Income From Capital Gains

Income From Capital Gains

According to Section 2(14) of the Income Tax Act, 1961, unless the context otherwise requires, the term ‘capital asset’ refers to:

• Property of any kind held by an assessee, whether or not connected with his business or profession;
  
  
• Any securities held by a Foreign Institutional Investor (FII) which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India (SEBI) Act, 1992.

However, capital asset does not include the following:

• Any stock-in-trade, other than the securities referred to in subclause (b), consumable stores or raw materials held for the purposes of his business or profession;
  
  
• Personal effects, such as movable property (including apparel and furniture) held for personal use by the taxpayer or any member of his family dependent on him/her, but excludes the following:
  
  
  • jewellery
  • archaeological collections
  • drawings
  • paintings
  • sculptures
  • any work of art

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Capital Assets and Its Types

There are two types of capital assets, long-term and short-term capital assets. The basis of differentiation depends on the time period for which the asset was held by the taxpayer before its transfer. In case the asset is acquired as inheritance, gift or succession, the period for which the asset was held by its preceding owner would also be included while classifying the asset as a short-term or a long-term asset.

Short-term Assets and Long-term Assets

A long-term asset is one that is held for more than 36 months. However, from the financial year 2017-18, this criterion has been revised to 24 months in the case of immovable property, such as land, building and house property. For example, Mr A sells his house property after holding it for a period of 24 months. In this case, any income arising will be treated as a long-term capital gain.

This reduced period is, however, not applicable to the movable property, such as jewellery, debt-oriented mutual funds, etc. These items will be classified as longterm capital assets only if they are held for more than 36 months. Capital assets are considered short-term in case they are held for a period less than 36 months from the date of transfer. This rule applies to assets transferred after 10th July, 2014 regardless of the date of purchase. However, the period of holding should be less than 12 months in case of shares (equity and preference).

For example, short-term assets include the following:

• Equity or preference shares in a company listed on a recognised stock exchange in India
  
  
• Securities listed on a recognised stock exchange in India
  
  
• Units of UTI, whether quoted or not
  
  
• Units of equity-oriented mutual funds, whether quoted or not
  
  
• Zero-coupon bonds, whether quoted or not

It should be noted that in case these assets are held for a period above 12 months, they will be considered as long-term capital assets. Let us look at a few examples to understand the difference clearly:

Example 1: Consider Mr X as a salaried employee. In the month of April, 2014, he purchased a piece of land and disposed the same off in December 2015. In this case, land is a capital asset for Mr X. He purchased the piece of land in April 2014 and disposed it off in December 2015. In this case, the period of holding was less than 36 months. Therefore, the land will be considered as a short-term capital asset.

Example 2: Consider Mr Y as a salaried employee. In the month of April 2015, he purchased equity shares of an Indian company listed at the NSE and sold the same in December 2017. In this case, equity shares are capital assets for Mr Y. He purchased shares in April 2015 and sold them in December 2017. The period of holding in this case is more than 12 months. Therefore, the equity shares will be considered as long-term capital assets.

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Period of Holding

For proper tax computation, it is important for a taxpayer to understand the concept of a period of holding of a capital asset. This is because the tax treatment of capital gains and losses on short- and long-term capital assets is different. Period of holding refers to the time during which an assessee holds on to a given capital asset. It is the elapsed time between the initial date of purchase of a capital asset and the date on which it was sold.

Example 3: Mr A purchased a security on January 1, 2009 and sold the same on June 30, 2009. The holding period for the security would be six months. Hence, it would be treated as a short-term asset. To compute the holding period of a capital asset, counting begins on the day after the date of purchase (acquisition) and ends on the day of sale of that capital asset. The first day after purchase is used as a benchmark for each succeeding month till the sale date of the asset to determine the period of holding for the given capital asset.

Classification of capital gains on the basis of period of holding is shown in Figure:

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Capital Gains (Section 45)

Section 45 of the Income Tax Act, 1961 deals with the computation of capital gains resulting from the transfer of capital assets. This Section also specifies the year and scope of chargeability of the profits or gains. A capital gain’s tax liability arises if the following conditions are met:

• Presence of a capital asset
• Capital asset is transferred by the assessee
• Transfer takes place in the previous year
• Transfer results in some profit or gain
• Profit or gain so resulted is not exempt from tax under relevant sections

According to Section 45(1), any profits or gains arising from the transfer of a capital asset effected in the previous year other than certain exemptions are chargeable to Income Tax under capital gains in the immediately following assessment year and the year of chargeability is the previous year in which the transfer took place. Exemptions from being charged under this head are covered under Sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H.

According to Section 45(1A), in case a person receives any money or assets at any time during the previous year from an insurer in lieu of damage or destruction of any capital asset, then the value of the money received (or the fair market value) chargeable to tax and the year of chargeability would be the previous year in which the person has received the money or asset from the insurer.

According to Section 45(2), in case an owner converts (or treats) his capital asset into stock-in-trade, the profits or gains arising from the same are chargeable to tax and the year of chargeability would be the previous year in which the stock-in-trade is sold or transferred. The amount of consideration is the fair market value of the stock-in-trade as on the date of conversion or treatment.

