Capital gains.

Capital gains

Basis of charge Basis of charge Profits and gains – - arising on transfer - of capital assets - during the previous year

Capital assets – Sec. 2(14) Includes – Property of any kind held by the assessee – - whether connected with business or not - whether for residential purpose or not - whether tangible or intangible

…Capital assets – Sec. 2(14)
Amendment to the definition of capital asset – Sec. 2(14) by the Finance (No. 2) Act, 2014 W.e.f. AY , any security held by a Foreign Institutional Investor (which has invested in such security in accordance with the regulations made under SEBI Act) will be treated as “capital asset.” After this amendment, such a security cannot be treated as stock in trade.

Excludes – Stock in trade, consumables, raw materials, stores – held for business or profession Personal effects – wearing apparel, furniture, articles, commodities, property which are used for personal use, excluding a. jewellery b. archaelogical collections c. drawings d. paintings e. sculptures or f. any work of art 3. Agricultural land in India situated in Rural areas. Thus urban agricultural lands constitute capital assets. Capital gains arising from transfer of such urban agricultural lands would not be treated as agricultural income for the purpose of exemption u/s 10(1). Hence, such gains would be taxable. 4. 6.5% Gold Bonds 1977 and 7% Gold Bonds 1980 5. Gold Deposit Bonds issued under Gold Deposit Scheme 1999 6. National Defence Bonds 1980 issued by Central Government Special Bearer Bonds 1991 Deposit certificates issued under Gold Monetisation Scheme, 2015 (w.e.f. AY )

Note : “Jewellery” includes – Ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals – - whether or not containing any precious or semi precious stones and - whether or not sewn into any wearing apparel. Precious or semi precious stones – - whether or not set in any furniture, utensil or other article or - worked or sewn into any wearing apparel.

Illustration A is the owner of a car. On , he starts a business of purchase and sale of motor cars. He treats the above car as part of the stock in trade of his new business. He sells the same on and gets a profit of Rs.1 lakh. Discuss the tax implications. Solution Since car is a personal asset, conversion or treatment of the same as the stock in trade of the business will not be treated as transfer of a capital asset. Hence, A is not liable to capital gains tax.

Transfer The following transactions constitute transfer –
Sale, exchange or relinquishment of asset Extinguishment of a right in the asset Compulsory acquisition of assets under any law Conversion of capital asset into stock in trade Transfer of assets by a partner to the firm Part performance of a contract u/s 53A of the Transfer of Property Act (in an agreement to sell – both parties have substantially performed their roles – possession has been transferred but only the registration is pending) Allotment of a house to a member by a company, co-operative society or AOP in a house building scheme Transfer of Zero coupon bonds (not being held as stock in trade) on maturity or redemption.

Short term v/s long term capital assets
Based on the period of holding (POH) from date of acquisition till date of transfer, capital asset is classified as – - Short term capital asset or - Long term capital asset

Short term capital asset Long term capital asset
Short term v/s long term capital assets Short term capital asset Long term capital asset POH < = 12 months POH < = 36 mths POH > 12 months POH > 36 mths Equity or preference shares in a company (listed in a recognised stock exchange in India) Others Securities (like debentures, bonds, Government securities, derivatives etc.) listed in a recognised stock exchange in India

Short term capital asset Long term capital asset
Short term v/s long term capital assets Short term capital asset Long term capital asset POH < = 12 months POH < = 36 mths POH > 12 months POH > 36 mths Units of UTI – whether quoted or not Units of Equity oriented Mutual Funds (whether quoted or not) Zero Coupon Bonds – whether quoted or not W W.e.f. AY , unlisted shares in a company become long term capital assets only if period of holding is more than 24 months (not 36 months)

Period of holding In counting the POH, the following period will be included – S. No. Situation Period to be included 1. Assets acquired u/s 49(1) i.e. under gift, will, inheritance, partition of HUF, dissolution of firm, liquidation POH of the previous owner 2. Amalgamation POH in amalgamating entity 3. Demerger POH in demerged entity 4. Liquidation POH upto the date of liquidation 5. Demutualisation or corporatisation of recognised stock exchange POH in the old entity 6. Financial asset allotted without any payment and on the basis of holding of any other financial asset POH from the date of allotment of the financial asset

…Period of holding In counting the POH, the following period will be included – S. No. Situation Period to be included 7 In the case of unit or units, which become the property of the assessee in consideration of a transfer referred to in Section 47(xviii) Period for which the unit or units in the consolidating scheme of the mutual fund were held by the assessee 8 In the case of shares in a company (acquired by the non-resident assessee on redemption of Global Depository Receipts referred to in Sec. 115AC(1)(b) held by such assessee Period shall be reckoned from the date on which a request for such redemption was made.

