Income from capital gain is one of
the five income heads as given in the Income Tax Act, 1961 in India. The
definition of income from capital gain:-
“Any profit or gain arising from transfer of
capital asset held as investments is said to be capital gain income and it is
chargeable to tax under the head income from capital gains”
From the above definition following
questions arise:
a)
What
is a capital asset?
b)
When
capital asset is said to be transferred?
c)
How
the profit or gains are calculated on transfer of capital asset?
d)
The
calculation of tax there upon.
e)
How
the capital gain tax can be saved?
Capital assets:–
Following assets are considered as
capital assets:
1)
Land
(excluding rural agricultural land)
2)
Building
3)
House
property
4)
Vehicles
5)
Patents
and trademarks
6)
Shares
7)
Leasehold
rights
8)
Plant
and machinery
9)
Jewelry
Capital Asset does not include:-
1)
Any
item held as stock, consumables or raw material for the purpose of business or
profession.
2)
Personal
goods, house hold material i.e. furniture at house, clothes, utensils, etc.
3)
Rural
agricultural land:
Whether the Agriculture Land will be
considered Rural or Urban agriculture Land depends upon the situation of land
and distance from municipal limits.
Following table will help to
understand when agriculture land is said to be Rural and is not considered a
capital asset:
Population of Municipality
|
Capital Asset / Urban agriculture land
|
Not Capital Asset / Rural Agriculture land
|
More than 10000 but less
than 100000
|
Within 2 KM from Municipal
Limits
|
Outside 2 KM of Municipal
limits
|
More than 1lakh but less
than 10 lakhs
|
Within 6 Km
|
Outside 6 KM
|
More than 10 lakhs
|
Within 8 KM
|
Outside 8 KM
|
for
calculating capital gain income and tax thereupon the capital assets are
further classified into long term capital assets and short term capital assets
based upon the holding Period of the assets by the assessee.
1.
Long term capital assets - Any asset other than shares and
securities which is held for more than 36 months is long term capital assets.
The time period of 36 months has been changed to 24 months from F.Y. 2017-18.
So if an asset has been sold up to 31.03.2017, then it will be considered long
term capital asset, if it was held for more than 36 months by the taxpayer. In
case the capital asset is sold after 31.03.2017, then it will be said to be
long term capital asset if was held for more than 24 months by the taxpayer.
In case of shares and securities, the
holding period for classification of short term and long term capital assets is
12 months. If the holding period is more than 12 months ,then the shares
,securities , mutual funds etc. are said to long term capital assets.
2.
Short
term capital assets -Any capital asset which is not long term capital asset is
known as short term capital assets if shares and securities are held for less
than 12 months, and for other assets are held for less than 36 months (24
months if asset is sold after 31.03.2017), then the capital asset is classified
as short term capital asset .
TRANSFER OF A CAPITAL ASSET: In relation to capital
asset, transfer includes –
1.
Sale,
exchange or relinquishment of an asset or extinguishment of any rights in the asset.
2.
Compulsory
acquisition of the land or any other capital asset by government or any authority.
3.
Conversion
of any capital assets into stock in trade.
4.
Taking
possession of any immovable property in part performance of a contract.
5.
If
any transaction gives effect to transfer or enable the transferee, for
enjoyment of any rights in the immovable property
6.
Maturity
/ redemption of zero coupon bonds.
Following is not considered transfer
of Capital Asset:
If a property is transferred through
will or inheritance or by way of gift then, it is not considered transfer for
the purpose of calculating income from capital gain.
Calculation
of Profits or Gains on transfer of Capital Asset:-
For the purpose of understanding the
calculation of profits or gains on transfer of capital asset, one should know
the following terms:
1)
Sale consideration: Consideration received or receivable by transferor or
seller of capital asset against the transfer of his asset. If for the purpose
of transfer or sale of asset some expenses are incurred like commission on sale
of property or any other incidental expenses then these expenses are deductible
from the sale value to arrive at the net consideration. Capital gain is taxable
in the year of transfer of asset whether the consideration of transfer is
received in same year or future/past years.
2)
Cost of acquisition: It is the cost at which the capital asset was
acquired by the transfer. The cost of acquisition of the asset include other
costs like stamp duty paid for registration of property, any commission paid
for acquiring the property or any other incidental expenses for the purpose of
the sale.
3)
Cost of improvement: Amount spent for any improvement
and enhancement of the
capital asset is said to be cost of improvement of capital asset.
CALCULATION OF SHORT TERM CAPITAL
GAINS
The profit
or gain on sale of a short term capital asset is said to be short term capital
gain. Calculation of short term capital gain is very simple.
|
(Subtract)
|
(Subtract)
Subtract ·
Cost of acquisition
·
Cost of improvement
|
·
First
net consideration is calculated by subtraction of transfer expenses from full
value of consideration.
·
Then,
from net consideration, the cost of acquisition and cost of improvement are
deducted to arrive at the amount of short term capital gain.
CALCULATION
OF LONG TERM CAPITAL GAIN
In case of
long term capital gain, the cost of acquisition and cost of improvement are
taken after Indexation i.e. we
consider indexed cost. Indexed cost of acquisition and indexed cost of
improvement. In case of long term capital gains, assets are being held for long
term and cost is considered to be increased on account of inflation over the
period of holding the property. The effect of inflation is given by applying
cost inflation index numbers of the years in which property was acquired/
improved and transferred.
Index COA = COA
* Index no. of year of sale
_______________________________________
Index no. of year of purchase of
property
COA stands for cost of
acquisition
Calculation
of Indexed cost of acquisition/improvement:
Similarly indexed cost of improvement
is calculated.
Long term
capital gain is calculated as:
|
(Subtract)
|
(Subtract)
(Subtract)
·
Indexed Cost of acquisition
·
Indexed Cost of improvement
|
·
First
net consideration is calculated by subtraction of transfer expenses from full
value of consideration.
·
Then,
from net consideration, the Indexed cost
of acquisition and Indexed cost of improvement are deducted to arrive at
the amount of short term capital gain.
·
Year
wise Index no. for the purpose of calculating Income from Capital gain as
follows:
Year
|
Cost
Inflation Index Number
|
2001-02
|
100
|
2002-03
|
105
|
2003-04
|
109
|
2004-05
|
113
|
2005-06
|
117
|
2006-07
|
122
|
2007-08
|
129
|
2008-09
|
137
|
2009-10
|
148
|
2010-11
|
167
|
2011-12
|
184
|
2012-13
|
200
|
2013-14
|
220
|
2014-15
|
240
|
2015-16
|
254
|
2016-17
|
264
|
2017-18
|
272
|
2018-19
|
280
|
2001 is taken
as base year. If the asset has been purchased before 2001, then the fair market
value of 2001 is to be calculated. The fair market value in year 2001 would be
taken as coast of acquisition of capital asset.
Following topics related to capital gains income would be covered in our
next issue.
1)
How
to arrive at fair market value of Long Term Capital Asset in 2001?
2)
Calculation
of capital gain tax
3)
Exemption
available for tax payer to save capital gain tax.
4) Some special cases to understand the
taxation of capital gain income.
