CAPITAL GAINIncome under the Capital Gains

1. Chargeability:

Capital gains shall be chargeable to tax if following conditions are satisfied:

a) There should be a capital asset. In other words, the asset transferred should be a capital asset on the date of transfer;

b) It should be transferred by the taxpayer during the previous year;

c) There should be profits or gain as a result of transfer.

2. Meaning of Capital Asset [Sec 2(14)]

Capital Asset is defined to include:

a) Any kind of property held by an assessee, whether or not connected with business or profession of the assessee.

b) Any securities held by a FII which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992.

a) Stock-in-trade, consumable stores, raw materials held for the purpose of business or profession;

b) Movable property held for personal use of taxpayer or for any member of his family dependent upon him. However, jewellery, costly stones, and ornaments made of silver, gold, platinum or any other precious metal, archaeological collections, drawings, paintings, sculptures or any work of art shall be considered as capital asset even if used for personal purposes;

c) Specified Gold Bonds and Special Bearer Bonds;

d) Agricultural Land in India, not being a land situated:

a. Within jurisdiction of municipality, notified area committee, town area committee, cantonment board and which has a population not less than 10,000;

b. Within range of following distance measured aerially from the local limits of any municipality or cantonment board:

i. not being more than 2 KMs, if population of such area is more than 10,000 but not exceeding 1 lakh;

ii. not being more than 6 KMs , if population of such area is more than 1 lakh but not exceeding 10 lakhs; or

iii. not being more than 8 KMs , if population of such area is more than 10 lakhs.

e)  Deposit certificates issued under the Gold Monetisation Scheme, 2015

3. Type of Capital Assets

A. Short Term Capital Asset

Capital asset held for not more than 36 months immediately prior to the date of transfer shall be deemed as short-term capital asset. However, following assets held for not more than 12 months shall be treated as short-term capital assets:

a) Equity or preference shares in a company which are listed in any recognized stock exchange in India;

b) Other listed securities;

c) Units of UTI;

d) Units of equity oriented funds; or

e) Zero Coupon Bonds.

Note: Unlisted shares and immovable property (being land or building or both) held for not more than 24 months immediately prior to the date of transfer shall be treated as short-term capital asset.

B. Long Term Capital Asset

Capital Asset that held for more than 36 months or 24 months or 12 months, as the case may be, immediately preceding the date of transfer is treated as long-term capital asset.

5. Meaning of Transfer [Section 2(47)]

“Transfer”, in relation to a capital asset, includes:

(i) Sale, exchange or relinquishment of the asset;

(ii) Extinguishment of any rights in relation to a capital asset;

(iii) Compulsory acquisition of an asset;

(iv) Conversion of capital asset into stock-in-trade;

(v) Maturity or redemption of a zero coupon bond;

(vi) Allowing possession of immovable properties to the buyer in part performance of the contract;

(vii) Any transaction which has the effect of transferring an (or enabling the enjoyment of) immovable property; or

(viii) Disposing of or parting with an asset or any interest therein or creating any interest in any asset in any manner whatsoever.

The sale of capital assets may lead to capital gains and these gains may attract tax under the Income Tax Act. To save tax on these capital gains, a few capital gains exemption/deductions are available. Thus, one needs to plan benefits, considering all the relief available under law.

The calculation of capital gains is done in the following manner:

F. TAX U/S 111A (Short Term Capital Gain) :

a) Short Term Capital Gain (S.T.C.G.) arising to an assessee on sale of equity shares of a company or Units of an Equity Oriented Fund / Business Trust on which Securities Transaction Tax has been paid.

b) Tax is levied @ 15% + Surcharge (on the basis of slab of income) + Cess

G. TAX U/S 112 (Long Term Capital Gain  )

a) On transfer of long term capital asset by a resident Individual, H.U.F., domestic Company: Tax payable @ 20 %

b) On transfer of long term capital asset by a non-resident or foreign Company :