For short term capital assets For long term capita assets
Computation of capital gains For short term capital assets For long term capita assets Sale consideration (full value) Less : Cost of acquisition Indexed cost of acquisition Cost of improvement Indexed cost of improvement Transfer expenses Short term capital gains Long term capital gains Exemptions Taxable long term capital gains

Indexation Adjustment made to the cost of acquisition, cost of improvement of the capital asset in order to give effect to inflation that has taken place during the period of holding. Cost Inflation Index (CII) is prescribed for the previous year. W.e.f. AY , the Central Govt. will notify the CII having regard to 75% of average rise in Consumer Price Index (Urban) for the immediately preceding previous year to such previous year. CII commences from the base year PY for which CII is 100 Indexation starts from the PY in which the capital asset is held – year of payment of cost of acquisition / improvement is immaterial Indexation ends in the PY in which the capital asset is transferred – year of receipt of sales consideration is immaterial Formula for indexation – COA / COI * CII (YOT) CII (YOA) Indexation benefit is NOT AVAILABLE to – a.Transfer of short term capital assets b. Transfer of bonds or debentures (except capital indexed bonds) c. Transfer of shares or debentures in Indian Co. by a non-resident assessee

Computation of capital gains – Formats General
Situation Capital asset Period of holding (From date of acquisition till date of transfer) Short term Long term Cost Inflation index : For Year of acquisition and Year of transfer Computation Sale consideration Rs. Less : Cost of acquisition or indexed cost of acquisition Rs. Cost of improvement or indexed cost of improvement Rs. Transfer expenses Rs. Short term capital gain (loss) or Long term capital gain (loss) Rs. Less : Exemption u/s 54 (various sections) Rs. Balance taxable under the head “Capital gains” Rs.

…Computation of capital gains – Formats Situation 1 : Sale
Capital asset : Any Period of holding : From date of acquisition till date of transfer Cost Inflation index : For Year of acquisition and Year of transfer Computation Sale consideration Rs. Actual Less : Cost of acquisition or indexed cost of acquisition Rs. COA * CII (YOT) CII (YOA) Cost of improvement or indexed cost of improvement Rs. COI * CII (YOT) CII (YOI) Transfer expenses Rs. Actual Short term capital gain (loss) or Long term capital gain (loss) Rs.

…Computation of capital gains – Formats
Situation 2 : Capital asset acquired before and transferred on or after Capital asset : Any Period of holding : From date of acquisition till date of transfer CII : For Year of acquisition (always 100) and Year of transfer Computation Sale consideration Rs. Actual Less : Indexed cost of acquisition Rs. Higher of Actual COA or FMV on * CII (YOT) Cost / Indexed cost of improvement Rs. COI * CII (YOT) (Actual COI prior to to be ignored) CII (YOI) Transfer expenses Rs. Actual Long term capital gain (loss) Rs.

Illustration Mr. C purchases house property for Rs.1,06,000 on May 15, The following expenses are incurred by him for making additions / alterations to the house property: Cost of construction of 1st floor in Rs.1,35,000 Cost of construction of 2nd floor in Rs.3,10,000 Reconstruction of the property in Rs.2,50,000 Fair market value of the property on April 1, 1981 is Rs.4,50,000. The house property is sold by Mr. C on August 10, 2016 for Rs.1,10,00,000 (expenses incurred on transfer Rs.50,000). Compute the capital gain for the AY Financial year Cost inflation index 100 116 223 1125

…Illustration Solution Capital asset : House Property Period of holding : From May 15, 1963 till August 10, 2016 (LT) CII : For FY : 100, FY : 116, FY : 223, FY : 1125 Computation of capital gain Sale consideration Rs. 1,10,00,000 Less : Indexed cost of acquisition * 1125/100 Rs.50,62,500 Indexed cost of construction 1st floor Rs. Nil Indexed cost of construction 2nd floor * 1125/116 Rs. 30,06,466 Indexed cost of reconstruction * 1125/223 Rs. 12,61,211 Transfer expenses Rs. 50, Rs. 93,80, Long term capital gain Rs. 16,19,823

Situation 3 : Capital asset acquired by previous owner after and also by the assessee after u/s 49(1) i.e. gift, will, inheritance, partition of HUF, dissolution of firm, liquidation Capital asset : Any Period of holding : From date of acquisition to date of transfer. POH of previous owner to be included. CII : For Year of acquisition (YOA is the year in which previous owner gets the CA) and Year of transfer Computation Sale consideration Rs. Actual Less : COA or Indexed COA Rs. Actual COA to previous owner * CII (YOT) CII (YOA) Cost / Indexed cost of improvement Rs. COI to prev. owner* CII (YOT) + COI to assessee* CII (YOT) CII (YOI) CII (YOI) Transfer expenses Rs. Actual Short / Long term capital gain (loss) Rs.

Previous owner “Previous owner” means the last previous owner who acquired the property by means other than gift, will, inheritance, partition of HUF, dissolution of firm, liquidation. Cost of improvement of the asset borne by the previous owner or the assessee will be added to such cost. Example : If X acquires a house property in 1985 from his father under a will, the cost of property to the father will be taken as the cost of acquisition at the time of sale of property by X. If however, the father of X has acquired the property from a partnership firm on its dissolution, cost of the partnership firm will be taken as the cost of acquisition at the time of its sale by X.

