SECTION 45: CAPITAL GAINS - THEORY
Capital Gains: Meaning
Any Profit or Gain arising out of transfer of a Capital Asset is called Capital
Gain.
Capital Gains are of 2 types:
i. Long-term Capital Gain (LTCG)
ii. Short-term Capital Gain (STCG)
Long-term Capital gain means Capital gain arising from the Transfer of a Long
term Capital asset.
Short-term Capital gain means Capital gain arising from the Transfer of a Short
term Capital asset.
Capital Assets: Sec 2(14)
‘Capital Asset’ means property of any kind (may be movable or Immovable,
tangible or Intangible, fixed or floating) held by an assessee whether or not
connected with his business or profession but does not include:
1. Any stock-in-trade, stores or raw materials held for the purpose of his
business or profession.
2. Personal effects i.e. movable property or Furniture excluding
jewellary/ornaments.
3. Agricultural Land situated in Rural Areas. (Urban Agricultural Land is
treated as Capital Asset).
4. 6 ½% Gold Bonds 1977,7% Gold Bonds 1980 or National Defense Gold
Bonds 1980, Special Bearer bonds 1991 issued by the Central
Government.
5. Gold deposit bonds issued under the Gold deposit scheme 1999.
Note: Business vehicle is treated as Capital asset.
Kinds of Capital asset:
Capital assets are of two types:
i. Long-term Capital Asset
ii. Short-term Capital Asset
Long term Capital assets:
Means of Capital Asset held by an assessee for More than 36 months
immediately preceding the date of transfer.
In the case of shares held in a company or Listed securities or units of unit
Trust of India or Mutual fund held by an assessee, Long term Capital asset will
mean shares or securities held for More than 12 Months.
Short term Capital Asset:
Means a Capital asset held by the assessee for Less than 36 months
immediately preceding the date of transfer.
In the case of shares, listed securities, Units of UTI or Mutual Fund it should be
held by assessee for 12 Month or less.
Distinction between Lon-term Capital Gain & Short –term capital
Gain:
1. LTCG arises from transfer of a Long term Capital asset. STCG arises
from transfer of a Short term Capital asset.
2. While computing the LTCG, the Cost of acquisition and the Cost of
improvements are indexed. No such indexation is done while
computing STCG.
3. Where a Long term Capital asset is acquired before 1-4-2001, the
FMV as on 1-4-2001 or the original cost acquisition, whichever is
beneficial (Higher) is considered. No such option is applicable in
respect of STCG.
4. Long term capital gains are taxed at a Lower rate. The rates are: on
transfer of securities: 10%; on other long term Capital gains: 20%.
Short-term Capital gains are taxed at usual rates along with other
incomes.
Transfer of Capital asset: Sec. 2(47)
Transfer in relation to capital asset includes the following:-
1. The Sale, Exchange or Relinquishment of the asset;
2. The Extinguishment of any right therein;
3. Compulsory acquisition of the capital asset by law;
4. Conversion of the capital asset by the owner into trading asset or
stock in trade;
5. Any transaction allowing the possession of the asset in part
performance of a contract;
6. Any transaction which has the effect of transfer or which enables the
enjoyment of the asset.
Transaction not regarded as transfer:
1. Debentures converted into shares.
2. Distribution of Assets on partition of a Hindu undivided family.
3. Any transfer of Agricultural land effected before 1-4-1970
4. Any transfer of a capital Asset under a Gift or Will or an irrevocable
trust.
5. Any transfer of a Capital Asset by a holding company to its
subsidiary company is not considered as transfer if:
a. Subsidiary company is an Indian company
b. That the holding company holds full or entire capital of the
company.
6. Any transfer of a Capital asset by a subsidiary company to its
holding company is not considered as transfer if;
a. Holding company is an Indian company,
b. That the subsidiary company holds full or entire capital of the
company.
7. Any transfer of a capital asset, in a scheme of amalgamation of
companies.
8. Any transfer of Capital Asset (like work of art, archeological
scientific or art collection, books, manuscript, drawings, painting,
photographs) to the Government or University or National Museum
of National importance.
CAPITAL GAINS EXEMPT FROM TAX
SUMMARY
Section 54 : Transfer of a Long Term Residential House
Property and Purchasing/Constructing a New Residential House
Property.
Section54 B: Transfer of Agricultural Land and acquires a new
land for agricultural purpose.
Section 54 D: Compulsory acquisition of land and buildings
forming part of industrial undertaking and again invested.
Section 54 EC: Transfer of Long Term Capital Asset and
investing in Long Term Bonds.
Section 54 F: Transfer of a Long Term Capital Asset other than
a House Property and investing in Long Term Residential House
Property.
Section 54 G: Transfer of Assets in shifting of industrial
undertakings from urban area to rural area.
Section 54 GA: Capital Gains from Transfer of assets in cases of
Shifting of industrial undertaking from urban area to any
Special Economic Zone(SEZ)