(i) Tax payable @ 20 % on Long Term Capital Gains arising from transfer of a long term capital asset ,except where such gain arises from Capital Asset referred to in Para (ii) hereinbelow;

(ii) In case of transfer of unlisted securities or shares of private limited company , tax payable @ 10 % on Long Term Capital Gains without giving effect to First Proviso to Section 48 [ First Proviso is applicable in the case of sale of shares / debentures of Indian Company by non-resident assessee whereby Capital Gain is calculated by converting cost of acquisition and sale consideration into foreign currency and then reconverting Capital Gain so calculated into Indian Rupees] and also Second Proviso to said Section whereby Indexation benefit is available to assessee in the case of sale of Long Term Capital Asset [ Other than sale of shares / debentures by non-resident referred to in First Proviso ] .

H. TAX U/S 112A (Long Term Capital Gain ) :

a) Transfer of Long Term Capital Asset being Equity Share of a Company or Unit of Equity Oriented Fund;

b) Securities Transaction Tax has been paid on acquisition as well as sale of Equity Share ;

c) Securities Transaction Tax has been paid on sale of Unit of Equity Oriented Fund / Business Trust;

d) Tax payable on Long Term Capital Gain exceeding Rupees One Lakh: @ 10 %.

e) This Section is applicable to all assessees.

f) This Section is effective from Assessment Year 2019-20.

ILLUSTRATION:1

Mr.Ghosh sold a house on 1-9-2019 for Rs.15,00,000. This house was inherited by him during 2001-02 from his father who had constructed it in 1991-92 for Rs.50,000. Mr.Ghosh spent Rs.50,000 on renovation of the house in 2006-07. Fair market value of the house as on 1-4- 2001 was Rs.4,40,000.

This house was under negotiations for sale in May,2010 and he received Rs.20,000 as advance money. The contract could not materialize and the advance money was forfeited. Compute the amount of capital gain assuming that he does not qualify for any exemptions.

[C.I.I. for 2001-02 : 100 , 2006-07 : 122, 2010-11: 167 & 2019-20:289]

ILLUSTRATION:1(Computation of Capital Gain (Assessment year 2020 - 21)

Sale price on 1-9-2019 15,00,000

Less: Cost of acquisition 4,40,000

Less: Advance money forfeited 20,000

Net cost 4,20,000

Indexed cost [4,20,000 x 289/100] 12,13,800

Indexed cost of improvement[50,000x 289/122] 1,18,443 13,32,243

Long Term Capital Gain 1,67,757

ILLUSTRATION:2

Mr. A purchased a piece of land for Rs.5,00,000 during the previous year 2001-02. In 2005-06 he agreed to sell it to Mr.B for Rs.9,00,000 and accepted an advance money of Rs.50,000. Mr.B, however, failed to honour his promise and could not get the sale deed executed in his favour within stipulated time. As a result the advance money was forfeited by Mr.A. Now—

(a) Mr. A has sold this land during 2019-20 for Rs.20,00,000. Determine the amount of capital gains chargeable to tax in the hand of Mr.A.

(b) Suppose Mr.A received advance money in May 2016 and forfeited the same as the buyer could not pay the balance amount within stipulated period of 3 months.

(c ) Suppose Mr. A .transferred this land to Mr.C. under a gift deed during 2012-13 and land is sold by Mr.C for Rs.20,00,000 during 2019-20.

Calculate capital gain in the hand of Mr.C.

[ C.I.I. for 2001-02 is 100, for 2005-06 is 117 , 2012-2013 is 200 and for 2019-20 is 289].

(a) Calculation of taxable capital gain of Mr.A for A.Y.2020-21

Sale consideration 20,00,000Less: Expenses on transfer NIL

Net consideration 20,00,000

Less: (i) Indexed cost of acquisition Cost in 2001-02

5,00,000

Less: Advance forfeited in 2005-06

50,000

4,50,000

[(4,50,000x289/100)

(ii) Indexed cost of Improvement

Taxable Long Term Capital Gain Note: Advance money forfeited has deducted from cost of acquisition a was forfeited prior to 1-4-2014.