Illustration X owns the following assets : Non-listed shares House property Rs. Rs. Cost of acquisition 50,000 70,000 Date of acquisition March 10, 1992 March 10, 2015 These capital assets are gifted by X to S on April 1, On July 7, 2016 these assets are transferred by S for consideration of Rs.5,50,500 (i.e. shares Rs.3,15,700 and house property Rs.2,34,800). Compute the capital gains chargeable to tax in the case of S for AY CII : FY (199); FY (852); FY (939); FY (1125)

…Illustration Solution Capital asset : Non-listed shares Period of holding : From March 10, 1992 to July 7, 2016 (LT) CII : FY (199); FY (939); FY (1125) Computation Sale consideration Rs.3,15,700 Less : Indexed COA Rs * 1125 / 199 Rs.2,82, Long term capital gains (A) Rs. 33,037 Capital asset : House property Period of holding : From March 10, 2015 to July 7, 2016 (ST) Sale consideration Rs.2,34,800 COA Rs. 70,000 Short term capital gains (B) Rs.1,64,800

…Computation of capital gains - Formats
Situation 4 : Capital asset acquired by previous owner before and by the assessee after u/s 49(1) i.e. gift, will, inheritance, partition of HUF, dissolution of firm, liquidation Capital asset : Any Period of holding : From date of acquisition to date of transfer. POH of previous owner to be included. CII : For Year of acquisition (YOA is the year in which previous owner gets the CA) and Year of transfer Computation Sale consideration Rs. Actual Less : Indexed cost of acquisition Rs. Higher of Actual COA to prev. owner or FMV on * CII (YOT) Cost / Indexed COI Rs. COI to prev. owner* CII (YOT) + COI to assessee* CII (YOT) CII (YOI) CII (YOI) Transfer expenses Rs. Actual Short/ Long term capital gain (loss) Rs.

Situation 5 – Sale of Business Fixed Assets Capital asset : Depreciable assets Period of holding : Always considered as short term capital assets CII : Not applicable Block of assets (BOA) existing (part sold) Block of assets (BOA) empty (entire sold) Opening Block of assets Add : Additions Less : Sale consideration If negative (STC gains) If positive (depreciation will continue to be charged) If positive (STC loss)

…Situation 5 – Sale of Business Fixed Assets Illustration Amount (No. of assets) Rs Nos. Opening WDV 300000(3) Add Purchases 100000(1) 400000(4) Less : Sales 425000(3) 450000(4) 300000(4) 325000(3) Closing WDV (25000)(1) (50000)(0) 100000(0) 75000(1) Whether depreciation available No Yes Contd.

…Situation 5 – Sale of Business Fixed Assets …Illustration Amount Rs. Capital gains Sale consideration 425000 450000 300000 325000 Less : COA (Opening WDV + purchases) 400000 25000 50000 (100000) (75000) STC Gain STC loss No Capital gains / loss

Situation 6 : Conversion of capital asset into stock in trade of business Capital asset : Any Period of holding : (From date of acquisition till date of conversion) Cost Inflation index : For Year of acquisition and Year of conversion Computation Sale consideration Rs. Fair market value on date of conversion Less : Cost of acquisition or indexed cost of acquisition Rs. COA * CII (YOConversion) CII (YOA) Cost of improvement or indexed cost of improvement Rs. COI * CII (YOConversion) CII (YOI) Transfer expenses Rs. Actual Short term capital gain (loss) or Long term capital gain (loss) Rs.

…Situation 6 : Conversion of capital asset into stock in trade of business Notes : In the year of conversion, only computation of capital gains is to be done. Tax is not to be paid in the year of conversion. The period of 6 months for making investments in specified assets for the purpose of Section 54EC should be taken from the date such stock in trade is sold or otherwise transferred. [Circular No. 791 dt. June 2, 2000]

Situation 6A – Converted capital asset which is held as stock in trade of business is sold as business goods Computation of business income Sales value of goods Rs. Actual sales value Less : Purchase cost of the asset Rs. FMV as on date of conversion Other business expenses Rs. Actual Business income Rs. Note : 1. In the year of sale as business goods, tax payment will be as follows On profit on sale of business assets : Tax at normal rates applicable to AY of sale On cap. gains computed in year of conversion : Tax at CG rates applicable to AY of sale 2. If the asset is not sold at all, there would be no tax payable.

Illustration X converts his capital asset (acquired on June 10, 1988 for Rs.60,000) into stock in trade in March 10, The fair market value on the date of the above conversion was Rs.4,00,000. He subsequently sells the stock in trade so converted for Rs.5,00,000 on June 10, Discuss the tax implications. Capital asset : Any Period of holding : June 10, 1988 to March 10, 2015 (LT) Cost Inflation index : For Year of acquisition (FY ) = 161 and for Year of conversion (FY ) = 1024 Computation of capital gain for AY Sale consideration (FMV on date of conversion) Rs. 4,00,000 Less : Indexed cost of acquisition Rs. 60,000 * = Rs. 3,81, Long term capital gain Rs. 18,385 Note : In the year of conversion, only computation of capital gains is to be done. Tax is not to be paid in the year of conversion.

