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CAPITAL GAINS
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Rizvi Management Institute
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Group Members:-
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Asrar Hamidani – 11
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Bhavin Shah – 13

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Binita Babu – 15

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Chetan Sapariya – 17
Deven Prajapati – 19
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 CAPITAL GAINS
A capital gain is income derived from the sale of an investment. A capital
investment can be a home, a farm, a ranch, a family business, or a work of
art, for instance. In most years slightly less than half of taxable capital gains
are realized on the sale of corporate stock. The capital gain is the difference
between the money received from selling the asset and the price paid for it.

"Capital gains" tax is really a misnomer. It would be more appropriate to call

it the "capital formation" tax. It is a tax penalty imposed on productivity,
investment, and capital accumulation.

The capital gains tax is different from almost all other forms of taxation in
that it is a voluntary tax. Since the tax is paid only when an asset is sold,
taxpayers can legally avoid payment by holding on to their assets--a
phenomenon known as the "lock-in effect."

There are many unfairness’s imbedded in the current tax treatment of

capital gains. One is that capital gains are not indexed for inflation: the
seller pays tax not only on the real gain in purchasing power but also on the
illusory gain attributable to inflation. The inflation penalty is one reason
that, historically, capital gains have been taxed at lower rates than ordinary
income. In fact, "most capital gains were not gains of real purchasing power
at all, but simply represented the maintenance of principal in an inflationary
world."

Another unfairness of the tax is that individuals are permitted to deduct

only a portion of the capital losses that they incur, whereas they must pay
taxes on all of the gains. That introduces an unfriendly bias in the tax code
against risk taking. When taxpayers undertake risky investments, the
government taxes fully any gain that they realize if the investment has a
positive return. But the government allows only partial tax deduction if the
venture goes sour and results in a loss.

There is one other large inequity of the capital gains tax. It represents a
form of double taxation on capital formation. This is how economists Victor

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Canto and Harvey Hirschorn explain the situation:

A government can choose to tax either the value of an asset or its yield, but
it should not tax both. Capital gains are literally the appreciation in the
value of an existing asset. Any appreciation reflects merely an increase in
the after-tax rate of return on the asset. The taxes implicit in the asset's
after-tax earnings are already fully reflected in the asset's price or change in
price. Any additional tax is strictly double taxation.

Take, for example, the capital gains tax paid on a pharmaceutical stock. The
value of that stock is based on the discounted present value of all of the
future proceeds of the company. If the company is expected to earn
Rs.100,000 a year for the next 20 years, the sales price of the stock will
reflect those returns. The "gain" that the seller realizes from the sale of the
stock will reflect those future returns and thus the seller will pay capital
gains tax on the future stream of income. But the company's future
Rs.100,000 annual returns will also be taxed when they are earned. So the
Rs.100,000 in profits is taxed twice--when the owners sell their shares of
stock and when the company actually earns the income. That is why many
tax analysts argue that the most equitable rate of tax on capital gains is
zero.

Capital Gain In Indian Tax system

Section 45 to 55A of the Income-tax act, 1961 deal with the capital gains.
Section 45 of the Act, provides that any profits or gains arising from the
transfer of a capital asset effected in the previous year shall, save otherwise
provided in section 54, 54B, 54D, 54EA, 54EB, 54F 54G and 54H [with effect
from 1-4-1991] be chargeable to income-tax under the head ''Capital Gains''
and shall be deemed to be the income of the previous year in which the
transfer took place.

Doubts may arise as to whether 'Capital Gains' being capital receipt cab be
brought to tax as income. It may be noted that the ordinary accounting
canons of distinctions between a capital receipt and a revenue receipt are
not always followed under the Income-tax Act. Section 2(24) of the Income-
tax Act specifically provides that ''income'' includes 'any capital gains
chargeable under section 45'.

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The requisites of a charge to income tax, of capital gains under section 45
are :-

1. There must be a capital asset.

2. The capital asset must have been transferred.
3. The transfer must have been effected in the previous year.
4. There must be a gain arising on such transfer of a capital asset.

Short-term and long-term capital gains:

Gains on sale of capital assets held for more than three years (one year for
listed securities or mutual fund units) are treated as long-term capital gains
and are taxed at concessional rates compared short-term capital gains.