According to Section 45(2A) relates to the taxation of the profits or gains arising from securities held by a person who had held more than 25% securities (beneficial interest) at any time during a previous year. When a depository registered under the Depositories Act, 1996 transfers any securities in a previous year based on First-In-First-Out method, the profits or gains arising from this transfer are chargeable to tax. The amount receivable on transfer is chargeable in the hands of both the beneficial owner as well as the depository.

According to Section 45(3), if a person transfers any capital asset to a firm/AOP/BOI in which he/she is a partner or member, then the profits or gains arsing out of such transaction are chargeable to tax. The year of chargeability is the previous year in which the transfer took place and the value to be charged to tax is the value of the capital asset that is recorded in the books of accounts of the firm/AOP/BOI.

According to Section 45(4), in case the capital assets of a firm/AOP/ BOI are distributed upon dissolution of the firm/AOP/BOI or otherwise, then the profits or gains arising out of such transaction are chargeable to tax. The year of chargeability is the previous year in which the transfer took place. The value to be charged to tax is the fair market value of the capital asset on the date of such transfer.

According to Section 45(5), there can be a transfer of capital asset by way of compulsory acquisition under any law in the form of initial compensation or enhanced compensation. In such a case, the initial or the enhanced compensation is chargeable to tax. For initial compensation, the year of chargeability is the previous year in which the compensation or a part of compensation is received. For the enhanced compensation, the year of chargeability is the latter of the previous years in which the compensation is received or the year in which the competent authority (court/tribunal) passes its final order.

According to Section 45(5A), if an individual or HUF transfers any land or building or both by means of an agreement for the development of a project, then the profits or gains arising out of such transaction are chargeable to tax. Here, the consideration is the stamp duty on the share of the project of the individual/HUF as on the date of issue of a certificate and the consideration received in cash. In this case, the year of chargeability is the previous year in which the certificate of completion of the project or part of the project is issued by the competent authority.

According to Section 45(6), if an assessee repurchases any mutual fund units of an Equity-Linked Savings Scheme as mentioned in Section 80CCB, then the profits or gains arising out of such transaction are chargeable to tax. Here, the consideration is the repurchase price of the units. The capital gain is calculated as the difference between the repurchase price and the capital value of the units. The year of chargeability is the previous year in which the repurchase takes place.

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Transfer as Defined Under Section 2(47)

According to Section 2(47) of Income Tax Act, 1961, unless otherwise specified, the term ‘transfer’, with reference to any capital asset, shall refer to the following:

• the sale, exchange or relinquishment of the asset
  
  
• the extinguishment of any rights therein
  
  
• the compulsory acquisition thereof under any law
  
  
• in case where the capital asset is converted by the owner thereof into, or is treated by him/her as, stock-in-trade of a business owned by him/her, such conversion or treatment
  
  
• the maturity or redemption of a zero-coupon bond
  
  
• any transaction containing the consent to possess any immovable property to be taken or retained in part performance of a contract of nature referred to in Section 53A of the Transfer of Property Act, 1882
  
  
• any transaction involving becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner, which results in transferring, or enabling the enjoyment of, any immovable property.

From the above definition, it can be concluded that the term ‘Transfer’ under the Income Tax is important to understand to compute the tax liability arising under the head ‘income from capital gains’ arising from the transfer of a capital asset.

Section 47 of the Income Tax Act defines the transactions which are not regarded as transfer for purpose of capital gains. Some of the transactions that are not regarded as transfers for the purpose of capital gains are as follows:

• Any transfer done by distributing capital assets on the total or partial value of the partition of an HUF.
  
  
• Any transfer of capital asset done under a will or gift or an irrevocable trust.
  
  
• Any transfer of capital asset from a holding company to any of its wholly owned Indian subsidiary company or vice versa.
  
  
• Any transfer or issue of shares from the company/companies resulting from the demerger to the shareholders of the demerged company.
  
  
• In case two or more companies have resolved to amalgamate, then, if a shareholder holding any shares in the amalgamating companies transfers his/her shares in exchange for shares in the amalgamated company, then such transfer is not taxable.
  
  
• Any transfer of sovereign gold bonds issued by RBI and held by an individual by way of redemption.
  
  
• Any conversion of bonds, debentures, debenture stock and deposit certificates of a company into the shares and debentures of the same company.
  
  
• Any conversion of the preference shares of a company into the equity shares of the same company.

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Computation of Capital Gains (Sections 48 and 50)

The capital gain on transfer of the capital asset is computed as follows:

Short-term capital assets (Section 48)	Long-term capital assets (Section 48)
Full value of consideration	Full value of consideration
Less: Cost of acquisition of asset	Less: Indexed cost of acquisition
Less: Cost of improvement	Less: Indexed cost of improvement
Less: Expenditure incurred wholly and exclusively in connection with such transfer	Less: Expenditure incurred wholly and exclusively in connection with such transfer Less: Exemptions provided under sections 54, 54EC, 54F, and 54B
Resulting figure is short-term capital gain	Resulting figure is long-term capital gain

For example, Mr X purchased shares worth ₹1000 on September 30, 2017 and disposed them off on December 31, 2020 for ₹1200. The stock value was ₹1100 as on 31st January, 2020. Out of the capital gains realised by Mr X, ₹200 (1200–1000), ₹100 (1100–1000) is not taxable. The remainder of the capital gain of ₹100 would be taxed at the rate of 10 percent without the benefit of indexation.