…Illustration Computation of business income for AY Sales value of goods Rs. 5,00,000 Less : Purchase cost of the asset (FMV on date of conversion) Rs. 4,00, Business income Rs.1,00,000 Note : In the year of sale as business goods (AY ), tax payment will be as follows On Rs.1,00,000 being profit on sale of business assets : Tax at normal rates applicable to AY On Rs.18,385 being cap. gains in year of conversion : Tax at CG rates applicable to AY

Situation 7 – Introduction of partner’s personal capital assets as partners’ capital in the partnership firm Capital asset : Any POH : DOA to DOIntroduction in firm CII : For YOA and YOIntroduction in firm Computation of capital gains Sale consideration Rs. Value at which assets are recorded in the books of account of the partnership firm Less : Cost / indexed cost of acquisition Rs. COA * CII (YO Introduction) CII (YOA) Cost / indexed cost of improvement Rs. COI * CII (YOIntroduction) CII (YOI) Transfer expenses Rs. Actual STCG (loss) or LTCG (loss) Rs.

Illustration X and Y form a partnership firm. Soon after formation of the firm, X brings on July 10, 2016, the following assets as his capital contribution : Gold Silver Fair market value on the date of transfer by X to firm 5,40,000 72,000 Amount recorded in the books of account 6,00,000 50,000 Actual cost 30,000 12,000 Year of acquisition Rs.6,50,000 is credited in the capital account of X in the firm. Is X chargeable to tax in this case? CII : FY (133); (632); (1125)

…Illustration Capital asset : Gold POH : to July 10, 2016 (LT) CII : For FY (133); (1125) Computation of capital gains Sale consideration Rs. 6,00,000 Less : Indexed cost of acquisition * 1125 / 133 Rs.2,53,759 LTCG on sale of gold (A) Rs.3,46,241 Capital asset : Silver POH : to July 10, 2016 (ST) Sale consideration Rs. 50,000 Cost of acquisition Rs.12,000 STCG on sale of silver (B) Rs.38,000

Situation 8 : Transfer of bonus shares Capital asset : Bonus shares POH : DOAllotment to DOT CII : For YOAllotment and YOT Computation of capital gains Sale consideration Rs. Actual Less : COA (if allotted before ) FMV as on Indexation available COA (if allotted after ) NIL Transfer expenses Rs. Actual STCG (loss) / LTCG (loss) Rs.

Illustration Mr. A purchased 1000 shares of X & Co. Ltd. on for Rs.45,000. He was allotted bonus shares of the said company on He sold the entire lot of 2000 shares of X & Co. Ltd. on and STT paid on sale of shares is Rs.NIL. The net sale proceeds received is Rs.4,40,000. Compute the capital gains in the hands of Mr. A for AY Financial year Cost Inflation Index 150 1125

…Illustration Solution Capital asset : Original shares & Bonus shares POH : Original shares ( to ) – LT Bonus shares ( to ) - LT CII : For FY (150); for FY (1125) Computation of capital gains Sale consideration Rs. 4,40,000 Less : Indexed COA of original shares 45000*1125/150 Rs.3,37,500 COA of bonus shares Rs. Nil Rs.3,37, LTCG Rs. 1,02,500

…Illustration Notes : If Mr. A had sold only 1000 bonus shares on the same date for Rs.1,20,000, the long term capital gain will be Rs.1,20,000 as the cost of bonus shares is to be taken as Rs. NIL and indexed cost will also be Rs. NIL. If the bonus shares had been allotted on , instead of , then Rs.1,20,000 (as computed in Note 1 above) would be short term capital gain as the period of holding of such shares is less than 1 year. As STT paid is Rs. NIL, charging tax on the short term capital gains at the flat rate of 15% will not apply.

Situation : Transfer of Right shares Situation 9A : Original shareholder accepts the offer and is allotted the shares for a price Capital asset : Right shares POH : DOAllotment to DOT CII : For YOAllotment and YOT Computation of capital gains Sale consideration Rs. Actual Less : COA or Indexed COA Price paid for right shares * CII (YOT) CII (YOAllotment) Transfer expenses Rs. Actual STCG (loss) / LTCG (loss) Rs.

Situation 9B : Original shareholder renounces the offer in favour of other person for a price Capital asset : Right to accept the offer of right shares POH : DOOffer to DORenouncing CII : For YOOffer and YORenouncing Computation of capital gains Sale consideration Rs. Actual Less : COA Nil Transfer expenses Rs. Actual STCG (loss) / LTCG (loss) Rs.

Situation 9C : Renouncee is allotted the shares for a price Capital asset : Right shares POH : DOAllotment to DOT CII : For YOAllotment and YOT Computation of capital gains Sale consideration Rs. Actual Less : COA / Indexed COA(1) Price paid to original shareholder for right shares * CII (YOT) CII(YOAllot.) COA / Indexed COA(2) Price paid to the Company for allotment of right shares * CII (YOT) Transfer expenses Rs. Actual STCG (loss) / LTCG (loss) Rs.