While calculating taxable long-term capital gains, the cost of acquisition and
the cost of improvement are linked to a cost inflation index. As a result, the
indexed cost of acquisition is deducted from the sale consideration
received, to arrive at the capital gain.

Long-term capital gains are taxed at a flat rate of 20 per cent for individuals
and foreign companies, and 30 per cent for domestic companies. Long-term
capital gains on the transfer of shares/bonds issued in a foreign currency
under a scheme notified by the Indian Government are taxed at 10 per
cent.

Capital Gain

An income that is derived from the sale of an investment is known as

Capital gain. Capital investment can be in the form of a home, a farm, a
ranch, a family business, or a work of art. When any kind of property is
purchased at a lower price & then sold at a higher price, the seller makes a
gain. Then this sale of a capital asset is known as capital gain.

This type of gain is a one-time gain and not a regular income such as salary
or house rent. Hence we can say that capital gain is is not recurring.

Capital Gain Tax/ Tax Liability of Capital Gain

Tax liability of capital gains arises when all of the following conditions are
satisfied:

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  There is a capital asset
 The assessee must have transferred the capital asset during the
previous year
 There is a profit or gain arising as a result of transfer known as capital
gain
 Such capital gain should not be exempt u/s 54, 54B, 54D, 54EC, 54 ED,
54F, 54G or 54GA.

What is a Capital Asset?

Any kind of property (movable, immovable, tangible, intangible) held by an

assessee, whether or not connected with his business or profession, is
nothing but a "Capital Asset".

The following assets are excluded from the definition of capital Asset:-

 Stock-in-trade, consumable stores, raw materials held for the purpose

of business/profession
 Items of personal effects, that is, personal use excluding jewellery,
costly stones, silver, and gold
 Agricultural land in India
 Specified Gold Bonds and special Bearer Bonds
 Gold Deposit Bonds

Types of Capital Assets:

Two types of Capital Assets are present as follows:

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 Asset. In other words, an asset, which is transferred within 36
months of its acquisition by assessee, is called Short Term Capital Asset.
However, if the investment is in the form of mutual funds/company shares,
the allowed time duration is one year 1.Short Term Capital Gains : If any
taxpayer has sold a Capital asset within 36 months and Shares or securities
within 12 months of its purchase then the gain arising out of its sales after
deducting there from the expenses of sale(Commission etc) and the cost of
acquisition and improvement is treated as short term capital gain and is
included in the income of the taxpayer.
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The deduction u/s 80C to 80U can be taken from the income from short
term capital gain apart from the short term capital gain u/s111A

Taxability of short term capital gains: Section 111A of the Income tax Act
provides that those equity shares or equity oriented funds which have been
sold in a stock exchange and securities transaction tax is chargeable on such
transaction of sale then the short term capital gain arising from such
transaction will be chargeable to tax @10% upto assessment year 2008-09
and 15% from assessment year 2009-10 onwards.

The short term capital gains other than those u/s 111A shall be added to
the income of the assessee and no such benefit is available on short term
capital gains arising in other cases and they will be taxed normally at slab
rates applicable to the assessee.

If an assessee does the business of selling and purchasing shares he cannot

take advantage of section 111A or section 10(38). In this case income will be
treated as business income.

Capital gains in case of depreciable assets : According to section 50 of

Income tax act if an assessee has sold a capital asset forming part of block
of assets (building, machinery etc) on which the depreciation has been
allowed under Income Tax Act, the income arising from such capital asset is
treated as short term capital gain.

Where some assets are left in block of assets: If a part of such capital asset
forming part of a block of asset has been sold and after deducting the net
consideration received from sale of such asset from the written down value
of the block of such asset the written down value comes to NIL then the
gain arising shall be treated as short term capital gain and in such case
where written down value has become NIL no depreciation shall be
available on such block of asset even if some assets are physically left in the
block of assets.

When no assets are left in block of assets: If the whole of the capital assets
forming part of a block of assets have been sold during a year and the
assessee has suffered a loss after deducting the net sale consideration from
the written down value of the block of assets then such loss shall be treated

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as short term capital loss and no depreciation shall be allowed from such
block of assets.

