Computation of capital gains

MODULE 4
 INTRODUCTION
When we buy any kind of property for a lower price and then
subsequently sell it at a higher price, we make a gain. The gain on sale
of a capital asset is called capital gain.
This gain is not a regular income like salary, or house rent. It is a one-
time gain; in other words the capital gain is not recurring, i.e., not
occur again and again periodically.
Opposite of gain is called loss; therefore, there can be a loss under the
head capital gain. We are not using the term capital loss, as it is
incorrect.
Capital Loss means the loss on account of destruction or damage of
capital asset.
Thus, whenever there is a loss on sale of any capital asset it will be
termed as loss under the head capital gain.
 BASIS OF CHARGE[ SEC.45]

As per sec 45(1) profits or gain arising on transfer of a

capital asset shall be chargeable under the head capital
gains.
Any gain arising on the transfer of a capital asset is treated as
capital gain. Such gain is taxable under sec 45 if it is not
eligible for exemption under sec 54, 54B, 54D, 54EC, 54ED,
54F, 54G and 54GA.
The capital gain is chargeable to income tax if the following
conditions are satisfied:
1. There is a capital asset.
2. Assessee should transfer the capital asset.
3. Transfer of capital assets should take place during the previous year.
4. There should be gain or loss on account of such transfer of capital
asset.
5. Such profit or gains is not exempt from tax under sections 54, 54B,
54D, 54EC, 54F,54G, 54GA and 54GB.
 CAPITAL ASSET

Capital Asset means property of any kind, whether fixed or

circulating, movable or immovable, tangible or intangible,
held by the assesses, whether or not connected with his
business or profession.
 ASSETS EXCULDED FROM CAPITAL ASSETS [ EXCEPTIONS]

1. Any stock-in-trade, consumable stores or raw materials held for the purposes of
business or business.
2. Personal effects of the assessee, that is to say, movable property including
wearing apparel and furniture held for his personal use or for the use of any member
of his family dependent upon him [ jewelry, archaeological collections, drawings,
paintings, or any work of art will not be taken as personal effects. Consequently, on
transfer of these assets, capital gain will be chargeable to tax].
3. Agricultural land India in a rural area.
4. 6.5% gold bonds, 1977 or 7% gold bonds, 1980 or national defence gold bonds,
1980 issued by the central government.
5. Special bearer bonds, 1991.
6. Gold deposit bonds issued under gold deposit scheme, 1999.
 TYPES OF CAPITAL ASSET
There are two types of Capital Assets:
1. Short Term Capital Assets (STCA): An asset, which is held by an
assessee for less than 36 months, immediately before its transfer, is
called Short Term Capital Assets. In other words, an asset, which is
transferred within 36 months of its acquisition by assessee, is called
Short Term Capital Assets.
2. Long Term Capital Assets (LTCA): An asset, which is held by an
assessee for 36 months or more, immediately before its transfer, is
called Long Term Capital Assets. In other words, an asset, which is
transferred on or after 36 months of its acquisition by assessee, is called
Long Term Capital Assets.
The period of 36 months is taken as 12 months under
following cases:
Equity or Preference shares,
Securities like debentures, government securities, which
are listed in recognized stock exchange,
Units of UTI
Units of Mutual Funds [ sec10(23D)
Zero Coupon Bonds.
 TRANSFER
Capital gain arises on transfer of capital asset; so it becomes
important to understand what is the meaning of word
transfer.
The word transfer occupy a very important place in capital
gain, because if the transaction involving movement of
capital asset from one person to another person is not
covered under the definition of transfer there will be no
capital gain chargeable to income tax. Even if there is a
capital asset and there is a capital gain.
 The word transfer under income tax act is defined under section 2(47). As per
section 2 (47) Transfer, in relation to a capital asset, includes sale, exchange or
relinquishment of the asset or extinguishments of any right therein or the
compulsory acquisition thereof under any law.
In simple words Transfer includes:
Sale of asset
Exchange of asset
Relinquishment of asset (means surrender of asset)
Extinguishments of any right on asset (means reducing any right on asset)
Compulsory acquisition of asset.
The definition of transfer is inclusive, thus transfer includes only above said five
ways. In other words, transfer can take place only on these five ways. If there is any
other way where an asset is given to other such as by way of gift, inheritance etc. it
will not be termed as transfer.
 List the transactions that do not constitute transfer
section Transaction not treated as transfer
46(1) Distribution of asset in kind by a company to its shareholders at the time of liquidation
47(i) Distribution of capital asset on total or partial partition of Hindu undivided family
47(iii) Transfer of capital asset under a gift or will or an irrevocable trust
47(iv) Transfer of a capital asset by a company to its 100% subsidiary company
47(vi) Transfer of capital asset in a scheme of amalgamation, transfer of a capital asset by the amalgamating
company to the amalgamated company if the amalgamated company is an Indian company;

