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Understanding the Capital Gain (Part-I)
-CA. Udit Maheshwari
Chargeability
Any profits or gains arising from the transfer of a capital asset shall be chargeable under the head “Capital gains”. It implies that following condition should be satisfied for chargeability:
- Asset should be transferred
- Assets that is being transferred should be a capital asset on date of transfer
- Profit or gain must arise on such transfer
Capital Asset
What is Capital Asset?
Capital Asset is defined under Section 2(14) of Income Tax Act, 1961 (the Act).
Capital Asset means:
- Property of any kind whether held for business or not.
- Any securities held by FII (Foreign Institutional Investor) as per SEBI rules and regulations.
But there are certain exceptions to it i.e. few assets are excluded from the definition of capital asset. These assets are as follows:
S.No | Nature of Asset | Remarks/Explanation |
(i) | Any stock-in-trade, consumable or raw material used in business or profession | But stock-in-trade does not include securities held by FII as mentioned above (b) |
(ii) | Personal effects i.e. movable property used for personal purpose by assessee or his family member or dependent | It includes wear apparel and furniture but excludes- Jewellery, archaeological collection, drawings, paintings, sculpture, or any work of art.
Jewellery includes gold, silver, platinum, or any precious metals either in raw form or used with any other asset like furniture, utensil, wearing apparel etc.
For clarification purposes, it is emphasised that above explanation means that Jewellery, archaeological collection, drawings, paintings, sculpture, or any work of art will be deemed as the capital asset. |
(iii) | Rural Agriculture Land in India
(It must be taken care that land is situated in India) | Not being land situated in: · Any area which comes under jurisdiction of municipality or cantonment board and population should not be less than 10k · Any area within distance measured aerially from the local limits of any municipality or cantonment board: o Up to 2 Km having population between 10k to 100k o Up to 6 Km having population between 100k to 1,000k o Up to 8 Km having population more than 1,000k |
(iv) | Specified Gold Bonds or Bearer Bonds | · 6.5% Gold bonds,1977 · 7 % Gold bonds, 1980 · National Defence Gold Bonds, 1980 · Special bearer bonds, 1991 · Gold deposit bond under Gold deposit Scheme, 1999 · Certificates issued under Gold monetization Scheme, 2015 |
Nature of Capital Asset
For computing income chargeable under the head “Capital gains”, the Act mandates that asset shall be classified as either short-term capital asset or as long-term capital asset.
- Short Term Capital Asset [Section 2(42A)]
Generally, a short-term capital asset is the asset held by assessee for not more than 36 months preceding the date of its transfer.
There are few assets for which period of holding (POH) is less than 36 months to classify such asset as short-term capital asset. These assets are as follows:
S.no | Name of Asset | Period of holding |
(i) | Listed securities in India (Other than Units)/unit of equity oriented fund/Unit of Unit Trust of India/Zero coupon bond | 12 months |
(ii) | Share of unlisted company/ Land or Building or both | 24 months |
Further, in certain cases, the period of holding i.e. 36 months/24 months/12 months shall be reckoned after considering below provisions:
S.no | Name of Asset | Special consideration |
(i) | Shares of a company which is under liquidation | Period subsequent to the date on which company goes into liquidation shall be excluded |
(ii) | Capital Assets become property of assessee as defined by way of division of HUF, gift or will, succession or inheritance, dissolution of firm, transfer under revocable or irrevocable trust or liquidation of company | Period of holding shall include period for which such capital asset is held by previous owner |
(iii) | Where stock-in-trade is converted into Capital asset | Period of holding shall start from date of conversion or treatment in books |
(iv) | Capital asset being shares of Indian Company received by shareholder from amalgamated company for the shares held in amalgamating company except where shareholder itself is an amalgamated company | Period of holding shall include period for which such capital asset is held by shareholder in amalgamating company i.e. previous company |
(v) | Right shares or other security | Period of holding shall start from date of allotment of such security |
(vi) | Right entitlement for shares or other security | Period of holding shall start from the date of announcement of such right by the company. |
(vii) | Bonus shares | Period of holding shall start from date of allotment of such capital asset |
(viii) | Capital asset being shares of Indian Company received by shareholder from resulting company for the shared held in demerged company | Period of holding shall include period for which such capital asset is held by shareholder in demerged company i.e. previous company |
(ix) | Membership right of Recognized Stock Exchange (RSE) allotted prior to demutualization or corporatization | Period of holding shall include the period for which person was member of such RSE before demutualization or corporatization |
(x) | Sweat equity shares allotted or transferred by employer to its employee | Period of holding shall be recognized from the date of transfer |
(xi) | Units of Business trust (units allotted by business trust on exchange of shares) | Period of holding shall include period for which such shares are held by assessee prior to exchange for units of Business trust |
(xii) | Units allotted to assessee on account of transfer of consolidation plan/scheme of two or more Mutual funds
| Period of holding shall include period for which such units were held by assessee prior to such transfer. |
(xiii) | Capital asset being share of a company acquired by Non-resident on redemption of Gold depository receipt | Period of holding shall start from date of request for redemption is made
|
(xiv) | Preference share of a company converted in Equity share of that company only
| Period of holding shall include period for which such preference shares held as capital asset. |
- Long Term Capital Assets
Any capital asset which are out of preview of short-term capital asset u/s 2(42A) are categorized as long term capital asset.
Transfer of Capital Asset [section 2(47)]
Transfer in relation to capital asset includes:
- Sale, exchange, or relinquishment of asset;
- Extinguishment of any right;
- Compulsory acquisition under any law;
- Conversion of capital asset into stock in trade;
- Maturity/redemption of zero-coupon bonds;
- Immovable property taken as consideration or part of consideration under any contract;
- Any transaction which will effect of transferring or allowing enjoyment for any immovable property.