It was decided by Chandigarh tribunal in (2004) 3 S.O.T. 521/ 83 T.T.J. 1057 if

the whole of capital assets in a block have been sold in a year and some
gain arises after the sale such gain shall not be treated as short term capital
gain if some new asset has been purchased within the same year in the
same block of assets and the total value of new and old capital assets in the
same block is more than the sale consideration of the assets sold, since the
block of asset does not cease to exist in such case as is required u/s 50(2).
This can be explained with an example as below:

Written down value of 5 Machinery

as on 01-04-2008 500000
5 machinery sold on 01-05-2008 600000
New Machinery purchased on 01-06-2008 250000

now in above cases the difference between the w.d.v and sale value i.e. Rs
100000 cannot be treated as short term capital gain in the year 2008-09
since new machinery has been purchased in the same block of asset
afterwards in the same year and the total of new and old machinery is more
than the sale value of the machineries sold as a result the block of asset
continue to exist.

1) Short term capital gain where land & building are sold together:
Sometimes it happens that in a block of assets namely land & building, the
whole of land & building is sold together. In such cases the capital gain on
land and building should be calculated separately.

The Supreme Court has held in (1967) 65ITR 377 that depreciation is
available on the value of building and not on the value of plot. Considering
the above decision of Supreme Court, the Rajasthan High court in
(1993)201 ITR 442 has held that Plot and building are different assets. If the
assessee has purchased plot more than 3 years back and constructed
building on it less than 3 years back then the gain arising on sale of plot
shall be long term capital gain and the benefit of indexation shall be given
on it whereas the gain arising on sale of building shall be short term capital

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gain and will be added to the income of the assessee. Therefore both
should be calculated separately.

Where the plot has been purchased more than three years back and the
building has been constructed on it less than 3 years back, it is advisable
that in the sale deed the sale value of plot and building should be shown
separately for more clarity and if the consolidated sale value of the Plot and
building has been written in the sale deed then the valuation of plot and
building should be done separately from a registered valuer.

Capital asset transferred by the partner to the partnership firm: As per

section 45(3) of the Income Tax Act 1961 if any partner in a firm transfers
his asset to the firm then the capital gain on such asset as arising to the
partner shall be calculated by presuming the sale value of such asset as is
shown in the books of accounts of the firm and not the market value of the
asset.

whether such gain is treated as long term or short term will be decided as
below:

a) If the depreciation has been claimed on the asset transferred to the firm
then in view of section 50(2) the gain arising there from will be treated as
short term capital gain.

b) If the partner has been the owner of the asset for more than 36 months
and no depreciation has been claimed on it then the gain arising from such
asset shall be treated as long term capital gain.

Capital gain in case of Dissolution of a Firm: As per section 45(4) of the

Income Tax Act where any partnership firm or AOP or BOI is dissolved and
the Capital assets of the such firm or AOP or BOI are transferred by way of
distribution of assets to the partners at the time of Dissolution in such case
the gain arising from such transfer to the partners will be treated as capital
gain and the firm will be liable for paying tax on it in the year of distribution
of the assets.

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For the purpose of section 48 the fair market value of the asset on the date
of such transfer shall be deemed to be the full value of the consideration
received or accruing as a result of the transfer.

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 Asset. In other words, an asset which is transferred on or after 36
months of its acquisition by assessee, is Long Term Capital Asset. Selling
mutual funds and company shares after one year also constitutes a long-
term capital gain. A Capital Asset held for more than 36 months and 12
months in case of shares or securities is a long term capital asset and the
gain arising therefrom is a long term capital gain. Long term capital gains
are arrived at after deducting from the net sale consideration of the long
term capital asset the indexed cost of acquisition and the indexed cost of
improvement
of the asset.

The Central government notifies cost inflation index for every year. The indexed cost
of acquisition is calculated by multiplying the actual cost of acquisition with C.I.I of the
year in which the capital asset is sold and divided by C.I.I of the year of purchase of
capital asset. Similarly the indexed cost of improvement can be calculated by using the
C.I.I of the year in which the capital asset is improved. Where the capital asset was
acquired before the year 1981 then the cost of acquisition shall be the fair market value or
the actual cost of its acquisition which ever is higher. The Fair market value of a capital
asset can be known by the valuation of the registered valuer.