47(via) Transfer of shares of an indian company, by an amalgamating foreign company to the amalgamated
foreign company
47(vib) Transfer of a capital asset by the demerged company to the resulting company, if the resulting company
is an indian company;
47(vic) Transfer of share or shares held in an Indian company by the demerged foreign company to the
resulting foreign company
47(viia) Transfer of bonds or global depository receipts, purchased in foreign currency by a non-resident to
another non-resident outside India.
47(viii) Transfer of agricultural land in India effected before first of march, 1970.
 COMPUTATION OF CAPITAL GAINS Sec 48
Computation of capital gain depends upon the nature of capital asset
transferred, .
Such as STCG & LTCG
Capital gain arising on transfer of a STC asset is STCG, whereas
transfer of long term capital asset generates LTCG.
The tax incidence is generally higher in the case of short term capital
gain as compared to long term capital gain.
 The method of computation of short-term and long-term capital gain is as
follows:

STCG LTCG
1. Find out full value of consideration 1. Find out full value of consideration
2. Deduct the following: 2. Deduct the following:
a. Expenditure incurred wholly and exclusively in a. Expenditure incurred wholly and exclusively in
connection with such transfer connection with such transfer
b. Cost of acquisition b. Indexed cost of acquisition[ in some cases Cost of
acquisition is deducted]
c. Cost of improvement c. Indexed cost of improvement [ in some cases Cost of
improvement is deducted]

3. From the resulting sum deduct the exemptions 3. From the resulting sum deduct the exemptions provided
provided by sections 54B,54D,54G & 54GA by sections 54, 54B,54D,54EC, 54F, 54G, 54GA & 54GB

4. The balancing amount is STCG 4. The balancing amount is LTCG

 Long Term Capital Gains
Where the capital gain is to be computed in respect of a long term asset, instead
"cost of acquisition" and "cost of improvement", "indexed cost of acquisition" and
"indexed cost of improvement" are to be deducted. However, there are two
exceptions viz.-
a. In case of a non-resident, capital gains on transfer of shares or debentures of
Indian company firstly by converting cost of acquisition, full value of consideration
and expenses incurred for transfer into originally utilized foreign currency and
reconverting capital gain into Indian rupees and
b. Benefit of indexation of cost will not be available on transfer of bonds and
debentures even though they may qualify to be called long term capital assets., This
is because bonds and debentures are normally issued and redeemed at par and if
benefit of indexation is given, it will always give capital loss.
 Depreciable Capital Assets Sec. 50:
Where a capital asset has been sold or transferred and in respect of such capital
asset depreciation had been allowed, the following rules will apply
A. Written down value of the block at the beginning of the year as increased by
the cost of acquisition of any new asset falling in the same block purchased during
the year and the incidental expense on transfer the asset sold. The balance will be
the written down value of the block and there will be no capital gain.
B. If sales consideration exceeds the WDV of the block as increased by the new
purchase and the incidental expense on transfer, such excess consideration will be
treated as short term capital gain.
C. If the resulting figure is negative, it will be treated as short term capital loss.
D. If block ceases to exist, that is all assets in a block are sold, the WDV in the
block will be short term capital loss.
 FULL VALUE OF CONSIDERATION [SEC.48]
Full value of consideration means & includes the whole/complete sale
price or exchange value or compensation including enhanced
compensation received in respect of capital asset in transfer. The
following points are important to note in relation to full value of
consideration.
The consideration may be in cash or kind.
The consideration received in kind is valued at its fair market value.
It may be received or receivable.
The consideration must be actual irrespective of its adequacy.
 COST OF ACQUISITION
Cost of Acquisition (COA) means any capital expense at the time of
acquiring capital asset under transfer, i.e., to include the purchase
price, expenses incurred up to acquiring date in the form of
registration, storage etc. expenses incurred on completing transfer.
In other words, cost of acquisition of an asset is the value for which
it was acquired by the assessee. Expenses of capital nature for
completing or acquiring the title are included in the cost of
acquisition.
 COST OF IMPROVEMENT
Cost of improvement is the capital expenditure incurred by an
assessee for making any addition or improvement in the capital
asset. It also includes any expenditure incurred in protecting or
procuring the title.
In other words, cost of improvement includes all those
expenditures, which are incurred to increase the value of the capital
asset.
 EXPENDITURE ON TRANSFER