Section 50 of the Income Tax Act gives the provisions for computation of capital gains arising from depreciable assets. Accordingly, in case a taxpayer has transferred a capital asset forming part of a block of assets (building, machinery, etc.) on which the depreciation has been allowed under the Income Tax Act, the income arising from such capital asset shall be considered as short-term capital gain.

Short-term capital gain or loss from sale of depreciable asset shall be realised only in the following two conditions:

• When, on the last day of the previous year, Written Down Value (WDV) of the block of asset is zero.
  
  
• When, on the last day of the previous year, block ceases to exist.

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Full Value of Consideration

Full Value of Consideration (FVC) refers to the amount received/ receivable by the transferor with respect to the transfer of a capital asset, which may be received in cash or kind. However, some points to be noted here are as follows:

• Adequacy or inadequacy of consideration is not a relevant factor for the purpose of determining the full value of consideration.
  
  
• It does not make any difference whether full value of consideration is received in totality or in instalments during the previous year, since, in both cases, full value of consideration due will be taken for the purpose of calculation of computing capital gains.
  
  
• In case of exchange, the full value of consideration will be the market value of the property transferred.

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Cost of Acquisition

Cost of Acquisition (COA) refers to the cost that is paid by the assessee towards the acquisition of the capital asset. Expenses incurred for completing the title of the asset constitute a part of the cost of acquisition.

However, following points should be considered:

• Ground rent cannot be taken as expenditure incurred by the assessee for the acquisition of the capital asset.
  
  
• Interest paid on the capital taken on loan to purchase an asset is supplemented in the total cost of the asset.
  
  
• Estate duty remunerated with respect to the inherited property cannot be considered as the cost of enhancement or should form a part of the acquisition.

Deemed Cost of Acquisition

Where the capital asset becomes the property of the assessee in any of the below-mentioned cases, the cost to the previous owner shall be the deemed to be cost of acquisition for the purpose of computation of capital gains:

• On the distribution of assets on the total/partial partition of Hindu Undivided Family (HUF)
  
  
• Under a Gift/Will
  
  
• By succession, inheritance or devolution
  
  
• On the distribution of assets on liquidation of the firm
  
  
• Under a transfer to a revocable or irrevocable trust
  
  
• On transfer by a wholly owned subsidiary firm to its holding firm or vice versa
  
  
• On conversion of the self-acquired property of a member of an HUF to the Joint Family property
  
  
• On any transfer in a scheme of amalgamation of two Indian companies subject to conditions specified under Section 47(vi)
  
  
• On any transfer in a scheme of amalgamation of two foreign companies subject to certain conditions
  
  
• On any transfer of a capital asset by the banking company to the banking institution in a scheme of amalgamation

Cost of acquisition in case of shares/debentures acquired on conversion of debentures [Section 49(2A)]:

• The cost of acquisition of the shares/debentures on such conversion shall be deemed to include that part of the cost of the share/debenture stock/deposit certificate, in relation to which such an asset is acquired by the assessee.
  
  
• For example, A subscribed to 15 partly convertible debentures worth ₹100 each of XYZ Ltd. in 2020. On December 10, 2021, A received 5 shares worth ₹10 each in lieu of each debenture. Thus, the cost of 5 shares received will be the cost of 5 debentures converted into shares of ₹50.
  
  
• The period of holding of such converted shares/debentures will be from the date of conversion of such debenture bonds into shares/ debentures till the actual date of transfer

Stock or shares becoming the property of the assessee on consolidation, conversion, etc.:

• Deemed acquisition cost is the cost of such stock or shares from which asset is derived.

Illustration 1: Mr Sharma subscribed to 300 debentures which are partly convertible. The face value of debentures is ₹100 each. Onethird of the debentures are convertible. A debenture may be converted into 2 equity shares of ₹10 each and at a premium of ₹5 per share. Mr Sharma writes to the debenture-issuing authority to convert his 1/3rd debentures into equity shares. Calculate the cost of acquisition of the shares.

Solution: COA = Cost of unconvertible debentures to be converted into shares/no. of shares to be issued after conversion

= (100 × 100)/(2 × 10 × 5)

= ₹100 per share

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Cost of Transfer

When an assessee transfers or sells a capital asset, he/she may incur certain costs that are wholly and directly related to the sale or transfer of that capital asset. These costs are unavoidable and, hence, necessary for the transfer to take place. While computing the tax on capital gains for any assessee, these costs referred to as the cost of transfer are permissible for deduction from sale proceeds.

For example, in the case of sale of a house property, following costs may be incurred by the assessee to carry out the transfer:

• Brokerage or commission paid for securing a buyer
  
  
• Cost of stamp papers
  
  
• Travelling expenses in connection with the transfer
  
  
• Where a property has been inherited, expense related to procedures associated with the will and inheritance, obtaining succession certificate, costs of executor, etc.

In case of sale of shares, a taxpayer may be allowed to deduct broker’s commission for shares sold. Similarly, in case of sale of jewellery, expense on broker’s services for securing a buyer can be deducted to compute tax on capital gains.