Short-term Capital Long-term capital

gains tax gains tax
Sale transactions of 10% NIL
securities which attracts
STT:-
Sale transaction of securities
not attracting STT:-
Individuals (resident and Progressive slab rates 20% with indexation;
non-residents)

Rizvi Management Intitute Page 9

Partnerships (resident and 30% 10% without
non-resident) indexation (for units/
zero coupon bonds)
Individuals (resident and 30%
non-residents)
Overseas financial 40% (corporate) 10%
organizations specified in 30% (non-corporate)
section 115AB
FIIs 30% 10%
Other Foreign companies 40% 20% with indexation;
Local authority 30%
10% without
Co-operative society Progressive slab rates indexation (for units/
zero coupon bonds)

Transfer of capital assets

 Transfer of capital assets includes the following:-

 Sale of asset
 Exchange of asset
 Relinquishment of asset (that is surrender of asset)
 Extinguishments of any right on asset
 Compulsory acquisition of asset

Capital gain tax rates

Incase of short-term capital gains, you will be taxed depending on the tax
slab relevant to you after you have added the capital gain to your annual
income. However if the transaction was levied with Securities Transaction
Tax (STT), your gain will be taxed 10%.

Incase of long term capital gains, you will be taxed 20%. When the
transaction is levied with STT, you don't need to pay any tax on your gain. In
this case, you can either calculate your capital gain using an indexed
acquisition cost, or choose not to opt for indexing.

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Income From Capital Gain
Section 2(47) of the Income Tax Act, defines transfer in relation to a capital
asset, and it includes
 The sale, exchange or relinquishment of the asset.
 The extinguishment of any rights therein.
 In a case where the asset is converted by the owner thereof into, or is
treated by him as, stock-in-trade of a business carried on by him, such
conversion or treatment.
 Any transaction involving the allowing of the possession of any
immovable property to be taken or retained in part performance of a
contract of the nature referred to in section 53A of the Transfer of
Property Act, 1882(4 of 1882).
 Any transaction (whether by way of 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 whatsoever) which has the
effect of transferring, or enabling the enjoyment of, any immovable
property.
 Explanation - For the purposes of sub-clauses (v) and (vi),
''immovable property'' shall have the same meaning as in clause (d)
of section 269UA]

Transactions which are not deemed to be transfer for the purposes of

capital gains
The Income Tax Act also exempts certain transactions from being covered
under the definition of transfer. These are more specifically contained in
section 46 & 47 of the Income Tax Act. In brief the transactions not
regarded as transfer are as under :-

a. Where the assets of a company are distributed to its share holders

upon its liquidation, the distribution is not regarded as transfer.
However where a share holder receives any money or other assets on
the date of distribution which exceeds the amount of dividend within
the meaning of section 2(22)(c), the excess is chargeable under the
head capital gains.
b. Any distribution of capital assets on the total or partial partition of a
huf is not regarded as transfer

Rizvi Management Intitute Page 11

 c. Where a capital asset is transferred under the gift or will or an
irrevocable trust, the transaction is not of the nature of transfer as
per the Income Tax Act.
d. The transfer of a capital asset to an Indian subsidiary company by a
parent company or its nominees who hold the entire share capital of
the Indian subsidiary company is not regarded as transfer.
e. Any transfer of a capital asset by a wholly owned subsidiary company
to its Indian holding company is also not regarded as transfer for the
purposes of capital gains. Top However in respect of (d) & (e) above
the transfer of a capital asset as stock in trade is covered by the
provisions of capital gains.
f. Any transfer in a scheme of amalgamation of a capital asset by the
amalgamating company to an Indian amalgamated company is also
not a transfer for the purposes of capital gains.
g. In the case where the amalgamating and the amalgamated
companies are both foreign companies, the transfer of shares held in
the Indian company by the foreign amalgamating company to the
foreign amalgamated company is not regarded as a transfer for the
purposes of capital gains if at least 25% of the share holders of the
amalgamating foreign company continue to remain share holders of
the amalgamated foreign company and if such transfer does not
attract tax on capital gains in the country in which the amalgamating
company is incorporated..
h. Any transfer by a share holder, in a scheme of amalgamation, of share
or shares held by him in the amalgamating company in consideration
of the allotment of any share or shares in the amalgamated Indian
company is not regarded as a transfer for the purposes of capital
gains.
i. Where a non resident transfers any bond or shares of an Indian
company which were issued in accordance with any scheme notified
by the Central Government for the purposes of section 115AC or
where the non resident transfer any bonds or shares of a public
sector company sold by the government and purchased by the non
resident in foreign currency is not regarded as a transfer for the
purposes of capital gains . However this is so only when the transfer
of the capital asset is made outside India by the non resident to
another non resident.