Illustration Mr. R holds 1000 shares in ABC Ltd., (an unlimited company) acquired in the year at the cost of Rs.25,000. He has been offered rights shares by the Company in the month of August 2016 at Rs.40 per share, in the ratio of 2 for every 5 held. He retains 50% of the rights and renounces the balance right shares in favour of Mr. Q for Rs.10 per share in September All the shares are sold by Mr. R for Rs.200 per share in January 2017 and Mr. Q sells his shares in December 2016 at Rs.130 per share. What are the capital gains taxable in the hands of Mr. R and Mr. Q? Financial year Cost inflation index 100 1125

…Illustration Solution Capital gains in the hands of Mr. R for AY Capital asset : 1000 original shares shares Period of holding : From date of acquisition ( ) till date of transfer (January 2017) - LT CII : For (100) and (1081) Computation Sale consideration 1000 * 200 Rs.2,00,000 Less : Indexed cost of acquisition * 1125 / 100 Rs. 2,81, Long term capital gain (A) Rs. (81,250)

…Illustration …Solution …Capital gains in the hands of Mr. R for AY Capital asset : 200 Right shares Period of holding : From August 2016 till January ST Computation Sale consideration 200 * 200 Rs.40,000 Less : Cost of acquisition 200 * 40 Rs. 8, Short term capital gain (B) Rs. 32,000

…Illustration …Solution …Capital gains in the hands of Mr. R for AY Capital asset : 200 Right shares renounced in favour of Mr. Q Period of holding : From August 2016 till September 2016 – ST Computation Sale consideration 200 * 10 Rs.2,000 Less : Cost of acquisition Rs. Nil Short term capital gain (C) Rs. 2,000 Total capital gains Long term capital gains Rs.(81,250) Short term capital gains Rs.34,000

…Illustration …Solution …Capital gains in the hands of Mr. Q for AY Capital asset : 200 Right shares acquired from Mr. R Period of holding : From September 2016 till December 2016 – ST Computation Sale consideration 200 * 130 Rs.26,000 Less : Cost of acquisition - Price paid to Mr. R 200 * 10 Rs.2,000 - Price paid to the Co. 200 * 40 Rs.8, Rs.10, Short term capital gain Rs.16,000

Situation 10 : Transfer of intangible assets – Sec. 55 Capital asset : Goodwill of business, Trade mark, Brand name, Patent, Tenancy Rights, State Route Permit, Loom hours POH : DOA to DOT CII : For YOA and YOT Computation of capital gains Sale consideration Rs. Actual Less : COA (if self generated) NIL ** Cost / Indexed cost of acquisition (if purchased) COA * CII (YOT) / CII(YOA) Cost / Indexed cost of improvement (whether self generated or purchased) COI * CII (YOT) / CII(YOI) Transfer expenses Rs. Actual STCG (loss) / LTCG (loss) Rs. ** Even if the aforesaid assets were acquired before April 1, 1981, the option of adopting the fair market value on the said date isnot available

Fair market value on April 1, 1981
Illustration X transfers the following assets on May 15, 2016 : Cost Rs. Fair market value on April 1, 1981 Sale consideration Land (acquired in 1968) 20,000 45,000 4,55,000 Goodwill Self generated (Long term) 10,000 1,75,000 Tenancy rights 30,000 2,00,000 Determine the capital gains chargeable to tax for AY

…Illustration CII : For FY (100) and FY (1125) Computation of capital gains Capital asset Land Goodwill Tenancy rights POH FY 1968 to FY (LT) Self generated (LT) Land Goodwill Tenancy rights Sale consideration 4,55,000 1,75,000 2,00,000 Indexed COA 5,06,250 45,000*1125/100 Nil Long term capital gain / (loss) (51,250)

Situation 11 – Receipts of insurance claims on damage / destruction of assets Capital Asset : Any POH : DOA to DODestruction CII : For YOA & YODestruction Conditions : Compensation is received due to damage / destruction of any capital asset only due to the following events : flood, typhoon, hurricane, cyclone, earthquake or other natural disasters Riot or civil disturbances Accidental fire or explosion Action of enemy or action taken to combat enemy (whether with or without declaration of war)

…Computation of capital gains – Formats Situation 11 – Receipts of insurance claims on damage / destruction of assets Notes : If insurance compensation is a capital receipt : If the specified conditions are not satisfied, insurance compensation (if it is a capital receipt) will not be chargeable to tax. Examples : Road accident where vehicles or machinery or furniture being carried are destroyed. A ship, being overweight, Is sunk and assets are lost. The receipt of insurance compensation in such circumstances is not chargeable to tax, since the reasons for destruction are other than those specified. If insurance compensation is a revenue receipt : If the specified conditions are not satisfied, insurance compensation (if it is a revenue receipt) will be chargeable to tax as “Business profits” or “Income from Other Sources.” Example : Theft of stock in trade. The receipt of insurance compensation in such circumstances is chargeable to tax as “Business profits”, since the reasons for destruction are other than those specified.

…Situation 11 – Receipts of insurance claims on damage / destruction of assets Chargeability : In the year of destruction Tax to be paid : In the year of receipt of compensation from insurance company Computation of capital gains Sale consideration As on the date of destruction 1. Money paid by insurance company 2. FMV of assets calculated by insurance company Less : Cost / indexed cost of acquisition Rs. COA * CII (YODestruction) CII (YOA) Cost / indexed cost of improvement Rs. COI * CII (YODestruction) CII (YOI) Transfer expenses Rs. Actual STCG (loss) or LTCG (loss) Rs.