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Cost of Improvement

After acquiring or purchasing any capital asset, the assessee may add value to the asset by way of improvement or addition to the asset. The capital expenditure incurred by an assessee in carrying out these additions and improvements in the capital asset is referred to as the cost of improvement. It also includes any cost incurred in protecting or curing the title.

Therefore, it can be concluded that the cost of improvement includes all those expenditures incurred by a taxpayer in increasing the value of the capital asset. However, the cost which is deductible in computing the income of the assessee under the heads ‘Income from House Property’, ‘Profits and Gains from Business or Profession’ or ‘Income from Other Sources (Interest on Securities)’ would not be considered as cost of improvement. Cost of improvement does not include normal repairs.

Cost of improvement with reference to the following shall be considered to be nil:

• Goodwill
• Right to manufacture, produce or process any article or thing
• Right to carry on any business
• Any other capital asset

Until now, the base year for purposes of tax computation was 1981. However, this has been revised to the year 2001 with effect from the financial year 2017-18.

For computing cost of improvement:

• In case, the capital asset was acquired before 01/04/2001, cost of improvement incurred since 01/04/2001 either by the previous owner or assessee shall be considered.
  
  
• In case, the capital asset was acquired after 01/04/2001, all cost incurred by previous owner and assessee shall be considered.

Illustration 2: Mr A purchased a house property constructed up to the ground floor only on 1.12.2007 for ₹5,00,000. Later on, by 31.03.2008, he elevated the sidewalls which were 5 feet tall to 7 feet. The expenditure incurred in the process was ₹30,000. After a while, he began constructing the first floor of the house as per the plan incurring an expenditure of ₹40,500 by 31.3.2010. The finishing took place between 1.4.2010 and 28.06.2010 which cost him another ₹80,500. He sold the house on 01.03.2011. Find the cost of improvement and total indexed cost.

Solution: Indexed Cost of Acquisition (1) = 5,00,000 × (CII 2010–11)/ CII 2007–08)

= 5,00,000 × (167/129)

Indexed Cost of Improvement (2) = 30,000 × (CII 2010–11)/CII 2007– 08) + 40,500 × (CII 2010–11)/CII 2009–10) + 80,500 × (CII 2010–11)/CII 2010–11)

Total indexed cost =(1)+(2)

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Capital Gain on Transfer of Securities

An assessee is not required to pay any capital gain on shares if the shares are sold through a recognised stock exchange, and Securities Transaction Tax (STT) has been paid for their transfer. STT is a tax levied on all transactions (excluding transactions related to commodities and currency) undertaken by the stock exchange. It is levied on both the buyer and the seller.

As taxes have already been paid by the buyer and seller, capital gains tax is not chargeable on transactions where STT is paid. When the total income of an assessee includes any income that is chargeable under the head ‘Capital Gains’ that results on account of transfer of equity shares in a company or an equity fund unit, such transaction is chargeable to STT.

In such a case, the assessee has to pay tax on his/her total income that is a sum of the following two:

• Short-Term Capital Gains (STCG) as a result of the transfer of securities are charged at the rate of 15%, and
  
  
• Balance amount that results after deducting the STCG amount from the total income is charged at normal rates of tax as applicable.

Section 111A deals with tax on short-term capital gains in certain cases. As per Section 111A, if an STCG occurs as a result of the transfer of equity shares and the units of equity-linked fund and if STT has been paid on such sale, then, a tax of 15% is applicable to such transaction.

Also, according to this section, if a STCG arises as a result of transaction that is undertaken on a recognised stock exchange in any International Financial Services Centre in foreign currency and irrespective of whether STT has been paid or not, tax at the rate of 15% is applicable on it. STCG resulting by way of transfer of all other normal Short Term Capital Assets are chargeable at normal tax rates.

Section 112 deals with tax on long-term capital gains. This section describes the tax payable by assessees if their total income includes any income that arises as a result of the transfer of a long-term capital asset that is chargeable under the head of ‘Capital Gains’.

The LTCG tax applicable to various LTCAs and for different persons is presented in Table:

LTCA	Rate of LTCG tax
Unlisted securities of a closely held company	Transfer made by non-corporate/non-resident/foreign company – 10% (no benefit of indexation and currency fluctuation)
	Others including resident individual/resident HUF – 20% (with indexation benefit)
Listed securities not traded through a recognised stock exchange and STT not paid	10% without benefit of indexation or 20% with benefit of indexation, whichever is more beneficial for the assessee
Zero-coupon bonds	10% without the benefit of indexation

Until recently, the long-term capital gains that arise as a result of transfer of listed equity shares or units of equity-oriented fund or units of business trusts, were exempt from income-tax as per Section 10(38) of the Act. However, in the budget of 2018 and in the Finance Act, 2018, this exemption has been withdrawn and a new Section, Section 112A has been inserted. Section 10(38) now stands deleted. It used to deal with the long-term capital gains resulting from the sale or transfer of securities that were not chargeable to tax under the Income Tax Act.