Rizvi Management Intitute Page 12

 j. Where any assessee transfers any work of art, archaeological or art
collection, book, manuscript, drawing , painting, photograph or print
to a University, the National Museum, the National Art Gallery, the
National Archives, to the Government or any other notified
institution of national importance is not considered as transfer for
the purposes of capital gains.
k. Any transfer by way of conversion of a company's bonds or
debentures, debenture-stock or deposit certificates in any form into
shares and debentures of that company is not regarded as transfer
for the purpose of capital gains.
l. Where a non corporate person transfers its membership of a
recognized stock exchange Top in India to a company in exchange of
shares allotted by that company is not regarded as a transfer for the
purposes of capital gains provided that such transfer was made on or
before 31st day of December, 1998.
m. Any transfer of a land of a sick industrial company which is being
managed by it s Worker's Cooperative is not regarded as transfer for
the purposes of capital gain if the transfer is made under a scheme
prepared and sanctioned under section 18 of the Sick Industrial
Companies (Special Provisions) Act, 1985. This exemption is operative
only in the period commencing from the previous year in which the
said company became a sick industrial company under section 17(1)
of that act and ending with the previous year during which the entire
net worth of such company becomes equal to or exceeds the
accumulated losses. The net worth is defined in the Sick Industrial
Companies Act.
n. With effect from 1-4-99 the process of sale or transfer of any capital
or intangible asset of a firm is not regarded as a transfer for the
purposes of capital gains where it is on account of the succession of
the firm by a company in the business carried on by it. This
exemption is dependent on the following conditions :-
i. all the assets and liabilities of the firm before the succession
and relating to the business should become the assets and
liabilities of the company.
ii. All the partners of the firm before the succession should
become share holders of the company in the same proportion

Rizvi Management Intitute Page 13

 in which their capital accounts stood in the books of the firm
on the date of succession.
iii. The partners of the firm should not receive any consideration
or benefit, directly or indirectly, in any form or manner, other
than by allotment of shares in the company.
iv. The aggregate share holding in the company by the partners
should be more than 50% of the total voting power for a period
of 5 years from the date of succession.
o. With effect from 1-4-99 where a sole proprietary concern is
succeeded by a company in the business carried on by it and as a
result of which the sole proprietary concern sells or transfers any
capital asset or intangible asset to the company, such transfer shall
not be regarded as transfer for the purposes of capital gains. This
exemption is available only if the following conditions are fulfilled:-
i. All the assets and liabilities of the business of the sole
proprietary concern should become the assets and liabilities of
the company.
ii. The share holding of the sole proprietor should be more than
50% of the total voting power in the company for a period of 5
years from the date of succession.
iii. The sole proprietor should not receive any consideration or
benefit, directly or Top indirectly, in any form or manner, other
than by way of allotment of shares in the company.
p. With effect from 1-4-99 any transfer in a scheme for lending of any
securities under an agreement or arrangement which the assesses
enters into with the borrower of such securities subject to the
guidelines issued by the Securities and Exchange Board of India is not
regarded as a transfer for the purposes of capital gains.

where in the transaction of lending shares of some distinctive

numbers and receiving back shares of some other numbers is the
result, the same would not be considered as exchange of asset within
the definition of capital asset since the meaning of the word
exchange necessarily involves exchange of two different assets. Thus
where the asset received back is not different from what was lent in
the above scheme of lending, no transfer is there for the purposes of
capital gain as long as the assets received back represent the same
fraction of the ownership of the company
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Calculation/Computation of Capital Gains

Capital gain can be calculated as follows:

Full Value of Consideration

Less:

 Cost of Acquisition
 Cost of Improvement
 Expenditure of Transfer

Capital gains

Less:

 Exemption u/s 54

Taxable Capital Gains

Exemptions of Capital Gains

Exemption is nothing but a reduction from the capital gain which is taxable,
on which tax will not be levied and paid.