13,00,500

NIL13,00,500

6,99,500

b) Calculation of taxable capital gain for the A.Y.2020-21

Sale consideration 20,00,000

Less: Expenses on sale NIL

Net consideration 20,00,000

Less : Indexed cost of acquisition

Cost in 2001-02 Rs.5,00,000[(5,00,000x289/100)] 14,45,000

Taxable Long Term Capital Gain 5,55,000

(c) Calculation of taxable capital gain of Mr.C for the A.Y.2020-21

Full value of consideration 20,00,000

Less: Expenses on sale NIL

Net consideration 20,00,000

Less : (i) Indexed cost of acquisition

Cost to previous owner Rs.5,00,000P.Y. of Receipt of Gift 2012-13[(5,00,000x289/200)

(ii) Indexed cost of Improvement 7,22,500 NIL

Taxable Long Term Capital Gain 12,77,500

ILLUSTRATION: 3

Find out the Indexed cost in following cases (separately for each case) for the assessment year 2019-20:

(a) Cost of plot acquired in 2006-07 for Rs.80,000

(b) Cost of house purchased in 1998-99 for Rs. 90,000 Fair market value on 1-4-2001 being Rs.1,50,000

(c ) Cost of house purchased in 1996-97 for Rs.2,00,000 but F.M.V. on 1-4-2001 4,00,000.

[C.I.I. for 2001-02 = 100 , for 2006-07 = 122, and for 2020 -21 = 289]

Solution: Computation of Indexed Cost

Case (a) Cost in 2006-07 Rs.80,000

Indexed cost = 80,000x 289/122 1,89,508Case(b) Cost in 1998-99 = Rs.90,000 or F.M.V.

on 1-4-2001 Rs.1,50,000Whichever is higher is cost i.e., Rs. 1,50,000

Indexed cost = Rs. 1,50,000 x 289/1004,33,500

Case ( c) Cost in 1996 -97 Rs.2,00,000 or F.M.V. on 1-4-2001 Rs.4,00,000

Whichever is higher is cost i.e., Rs.4,00,000 Indexed cost = 4,00,000 x 289/100 11,56,000

ILLUSTRATION:4

S, an owner of three houses, sells a residential house in Chennai for Rs.8,00,000 on May 23,2019. This house was purchased by him on 1-4-2002 for Rs.2,00,000. On May 30, 2019, he purchased a flat in Mumbai for Rs.8,70,000 for the Purpose of the residence of his son-in-law. On March 1,2020, S sells the house in Mumbai for Rs.12,10,000.

Compute the capital gain arising on the two transactions. Is S eligible for exemption u/s 54 in respect of the second sale?

Cost inflation index for the financial year 2002-03 and 2020-21 are 105 and 289.

Solution:

Computation of capital gain and exemption u/s 54 for the Assessment year 2020-2021.

Chennai House

Sale price of house at Chennai 8,00,000

Less: Indexed cost of the house 2,00,000x289/105 5,50,476

Long Term capital Gain 2,49,524

Less: Exemption u/s 54

Investment of Rs.8,70,000 made to purchase a flat in Mumbai within 2 years of the sale of the Chennai house. Since the amount invested in the new house is more than the amount of long term capital gain, so it is fully exempted

2,49,524

TAXABLELTCG

NIL

Computation of capital gain and exemption u/s for the Assessment year 2020-2021

Mumbai Flat

Sale price of flat at Mumbai 12,10,000

Less: Cost price of the flat (Purchased on May 30,2018) 8,70,000

Short Term capital Gain 3,40,000

ILLUSTRATION: 5

Mr. Raj Singh Parmar sold a plot of land at Jaipur on 1-6-2019 [C.I.I.=289] for Rs.14,40,000. He paid Rs.40,000 as selling expenses. The plot was received by him on the death of his father on 15-3-2005 (C.I.I.= 113 ]. His father had acquired it on 1-4-1990 for Rs.1,00,000 and its F.M.V. on 1-4-2001 was Rs. 3,10,000.