Section 112A (Long-term capital gain on listed securities) shall be effective from A.Y. 2019-20. As per this Section, the long-term capital gains in excess of ` 1 lakh arising from the transfer of listed equity shares in the company or a unit of an equity-oriented fund/business trust that are listed on a recognised stock exchange and are subject to the STT are taxed at 10%. The transactions of shares that are listed on a recognised stock exchange in an International Financial Service Centre and irrespective of whether STT has been paid or not, tax at rate of 10% is applicable to it.

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LTCG Under Grandfathering Provisions

The Finance Bill 2018 reintroduced tax on LTCG made from listed shares and equity-oriented mutual funds. With Effective 1st April 2018, LTCG arising from the sale of these shares and equity-oriented funds that are held for more than 12 months are taxable at the rate of 10% if such LTCG exceeds ₹1 lakh in the given Financial Year.

The LTCG can be taxable under two things—the exemption for LTCG up to ₹1 lakh, and the grandfathering provision. If you had invested in equity mutual funds or shares before 31st January 2018, any gains till that date will be considered as grandfathered and thus will be exempt from tax.

Method of Determining Cost of Acquisition

A method of determining the Cost of Acquisition (COA) of such investments has been specifically laid down according to which the COA of such investments shall be deemed to be the higher of-

• The actual COA of such investments
  
  
• The lower of-
  
  
  • Fair Market Value (‘FMV’) of such investments; and
    
    
  • the Full Value of Consideration received or accruing as a result of the transfer of the capital asset i.e., the Sale Price.

Tax Implications Under Grandfathering Rule

Sl. No.	Scenario	Tax Implications
1.	Purchase and sale before 31/1/2018	Exempt under Section 10(38)
2.	Purchase before 31/1/2018 Sale after 31/1/2018 but before 1/4/2018	Exempt under Section 10(38)
3.	Purchase before 31/1/2018 Sale on or after 1/4/2018	LTCG taxable Gains accrued before 31/1/2018 exempt
4.	Purchase after 31/1/2018 Sale on or after 1/4/2018	LTCG taxable

For Example:

Mr Amit bought equity shares on 10/03/2016 for ₹12,000.

FMV of the shares was ₹15,000 as on 31/01/18.

He sold the shares on 10/05/2018 for ₹18,000.

What will be the long-term capital gain/ loss?

Cost of Acquisition (COA)

Higher of –

• Original COA i.e., ₹12,000, and

Lower of –

• FMV on 31.1.18 i.e., ₹15,000, and
• Sale Price i.e., ₹18,000

Hence, COA = Higher of (₹12,000 or ₹15,000) = ₹15,000

Capital Gain/ (Loss)

• Sale Price – Cost of Acquisition
• ₹18,000 – ₹15,000
• ₹3,000

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Capital Gain on Transfer of Capital Assets (Other Than Securities)

Section 50 of the Income Tax Act, 1961 deals with the computation of capital gains with respect to depreciable assets. When an assessee has sold a capital asset that forms a part of a block of assets (building, machinery, etc.) on which depreciation has been allowed under the Act, the gain or loss arising out of such a transfer is considered as Short-Term Capital Gain. In this case, two conditions may arise.

One, some assets of the block of assets are sold. And two, all the assets (whole block) in the block are sold. Section 50C deals with the computation of capital gains with respect to transfer of immovable property (land and building). If, in a transfer of a land or building or both, the value received or accrued is less than the value adopted or assessed by the stamp valuation authority for payment of stamp duty in respect of the transfer, then the value so adopted or assessed is considered as the FVC received.

If the dates of agreement and registration are different, then the stamp duty value as on the date of agreement is considered for computing the FVC. Self-generated assets are those assets that bear no date or cost of acquisition to the assessee in relation to their acquisition or creation.

The computation of capital assets in case of self-generated assets is done as follows:

Self-generated asset	Treatment
Goodwill of a business	Full value of consideration will be taken on actual basis.
Right to manufacture, produce or process any article or thing or right to carry on any business.	Cost of acquisition and/or improvement will be taken as nil. Expenses on transfer will be deductible on actual basis.
Tenancy rights	Full value of consideration will be taken on actual basis.
Route permits	Cost of acquisition will be taken as nil.
Loom hours	Cost of improvement will be taken on actual basis.
Trademarks and brand name associated with the business	Expenses on transfer will be deductible on actual basis.

S. No.	Capital Asset	Section	Circumstance	Deemed Full Value of consideration for computing Capital Gains
1.	Land or Building or both	50C	(1) If the Value of Stamp Duty is >110% of consideration obtained or accruing as a result of the transfer	Value of Stamp Duty
			(a) If the date of agreement differs from the date of transfer, and the entire or a portion of the consideration is obtained on or before the date of agreement via account payee cheque, bank draft, ECS, or other specified electronic modes (IMPS, UPI, RTGS, NEFT, Net banking, debit card, credit card, or BHIM Aadhar Pay),	Value of Stamp Duty on the date of agreement
			(b) If the date of agreement differs from the date of transfer, but the entire or a portion of the consideration has not been issued on or before the date of agreement by account payee cheque, bank draft, ECS, or other specified electronic mode If the value of stamp duty on the date of agreement or transfer, as the case may be, is ≤ 110 percent of the selling consideration obtained,	Value of Stamp Duty on the date of transfer Consideration so received
2.	Unquote d shares	50CA	If consideration received or accruing as a result of transfer < FMV of such share determined in the prescribed manner The provisions of this section, on the other hand, will not apply to any consideration obtained or accruing as a result of a transfer by such a class of people and under such conditions as may be prescribed.	FMV of such share determined in the prescribed manner
3.	Any Capital asset	50D	When the consideration obtained or accruing as a result of an assessee transfer of a capital asset is uncertain or cannot be calculated	FMV of the said asset on the date of transfer