The exemptions of capital gains are provided in the following cases under
sec 10, 54, 54B, 54D, 54EC, 54ED, 54EF, 54F & 54G as follows:

 Exemption of capital gains on compulsory acquisition of agricultural

land
 Exemption of LTCG arising from sale of shares and units
 Exemption of capital gain on transfer of an asset of an undertaking
engaged in the business of generation, transmission, distribution of
power
 If house property that is transferred is used for residential purpose
 House property was a long term capital asset
 If agricultural land used by an assessee to purchase another
agricultural land within a period of 2 years after the date of transfer

Rizvi Management Intitute Page 15

  Any capital gain arising to an individual undertaking from the
compulsory acquisition under any law, shall be exempt to the extent
such capital gain is invested in the purchase of another land/building
within a period of 2 years after the date of transfer
 Any LTCG shall be exempt to the extent such capital gain is invested
within a period of 6 months after the date of transfer in the specified
long term asset
 Capital gain arising from the transfer of LTCA being listed securities or
Unit of a mutual fund or the UTI shall be exempt to the extent such
capital gain is invested in equity shares forming part of an eligible
capital within a period of 6 months after the date of such transfer
 The Capital gain that arises to an individual/HUF from the transfer of
any capital asset other than residential house property shall be
exempt in full if the entire net sales consideration is invested in
purchase of one residential house 1 year before or two years after
the date of transfer

Income Tax In India

A tax that is applicable on income that has been generated from any source
is termed as Income tax. The central board of direct tax (CBDT) is the
governing body that takes care of the Indian Income tax. Income tax is
imposed by the government on an individual, company, business, Hindu
undivided families (HUFs), co-operative organization and trusts. The tax
structure is different on different commodities and products. Indian income
tax is regularized under income tax act 1961.

History of Income tax

In India Income tax comes into existence in the year 1860. Initially at the
time when it was imposed it had taken almost five years to regularize and
implement the income tax however income tax act lapsed in the year 1865.
Again after a gap of so many years it again comes into force. Act of 1886
was again came into force it defines the full fledged law of income tax it
includes the exemption in various agricultural professions, income tax rules
on industries and corporation. In the year Act VII of 1918 was launched that
reforms the income tax law in a new way. This new act scrutinized the new

Rizvi Management Intitute Page 16

industries that come under income tax bracket. This new act tries to expand
the horizon to generate large revenue for the country.

In the year 1922 another income tax act came into existence as a result of
recommendation by the all India income tax committee. With this act a new
clause was introduced under which unlike earlier where the collection of
income tax in the current assessment year depends on the estimated
collection of income tax of previous year. After the income tax act of 1922
there will be no important provision came however the income tax later on
comes under the provision of finance act. Every assessment year the new
tax structure is decided by the finance department of the country that is
released with the union budget. The income tax act of 1922 existed till 1961
however government had handed over the income tax clause to the law
commission to review and recast it in a logical way so that the tax amended
in an easies way without changing the basic tax structure.

The income tax laws hold many industries and it has diversified clauses for
different industries. There are various industries where government offers
wavers in subsidies time to time. The present income tax act is same as of
1961 income tax act of India. As per the constitution of India every
individual is bound to pay income tax for the progress of the nation. Any
individual or an organization if earning any income in the country has to pay
income tax. Although in the present day tax structure there is a different
slab for man and women. As per Indian income tax law senior citizens are
exempted from the regular income tax slab, similarly income generated
through the agriculture is not subjected to the income tax. Any state that is
affected by the natural calamity is also subjected to the income tax waver.

Tax Rates:

In this budget, the senior citizens are divided into two categories as senior
citizen from 60 - 80 years of age and very senior citizens years of the age 80
and above.
The new tax slabs applicable from April 1, 2011 are as follows:

 On all incomes up to Rs. 1,80,000 per year. (For women - Rs.

1,90,000, for senior citizens - Rs. 2,50,000 and for very senior citizens
- Rs. 5,00,000 ), no Income Tax is applicable.

