CAPITAL GAINS

Capital asset includes property of any kind, whether fixed or circulating, movable or immovable, tangible or intangible.

Exclusions

a. Stock-in-trade, consumables stores, raw material held for business or profession

b. Personal effects of assessee for personal use or use by dependents

c. Agricultural land in India provided it is not situated –

1. Where population is 10,000 or more

2. In any notified area

d. Gold bonds issued by central government

e. Special bearer bonds, 1991

CAPITAL GAINSCAPITAL GAINS

BASIS OF CHARGE – SEC 45

Any profit or gain arising from transfer of a capital asset is chargeable to tax under head “Capital Gains” in the PY in which transfer took place

Conditions:1. There should be a capital asset2. The capital asset is transferred by assessee3. Such transfer takes place during PY4. Any profit or gains arises as a result of transfer5. Profit not exempt u/s 54, 54B, 54D, 54EC, 54ED, 54F and 54G

CG is taxable in AY relevant to PY in which asset is transferred

Short-term capital asset means a capital asset held by assessee for <36 months, immediately prior to its date of transfer.

Cases where an asset held for < 12 months treated as short-term capital asset,

1. Equity or preference shares in a company

2. Securities ( like debentures, government securities) listed in a recognized stock exchange in India

3. Units of UTI

4. Units of a mutual fund specified under section 10 (23D)

An asset other than a short-term capital asset is regarded as a Long-term capital asset

TRANSFER OF CAPITAL ASSETTransfer includes sale, exchange or relinquishment of the asset or the extinguishment of any rights or compulsory acquisition under any lawTransactions not regarded as transfer

CAPITAL ASSET

COMPUTATION OF CAPITAL GAINSCOMPUTATION OF CAPITAL GAINSShort term capital gains

1.Find the full value of consideration

Less- exp incurred wholly and exclusively in relation to such transfer

-Cost of acquisition

-Cost of improvement

Less-provn u/s 54B,54D,54G

2.Balancing amount is short term capital gains

Long term capital gains

1. Find the full value of consideration

Less- exp incurred wholly and exclusively in relation to such transfer

-Indexed Cost of acquisition

-Indexed Cost of improvement

Less-provn u/s 54,54B,54D, 54EC,54ED,54F,54G

2.Balancing amount is long term capital gains

Benefit of Indexation from 98-99-Transfer of Bonds or Debentures

FULL VALUE OF CONSIDERATIONFULL VALUE OF CONSIDERATION

1.Employees stock option plan

2.In case of Real Estate(Sec 50.C)

-Sec applicable only in case of Land or Building or both.

-When Consideration << Value of Stamp Duty

Value adopted for stamp duty to be taken to calculate capital gains

-Assesse claims Stamp Duty value >> FMV of property and no reference made case may be referred to valuation officer…..

When referred to the Valuation officer

Example: Transaction Value-Rs 12 cr

Stamp Duty -Rs 15 cr

Valuation may be as follows:- Valuation

less than transaction value between transaction more than stamp and stamp duty value duty value Eg: 11 cr 13 cr (T<V<SD) 18 cr

Then Full value of consideration is:-

Transaction value Valuation itself Stamp duty value i.e 12 cr 13 cr 15 cr

Expenditure on Transfer:Expenditure wholly and exclusively in connection of transfer of capital asset is deductible e.g.•Expenses after passing on the title•Deduction after passing the title•Legal Expenses incurred

Cost of Acquisition:is the value for which it was acquired by the assesse.

Interest on borrowed money

Amendment to articles of association

Estate Duty paid

Mortgage

Notional cost of Acquisition:

In the instances given below the cost of acquisition is taken as a notional figure

Cost of acquisition as to the previous owner(Sec 49(1))

Provisions of Sec 49(1):Cost to the previous owner is deemed to be the cost of acquisition to the assesse in cases where capital asset becomes the property under the mode of transfer described below:

Acquisition of property under various cases:

The following points should be duly considered• The cost to previous owner is the “Cost of Acquisition• The property acquired by the previous owner as a gift •The cost of improvement of the asset borne by the previous •Capital asset is short term or long term= Period of holding of the previous owner• Benefit of indexation starts when asset was acquired by current owner•When the cost of asset to the previous owner cannot be ascertained

Cost of acquisition taken as Fair market value as on April 1 1981

Assesse has an option of either considering Actual cost or Fair market value of asset(other than depreciable asset) as on April 1 1981 as cost of acquisition :

•Property of assesse before April 1 1981

•Capital asset the property of assesse under sec49(1)

Other points:

•Assetacquired by the assesse or previous owner before 1/4/1981

•Option not available in case of depreciable assets

•Cost of asset or Fair market value whichever is higher taken as cost of acquisition

•FMV not available in various cases.

