Capital gain

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A brief information regarding capital gain tax in india.
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Capital gain

  1. 1. MSU PG DEPLOMA Capital Gain C.A Yogesh Kesariya C.A Yogesh Kesariya
  2. 2. BASIS OF CHARGE • FOLLOWING CONDITIONS MUST BE SATISFIED TO CONFIRM CHARGEBILITY:1. There is a capital asset. 2. Assessee should transfer the capital asset. 3. Transfer of capital assets should take place during the previous year. 4. There should be gain or loss on account of such transfer of capital asset. 5. Such gain should not be exempt under section 54, 54B, 54EC, 54F, 54G or 54GA . If aforesaid conditions are satisfied, capital gain shall be arise and taxed in respective previous year. C.A Yogesh Kesariya C.A Yogesh Kesariya
  3. 3. CAPITAL ASSETS[sec 2(14)] Capital assets means any property held by assessee will not include following: 1. Stock in trade held for business. 2. Agricultural land in India not in urban area i.e., an area with population more than 10,000. 3. Items of personal effects, i.e., personal use excluding: iJewellery, precious stones, iii-Archaeological collections, Drawings, Paintings, Sculptures. 4. Special bearer bonds 1991.(instruments does not exist at present) 5. 6.5% Gold bonds 1977, 7% Gold bonds & National Defence Bonds 1980. (instruments does not exist at present) 6. Gold Deposit Bonds 1999. C.A Yogesh Kesariya C.A Yogesh Kesariya
  4. 4. Non existence of definition of ‘property’ • The word ‘property’ used in section 2(14) includes not only tangible assets but also intangible assets. • The word property does not mean merely physical property but also includes rights, title or interest in it. C.A Yogesh Kesariya C.A Yogesh Kesariya
  5. 5. TYPES OF CAPITAL ASSETS There are two types of Capital Assets: 1. 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 Assets. In other words, an asset, which is transferred within 36 months of its acquisition by assessee, is called Short Term Capital Assets. 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 Assets. In other words, an asset, which is transferred on or after 36 months of its acquisition by assessee, is called Long Term Capital Assets. C.A Yogesh Kesariya C.A Yogesh Kesariya
  6. 6. WHEN PERIOD IS NOT 36 MONTHS? The period of 36 months is taken as 12 months under following cases: • Equity or Preference shares, • Securities like debentures, government securities, which are listed in recognized stock exchange, • Units of UTI • Units of Mutual Funds • Zero Coupon Bonds C.A Yogesh Kesariya C.A Yogesh Kesariya
  7. 7. TYPES OF CAPITAL GAINS • The profit on transfer of STCA is treated as Short Term Capital Gains (STCG) sec 2(42B) • while that on LTCA is known as Long Term Capital Gains (LTCG). Sec 2(29B) C.A Yogesh Kesariya C.A Yogesh Kesariya
  8. 8. WHAT IS TRANSFER SEC 2(47) • Transfer in this context includes following: 1. Sale of asset 2. Exchange of asset 3. Relinquishment of asset (means surrender of asset) 4. Extinguishments of any right on asset (means reducing any right on asset) 5. Compulsory acquisition of asset 6. The maturity or redemption of zero coupon bonds. C.A Yogesh Kesariya C.A Yogesh Kesariya
  9. 9. COMPUTATION OF CAPITAL GAIN • The capital gain can be computed by subtracting the cost of capital asset from its transfer price. Particulars Amount Full Value of Consideration ----------- Less: Cost of Acquisition*(COA) ----------- Cost of Improvement*(COI) ----------- Expenditure on transfer ----------- Capital Gains Less: Exemption U/S 54 --------------------- Taxable Capital Gains ----------- *To be indexed in case of LTCA C.A Yogesh Kesariya C.A Yogesh Kesariya
  10. 10. FULL VALUE OF CONSIDERATION • Full value of consideration includes whole sale price or exchange value or compensation including enhanced compensation received for capital asset in transfer. The following points are considered in relation to full value of consideration. 1. The consideration may be in cash or kind. 2. The consideration received in kind is valued at its fair market value. 3. It may be received or receivable. 4. The consideration must be actual irrespective of its adequacy. C.A Yogesh Kesariya C.A Yogesh Kesariya
  11. 11. EXPEDITURE ON TRANSFER • Expenditure incurred wholly and exclusively for transfer of capital asset is called expenditure on transfer. • It is fully deductible from the full value of consideration while calculating the capital gain. • Examples of expenditure on transfer are : – Commission or Brokerage paid by seller, – Registration fees & cost of stamp papers etc. – Travelling expenses, and litigation expenses C.A Yogesh Kesariya C.A Yogesh Kesariya