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  From Rs. 1,80,001 - Rs. 5,00,000 : 10% of amount ( For women - Rs.
1,90,001 to Rs. 5,00,000 and for senior citizens - Rs. 2,50,001 to Rs.
5,00,000)
 From Rs. 5,00,001 to Rs. 8,00,000 : 20% of amount ( Same for
women, senior citizens and very senior citizens)
 Above Rs. 8,00,000 : 30% of amount ( Same for women, senior
citizens and very senior citizens)

Income from Capital Gains

Under section 2(14) of the I.T. Act, 1961, Capital asset is defined as property
of any kind held by an assessee such as real estate, equity shares, bonds,
jewellery, paintings, art etc. but does not consist of items like stock-in-trade
for businesses or for personal effects. Capital gains arise by transfer of such
capital assets.

Long term and short term capital assets are considered for tax purposes.
Long term assets are those assets which are held by a person for three
years except in case of shares or mutual funds which becomes long term
just after one year of holding. Sale of long term assets give rise to long term
capital gains which are taxable as below:

 As per Section 10(38) of Income Tax Act, 1961 long term capital gains
on shares/securities/ mutual funds on which Securities Transaction
Tax (STT) has been deducted and paid, no tax is payable. Higher
capital gains taxes will apply only on those transactions where STT is
not paid.
 For other shares & securities, person has an option to either index
costs to inflation and pay 20% of indexed gains, or pay 10% of non
indexed gains.
 For all other long term capital gains, indexation benefit is available
and tax rate is 20% .

Any Income derived from a Capital asset movable or immovable is taxable

under the head Capital Gains under Income Tax Act 1961. The Capital Gains
have been divided in two parts under Income Tax Act 1961. One is short
term capital gain and other is long term.

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The cost inflation index table as notified is here below:

Cost Inflation Index Notified by the GOVT

Financial Year (CII) Financial Year (CII)

1981-82 100 1995-96 281

1982-83 109 1996-97 305

1983-84 116 1997-98 331

1984-85 125 1998-99 351

1985-86 133 1999-2000 389

1986-87 140 2000-2001 406

1987-88 150 2001-2002 426

1988-89 161 2002-2003 447

1989-90 172 2003-2004 463

1990-91 182 2004-2005 480

1991-92 199 2005-2006 497

1992-93 223 2006-2007 519

1993-94 244 2007-2008 551

1994-95 259 2008-2009 582

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2009-10 632

If a capital asset has been subjected to depreciation then no indexation

benefit is allowed on sale of such capital asset in view of section 50(2) as
discussed above.

Capital gain from Plot and building should be separately calculated: As

discussed above plot and building are separate assets and the capital gain
on above should be calculated separately. If the plot is purchased more
than 3 years back and building has been constructed within 3 years the
capital gain on plot will be considered as long term and the capital gain on
building will be treated as short term capital gain.

Taxation of Long term capital gains: The long term capital gains are taxed @
20% after the benefit of indexation as discussed above. No deduction is
allowed from the long term capital gains from section 80C to 80U. But in
case of individual and HUF where the income is below the basic exempted
limit the shortage in basic exemption limit is adjusted against the long term
capital gains.

Section 112(1) provides that any capital gain arising from a long term capital
asset being the listed securities which are sold outside the stock exchange
the long term capital gain shall be calculated on such securities as below:

a) Tax arrived at @ 20% on such long term capital gain after indexation u/s
48 or
b) Tax arrived at @ 10 % on such long term capital gain without indexation
Whichever is less.

The long term capital gain on equity shares or units of equity oriented
mutual fund which are sold in the stock exchange and on which securities
transaction tax is paid, is exempt u/s 10(38).

Section 50C: Section 50C has been introduced with effect from 01-04-2003
and is a very important section while calculating capital gain on land &
building. Section 50C provides that Where the consideration received or
accruing as a result of the transfer by an assessee of a capital asset, being
land or building or both, is less than the value adopted or assessed or

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assessable by stamp valuation authority) for the purpose of payment of
stamp duty in respect of such transfer, the value so adopted or assessed or
assessable shall, for the purposes of section 48, be deemed to be the full
value of the consideration received or accruing as a result of such transfer.

It means that the capital gain will be calculated by considering the sale
value of the capital asset as equal to the value adopted or assessed by the
stamp valuation authority for that capital asset if the actual sale value is less
than the value assessed by stamp valuation authority.