Cost in case of Depreciable Assets

Situation 1 Sec 50(1):Block of asset does not cease to exist but full value of consideration exceeds the following amount:-

•Exp incurred inrelation to transfer

•WDV of assets at beginning of p.y.

•Actual cost of any asset falling within the block of assets acquired

during previous year

Such excess is short term capital gains

Situation 2 Sec 50(2):

Block ceases to exist because all the assets in the block are sold of in the previous year,the cost of asset is the aggregate of the foll:-

•WDV of the block of assets in p.y

•Actual cost of any asset falling within that block of assets in p.y

•If consideration < cost of acquisition+expenses incurred

Shortfall is the short term capital loss

•If consideration > cost of acquisition+expenses incurred

Excess is short term capital gains

COST OF ACQUISITION IN CASE OF COST OF ACQUISITION IN CASE OF ADVANCE MONEY RECEIVED (SEC 51)ADVANCE MONEY RECEIVED (SEC 51)

• Advance or other money received and forfeited by the assessee in case of negotiation for transfer -shall be deducted from cost or FMV of the asset

COST OF IMPROVEMENT SEC 55(1)(B)

•Includes expense of capital nature incurred after 31-3-1981

•In making addition to capital asset

•To protect or complete title to capital asset or cure such title

•Expense to increase value of capital asset

INDEXED COST OF ACQUISITION & INDEXED COST OF ACQUISITION & IMPROVEMENTIMPROVEMENT

• Cost of acquisition and cost of improvement adjusted for inflation

• Indexation introduced in AY 1993-94

• CII specified by Central Govt. takes into account 75% of average rise in CPI

Case 1 - Capital asset acquired before 1-4-1981

ICOA = Higher of FMV on 1-4-81or cost *CII in year of transfer of acquisition CII for 1981-82 i.e. 100 ICOI = COI after 1-4-81 * CII in year of transfer

CII for 1981-82 i.e. 100

Case 3 – Capital Asset acquired before 1/4/81 & acquired by previous owner before 1/4/81

• ICOA = Greater of FMV on 1/4/81 *CII in year of Transfer & COA to previous owner CII on 1/4/81 i.e. 100

• ICOI = COI * CII in year of transfer CII in year of improvement

Case 2 - Capital asset acquired on or after 1-4-1981

ICOA = COA * CII in year of transfer CII in year of acquisition

•ICOI = COI * CII in year of transfer CII in year of Improvement

Case 5 – Capital Asset acquired by assessee & previous owner on/after 1/4/81

•ICOA = COA to previous owner * CII in year of transfer

CII in 1st year asset was held

•ICOI = COI (assessee + * CII in year of transfer

Previous owner) CII in year of improvement

Case 4 – Capital Asset acquired on/after 1/4/81 & acquired by previous owner before 1/4/81

ICOA = Greater of FMV on 1/4/81 * CII in year of transfer& COA to previous owner CII in year of holding

ICOI = COI (assessee + previous * CII in year of transferowner) CII in year of improvement

KEY POINTSKEY POINTS

• Date of transfer of asset is immaterial as long as it is within a FY .

• All assets transferred on any date in a PY would be subjected to

same indexation for determination of cost of improvement .

• The benefit of indexation shall not be allowed in the computation

of LTCG arising from the capital asset being bond or debenture .

• Indexation benefit is not available in computing the CG arising

from transfer of shares held in Indian company by a Non Resident

acquired out of convertible foreign currency.

COMPULSORY ACQUISITION OF COMPULSORY ACQUISITION OF ASSET SEC 45(5)ASSET SEC 45(5)

If any compensation is enhanced by a court, tribunal or any authority then it is taxable as:

• Taxable in PY in which enhanced compensation is recd by assessee• Cost of Acquisition & Cost of Improvement = NIL• Litigation expenses are deductible as expenses on transfer• If enhanced compensation is recd by any other person it is taxable

as income of recipient

Applicability:•Transfer of capital asset due to compulsory acquisition under any law•Capital asset transfer approved or determined by Central Govt. or RBI

Initial compensation is taken as sale consideration & chargeable to tax in PY in which compensation is recd. Capital gain not taxable in year of transfer but in first year in which initial compensation is recd.

