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CAPITAL GAINS : Detailed Introduction and Important provisions


                             CAPITAL GAINS

Generally, When we transfer (sale,exchange etc.) capital asset (house property etc.), we need to find out if any profit or gains arising from transfer of that capital asset. After computation, If any profit or gains arising on such transfer then we have to pay taxes on that profit or gains as per the rules laid down in Income Tax Act. It is known as Capital Gains.

Section  45. (1)  Any profits or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to income-tax under the head “Capital gains”, and shall be deemed to be the income of the previous year in which the transfer took place. (exemption under sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F , 54G and 54H is available)

 

Some important points need to be remembered :

1) Capital Gain arises only when a capital asset is transferred.

No Capital asset, No capital gain. Capital asset is defined under section 2(14) of The Income Tax Act.

Some example of Capital Asset : Residential Property, Commercial Property, Land, Jewellery, Shares of companies, Patents and Copyrights, Goodwill, leasehold rights, drawings, paintings, archaeological collections, Car and Scooter ( if not for personal use).

Personal effects movable property held for personal use will be not treated as capital asset. e.g furniture, Television, home appliances,cycle etc.

Rural agricultural land is also not a capital asset and hence capital gain need not to be calculated on transfer of such land.

 

Capital assets are of two type :

i) Short term capital asset (if asset is held by assessee for not more than 12/24/36 months, conditions related to period of holding differs from assets to assets).

Gains arising on transfer of short-term capital assets is termed as short-term capital gains.

ii) Long term capital asset (if asset is held by assessee for more than 12/24/36 months, conditions related to period of holding differs from assets to assets).

Gains arising on transfer of long-term capital assets is termed as long-term capital gains.

 

2)Transfer of capital asset is also important in order to compute capital gain.

No transfer, No capital gain. Transfer is defined under section 2(47) of The Income Tax Act. Transfer includes the sale, exchange or relinquishment of the assets, the extinguishment of any rights therein, the compulsory acquisition, Conversion of assets in stock in trade, maturity or redemption of a zero coupon bond, any transaction involving the allowing of the possession of any immovable property etc.

 

3) Profits or Gains on transfer of Capital assets.

Any profits or gains arising from the transfer of a capital asset shall be deemed to be the income of the previous year in which the transfer took place even if the consideration is received in a later year.

However, there are some exceptional cases where capital gains is not taxable in the year of transfer of the assets.

Example :

  1. person receives any money or other assets under an insurance from an insurer on account of damage or destruction of any capital asset, as a result of flood, typhoon, hurricane, cyclone, earthquake, riot or civil disturbance, accidental fire or explosion etc. (taxable in the previous year of receipt of such money or asset.)
  2. Conversion of capital assets into stock in trade. (taxable in the previous year when such stock in trade was sold.)
  3. Compulsory acquisition of an capital asset under any Law. (taxable in the previous year when compensation is received.)

 

4) And finally, Gain arising on transfer of capital asset will be charged to tax under the head “Capital Gains” if  such gain is not exempted u/s sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H.

 

                         TAXABILITY OF CAPITAL GAINS

The taxability of capital gains depends on the nature of gain, it may be short-term or long-term. Hence, to determine the taxability, capital gains are to be classified into short-term and long-term.

               

                       SHORT TERM CAPITAL GAINS

Gain arising on transfer of short-term capital assets is termed as Short-Term Capital Gains. Short-term capital gains arising on account of transfer of short-term capital assets will be computed as follows :

 
ParticularsRs.
Full value of consideration (i.e., Sales consideration of assets).  XXXX
Less: Expenditure incurred wholly and exclusively in connection with transfer of capital assets.

(E.g.,brokerage,commission,advertisement expenses, etc.)

 (XXXX)
Net  sale consideration  XXXX
Less:  Cost of acquisition ( Purchase price). (XXXX)
Less:  Cost of improvement  if any (capital expenses on improvement of capital assets). (XXXX)

 

Short-Term Capital Gains.
  XXXX
Less: (If any) Exemption available u/s 54B/54D/54G/54GA. (XXXX)
Taxable Short-Term Capital Gains.  XXXX

Note: Benefit of Indexation is not available for short term capital assets.

Also Read : Detailed Computation of Short Term Capital Gain with some examples.

 

 

                        LONG TERM CAPITAL GAINS

Gain arising on transfer of long-term capital asset is termed as Long-Term Capital gains. Long-term capital gains arising on account of transfer of long-term capital assets will be computed as follows :

 
ParticularsRs.
Full value of consideration (i.e., Sales consideration of asset).  XXXX
Less: Expenditure incurred wholly and exclusively in connection with transfer of capital assets.

(Example – brokerage, commission, advertisement expenses, etc.)

 (XXXX)
Net  sale consideration. XXXX
Less: Indexed Cost of acquisition ( Purchase price). (XXXX)
Less: Indexed Cost of improvement  if any (capital expenses on improvement of capital assets).  (XXXX)

 

Long-Term Capital Gains.
  XXXX
Less: (If any) Exemption available u/s 54/54B/54D/54EC/54F/54G/54GA.  (XXXX)
Taxable Long-Term Capital Gains.  XXXX

Indexation is a process by which the cost of acquisition is adjusted against inflationary rise in the value of asset.

Also read : Detailed Computation of Long Term Capital Gain with some Examples.

 

Please comment if Any query related to this post. Keep Smiling, Keep Learning.

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