Illustration 3: Mrs. Shikha purchased a flat in Gurgaon for ₹25 lakhs on 10th May, 2016 from her colleague, Mr Raj. The stamp duty as determined by the Stamp Duty Authority amounted to ₹2 lakhs with the deemed consideration being ₹27 lakhs. Mr Raj had initially purchased the flat on 21st May, 2011 for 12 lakhs. On 10th Nov., 2016, Mrs. Shikha sold the flat for ₹32 lakhs.

Determine the effect of the above transactions on the assessment of Mrs. Shikha and Mr Raj for the Assessment Year 2016–17. (Assume that the value for stamp duty purpose in case of the second sale was not more than the sale consideration.)

Solution: Computation of capital gain for Mr Raj:

Particulars	Amount (in ₹)
Deemed Consideration under Section 50C	27,00,000
Less: Cost of Acquisition	12,00,000
STCG	15,00,000

Computation of capital gain for Mrs. Shikha:

Particulars	Amount (in ₹)
Sale Price	32,00,000
Less: Cost of Acquisition	25,00,000
STCG	7,00,000

Illustration 4: Ramesh acquired a piece of land in 1977-78 for ₹2,00,000 and gifted it to his major daughter Rekha on 1st June, 1980. At that time, the market value of the land was ₹1,50,000. The FMV of the land on 1st April, 1981 was ₹3,00,000. Rekha sold the land on 15th September, 2015 for ₹40,00,000. Compute the capital gain for the Assessment Year 2016-17 assuming that the expenses incurred on the transfer were ₹2,00,000.

Solution: When the land is gifted on 1st June, 1980:

Particulars	Amount (in ₹)	Amount (in ₹)
Sale Consideration		40,00,000
Less: Expenses on Transfer	2,00,000
Indexed Cost of Acquisition	32,43,000	34,43,000
Long-term Capital Gain		5,57,000

Indexed cost of acquisition has been calculated as under:

Cost or fair market value as on 1st April, 1981, whichever is more,

i.e., ₹3,00,000 × (CII of the year of transfer/CII of 1981–82)

₹3,00,000 × (1081/100) = ₹32,43,000

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Indexation

The value of money at present will not be the same for tomorrow. The prices keep on increasing due to inflation. Indexation is a technique to adjust income payments by means of a Price Index to maintain the purchasing power of the public in inflation. The actual prices should not be used while computing the capital gains; rather, these prices should be indexed in line with the inflation in a country so that people could obtain the real value from sale of their assets.

For computing capital gains using indexation, the numerator is the index value of the year in which the asset is sold, while the denominator is the index value of the year when the asset was purchased. The index value is derived from the index known as ‘Cost of Inflation Index’.

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Cost Inflation Index

Cost Inflation Index (CII) is a means to measure inflation used in the computation of long-term capital gains. Cost inflation takes into account the Consumer Price Index (CPI) for a given year for urban non-manual employees (mainly requiring mental efforts) for the preceding year. As the price of a capital asset is likely to increase between the purchase and its sale, selling the asset would provide the owner a profit which is chargeable to tax.

In order to avoid paying huge amounts of tax, the sale price of the capital asset is indexed to provide the asset value as per its current value, taking inflation into consideration. Thus, indexation helps in arriving at the actual value of the asset at current market rate, taking into consideration the erosion of value due to inflation. The CII for a particular year is decided by the government and announced before the accounting year ends.

The Central Board of Direct Taxes (CBDT) has notified the ‘Cost Inflation Index’ applicable from financial year 2017-18 (Assessment Year 2018- 19) onwards, with base year shifted to 2001-02, in line with the amendments made in the budget 2017. Cost Inflation Index as per amended provisions has been fixed at 280 for financial year 2018-19/Assessment Year 2019-20, with cost inflation index for base year (financial year 2001-02) at 100.

The list of ‘Cost Inflation Index’ (CII) is as follows:

Financial Year	Index
2001-02	100
2002-03	105
2003-04	109
2004-05	113
2005-06	117
2006-07	122
2007-08	129
2008-09	137
2009-10	148
2010-11	167
2011-12	184
2012-13	200
2013-14	220
2014-15	240
2015-16	254
2016-17	264
2017-18	272
2018-19	280
2019-2020	289
2020-2021	301

How to calculate the cost inflation index:

Cost Inflation Index(CII) = (CII for the year the asset was transferred or sold/CII for the year the asset was acquired or purchased)

Illustration 5: Ms. Priya purchased as apartment for ₹20 lakhs in January 2001 and Sold it for ₹35 lakhs in January 2009. The profit or capital gain is ₹15 lakhs. Compute the tax liability on capital gain.

Solution: The CII for the year the apartment was purchased is 100. The CII for the year the apartment was sold is 148.