Situation 12 – Ascertaining full value of sale consideration (Section 50C) Capital asset : Land or building or both (Long term or short term, depreciable or non-depreciable) POH : DOA to DOT CII : For YOA and YOT Determination of Full value of sale consideration (FSC) Sale consideration or stamp duty value, whichever is higher. Where the date of an agreement fixing the value of consideration and the date of registration are not the same, the stamp duty value may be taken as on the date of the agreement for transfer (and not on the date of registration) for such transfer. However, this exception shall apply only in those cases where amount of consideration or part thereof has been received by way of an account payee cheque / draft or by use of electronic clearing system through a bank account on or before the date of the agreement for transfer. If stamp duty value is adopted, appeal may be preferred.

…Situation 12 – Ascertaining full value of sale consideration (Section 50C) If appeal is not preferred but reference made to Valuation Officer (VO) and value determined by VO If appeal is preferred If VO > Stamp duty value (SDV) FSC = SDV On appeal, FSC = SDV If SC < VO < SDV FSV = VO On finalisation of appeal FSC = value adopted in appeal Rectification of original order, within 4 years from the end of the previous year in which the appellate order is passed.

…Situation 12 – Computation of capital gains (Section 50C) Sale consideration As above Less : Cost / indexed cost of acquisition Rs. COA * CII (YOT) CII (YOA) Cost / indexed cost of improvement Rs. COI * CII (YOT) CII (YOI) Transfer expenses Rs. Actual STCG (loss) or LTCG (loss) Rs.

Valuation Officer preferred
…Computation of capital gains – Formats …Situation 12 – Computation of capital gains (Section 50C) No Appeal Valuation Officer preferred Appeal preferred On appeal On final SC 100 SDV 80 120 VO 150 110 VA 60 FSC

Illustration X owns a piece of land situated in NOIDA (Date of acquisition : March 1, 1983, Cost of acquisition : Rs.20,000, value adopted by the Stamp Duty authority at the time of purchase : Rs.45,000). On March 30, 2017, the piece of land is transferred to Y for Rs.4 lakhs. Compute the capital gains chargeable to tax in the following situations – The value adopted by the Stamp Duty authority is Rs.5.5 lakhs. X does not dispute it. The value adopted by the Stamp Duty authority is Rs.5.75 lakhs. X (or Y) files an appeal under the Stamp Act and stamp duty valuation has been reduced to Rs.4.9 lakhs by the Allahabad High Court. The value adopted by the Stamp Duty authority is Rs.5.60 lakhs. X and Y do not challenge it under the Stamp Act. However, in income tax proceedings, X claims before the AO that Rs.5.60 lakhs is more than the fair market value of the land. AO refers it to the Valuation Officer who determines Rs.5.25 lakhs as fair market value. In situation (3), suppose the value adopted by the Valuation Officer is Rs.6.10 lakhs. CII : FY : FY : 1125

…Illustration Situations (1) Rs. (2) (3) (4)
Full value of consideration 5,50,000 4,90,000 5,25,000 5,60,000 Less : Indexed cost of acquisition (Rs.20,000 * 1125 / 109) 2,06,422 Long term capital gains 3,43,578 2,83,578 3,18,578 3,53,578 Note : Value adopted by the Stamp duty Authority at the time of acquisition cannot be considered as cost of acquisition.

…Capital gains – Formats
Situation 13 – Buyback of shares by the company – treatment in the hands of the shareholder Capital asset : Shares in the company POH : DOA – DOBuyback CII : For YOA & and YOBuyback Computation of capital gains Sale consideration : Value of shares received from Company Less : Cost / Indexed cost of acquisition : COA * CII (YOBuyback) CII (YOA) Transfer expenses : Actual STCG (loss) / LTCG (loss) : Rs.

Capital Gains Accounts Scheme 1988
Tax on transfer of capital asset is to be paid in the previous year in which the transfer took place. Time limit for reinvestment in assets specified in Section 54 and other sections to avail the exemption extends beyond the end of the previous year. Therefore, tax liability will arise if investments are not made in the previous year itself. This may not be practically possible for the assessee due to which he may end up paying tax. To avoid such situation, the Income tax Act has specified an alternative in the form of Capital Gains Accounts Scheme 1988. The amount of capital gain (u/s 54) and the net consideration (u/s 54F), which is not utilised by the assessee for the acquisition of the required asset before the date of furnishing the Return of Income should be deposited in the Capital Gains Account Scheme before the due date of furnishing the Return.