On 1-10- 2018 he invested Rs.3,00,000 in bonds issued by Rural Electrification Corporation Limited notified u/s 54EC and 2,00,000 on 1-3-2019 in Bonds of National Highway Authority of India.

Compute his taxable gain.

Computation of Taxable Capital Gain

UNIT- 4 ‘Income from other sources’‘Income from other sources’ is the residual head of income. Hence, any income which is not specifically taxed under any other head of income will be taxed under this head. Further, there are certain incomes which are always taxed under this head.

These incomes are as follows:

As per section 56(2)(i), dividends are always taxed under this head. However, dividends from domestic company other than those covered by section 2(22)(e) are chargeable to tax in accordance with the provisions of section 115BBDA. As per Section 115BBDA, Dividend received from Domestic Companies upto Rs 10 Lacs will be exempt from Tax and then any amount received above 10 lacs will be tax at 10%.

Winnings from lotteries, crossword puzzles, races including horse races, card game and other game of any sort, gambling or betting of any form whatsoever, are always taxed under this head.

Income by way of interest received on compensation or on enhanced compensation shall be chargeable to tax under the head “Income from other sources”, and such income shall be deemed to be the income of the year in which it is received, irrespective of the method of accounting followed by the However, a deduction of a sum equal to 50% of such income shall be allowed from such income. Apart from this, no other deduction shall be allowed from such an income.

Gifts received by an individual or HUF (which are chargeable to tax) are also taxed under this head.

In addition to above, following incomes are charged to tax under this head, if not taxed under the head “Profits and gains of business or profession”.

o Any contribution to a fund for welfare of employees received by the [Section 56(2)(ic)].

o Income by way of interest on securities. [Section 56(2)(id)].

o Income from letting out or hiring of plant, machinery or furniture. [Section 56(2)(ii)].

o Income from letting out of plant, machinery or furniture along with building; both the lettings are inseparable. [Section 56(2)(iii)].

o Any sum received under a Keyman Insurance Policy including bonus. [Section 56(2) (iv)].

Relevance of method of accounting

Income chargeable to tax under the head “Income from other sources” is to be computed in accordance with the method of accounting regularly employed by the assessee. Hence, if the assessee follows mercantile system, then income will be computed on accrual basis. If assessee follows cash system, then income will be computed on cash basis. However, method of accounting does not affect the basis of charge in case of dividend income and income by way of interest received on compensation or on enhanced compensation.

Ascertain the head of taxability of the incomes given below:

Nature of income Head of taxability

Dividend of Rs. 10,84,000 received by Mr. Kapoor from an Indian company.

Dividend is always charged to tax under the head “Income from other sources”. However, dividends from domestic company are exempt from tax upto Rs 10 Lacs only. Any amount received more than 10 lacs tax at 10%.Hence Rs 84,000 will be tax at 10%.

Dividend of Rs. 1,84,000 received by Mr. Sunil from a foreign company.

Dividend is always charged to tax under the head “Income from other sources”. Dividends from foreign company do not qualify for exemption under section 10(34) and, hence, will be fully charged to tax.

Rs. 25,200 won by Mr. Soham from a game show.

Income by way of winnings from lotteries, crossword puzzles, racesincluding horse races, card game and other game of any sort, gambling or betting of any form whatsoever, are always charged to tax under the head “Income from other sources”. Hence, Rs. 25,200 won from a game show will be charged to tax under the head “Income from other sources”.

Rs. 84,000 received by Mr. Kumarfrom his friend on his birthday.

Gifts received by an individual or HUF (which are charged to tax) are taxed under the head “Income from other sources”. In this case, gift is received from a friend and it exceeds Rs. 50,000. Hence, entire amount will be charged to tax under the head “Income from other sources”.