Then, the cost inflation index is 148/100 = 1.48

To find the indexed cost of acquisition, CII is multiplied with the purchase price. This is the actual cost of the asset.

Therefore, the indexed cost of acquisition = 2000000 × 1.48 = 2960000

The long-term capital gain = Sale value of the asset – indexed cost of acquisition

3500000 – 2960000 = 540000

The tax liability for long-term capital gains is charged at 20 per cent.

Tax liability will be 20 percent of 5400000 = ₹108000.

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Short-Term Capital Gain

The taxability of capital gains is based on the nature of the capital gain, whether short-term or long-term. Therefore, in order to assess the taxability, capital gains are classified into short-term and long-term. In other words, the rates at which capital gain is taxed are different for long-term capital gain and short-term capital gain. The gain arising or accruing from the transfer of a short-term capital asset is called short-term capital gain. The gain on a depreciable asset is always considered as short-term capital gain.

Short-term capital gains are calculated as follows:

• Take the full value of consideration
  
  
• Deduct the following from the above:
  
  
  • Expenditure incurred wholly and exclusively in connection with such transfer
    
    
  • Cost of acquisition
    
    
  • Cost of improvement
    
    
• The resultant figure is short-term capital gain. Such gain is charged to tax at 15 percent (plus surcharge and cess as applicable)

Particulars	Amount (in ₹)
Full value of consideration (i.e., Sales value of the asset)	XXXXX
Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (i.e., brokerage, commission, etc.)	(XXXXX)
Net Sale Consideration	XXXXX
Less: Cost of acquisition (i.e., the purchase price of the capital asset)	(XXXXX)
Less: Cost of improvement (i.e., post-purchase capital expenses on improvement of capital asset)	(XXXXX)
Short-term Capital Gains	XXXXX

The same is not applicable to stocks and bonds which are faster-moving assets compared to real estate or jewellery. In this case, if stocks and bonds are held for 12 months or less before sale, then the profits or gains arising from them are considered to be short-term capital gains. However, this rule is valid only to securities listed and traded on a recognised stock exchange.

Section 111A is applicable in case of STCG arising from transfer of equity shares, units of equity-oriented mutual-funds, or units of business trust, transferred on or after 1-10- 2004 through a recognised stock exchange and the transaction shall be liable to securities transaction tax (STT). Such gain is charged to tax at 15 percent (plus surcharge and cess as applicable).

With effect from Assessment Year 2017-18, benefit of concessional tax rate of 15 percent shall be available even where STT is not paid, if the following conditions are satisfied:

• Transaction is undertaken on a recognised stock exchange located in any International Financial Service Centre.
  
  
• Consideration is paid or payable in foreign currency.

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Long-Term Capital Gain

As per the Income Tax Act, immovable property held by an assessee for more than 36 months before sale shall be considered as long-term capital asset. Profits or gains arising/accruing thereof, shall be deemed to be long-term capital gains (LTCG). For stocks, shares and bonds, this period is more than 12 months instead of 36 months. Unlisted securities, on the other hand, will be considered as long-term capital gains only if sold after 36 months. Such gain is charged to tax at 20 percent (plus surcharge and cess as applicable).

Let us understand the computation of LTCG:

• Take the full value of consideration
  
  
• From the above, deduct the following:
  
  
  • Expenditure incurred wholly and exclusively in connection with such transfer
  • Indexed cost of acquisition
  • Indexed cost of improvement
    
    
• From the resulting number, deduct exemptions provided under Sections 54, 54EC, 54F, and 54B
  
  
• The resulting figure is long-term capital gain

Particulars	Amount (in ₹)
Full value of consideration (i.e., Sales value of the asset)	XXXXX
Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (i.e., brokerage, commission, etc.)	(XXXXX)
Net Sale Consideration	XXXXX
Less: Indexed cost of acquisition (i.e., the purchase price of the capital asset)	(XXXXX)
Less: Indexed cost of improvement (i.e., post-purchases capital expenses on improvement of capital asset )	(XXXXX)
Less: Exemptions provided under sections 54, 54EC, 54F, and 54B	(XXXXX)
Long-Term Capital Gains (LTCG)	XXXXX

For the financial year 2018–19, in case long-term capital gains on sale of equity shares/units of equity oriented mutual fund is more than ₹1 lakh, the same will be taxed at 10 percent without the benefit of indexation. Till 31st March, 2018, taxpayers were offered relief to exempt capital gains realised up to 31st January, 2018. The capital gains arising beyond this time period will be taxed at the given rate. Debt-oriented mutual funds and preference shares, however, are subject to general long-term capital gains tax rules.

They will be subjected to a tax liability at the rate of 20 percent for no-equity assets after inflation indexation and 10 percent without indexation. Indexation increases the purchase price and, thus, the capital gain decreases accordingly. The taxpayer may apply indexation on acquisition and calculate tax at 20 percent, or compute tax at 10 percent tax without indexation. Thereafter, he/she may choose the tax slab which is lower of the two.