If the assessee claims that the value adopted by the stamp valuation
authority exceeds the fair market value then the assessing officer may refer
to the valuation officer for valuation of the fair market value of the asset. If
the fair market value declared by the valuer is more than the value adopted
or assessed or assessable by the stamp valuation authority, the value so
adopted assessed or assessable by the stamp valuation authority will be
taken as full value of consideration of the capital asset.

CBDT vide its circular No 8/2002 dt 27-08-2002 has declared that if the
valuation officer has declared the fair market value of the capital asset less
than the value adopted, assessed or assessable by the stamp valuation
authority then the capital gain shall be calculated on the value so declared
by the valuer.

After the adding of word assessable u/s 50C in 2009 now it has become
clear that even those immovable properties in which no sale deed is
entered into and which have been sold on a full and final agreement will be
within the ambit of section 50C.

Exemptions from long term capital gain:

Section Asset Assessed Holding Whether Other Quantum

Period of Reinvestment Conditions/
Original Necessary — Incidents
Assets Time Limit
54 Residential Individual 3 years Yes — In The amount
House HUF Residential of gains, or
Property House, within 1 the cost of

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 year before, or new asset,
2 years after whichever is
the date of lower
transfer (if
purchased) or 3
years after the
date of transfer
(if
constructed).**
54B Agricultural Individual Use for 2 Yes — In Must have As above
Land years Agricultural been used
Land, within 2 by assessee
years after the or his
date of transfer. parents for
agricultural
purposes
See Notes 1,
2 and 10
54D Industrial Any Use for 2 Yes — In Must have As above
Land or Assessee years Industrial Land, been
Building or Building, or any compulsorily
any right there in acquired
right within 3 years
therein after the date
of transfer.

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54EC Any Long- Any Shares, Yes — Whole or The amount
term Assessee Listed any part of of gain or the
Capital Securities, capital gain in cost of new
Asset Units of bonds asset
(LTCA) UTI/Mutual redeemable whichever is
Fund after 3 years lower subject
covered and issued on to Rs.
u/s. or after 1-4- 50,00,000 per
10(23D) :1 2006 by NHAI assessee
year Others or REC and during any
: 3 years notified by the financial year
Govt. for
– within 6 investments
months from made on or
the date of after 1-4-
transfer. 2007. Also
investment in
bonds notified
before 1-4-
2007 would
be
subject to
conditions laid
down in
notification
including
limiting condi-
tions (i.e., Rs.
50 lakhs per
assessee)
54ED LTCA being — do — Listed Yes — Within exemption is — do —
listed Securities six months available
securities or units of from the date only in
or units UTI/Mutual of transfer in respect of
Fund acquiring the assets
covered eligible issue of transferred
u/s. capital before 1-4-
10(23D) : 1 2006
year
54F Any Capital Individual Shares, Yes — In If the cost of
Asset (not HUF Listed, Residential the specified
being a Securities, House, within 1 asset is not
residential Units of year before, or less than Net

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 house) UTI/Mutual 2 years after Consideration
Fund the date of of the original
covered transfer (if asset, the
u/s. purchased), or whole of the
10(23D) : 1 3 years after gains. If the
year Others the date of cost of the
: 3 years transfer (if specified
constructed).** asset is less
than the Net
Consider-
ation, the
proportionate
amount of
the gains.
54G Industrial Any — Yes— In similar The amount
land or Assessee assets and of gains, or
building or expenses on the aggregate
plant or shifting of cost of new
machinery original asset, asset and
within 1 year shifting
before, or 3 expenses,
years after the whichever is
date of transfer. lower.
54GA Industrial Any — Yes — In similar The amount
land or Assessee assets and of gains, or
building or expenses on the aggregate
plant or shifting of cost of new
machinery original assets asset and
to a Special shifting
Economic Zone expenses,
– within 1 year whichever is
before or 3 lower
years after the
date of transfer
115F ‘Foreign Non- Shares, Yes— In
Exchange Resident Listed ‘Specified
Asset’ Indian Securities, Assets’ (See
(See Note Units of Note 9) or
UTI/Mutual Specified
Fund Savings
covered Certificates of
u/s. Central
10(23D) : 1 Government,

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 year within 6
Others : 3 months after
years the date of
transfer

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