Rent of a plot of land of Rs. 20,000 received by Mr. Jagdish.

Rent from plot of land will be charged to tax under the head “Income from other sources”. Rent of plot of land is not charged to tax under the head “Income from house property”

Rent of a shop amounting to Rs. 1,00,000 per month received by Mr. Sohil.

Rent of  shop (being building) is charged to tax under the head “Income from house property”.

Interest of Rs. 50,000 from bank fixed deposits received by a salaried employee.

Interest    on   bank   fixed   deposits   is charged to tax under the head “Income from other sources”.

Cash:

If aggregate value is less than Rs.50000 than nothing will be taxable. If value exceeds Rs. 50,000, the whole amount will be taxable.

Illustration: 1

During the year 2019-20, Mr. Kumar received following gifts. Ascertain the total amount of gift charged to tax.

Gift of Rs. 84,000 from his father. Gift of Rs. 25,200 received from his friend on his birthday. 2,52,000 received on account of will of his grandfather. 30,000 received from his friends on the occasion of marriage anniversary

ANSWER:

Considering above, the tax treatment of various items in the hands of Mr. Kumar will be as follows :

Gift received from father will not he charged to tax (since father is covered in thedefinition of relative), hence, Rs. 84,000 will not be charged to tax.

Gift received from the friends is not covered in any of the above discussed exemptions and, hence, Rs. 25,200 received from his friend on his birthday will be charged to tax.

Money received on account of Will is covered in the above discussed exemptions and, hence, nothing will be charged to tax on account of Rs. 2,52,000 received on account of Will of his grandfather.

Money received on account of marriage of an individual in covered in above discussed exemptions. However, the benefit is not available in respect of money received on marriage anniversary. Hence, Rs. 30,000 received from his friends on account of marriage anniversary will be charged to tax.

Considering above discussion, the total amount of gift not covered in any of the specified exemptions will come to Rs. 55,200 (i.e., Rs. 25,200 + Rs. 30,000). If the gift not covered in specified exemptions exceeds Rs. 50,000 then the entire amount of such gift is charged to tax. Hence, taxable amount of gift will come to Rs. 55,200.

Some Exempt gifts If any gifts are received in following situations or from below mentioned people then those gifts will be fully exempt under Income Tax.

Any sum of money or any property received:

from any relative; or

on the occasion of the marriage of the individual; or

under a will or by way of inheritance; or

in contemplation of death of the payer or donor or

from any local authority or

from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10; or

from or by any trust or institution registered under section 12A or section 12AA; or

by any fund or trust or institution or any university or other educational institution or any hospital or other medical institution or

by way of transaction not regarded as transfer under clause (i) or clause (iv) or clause (v) or clause (vi) or clause (via) or clause (viaa) or clause (vib) or clause (vic) or clause (vica) or clause (vicb) or clause (vid) or clause (vii) of section 47; or

from an individual by a trust created or established solely for the benefit of relative of the individual.

any compensation or other payment, due to or received by any person, by whatever name called, in connection with the termination of his employment or the modification of the terms and conditions relating thereto

Note: In the above-mentioned points the term Relatives means

– Spouse of Individual – Brother & Sister of Individual – Brother & Sister of Spouse of Individual – Brother & Sister of either of the parents of Individual – Any Lineal ascendants or descendants of the individual -Any Lineal ascendants or descendants of the spouse of the individual.

Below is a comprehensive list of Donors as per definition of relative under I.Tax Act ( Hindi connotation has also been mentioned)

List of Male Donors List of Female Donors

Father (Papa or Pitaji) Mother (Maa or Mummy)

Brother (Bhai) Sister (Bahin)

Son (Beta or Putra) Daughter (Beti or Putri)

Grand Son (Pota or Potra) Grand Daughter (Poti or Potri)

Husband (Pati) Wife (Patni)

Sister’s Husband (Jija) Brother’s Wife (Bhabhi)

Wife’s Brother (Sala) Wife’s Sister (Sali)