NOTE: This definition starts with the word “include” meaning thereby that this is a non-exhaustive list (non-complete list).
Transactions which are not regarded as transfer (Section 47)
“Notwithstanding the generality of above definition, there are certain transactions which are not regarded as transfer for the purpose of computing capital gain”. Such transactions are specified under Section 47 of the Act.
Section 47 provides the list of transactions which will not be treated as transfer i.e. transactions will not be treated as transfer only for the purpose of computing capital gain but for rest of the provisions of Income Tax Act we have to be guided by the respective provisions.
Section 47 starts with the following lines ”Nothing contained in Section 45 shall apply” which means that it overrules all the provisions of section 45 and will not be considered as transfer.
Transactions u/s 47 is listed below:
Section | Particulars |
47(i) | Distribution of capital asset on total or partial partition of HUF |
47(iii) | Transfer of capital asset under a gift or will or an irrevocable trust |
47(iv) | Transfer of capital asset by a company to its wholly owned subsidiary company |
47(v) | Transfer of a capital asset by a wholly owned subsidiary company to its holding company |
47(vi) | Transfer of capital assets in a scheme of amalgamation |
47(via) | Transfer of shares in an Indian company held by a foreign company to another foreign company under a scheme of amalgamation of the two foreign companies |
47(viab) | Transfer of share of a foreign company (which derives, directly or indirectly, its value substantially from the share or shares of an Indian company) held by a foreign company to another foreign company under a scheme of amalgamation |
47(viaa) | Transfer of capital assets in a scheme of amalgamation of a banking company with a banking institution |
47(vib) | Transfer of capital assets by the demerged company to the resulting company in a demerger |
47(vic) | Transfer of shares held in an Indian company by a demerged foreign company to the resulting foreign company |
47(vica) | Any transfer of a capital asset by the predecessor co-operative bank to the successor co-operative bank in a business reorganization. |
47(vicb) | Any transfer of capital asset (being shares) held by a shareholder in the predecessor co-operative bank if the transfer is made in consideration of the allotment to him of any shares in the successor co-operative bank in a scheme of business reorganization |
47(vicc) | Transfer of share of a foreign company (which derives, directly or indirectly, its value substantially from the share or shares of an Indian company) held by a demerged foreign company to resulting foreign company in case of demerger (subject to conditions) |
47(vid) | Transfer or issue of shares by the resulting company to the shareholders of the demerged company in a scheme of demerger |
47(vii) | Allotment of shares in amalgamated company in lieu of shares held in amalgamating company |
47(viia) | Transfer of capital assets (being foreign currency convertible bonds or GDR) by a non-resident to another non-resident |
47(viiaa) | Any transfer made outside India, of a capital asset (being rupee denominated bond of an Indian company issued outside India) by a non-resident to another non-resident |
47(viiab) | Any transfer of following capital assets by a non-resident on a recognised stock exchange located in any International Financial Services Centre: a) Bond or GDR b) Rupee Denominated Bond of an Indian Co. c) Derivative d) Such other Securities as may be prescribed. |
47(viib) | Transfer of capital assets (being a Government security carrying periodic payment of interest) outside India through an intermediary dealing in settlement of securities by a non-resident to another non- resident |
47(viic) | Redemption of capital asset being sovereign gold bond issued by RBI under the Sovereign Gold Bond Scheme, 2015 |
47(ix) | Transfer of a capital asset (being work of art, manuscript, painting, etc.) to Government, University, National museum, etc. |
47(x) | Transfer by way of conversion of bonds or debentures into shares |
47(xa) | Transfer by way of conversion of bonds [as referred to in section 115AC(1)(a)] into shares or debentures of any company |
47(xb) | Any transfer by way of conversion of preference shares into equity shares |
47(xi) | Transfer by way of exchange of a capital asset being membership of a recognized stock exchange for shares of a company |
47(xii) | Transfer of land by a sick industrial company which is managed by its workers’ co-operative |
47(xiii) | Transfer of a capital asset by a firm to a company in the case of conversion of firm into company |
47(xiiia) | Transfer of a capital asset being a membership right held by a member of a recognized stock exchange in India |
47(xiiib) | Transfer of a capital asset by a private company or unlisted public company to an LLP, or any transfer of shares held in the company by a shareholder, in the case of conversion of company into LLP |
47(xiv) | Transfer of a capital asset to a company in the case of conversion of proprietary concern into a company |
47(xv) | Transfer involved in a scheme of lending of securities |
47(xvi) | Transfer of a capital asset in a transaction of reverse mortgage made under a scheme notified by the Government |
47(xvii) | Transfer of a capital asset (being share of a special purpose vehicle) to a business trust in exchange of units allotted by that trust to the transferor |
47(xviii) | Transfer of units of a mutual fund pursuant to consolidation of two or more schemes of equity oriented mutual fund or of two or more schemes of a mutual fund other than equity oriented mutual fund |
47(xix) | Transfer of units of a mutual fund from one plan to another pursuant to consolidation of plans within scheme of mutual funds. |
NOTE:- These above transactions are annexed with certain conditions, satisfaction of such condition is must so as to keep these transaction outside the definition of transfer. We will analyse these conditions later on.
Computation of capital gain [Section 48]
Provisions under section 48 provide the calculation rules for determining capital gain.
General rule to determine capital gain is as follow:
Particulars | Amount (Rs) |
Full value consideration (received or accruing on transfer) | XXX |
Less: - Expenditure exclusively for such transfer | XXX |
Less: - Cost of Acquisition | XXX |
Less: - Cost of Improvement | XXX |
Capital Gain | XXX |
