Phoenix Auditing

Capital Gains and Taxes

Amendment in Budget 2019 –

Capital gains exemption under Section 54:

Assessees can get an exemption by investing long term capital gains from the sale of house property in up to two house properties against the earlier provision of one house property with same conditions. However, the capital gains on the sale of house property must not exceed Rs 2 crores.

  1. What incomes are charged to tax under the head Capital Gains?
  2. What is the meaning of capital asset?
  3. Types of Capital Assets?
  4. What is long-term capital gain and short-term capital gain?
  5. How to compute long-term capital gain?
  6. How to compute short-term capital gain?
  7. How to calculate Cost of Acquisition?
  8. Is there any benefit available in respect of re-investment of capital gain in any other capital asset?
  9. Tax Rates for Capital Gains?

1. What incomes are charged to tax under the head Capital Gains?

 Any profit or gain arising from transfer of a capital asset during the year is charged to tax under the head “Capital Gains”.​ This is called capital gains tax, which can be short-term or long-term. Capital gains are not applicable when an asset is inherited because there is no sale, only a transfer. 

2. What is the meaning of capital asset?

Capital asset is defined to include:

  • Any kind of property held by an assesse, whether or not connected with business or profession of the assesse.
  • Any securities held by a FII which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992.

However, the following items are excluded from the definition of “capital asset”:

  • Any stock-in-trade, consumable stores, or raw materials held by a person for the purpose of his business or profession.
  • Personal effects of a person, that is to say, movable property including wearing apparels  and furniture held for personal use, by a person or for use by any member of his family dependent on him.

However, jewellery, archeological collections, drawings, paintings, sculptures, or any work of art are not treated as personal effects and, hence, are included in the definition of capital assets.

Agricultural Land in India, not being a land situated:

  • Within jurisdiction of municipality, notified area committee, town area committee, cantonment board and which has a population of not less than 10,000;
  • Within range of following distance measured aerially from the local limits of any municipality or cantonment board:
  • *​ not being more than 2 KMs, if population of such area is more than 10,000 but not exceeding 1 lakh;
  • not being more than 6 KMs , if population of such area is more than 1 lakh but not exceeding 10 lakhs; or
  • not being more than 8 KMs , if population of such area is more than 10 lakhs.

Population is to be considered according to the figures of last preceding census of which relevant figures have been published before the first day of the year.

  • Special Bearer Bonds, 1991, issued by the Central Government
  • Gold Deposit Bonds issued under Gold Deposit Scheme, 1999.
  • Deposit certificates issued under the Gold Monetisation Scheme, 2015.​

Following points should be kept in mind :

  • The property being capital asset may or may not be connected with the business or profession of the taxpayer
  • Any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 will always be treated as capital asset, hence, such securities cannot be treated as stock-in-trade. ​

3. Types of Capital Assets?

  • Short term Capital Assets (STCA)
  • Long term Capital Assets (LTCA)
Nature of Assets STCA LTCA
A security ( other than units) . Listed in a recognized stock exchange in                                                                    India . Units of UTI or equity oriented  mutual    fund . Zero Coupon bonds     Period of Holding <  12 Months     Period of Holding >/=  12 Months
Shares not Listed in a Recognized Stock Exchange Period of Holding <  24 Months 24 Months or More
Immovable Properties Period of Holding <  24 Months 24 Months or More
Any other Assets Period of Holding <  36 Months 36 Months or More

4. What is long-term capital gain and short-term capital gain?

​​Gain arising on transfer of long-term capital asset is termed as long-term capital gain and gain arising on transfer of short-term capital asset is termed as short term capital gain

However, there are a few exceptions to this rule, like gain on depreciable asset is always taxed as short-term capital gain.​​​

5. How to compute long-term capital gain?

​​​Long term capital gain arising on account of transfer of long-term capital asset will be computed as follows:

Particulars Rs.
Full value of consideration (i.e., Sales consideration of asset) XXX
Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (E.g., brokerage, commission,  etc.)   (XXX)
Net sale consideration XXX
Less: Indexed cost of acquisition (*) (XXX)
Less: Indexed cost of improvement, if any (*) (XXX)
Long-Term Capital Gain XXX

Indexed Cost of Acquisition-

Cost of acquisition * Cost inflation index of the year of transfer of capital asset
                                           Cost inflation index of the year of acquisition

Indexed Cost of Improvement-

Cost of improvement * Cost inflation index of the year of transfer of capital asset
                                            Cost inflation index of the year of improvement

Update –

As per Budget 2018, long term capital gains on the sale of equity shares/ units of equity oriented fund, realised after 31st March 2018, will remain exempt up to Rs. 1 lakh per annum. Moreover, tax at @ 10% will be levied only on LTCG on shares/units of equity oriented fund exceeding Rs 1 lakh in one financial year without the benefit of indexation.