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Exemptions/Deductions Under Capital Gains (Under Section 54, 54B, 54D, 54EC, 54F, 54G, 54GA)

Exemptions Under Section 54

Exemptions of Section 54 is applicable to an individual and HUF. It states that any long-term capital gain arising from the transfer of the residential house property shall be exempted from the capital gain tax if another residential property is purchased within one year before transfer or two years after transfer. If the amount of capital gains exceeds ₹2 crore, the assessee i.e., individual or HUF, should purchase one residential house in India within 1 year before or 2 years after the date of transfer/constructed within a period of 3 years after the date of transfer.

On the other hand, if the amount of capital gains does not exceed ₹2 crore, the assessee may purchase two residential houses in India within 1 year before or 2 years after the date of transfer/construct two residential houses in India within a period of 3 years after the date of transfer.

Exemptions Under Section 54B

Section 54B deals with the transfer of agricultural land. It states that if any sale of agricultural land takes place, the capital gain arising out of that shall be exempted to the extent that new agricultural land is purchased within 2 years of the transfer or two years prior to the transfer.

Illustration 6: Ravi had purchased certain agricultural land in 1990-91 for ₹1,00,000. The land was being used for agricultural purpose by him. This land was later sold by him in 2015 for ₹15,00,000. Compute taxable capital gains for Assessment Year 2016-17 if the agricultural land, which was sold, is rural agricultural land.

Solution: There is no capital gain since rural agricultural land is not a capital asset.

Exemptions Under Section 54D

Section 54D is applicable to any assessee who holds an industrial undertaking. To claim an exemption under this Section, the asset must have been used for 2 years immediately preceding the date of the transfer for the purpose of the business undertaking. Alternatively, the assessee must have constructed or purchased a land or building within a period of 3 years after the date of compulsory acquisition.

Illustration 7: Aditya purchased an industrial undertaking on 1.5.2005 for ₹2,00,000, which he employed for business purpose. He later sold it for ₹8,00,000 on 10.9.2009. Is he exempt from payment of tax on capital gain or not?

Solution: Aditya shall be exempt from the payment of capital gain on the sale of the industrial undertaking since he used it for a period of 4 years and 5 months before the sale of the asset.

Exemptions Under Section 54EC

Exemption under Section 54EC is applicable to all gains arising from the transfer of any long-term capital asset that was held or put to use for more than 24 months. The maximum quantum of the exemption amount is ₹50,00,000 in the year of transfer and in the subsequent financial year and the proceeds should be invested within the period of 6 months from the date of transfer in bonds issued by NHAI or RECL or PFCL or IRFCL. The new asset should be held for 5 years. If any of the given conditions is violated, then the capital gain which was exempted will be taxed as LTCG in the previous year in which the asset was transferred.

Illustration 8: Mukesh acquired shares of Genesis Ltd. on 10.10.1998 for ₹2,00,000. He later sold these shares on 1.7.2015 for ₹10,00,000. He invests ₹1,00,000 in the bonds of Rural Electrification Corporation Ltd. on 1.10.2015. What will be the consequences if Mukesh takes a loan against the security of such bonds?

Solution: If any loan is taken against the security of such bonds, it will be treated as if it is converted into money as such capital gain which was exempt earlier on such bonds shall be treated as longterm capital gain of the previous year, in which such loan is taken against the security of such bonds.

Exemptions Under Section 54F

Section 54F is applicable when an assessee constructs a residential property within 3 years of sales or purchases a residential property within 1 year before sale or 2 years after the sale of the asset. This is only available to individuals and HUF. The assessee claiming this exemption should not have more than one residential property. Furthermore, the asset sold may be any asset, but the asset acquired must be a residential property.

Exemptions Under Section 54G

Section 54G is only applicable to industrial undertakings. The exemption is granted for capital gain arising from the transfer of capital assets in the case of shifting of industrial undertaking from an urban area. This exemption is available for purchases made within one year before the transfer or 3 years after the transfer.

Exemptions Under Section 54GA

Section 54GA is only applicable to capital gains arising from the transfer of assets in cases of shifting of an industrial undertaking to any special economic zone (SEZ) whether it is developed in an urban area or any other area. This exemption is available for purchases made within 1 year before the transfer or 3 years after the transfer.

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Deemed Full Value Consideration (DFVC): Special Cases

There are certain cases where instead of actual consideration, the full value of consideration is considered to be the deemed value for the purpose of calculating the capital gains. These are listed in Table as follows:

S. No.	Section	Mode of Transfer	Deemed Value of Full Consideration
1.	45(1A)	Money/asset received from an insurer on account of damage/ destruction of capital asset	Value of money received and/or full market value of asset on the receipt date
2.	45(2)	Conversion of or treatment of capital asset into stock-in-trade	Full market value of asset on the date of its conversion or treatment
3.	45(3)	Introduction of capital in kind into a firm by a partner/member	Amount recorded in the books of accounts of the firm as the value of capital asset
4.	45(4)	Distribution of capital asset in kind on dissolution of firm	Full market value of assets on the date of distribution
5.	46(2)	Shareholders receiving assets from liquidator on the liquidation of a company	Market value of the assets on the date of distribution less the amount assessed as deemed dividend under Section 2(22)(e)
6.	48(4)	Gift, etc., of shares/debentures allotted under employee stock ownership plan (ESOP)	Market value on the date of gift
7.	50C	Transfer of land and/or building	Value declared by the assessee or value as assessed by the Stamp Valuation Authority, whichever is higher