Husband’s Brother (Dewar) Husband’s Sister (Nanad)

Mother’s Brother (Mama) Mother’s Sister (Mausi)

Mother’s Sister Husband (Mausa) Wife’s brother’s wife (Sala Heli)

Father’s Brother (Chacha or Tau) Father’s Brother’s Wife (Chachi or Tai)

Father’s Sister’s Husband(Fufa) Father’s Sister (Bua)

Grand Father (Dada, Pardada) Grand Mother (Dadi, Pardadi)

Daughter’s Husband (Jawai) Son’s Wife (Bahu or Putra Vadhu)

Spouse Father (Sasur) Spouse Mother (Sas)

Spouse Grand Father (Dada Sasur) Spouse Grand Mother (DadiSas)

Brother’s Wife (Bhabhi) Mother’s Brother’s Wife (Mami)Husband’s Brother’s Wife (Devrani or Jithani)

IMPORTANT RULES

Any amount received as gift up to Rs 50000 in one year is not taxable in the hand of

recipient.

But if amount exceeds Rs 50000 than whole received amount will be taxable.

There is limit provided on amount Received in one year as a gift not on amount

received by per person

Gift Received from Relative

Any sum of money or kind received as gift from relatives will not be taxable at all means there is no limit specified for amount (gift) received by relative hence any amount received by relatives is not taxable

e.g If your brother gift u Rs 50, 00,000  than it will not be taxable in the hand of recipient (you).

Gift received On occasion of the marriage of the individual

Gift received by any person (without limit) on the occasion of the marriage is tax free in the hand of individual (recipient).

For example:  if your friend or relative or any other person gift u on your marriage than nothing will be taxable.

Gift received under a will or by way of inheritance

Any sum of money or any property is received under a will or by way of inheritance it is totally exempt from Gift Tax. So if any person gets a Property worth Rs 50, 00,000 and some other things worth Rs 30, 00,000 through inheritance, than he will not have to pay any tax on such gift received.

Illustration 2

Mr. X received the following gifts during the previous year 2019-20. Compute his taxable income under the head “Income from other Sources”.

(i) Received Rs.1,00,000 as gift from Y (friend) on 1-6-2019 ; (ii) Received a Microwave costing Rs.14,500 as gift from his another friend Z. (iii) Received Rs.50,000 as gift from another friend Amrit on 1-11-2019; (iv) Received Rs.30,000 as gift from his sister on 1-1-2020; (v) Received Rs.40,000 as gift from his friend Mr. D on 1-12-2019; (vi) Received Rs.1,60,000 as gift from his non-resident friend on 1-2-2020. (vii) On April 13,2019, he receives a plot worth Rs.10 lacs from his nani’s sister

under a will. (viii) On June 21, 2019, he purchased a house from father-in-law of his brother for

Rs.5,00,000. The stamp duty value of the house is Rs.7,00,000SOLUTION: 1

Computation of Income from Other Sources(A) Monetary Gifts Rs. Rs. Gift from Y (friend) on 1-6-2019 1,00,000 Gift from Amrit (friend) on 1-11-2019 50,000 Gift from sister (Exempt as received from relative) NIL Gift from friend D 40,000 Gift from N/R friend 1,60,000 Total Monetary gifts 3,50,000Since the aggregate amount of the gifts received by Mr.X from various non-relative persons exceed Rs.50,000, therefore the whole amount shall be chargeable as income.

Therefore , Taxable Monetary Gifts 3,50,000 (B) Gift of Immovable Property: Purchase of immovable property for inadequateconsideration ( Rs.7,00,000 – Rs.5,00,000) 2,00,000( Difference between purchase price and stamp duty exceeds Rs.50,000) Gift of Plot under a will – Not taxable NIL(C ) Gift of Property other than immovable Property (i.e., Movable Property) Gift of microwave from friend – Not taxable becausemovable property does not include microwave NILIncome under head ‘ Other Sources’ 5,50,000

SOLUTION