  12. 12. COST OF ACQUISITION • Cost of Acquisition (COA) means any capital expense at the time of acquiring capital asset under transfer, i.e., to include the purchase price, expenses incurred up to acquiring date in the form of registration, storage etc. expenses incurred on completing transfer. • In other words, cost of acquisition of an asset is the value for which it was acquired by the assessee. • Expenses of capital nature for completing or acquiring the title are included in the cost of acquisition. C.A Yogesh Kesariya C.A Yogesh Kesariya
  13. 13. DEEMED COST OF ACQUISITION Under sec 49(1) • Where the capital asset became the property of the assessee in any of the following manner, the cost of acquisition of asset shall be deemed to be cost for previous owner: 1. On any distribution of assets on the total or partial partition of a Hindu undivided family; 2. Under a gift or will; 3. By succession, inheritance or devolution 4. On any distribution of assets on the dissolution of a firm, body of individuals, or other association of persons, where such dissolution had taken place at any time before the 1st day of April, 1987, C.A Yogesh Kesariya C.A Yogesh Kesariya
  14. 14. DEEMED COST OF ACQUISITION Continue... 5. On any distribution of assets on the liquidation of a company, 6. Under a transfer to a revocable or an irrevocable trust, 7. On a transfer by wholly owned Indian subsidiary company to its holding company or vise-versa. 8. On conversion of self acquired property of a member of HUF to the Joint family property, etc. 9. On any transfer in a scheme of amalgamation of two Indian(or foreign) companies subject to certain conditions u/s 47(vi); C.A Yogesh Kesariya C.A Yogesh Kesariya
  15. 15. COST OF ACQUISITION OF RIGHT SHARES • The price at which the rights issue is made plus amount paid to person renouncing right is treated as cost of acquisition. • Right Issue is normally at a discount to the market price. C.A Yogesh Kesariya C.A Yogesh Kesariya
  16. 16. COST OF ACQUISITION OF BONUS SHARES • the cost of acquisition is zero. • In case the bonus shares have been allotted to assessee before 1-4-1981 he can opt for market value of such shares on 1-4-1981 as cost of acquisition. C.A Yogesh Kesariya C.A Yogesh Kesariya
  17. 17. COST OF ACQUISITION OF DEPRECIABLE ASSETS Under sec 50 • Where full value of the consideration as a result of the transfer of any part or entire block of assets exceeds the cost of acquisition of that block of depreciable assets, there will be a capital gain , which will always be a short term capital gain. C.A Yogesh Kesariya C.A Yogesh Kesariya
  18. 18. INDEXED COST OF ACQUISITION • Indexed cost of acquisition means an amount which bears to the cost of acquisition the same proportion as cost inflation index for the year in which the asset is transferred bears to the cost inflation index for the first year in which the asset was held by the assessee or for the year beginning on 1-4-1981 which ever is later. • Cost Inflation Index(CII), in relation to a previous year, means such index as the central government may, having regard to 75% of a average rise in the consumer price index for urban non-manual employees for the immediately preceding previous year to such previous year, by notification in the official gazette, specified in this behalf. Continued... C.A Yogesh Kesariya C.A Yogesh Kesariya
  19. 19. INDEXED COST OF ACQUISITION Continue... Mode a) Asset can be acquired in following two modes: Assets acquired directly by the assessee himself Cost of acquisition x Mode b) CII of the year of transfer -------------------------------------CII of the year of acquisition Asset acquired from the previous owner n any mode given u/s 49(1): CII of the year of transfer Cost of acquisition previous owner x --------------------------------------CII of the year in which the asset is first held by the assessee C.A Yogesh Kesariya C.A Yogesh Kesariya
  20. 20. COST OF IMPROVEMENT • Cost of improvement is the capital expenditure incurred by an assessee for making any addition or improvement in the capital asset. • It also includes any expenditure incurred in protecting or curing the title. • Cost of improvement includes all those expenditures, which are incurred to increase the value of the capital asset. • Any cost of improvement incurred before 1st April 1981 is not considered or it is ignored. Continued... C.A Yogesh Kesariya C.A Yogesh Kesariya
