Capital gains are profits arising from the transfer of a capital asset. There are two types of capital assets - short term (held for less than 3 years for non-financial assets and 1 year for financial assets) and long term (held for more than 3 years/1 year). Capital gains are taxed differently based on whether the asset is short term or long term. Indexation of cost is allowed for long term capital gains to account for inflation. Various sections like 54, 54B, 54D, 54EC, 54F provide exemptions from capital gains tax if certain conditions are met like reinvestment of sale proceeds.

1. Income Tax Law & Practice
CAPITAL GAIN U/S 45(1)
GURUMOORTHI V
Asst. Professor

2. Capital Gain
“Any profit or gains arising from the
transfer of capital assets in the
previous year in which the transfer has
taken place is taxable under the head
capital gains.”

3. Conditions for Gains to be charged under Capital Gains
• There should be a capital asset.
• The capital asset should be transferred by the assessee.
• Such transfer should take place during the previous year.
• The profits or gains should arise as a result of this transfer.
• Such profit or gain should not be exempted from tax under sections 54, 54B,
54D, 54EC, 54F and 54G & 54GA.

4. Capital Asset u/s 2(14)
Capital Asset is defined to include property of any
kind, whether fixed or circulating, movable or
immovable tangible or intangible.
Exclude,
• a) Stock in trade-Business Assets (Raw materials, Work-in Progress,
Finished goods)
• b) Personal movable assets-(Other than Jewelry, Drawings, Art).
• c) Gold, Bonds and Special Bearer Bonds.
• d) Rural Agri. land (Situated 8kms away from municipality
population is >10lakhs.).

5. Types of Capital Assets
I) Short term capital asset
II)Long term capital asset

6. Short Term Capital Asset
• A Non-Financial Asset held by an assessee for not more than 36 months
immediately preceding the date of transfer is a short-term capital asset.
• If Financial Asset held by an assessee for not more than 12 months.
(Listed Securities, Listed Debentures, Units of UTI, Zero coupon bonds)
• If Unlisted shares & Immovable Property held by an assessee for not
more than 24 months. (Land and building)

7. Long Term Capital Asset
• A Non-Financial Asset held by an assessee for more than 36 months
immediately preceding the date of transfer is a long-term capital asset.
• If Financial Asset held by an assessee for more than 12 months.
(Listed Securities, Listed Debentures, Units of UTI, Zero coupon bonds)
• If Unlisted shares & Immovable Property held by an assessee for more
than 24 months. (Land and building)

8. Computation of Capital Gain
Short Term Capital Gain
Full Value Of Consideration XXX
Less : Expenses Of Transfer XXX
Net Consideration XXX
Less : Cost Of Acquisition XXX
Less : Cost Of Improvement XXX
Short Term Capital Gain XXX
Exemption u/s 54B,54D XXX
Taxable STCG XXX
Long Term Capital Gain
Full Value Of Consideration XXX
Less : Expenses Of Transfer XXX
Net Consideration XXX
Less : Indexed Cost Of Acquisition XXX
Less : Indexed Cost Of Improvement XXX
Long Term Capital Gain XXX
Exemption u/s 54,54B,54EC,54F XXX
Taxable LTCG XXX

9. CII (Cost of Inflation Index)
• To avoid the inflation effect, the value of the
capital assets is brought to present value using the
cost of inflation index.
• In short, the process of reducing inflation impact
on calculating capital gains.
• The Base year for the capital inflation index is first
April 1981-82(100) @ now it’s based on financial
year of 2001-02 (100)

11. Indexation of COA
Before 2001-02 After 2001-02
Actual cost x CII of sale year
Actual cost CII of acquisition
F.M.V W.E.H x CII of Sale year
CII OF 2001-02

12. Indexation of COI
Before 2001-02 After 2001-02
Actual cost x CII of sale year
Ignore CII of acquisition

13. Relevant Provisions In relation to CII
• Indexing of Long term assets only.
• No indexing of long term debentures and bonds.
• No indexing of Short-term capital assets.
• No Indexing of depreciable assets.
• No Indexing of share of NR.

14. Exemption from capital gain
1) Sec 54-Sale of Residential Property and Purchase of another Residential Property
2) Sec 54B-Sale of an agricultural land and purchase of another agriculture land
3) Sec 54D-Compulsory acquisition of land and Building
If any land and Building acquired by compulsorily by any government.
4) Sec 54EC-investment in specified bonds
If the amount is invested “REC (Rural Electrification Corporation (or) NHAI (National Highways
Authority of India) with in a Period of 6months from the date of transfer