Expenditure incurred wholly and exclusively for transfer of capital

asset is called expenditure on transfer. It is fully deductible from the
full value of consideration while calculating the capital gain.
Examples of expenditure on transfer are the commission or brokerage
paid by seller, any fees like registration fees, and cost of stamp papers
etc., travelling expenses, and litigation expenses incurred for
transferring the capital assets are expenditure on transfer.
Note: Expenditure incurred by buyer at the time of buying the capital
assets like brokerage, commission, registration fees, cost of stamp paper
etc. are to be added in the cost of acquisition before indexation.
 How to determine indexed cost of acquisition and indexed
cost of improvement
Indexed cost of acquisition is the amount which bears to the cost of
acquisition , the same proportion as cost inflation index [CII] for the
year in which the asset is transferred bears to the CII for the first year
in which the asset was held by the assessee or for the year beginning
on April 1, 1981, whichever is later.
Similarly, indexed cost of improvement is as an amount which bears
to the cost of improvement, the same proportion as CII for the year in
which the asset is transferred bears to the CII for the year in which the
improvement to the asset took place.
Cost inflation index: as notified by the central government
for different previous years is given below.
Previous year CII Previous year CII Previous CII
year
1981-82 100 1994-95 259 2007-08 551
1982-83 109 1995-96 281 2008-09 582
1983-84 116 1996-97 305 2009-10 632
1984-85 125 1997-98 331 2010-11 711
1985-86 133 1998-99 351 2011-12 785
1986-87 140 1999-2000 389 2012-13 852
1987-88 150 2000-01 406 2013-14 939
1988-89 161 2001-02 426 2014-15 1024
1989-90 172 2002-03 447 2015-16 1081
1990-91 182 2003-04 463 2016-17 1125
1991-92 199 2004-05 480
1992-93 223 2005-06 497
1993-94 244 2006-07 519
 Indexed cost of acquisition
Indexed Cost of Acquisition = CII of Year of transfer
COA
CII for the year in which
asset was first held by
the assessee or 1981-82,
whichever is later
 Indexed cost of improvement
CII of Year of transfer
COI
CII of Year of improvement
Any cost of improvement incurred before 1st April 1981 is not
considered or it is ignored. The reason behind it is that for carrying any
improvement in asset before 1st April 1981, asset should have been
purchased before 1st April 1981.
If asset is purchased before 1st April we consider the fair market value.
The fair market value of asset on 1st April 1981 will certainly include
the improvement made in the asset.
 STCG/LTCG how charged to tax: tax will be calculated as follows -

Gross total income [ excluding income LTCG taxable under sections 112 STCG taxable under section 111A
given in columns 2 & 3]

1 2 3
Step A1- find out gross total income Step B1- find out LTCG Step C1 find out STCG taxable
from all sources excluding income under section 111A
given in step B1& step C1

Step A2- deduct, deductions Step B2 find out income tax on Step C2 Find out income tax on
permissible under sections 80C to LTCG at the rate specified by STCG at the rate specified by
80U(A2 cannot exceed A1) section 112 section 111A

Step A3 the balancing amount is

other net income

Step A4- find out income tax on

other net income
Step D add the tax computed at steps A4, B2 & C2. It is income tax
on net income ( income tax on A3+B1+C1)
Step E add surcharge on income-tax computed under step D.
Step F find out D+E.
Step G add education cess at the rate of 2% of step F.
Step H - add secondary and higher education cess at the rate of 1% of
step F.
Step I tax liability is equal to F+G+H.
LTCG is taxable at a flat rate of 20% + SC + EC + SHEC