  21. 21. COST OF IMPROVEMENT Continue... • The reason behind it is that for carrying any improvement in asset before 1st April 1981, asset should have been purchased before 1st April 1981. • If asset is purchased before 1st April we consider the fair market value. • The fair market value of asset on 1st April 1981 will certainly include the improvement made in the asset. C.A Yogesh Kesariya C.A Yogesh Kesariya
  22. 22. INDEXED COST OF IMPROVEMENT Indexed Cost of improvement = CII of the year of transfer Cost of acquisition x ---------------------------------------CII of the year of improvement C.A Yogesh Kesariya C.A Yogesh Kesariya
  23. 23. INDEXED COST NOT ALLOWED 1. Transfer of bonds and debenture by company or govt. other than capital indexed bonds issued by government, 2. Transfer of shares & debentures by nonresident in foreign currency in Indian company. 3. Transfer of undertaking or division in a slump sale, 4. Transfer of offshore funds, 5. Transfer of GDR by non-resident purchased in foreign currency. 6. Transfer of securities by FII.[sec 115AD] C.A Yogesh Kesariya C.A Yogesh Kesariya
  24. 24. CAPITAL GAIN ON CONVERSION OF CAPITAL ASSET INTO STOCK IN TRADE Under sec 45(2) • Up to 1984-85 conversion of capital asset into stock in trade was not treated as transfer & no capital gain was charged on it. • From 1984-85 The profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, Continued... C.A Yogesh Kesariya C.A Yogesh Kesariya
  25. 25. CAPITAL GAIN ON CONVERSION OF CAPITAL ASSET INTO STOCK IN TRADE Continue... for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. C.A Yogesh Kesariya C.A Yogesh Kesariya
  26. 26. CAPITAL GAIN ON CONVERSION OF STOCK IN TRADE IN CAPITAL ASSET *HERE WE TAKE SHARES AS VARIOUS ASSETS. • In the absence of a specific provision to deal with this type of situation, two formulas can be evolved to work out the profits and gains on transfer of assets. • One Formula which had been adopted by the assessing officer, i.e., difference between the book value of the shares and the market value of the shares on the date of conversion, be taken as a business income and the difference between the sale price of the shares and the market value of the shares on the date of conversion, be taken as capital gain. Continued... C.A Yogesh Kesariya C.A Yogesh Kesariya
  27. 27. CAPITAL GAIN ON CONVERSION OF STOCK IN TRADE IN CAPITAL ASSET Continue... • The other formula which was adopted by the assessee, i.e., the difference between the sale price of the shares and the cost of acquisition of share, which was the book value on the date of conversion with indexation from the date of conversion, should be computed as a capital gain. • In the absence of a specific provision, out of these two formulas, the formula which was favorable to the assessee, should be accepted. C.A Yogesh Kesariya C.A Yogesh Kesariya
  28. 28. DISTRIBUTION OF CAPITAL ASSETS ON DISSOLUTION OF FIRM,AOP/BOI • Normally, firm/AOP/BOI is not considered a distinct legal entity from its partners or members and so transfer of a capital asset from the partners to the firm/AOP/BOI is not considered ‘Transfer’. • However, under the Capital Gains, it is specifically provided that if any capital asset is transferred by a partner to a firm/AOP/BOI by way of capital contribution or otherwise, the same would Continued... be construed as transfer. C.A Yogesh Kesariya C.A Yogesh Kesariya
  29. 29. DISTRIBUTION OF CAPITAL ASSETS ON DISSOLUTION OF FIRM,AOP/BOI Continue... • For the purpose of computation of capital gain, fair market value shall be taken as full value of consideration. C.A Yogesh Kesariya C.A Yogesh Kesariya
  30. 30. COMPULSORY ACQUISITION OF ASSETS UNDER ANY LAW • In this case, settlement of the amount of compensation usually takes a long time. The compensation is initially fixed by the Land Acquisition Officer and is subject to appeal and re-determination by courts. • The compensation amount may vary as the case progresses from one authority to another. The transferor may get paid in instalments as and when a higher authority awards further (enhanced compensation)compensation. Continued... C.A Yogesh Kesariya C.A Yogesh Kesariya
  31. 31. COMPULSORY ACQUISITION OF ASSETS UNDER ANY LAW Continue... • Capital gain is taxable in previous year in which compensation has been received. • As the deductions in computing the capital gains are considered while computing the capital gains in the initial year, no further deductions are allowed in the subsequent calculations on account of cost of acquisition etc. C.A Yogesh Kesariya C.A Yogesh Kesariya
