-fore 1-4-2000 invested in specified
long-term assets (subject to certain conditions and limits)
54EC Long-term capital gains invested in long-term specified Any assessee
asset (bond redeemable after 3 years) (maximum
investment in a financial year is Rs. 50 lakhs)9 issued by
National Highways Authority of India; or by the Rural
Electrification Corporation Limited (subject to certain
conditions and limits)
54ED Long-term capital gains on transfer before 1-4-2006 of Any assessee
certain listed securities or units invested in equity shares
forming part of an eligible issue of capital (subject to
certain conditions and limits)
54EE Long-term capital gain invested in long-term specified All assesses
assets being units of such fund as may be notified by
Central Government to finance start-ups
54F Net consideration on transfer of long-term capital asset Individual/HUF
other than residential house invested in residential
house10 (subject to certain conditions and limits)
54G Capital gain on transfer of machinery, plant, land or Any assessee
building used for the purposes of the business of an
industrial undertaking situate in an urban area (transfer
being effected for shifting the undertaking to a non-urban
area) invested in new machinery, plant, building or land,
in the said non-urban area, expenses on shifting, etc.
(subject to certain conditions and limits)
54GA Exemption of capital gains on transfer of assets in cases All assessees
of shifting of industrial undertaking from urban area to
any Special Economic Zone (subject to certain conditions
and limits)
54GB Exemption in respect of capital gain arising from the Individual/HUF
transfer of a long-term capital asset, being a residential
property (a house or a plot of land), owned by the eligible
assessee, and such assessee before the due date of
furnishing of return of income under sub-section (1) of
section 139 utilises the net consideration for subscription
in the equity shares of an eligible company and such
company has, within one year from the date of
subscription in equity shares by the assessee, utilised this
amount for purchase of specified new asset (subject to
certain conditions and limits).
W.e.f. April 1, 2017, eligible start-up is also included in
definition of eligible company.

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