6. How to compute short-term capital gain?

Short-term capital gain arising on account of transfer of short-term capital asset is computed as follows:

Particulars Rs.
Full value of consideration (i.e., Sales value of the asset) XXX
Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (E.g., brokerage, commission, etc.)   (XXX)
Net Sale Consideration XXX
Less: Cost of acquisition (i.e., the purchase price of the capital asset) (XXX)
Less: Cost of improvement (i.e., post purchase capital expenses incurred  on  addition/improvement to the capital asset)   (XXX)
Short-Term Capital Gain XXX

Things to be Noted –

In the case of sale of house property, these expenses are deductible from the total sale price:

  • Brokerage or commission paid for securing a purchaser
  • Cost of stamp papers
  • Travelling expenses in connection with the transfer – these may be incurred after the transfer has been affected.
  • Where property has been inherited, expenditure incurred with respect to procedures associated with the will and inheritance, obtaining succession certificate, costs of the executor, may also be allowed in some cases.

In the case of sale of shares, you may be allowed to deduct these expenses:

  • Broker’s commission related to the shares sold
  • STT or securities transaction tax is not allowed as a deductible expense

Where jewelry is sold, and a broker’s services were involved in securing a buyer, the cost of these services can be deducted. 

Note that expenses deducted from the sale price of assets for calculating capital gains are not allowed as a deduction under any other head of the income tax return, and these can be claimed only once.

7. How to calculate Cost of Acquisition?

  • Generally, cost of acquisition of a capital asset is the cost incurred in acquiring the capital asset. It includes the purchase consideration plus any expenditure incurred exclusively for acquiring the capital asset.
  • However, in respect of capital asset acquired before 1st April, 2001, the cost of acquisition will be higher of the actual cost of acquisition of the asset or fair market value of the asset as on 1st April, 2001.
  • This option is not available in the case of a depreciable asset.​

8. Is there any benefit available in respect of re-investment of capital gain in any other capital asset?

A taxpayer can claim exemption from certain capital gains by re-investing the amount of capital gain into specified asset. The following table highlights the assets in respect of which the benefit of re-investment is available:

Section under which benefit is available Eligible Assessee Gain eligible for claiming exemption Asset in which the capital gain is to be re-invested
section 54 Individual/HUF Long-term capital gain arising on transfer of residential house property. Gain to be re-invested in purchase or construction of one residential house property in India.
section 54B Individual/HUF Long-term or short-term capital gain arising on transfer of agricultural land which was used by individual or his parents or HUF for agriculture purposes for atleast 2 years immediately prior to transfer. Gain to be re-invested in purchase of agricultural land (may be in rural arear or urban area).
section 54EC Any person Long-term capital gain arising on transfer of any long term capital asset (upto A.Y 2018-19). Long term capital gain arising on transfer of land or building or both (Form A.Y 2019-20). Gain to be re-invested in purchase of bonds specified under section 54EC.
Section 54EE Any person Long-term capital gain arising on transfer of any capital asset. Gain to be re-invested in long-term specified assets to be notified by the Central Government to finance start-ups.
section 54F Individual/HUF Long-term capital gain arising on transfer of any capital asset other than residential house property, provided on the date of transfer the taxpayer does not more than one residential house property from the assessment year 2001-02 (except new house property) Net sale consideration to be re-invested in purchase or construction of only one residential house property in India.
section 54D Any person Long-term or Short-term capital gain arising on transfer of land or building forming part of an industrial undertaking which is compulsorily acquired by Government and was used for industrial purpose for a period of 2 years prior to its acquisition. Gain to be re-invested to acquire land or building for industrial purposes.
section 54G Any person Long term or Short term capital gain arising on transfer of land, building, plant or machinery in order to shift an industrial undertaking from urban area to rural area. Gain to be re-invested to acquire land, building, plant or machinery in order to shift an industrial undertaking to a rural area.
section 54GA Any person Long term or short term capital gain arising on transfer of land, building, plant or machinery in order to shift an industrial undertaking from urban area to any Special Economic Zone. Gain to be re-invested to acquire land, building, plant or machinery in order to shift an industrial undertaking to any Special Economic Zone.
section 54GB Individual/HUF Long-term capital gain arising on transfer of residential property (a house or a plot of land). The transfer should take place during 1st April, 2012 and 31st March 2017. However, in case of investment in “eligible start-up”, the residential property can be transferred upto 31st march 2019. The net sale consideration should be utilised for subscription in equity shares of an “eligible company”.   W.e.f. April 1, 2017, eligible start-up is also included in definition of “eligible company” .

9. Tax Rates for Capital Gains?