…Capital Gains Account Scheme 1988
Computation of capital gains will be as follows : Sale consideration Less : Indexed cost of acquisition / improvement Long term capital gains Less : Exemption under various sections Value of asset acquired as prescribed under various sections Add : Amount deposited in Capital Gains Account Scheme Balance capital gains if any If amount deposited in Capital Gains Account Scheme could not be utilised for acquiring the new asset within the specified time under various exemption provisions, the balance remaining unutilised shall be chargeable to tax under the head capital gains of the previous year in which the specified period expires. In the case of Section 54F, the proportionate amount will be taxable. In the event of death of an individual before the stipulated period, the unutilised amount is not chargeable to tax in the hands of the legal heirs of the deceased individual. [Circular No. 743 dt ]

Conditions for exemption
Exemption from Capital Gains – Section 54 Exemption when Long term Residential House Property (buildings or lands appurtenant thereto) is transferred Conditions for exemption Amount exempted Exemption is available to individual and HUF. New asset to be acquired – Residential House Property. Time of acquiring the new asset From the Date of Transfer Within 1 year prior : purchase New RHP Within 2 years next : purchase New RHP - Within 3 years next : complete construction of New RHP Lock in period From the Date of Purchase or Date of Completion of construction of the new RHP - Not to transfer the new RHP within three years If New RHP transferred within 3 years of acquisition, then on transfer of new RHP: COA of new RHP = (COA of new RHP less CG on transfer of original HP) Thus, COA of new RHP will be NIL if CG on transfer of original HP > = Cost of new RHP Lower of - Cost of New RHP - Amount of LTCG

…Exemption from capital gains – Section 54 …Exemption when Long term Residential House Property (buildings or lands appurtenant thereto) is transferred Example 1 If the capital gains is Rs. 5 lakhs and the cost of the new house is Rs. 7 lakhs, then the entire capital gains of Rs. 5 lakhs is exempt. Example 2 If the capital gains is Rs. 5 lakhs and the cost of the new house is Rs. 3 lakhs, then capital gains is exempt only upto Rs. 3 lakhs. Balance Rs. 2 lakhs is 20%. Example 3 Continuing example 1, if the new house was sold after 2 years for Rs. 8 lakhs, then short term capital gains chargeable to tax would be : Sale consideration Rs. 8,00,000 Less : Cost of acquisition Rs. 7,00,000 Capital gains exempt earlier Rs. 5,00, Rs. 2,00,000 Short term capital gain chargeable to tax Rs. 6,00,000

…Exemption from capital gains – Section 54 …Exemption when Long term Residential House Property (buildings or lands appurtenant thereto) is transferred Illustration Mr. C purchased a residential house on July 20, 2014 for Rs.10,00,000 and made some additions to the house incurring Rs. 2,00,000 in August He sold the house property in April 2016 for Rs.20,00,000. Out of the sale proceeds, he spent Rs.5,00,000 to purchase another house property in September What is the amount of capital gains taxable in the hands of Mr. C for AY ? Financial year Cost Inflation Index 852 1125

…Exemption from capital gains – Section 54 …Exemption when Long term Residential House Property (buildings or lands appurtenant thereto) is transferred Solution Capital asset : Residential house Period of holding : From July 20, 2014 to April 2016 (ST) Sale consideration Rs.20,00,000 Less : Cost of acquisition Rs.10,00,000 Cost of improvement Rs. 2,00,000 Rs.12,00,000 Short term capital gains Rs. 8,00,000 Note : Since the asset is a short term capital asset, no benefit of indexation and no exemption u/s 54.

…Exemption from Capital Gains – Section 54 - emption when Long term Residential House Property (buildings or lands appurtenant thereto) is transferred Amendment vide Finance (No. 2) Act, 2014 Section 54 has been amended vide Finance (No. 2) Act, 2014 w.e.f. AY Under the amended provisions,- the assessee can purchase only one residential house in India to get the benefit of exemption. If a person purchases / constructs more than one residential house, investment in only one house would be considered for the purpose of exemption u/s 54; investment in a property outside India will not be considered for the purpose of Section 54.

Exemption from Capital Gains – Section 54EC
Exemption when any Long term Capital Asset is transferred (Including Residential House Property) Conditions Exemption is available to any assessee. New asset to be acquired – Bonds of Rural Electrification Corporation Ltd. (REC Bonds) Bonds of National Highway Authority of India (NHAI Bonds) 3. Time of acquiring the new asset From the Date of Transfer Within 6 months next, invest the capital gains in the Bonds (Maximum investment possible is Rs.50 lakhs in total in both the bonds) In case of conversion of capital asset into stock in trade and subsequent sale of stock in trade, period of 6 months to be reckoned from the date of sale of stock in trade for the purpose of Section 54EC exemption. [CBDT Circular No. 791 dated ]. 4. Lock in period From the Date of Purchase - Within 3 years next - not to transfer, convert, take loan against Bonds 5. If Bonds transferred, converted or loan taken against them within 3 years of purchase, then Capital gains on original asset (which was originally exempt) is capital gain in the previous year in which Bonds are transferred or converted into money.