COMPUTATION OF CAPITAL GAINS: NRI COMPUTATION OF CAPITAL GAINS: NRI

Conditions:

• Taxpayer should be a NRI

• Acquisition of shares/debs of Indian co. utilizing foreign currency

• Asset may be short term or long term

Computation:

• CG computed in foreign currency

• Calculated CG reconverted into Indian currency

• Indexation benefit NOT available

• Applicable to CG accruing from every re-investment thereafter

CAPITAL GAIN COMPUTATIONCAPITAL GAIN COMPUTATION

Conversion Rate

Date Computation

Sale consideration

Avg. Exchange Rate

Date of Transfer

Sale consideration(INR)

Foreign currency (X)

Cost of Acquisition

Avg. Exchange Rate

Date of Acquisition

Cost of Acqui.(INR)

Foreign currency (Y)

Expenditure on Sale

Avg. Exchange Rate

Date of Transfer

Expense on transfer (INR)

Foreign currency (Z)

Capital Gain Buying Rate

Date of Transfer

X-Y-Z reconverted to INR

SPECIAL PROVISIONS IN CASE OF NRISPECIAL PROVISIONS IN CASE OF NRI

Conditions: • Taxpayer is a NRI• Transfer of assets, purchased with convertible FOREX• LTCG only• Within 6 months of transfer of asset, investment in:

- Indian co. shares - Central Govt. Securities- Debentures/Deposit of Indian PLC

Exemption:- If NAC < NC, ENTIRE CAP GAIN EXEMPT- If NAC < NC, exemption prop to Investment = (Investment in NA x LTCG)/(Amt of NC)- If NA transferred within 3 yrs. Exempted CG deemed to be

Income from LTCG of PY

COMPUTATION OF CAPITAL GAINS IN CASE COMPUTATION OF CAPITAL GAINS IN CASE OF SELF GENERATED ASSETSOF SELF GENERATED ASSETS

SGA Sale Consideration (A)

Acquisition Cost. (B)

Improve-

ment Cost (C)

Transfer Expense (D)

Cap Gain

Goodwill (bus) Actual NIL NIL Actual A-D

Tenancy Rights, Route Permits, Loom Hours

Actual NIL Actual Actual A-C -D

Right to process manufacture, carry on bus.

Actual NIL NIL Actual A-D

Trade mark, Brand Name

Actual NIL Actual Actual A-C -D

COST OF ACQUISITION OF BONUS SHARESCOST OF ACQUISITION OF BONUS SHARES

• If bonus shares are recd without any payment on basis of holding any financial asset, then Cost of Acquisition = NIL

Cost of Acquisition (original & bonus shares transferred after Mar.31, 95)

Original & bonus shares acquired before 1/1/81

Original-Greater of Actual Cost or FMV on 1/1/81 & Bonus-FMV on 1/1/81

Original shares before 1/1/81, bonus after 1/1/81

Original-Greater of Actual Cost or FMV on 1/1/81 & Bonus-NIL

Original & bonus shares acquired after 1/1/81

Original-Actual Cost & Bonus-NIL

CAPITAL GAIN ON TRANSFER OF RIGHTS CAPITAL GAIN ON TRANSFER OF RIGHTS SHARESSHARES

• Cost of Rights entitlement for original shareholder = NIL• For acquisition of rights shares by rights renouncee

Cost of Rights = Purchasing Cost of + Cost to Company Share Rights Entitlement

• For original shareholder, STCG

DISTRIBUTION OF ASSETS BY COMPANY ON LIQUIDATION

Cond: Assets distributed by co. at time of liquidation to shareholdersIf satisfied no CG chargeable to Co.In hands of Shareholder:A) Find money recd & MV of assets on date of distributionB) Find amount treated as DividendC) Full value of Consideration = A – BCapital Gain = C – Acquisition/Indexed Cost – Expenditure on Sale

CONVERSION OF CAPITAL ASSET INTO CONVERSION OF CAPITAL ASSET INTO STOCK IN TRADE SEC 45(2) STOCK IN TRADE SEC 45(2)

• Case of CIT v/s Bai Shirinbai K. Kooka

• From AY 1985-86 conversion of capital asset into stock-in-trade treated as transfer

• Chargeable to tax in year when stock-in-trade is sold• FMV on date of conversion is treated as sale consideration