  32. 32. CAPITAL GAIN ON TRANSFER OF INTANGIBLE ASSETS • Capital gain on transfer of Following intangible assets are taxable 1. 2. 3. 4. 5. 6. Goodwill Route permits Loom hours Trademarks Rights to manufacture specific products Tenancy rights • Cost will be original purchase price plus transaction cost plus improvement cost. C.A Yogesh Kesariya C.A Yogesh Kesariya
  33. 33. CAPITAL GAIN TAX ON TRANSFER OF DEPRECIABLE ASSET • In Income Tax Act depreciation is provided on only four types of assets: 1. Buildings 2. Furniture 3. Machinery and plant 4. Intangible Assets • For calculating depreciation different blocks are made based on the name of asset and then the rate of depreciation, thus a block will contain only that asset which will have the same name and same depreciation. Continued... C.A Yogesh Kesariya C.A Yogesh Kesariya
  34. 34. CAPITAL GAIN TAX ON TRANSFER OF DEPRECIABLE ASSET Continue... • For the purpose of computing capital gain following are deducted from consideration: 1. Expense on transfer 2. Cost of acquisition but for the case of transfer of depreciable asset Cost of acquisition will be aggregate of the following: i.WDV of block at beginning ii.Actual cost of any asset falling in same block, acquired during year. C.A Yogesh Kesariya C.A Yogesh Kesariya
  35. 35. LONG TERM CAPITAL GAIN FROM THE TRANSFER OF RESIDENTIAL HOUSE PROPERTY UNDER SEC 54 UNDER SEC 54 • This exemption is available subject to fulfillment of the following requirements: 1. The transferor shall be an individual or the HUF, 2. The asset to be transferred must be of long-term capital asset, being buildings or lands appurtenant thereto, being a residential house, 3. The income from such residential house shall be assessable under the head "Income from House Property", Continued... C.A Yogesh Kesariya C.A Yogesh Kesariya
  36. 36. LONG TERM CAPITAL GAIN FROM THE TRANSFER OF RESIDENTIAL HOUSE PROPERTY Continue... UNDER SEC 54 UNDER SEC 54 4. The transferor assessee should purchase a residential house in India within a period of one year before or two years from the date of transfer or construct a residential house within three years from the date of the transfer of the original house. 5. The new house property purchased or constructed has not been transferred within a period of three years from the date of purchase or construction. Continued... C.A Yogesh Kesariya C.A Yogesh Kesariya
  37. 37. LONG TERM CAPITAL GAIN FROM THE TRANSFER OF RESIDENTIAL HOUSE PROPERTY Continue... UNDER SEC 54 UNDER SEC 54 • Deposit Scheme under Section 54: Where the amount of capital gain is not so utilized for the purchase or construction of a new residential house before the due date of furnishing of the return of income, it shall be deposited by him on or before the due date in an account with a public sector bank in accordance with the Capital Gain Account Scheme, 1988. • If the new house property is transferred within a period of three years from the date of the purchase or construction, the amount of capital gains arising there from, together with the amount of gains exempted earlier, will be chargeable to tax in the year of sale of the house property. C.A Yogesh Kesariya C.A Yogesh Kesariya
  38. 38. CAPITAL GAIN ON THE TRANSFER OF AGRICULTURAL LAND UNDER SEC 54(B) UNDER SEC 54(B) • This exemption is available subject to fulfillment of the following requirements: 1. Assessee – Individual 2. Asset transferred - Agricultural land used by individual or his parent for agricultural purposes during 2 years preceding date of transfer. 3. Nature of Asset - Short/Long Term 4. New asset to be purchased/constructedAgricultural land (urban or rural) 5. Time-limit for purchase/construction - Purchase within 2 years from the date of transfer. C.A Yogesh Kesariya C.A Yogesh Kesariya
  39. 39. CAPITAL GAIN ON COMPULSORY ACQUISITION OF LAND AND BUILDING OF AN INDUSTRIAL UNDERTAKING UNDER SEC 54(D) UNDER SEC 54(D) • Capital gains arising on the compulsory acquisition of any land or building forming a part of an industrial undertaking is exempt subject to the following requirements: 1. Such land or building was used by the assessee for the purpose of industrial undertaking for 2 years preceding the date of compulsory acquisition, 2. The assessee has purchased any land or building or constructed a building within 3 years from the date of the receipt of the compensation, 3. Newly acquired land or building should be used for the purpose of shifting or re-establishing the said undertaking or setting up another industrial undertaking. C.A Yogesh Kesariya C.A Yogesh Kesariya