…Exemption from Capital Gains – Section 54EC
…Exemption when any Long term Capital Asset is transferred (Including Residential House Property) Amount of Exemption Lower of – Total amount invested in the Bonds Amount of long term capital gain

Illustration On March 10, 2017, X sells gold for Rs.97,86,000 (cost of acquisition on March 10, 1997 : Rs.4,00,000). Expenses on purchase and transfer are Rs.100 and Rs.200 respectively. On March 15, 2017, he acquires bonds of NHAI for Rs.50,00,000. Further, he purchases Rs.30,00,000 REC bonds on April 20, These bonds are redeemable after 42 months. Find out the amount of exemption u/s 54EC. CII : FY (305); FY (1125)

…Illustration Solution Capital asset : Gold Period of holding : March 10, 1997 to March 10, 2017 (LT) CII : For FY (305) ; for FY (1125) Sale consideration Rs.97,86,000 Less : Indexed Cost of acquisition * 1125 / 305 Rs.14,75,779 Transfer expenses Rs. 200 Rs. 14,75,779 Long term capital gain Rs. 83,10,221 Less : Exemption u/s54EC (Rs.50,00,000 + Rs.0) Rs. 50,00,000 Capital gains chargeable to tax Rs. 33,67,741 Note : If X transfers the bonds or takes any loan on the security of these bonds, within 3 years from the date of acquisition (i.e. March 15, 2017), then the amount of exemption will be deemed as capital gains of the previous year in which he transfers the bonds.

…Exemption from Capital Gains – Section 54EC - Exemption when any Long term Capital Asset is transferred (Including Residential House Property) – Amendment vide Finance (No. 2) Act, 2014 Secion 54EC has been amended by the Finance (No. 2) Act, 2014 by the insertion of second proviso to Sec. 54EC(1) w.e.f. AY As per the amendment, the investment made by an assessee in the long term “specified asset”, out of capital gains arising from transfer of one or more original assets, during the financial year in which the original asset or assets are transferred and in the subsequent financial year should not exceed Rs.50 lakhs.

Tax on capital gains Particulars STCG LTCG
On equity shares of a company or units of an equity oriented mutual fund Condition – if STT is paid Sec.111A has been amended w.e.f. AY whereby the concessional rate of 15% in case of STCG shall also apply to the transfer of a unit of a business trust. 15% (plus surcharge and cess) Note 1 Note 2 Exempt u/s 10(38) On listed securities (shares, debentures, Govt. securities, bonds), Units of Mutual Funds (Note 3), Units of Unit Trust of India or Zero Coupon Bonds No special concession Option 1 Without indexation – 10% (plus surcharge & cess) Option 2 With indexation – 20% (plus surcharge and cess)

…Tax on capital gains Note 1 :
If the basic exemption is not exhausted by any other income, - then STCG will be reduced by the unexhausted basic exemption limit and - only the balance would be 20%. No deductions under Chapter VIA on such STCG. Note 2 : Provisions of Sec111A shall not apply in respect of any income arising from transfer of units of a business trust which were acquired by the assessee in consideration of a transfer referred to in Sec. 47(xvii). Note 3 : Amendment vide Finance (No. 2) Act, 2014 Option of tax on LTCG at 10% without indexation or 20% with indexation not available in case of LTCG on transfer of units of debt oriented mutual fund if the transfer takes place after July 10, 2014.

Short term capital gains Long term capital gains
…Tax on capital gains Particulars Short term capital gains Long term capital gains Other assets 1. (in case of resident individual or HUF) Normal tax as applicable to the assessee 20% (plus surcharge and cess) Indexation available. Refer Note 1 Note 1 : If the basic exemption is not exhausted by any other income, - then the long term capital gain will be reduced by the unexhausted basic exemption limit and - only the balance would be 20%. No deductions under Chapter VIA on such LTCG.

…Tax on capital gains Particulars Short term capital gains Long term capital gains Other assets 2. (in case of domestic company) Normal tax as applicable to the assessee i.e. 30% plus surcharge and cess 20% (plus surcharge and cess) Indexation available. Refer Note 1 Note 1 : No deductions under Chapter VIA on such LTCG

…Tax on capital gains Particulars Short term capital gains Long term capital gains Other assets 3. (in case of Non-corporate non-resident / foreign company) Normal tax as applicable to the assessee 20% (plus surcharge and cess) Indexation available. Refer Notes Notes : 1. No deductions under Chapter VIA on such LTCG 2. W.e.f. AY , LTCG will be 10% (+SC+EC+SHEC) if the following conditions are satisfied : a. LTCG arises on transfer of unlisted securities (i.e. unlisted shares, unlisted debentures etc.) b. LTCG is calculated without giving effect to the first proviso to Section 48 (i.e. capital gain is calculated in foreign currency). c. Capital gain is calculated without applying indexation provisions.

…Tax on capital gains Particulars Short term capital gains Long term capital gains Other assets 4. (in case of Residents other than those under (1) above Normal tax as applicable to the assessee 20% (plus surcharge and cess) Indexation available. Refer Note 1 Note 1 : No deductions under Chapter VIA on such LTCG

Cost Inflation Index Financial Year CII 1981-82 100 1992-93 223
463 109 244 480 116 259 497 125 281 519 133 305 551 140 331 582 150 351 632 161 389 711 172 406 785 182 426 852 199 447 939

Cost Inflation Index Financial Year CII 2014-15 1024 2015-16 1081
1125

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