TRANSFER OF CAPITAL ASSET BY PARTNER

TO FIRM SEC 45(3)

•Capital gain chargeable in the year of transfer

• Full value of consideration is amount recorded in books of firm

DISTRIBUTION OF CAPITAL ASSET ON DISSOLUTION SEC 45(4)

• Capital gains in hands of firm in year of transfer

• Full value of consideration is FMV on date of transfer

TRANSFER OF SHARES IN LIEU OF SHARES OF TRANSFER OF SHARES IN LIEU OF SHARES OF AMALGAMATING COMPANY -SEC 47(VII)AMALGAMATING COMPANY -SEC 47(VII)

Not regarded as transfer if -•Transfer is in consideration of shares in amalgamated company•Amalgamated company is an Indian Co.•Shares is only consideration•Duration of holding is from acquisition of shares in amalgamating co.•Indexation from allotment in amalgamated co.

CONVERSION OF DEBENTURES INTO CONVERSION OF DEBENTURES INTO SHARES SEC 49(2A)SHARES SEC 49(2A)

• Not a transfer

• On sale, Debentures Cost = Cost of Acquisition

• Duration of holding determined from date of allotment of shares

• Indexation starts from date of conversion

TRANSFER OF SECURITY BY DEPOSITORY SEC 45(2A)

•Profits from transfer of securities by depository or participant chargeable to Income tax as income of beneficial owner

•COA and period of holding determined on the basis of FIFO

INSURANCE CLAIM RECD FOR DAMAGE OR DESTRUCTION OF CAPITAL ASSET

•From AY 2000-01 insurance claim received taxable as CG if

Compensation is recd on damage/destruction of capital asset because of:

- Convulsion of nature - Riot/Civil disturbance

-Accidental fire explosion - Action by enemy

• Chargeable in year of receipt of compensation

•Money recd or FMV of asset recd treated as full value of consideration

TRANSFER OF SHARES IN RESULTING CO. OR DEMERGED CO. - SEC49(2C)/(2D)

Share COA = Share Cost in * Bk value of assets trfd in demerger

in new Co. demerged Co NW in demerged co. before demerger

Original share COA = Original share COA – Share COA in

new co after demerger

• Duration of holding from acquisition in demerged co

• Indexation from date of allotment in resulting co.

CAPITAL GAINS IN CASE OF SLUMP SALE CAPITAL GAINS IN CASE OF SLUMP SALE SEC50BSEC50B

• Treated as LTCG if all capital assets are held > 36 monthsNet Worth = COA + COI

Net Worth = Total Assets - Liabilities (as per books)• No indexation benefit

PURCHASE BY A COMPANY OF ITS OWN PURCHASE BY A COMPANY OF ITS OWN SHARESSHARES

Calculation as per Sec 48 CG = COA – Value of Consideration from co. • Transfer of stock option or sweat equity -Sec 49(2AA) CG = COA - Sale Value

CAPITAL GAINS – TAX RATECAPITAL GAINS – TAX RATE

• Short- term capital gains are taxable like any other income

• Long term capital gains are taxable at a flat rate of 20% + Surcharge [Sec 112]– If Long term is covered u/s 115 AB, 115 AC,115 AD, or

115E than the rate applicable is 10 % + Surcharge

– Where tax liability arises because of inclusion of capital gains then LTCG is charged at 20 % + Surcharge

CAPITAL GAINS – SHARES SECURITIES, CAPITAL GAINS – SHARES SECURITIES, & UNITS& UNITS

• Option 1 – with Indexation – 20% + Surcharge

• Option 2 – Without Indexation – 10% + Surcharge

– Lower of the two options has to be paid as Long term Capital Gains

CAPITAL GAINS EXEMPT FROM TAX

• Total / partial exemption from capital gains

in terms of sections 54, 54B,54D,54EC, 54ED, 54F

54G, and 54H

Provisions For Capital Gain Exemption

BUDGET 2004BUDGET 2004

• Long Term Capital Gains– Long term capital gains on sale of equity shares or

units of an “equity oriented fund” are exempt from tax, provided such transfer is chargeable to securities transaction tax.

– Where Securities Transaction Tax is not attracted the normal Capital Gains will be applicable

– Applicable from Oct 1st 2004

• Short Term Capital Gains– Where STT is attracted short-term capital gains

will be charged at 10%– The concessional rate of short- term capital gains

is applicable to only to transfer of equity shares and units of equity oriented funds.

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