  40. 40. LONG TERM CAPITAL GAIN EXEMPTION FOR INVESTMENT IN CERTAIN BONDS UNDER SEC 54(EC) UNDER SEC 54(EC) • This exemption is available an individual, HUF, company or any other person • who invests the long term capital gain, within 6 months of a the transfer of the capital asset, in any of the specified bond (issued on or after April 1, 2006) redeemable after 3 years: 1. National Highway Authority of India (NHAI), or 2. Rural Electrification Corporation Ltd. (REC) • There is a limit of Rs. 50 Lakh on the investments on or after April 1, 2007. C.A Yogesh Kesariya C.A Yogesh Kesariya
  41. 41. LONG TERM CAPITAL GAIN FROM THE TRANSFER OF A CAPITAL ASSET OTHER THAN RESIDENTIAL HOUSE PROPERTY UNDER SEC 54(F) UNDER SEC 54(F) • The exemption is available only an individual or a HUF • who transfers (or sells) a capital asset that results in a long-term capital gain, and then invests the amount of gain in acquiring a new residential house. • This exemption is available subject to fulfilment of the following requirements: Continued... C.A Yogesh Kesariya C.A Yogesh Kesariya
  42. 42. LONG TERM CAPITAL GAIN FROM THE TRANSFER OF A CAPITAL ASSET OTHER THAN RESIDENTIAL HOUSE PROPERTY Continue... UNDER SEC 54(F) UNDER SEC 54(F) • The transferor assessee should purchase or a residential house in India within a period of one year before or two years from the date of transfer or construct a residential house within three years from the date of the transfer of the original house. (Construction must be completed within these 3 years.) & • The new house property purchased or constructed has not been transferred within a period of three years from the date of purchase or construction. C.A Yogesh Kesariya C.A Yogesh Kesariya
  43. 43. CAPITAL GAIN ON TRANSFER OF CAPITAL ASSETS IN CASE OF SHIFTING OF INDUSTRIAL UNDERTAKING FROM URBAN AREA UNDER SEC 54(G) UNDER SEC 54(G) • This exemption is available an individual, HUF, company or any other person, • Who transfers the capital assets (being plant, machinery, land or building or any right in the land or building) being used for the purpose of industrial undertaking situated in an urban area to any area other than urban area. Continued... C.A Yogesh Kesariya C.A Yogesh Kesariya
  44. 44. CAPITAL GAIN ON TRANSFER OF CAPITAL ASSETS IN CASE OF SHIFTING OF INDUSTRIAL UNDERTAKING FROM URBAN AREA Continue... UNDER SEC 54(G) UNDER SEC 54(G) • The assessee purchases within one year before or 3 years after the date of transfer: 1. Purchases plant or machinery for the purpose of business of industrial undertaking in the area to which the said undertaking has shifted, 2. Acquires building or land or constructed building for the purpose of his business in the said area, 3. Shifts the original asset and transferred the establishment in the said area, and 4. Incurs expenses on such other purpose as may be specified in a scheme framed by Central Government for the purpose of this section. C.A Yogesh Kesariya C.A Yogesh Kesariya
  45. 45. CAPITAL GAIN ON TRANSFER OF CAPITAL ASSETS IN CASE OF SHIFTING OF INDUSTRIAL UNDERTAKING FROM URBAN AREA TO ANY SEZ UNDER SEC 54(GA) UNDER SEC 54(GA) • This exemption is available to an individual, HUF, company or any other person. • who transfers the capital assets (being plant, machinery, land or building or any right in the land or building) being used for the purpose of industrial undertaking situated in an urban area to a special economic zone (SEZ). Continued... C.A Yogesh Kesariya C.A Yogesh Kesariya
  46. 46. CAPITAL GAIN ON TRANSFER OF CAPITAL ASSETS IN CASE OF SHIFTING OF INDUSTRIAL UNDERTAKING FROM URBAN AREA TO ANY SEZ Continue... • The assessee purchases within one year before or 3 years after the date of transfer: 1. Purchases plant or machinery for the purpose of business of industrial undertaking in the area to which the said undertaking has shifted, 2. Acquires building or land or constructed building for the purpose of his business in the said area, 3. Shifts the original asset and transferred the establishment in the said area, and 4. Incurs expenses on such other purpose as may be specified in a scheme framed by Central Government for the purpose of this section. C.A Yogesh Kesariya C.A Yogesh Kesariya
  47. 47. C.A YOGESH KESARIYA C.A Yogesh Kesariya C.A Yogesh Kesariya

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