UNIVRSITY OF MUMBAI

PROJECT REPORT

ON

DIRECT TAX

CAPITAL GAINS

BY

MISS YOGITA SAVARMAL VARMA

M.COM (Part II) (SEM III) (Roll No. 64)

ACADEMIC YEAR 2016-2017.

PROJECT GUIDE

PROF. PRASHANT KANVINDE

PARLE TILAK VIDYALAYA ASSOCIATION’S

M.L.DAHANUKAR COLLEGE OF COMMERCE

DIXIT ROAD, VILE PARLE (EAST)

MUMBAI - 400057.

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DECLARATION

I, Miss Varma Yogita Savarmal of PARLE TILAK VIDYALAYA

ASSOCIATION’S M.L.DAHANUKAR COLLEGE OF COMMERCE OF

MCOM (PART II) (Roll no. 64) (Semester III) hereby declare that I have

completed this project on DIRECT TAX-CAPITAL GAINS in academic year

2016-17. The information submitted is true and original in the best of my

knowledge.

(Signature of student)

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ACKNOWLEDGEMENT

To list who all helped me is difficult because they are so numerous and the depth is so

enormous.

I would like to acknowledge the following as being idealistic channels and fresh

dimensions in the completion of this project.

I would firstly thank the University of Mumbai for giving me chance to do this project.

I would like to thank my principal, Dr. Madhavi Pethe for providing the necessary

facilities required for completion of this project.

I even will like to thank our coordinator, for the moral support that we received.

I would like to thank our college library, for providing various books and magazines

related to my project.

Finally, I proudly thank my parents and friends for their support throughout the project.

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TABLE OF CONTENTS

SR NO. CONTENTS PAGE NO.

1 TAX – INTRODUCTION 5-8

2 DIRECT TAX 9

3 CAPITAL GAINS – INTRODUCTION 10-16

4 TYPE OF CAPITAL ASSETS 17

5 PERIOD OF HOLDING 18-20

6 COMPUTATION OF CAPITAL GAINS 21-34

7 ILLUSTRATIONS 35-36

8 CONCLUSION 37

9 BIBLIOGRAPHY 38

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TAX

A tax (from the Latin taxo) is a financial charge or other levy imposed upon a taxpayer (an

individual or legal entity) by astate or the functional equivalent of a state to fund various public

expenditures. A failure to pay, or evasion of or resistance to taxation, is usually punishable by

law. Taxes consist of direct or indirect taxes and may be paid in money or as its labour

equivalent. Some countries impose almost no taxation at all, or a very low tax rate for a certain

area of taxation.

Every one of us, have heard about the tax, it is a compulsory financial obligation, payable to the

government. But this definition is not sufficient to understand the complete tax system. It has

been mainly divided into two broad categories Direct Tax and Indirect Tax, comprising of the

different nature of taxes. Let’s understand the meaning and the difference between Direct Tax

and Indirect Tax.

Definition of Direct Tax

A direct tax is referred to as a tax levied on person’s income and wealth and is paid directly to

the government, the burden of such tax cannot be shifted. The tax is progressive in nature i.e. it

increases with an increase in the income or wealth and vice versa. It levies according to the

paying capacity of the person, i.e. the tax is collected more from the rich and less from the poor

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people. The tax is levied and collected either by the Central government or State government or

the local bodies.

The plans and policies of the Direct Taxes are being recommended by the Central Board of

Direct Taxes (CBDT) which is under the Ministry of Finance, Government of India.

There are several types of Direct Taxes, such as:

Income Tax

Wealth Tax

Property Tax

Corporate Tax

Import and Export Duties

Definition of Indirect Tax

Indirect Tax is referred to as a tax charged on a person who consumes the goods and services and

is paid indirectly to the government. The burden of tax can be easily shifted to the another

person. The tax is regressive in nature, i.e. as the amount of tax increases the demand for the

goods and services decreases and vice versa.  It levies on every person equally whether he is rich

or poor. The administration of tax is done either by the Central Government or the State

government.

There are several types of Indirect Taxes, such as:

Central Sales Tax

VAT (Value Added Tax)

Service Tax

STT (Security Transaction Tax)

Excise Duty

Custom Duty

Agricultural Income Tax

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Comparison Chart

BASIS FOR

COMPARISON

DIRECT TAX INDIRECT TAX

Meaning Direct tax is referred to as the tax,

levied on person's income and wealth

and is paid directly to the

government.

Indirect Tax is referred to as the tax,

levied on a person who consumes the

goods and services and is paid indirectly

to the government.

Burden The person on whom it is levied

bears its burden.

The burden of tax can be shifted to

another person.

Types Wealth Tax, Income Tax, Property

Tax, Corporate Tax, Import and

Export Duties.

Central Sales tax, VAT (Value Added

Tax), Service Tax, STT (Security

Transaction Tax), Excise Duty, Custom

Duty.

Evasion Tax evasion is possible. Tax evasion is hardly possible because it

is included in the price of the goods and

services.

Inflation Direct tax helps in reducing the

inflation.

Indirect taxes promote the inflation.

Levied on Persons, i.e. Individual, HUF (Hindu

Undivided Family), Company, Firm

etc.

Consumers of goods and services.

Nature Progressive Regressive

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Key Differences between Direct and Indirect Taxes

1. The tax, which is paid by the person on whom it is levied, is known as the Direct tax while the

tax, which is paid by the taxpayer indirectly, is known as the Indirect tax. The direct tax is levied

on person’s income and wealth whereas the indirect tax is levied on a person who consumes the

goods and services.

2. The main difference between the direct and indirect tax is that the burden of direct tax cannot be

shifted whereas the burden of indirect tax can be shifted.

3. The evasion of tax is possible in case of a direct tax if the proper administration of the collection

is not done, but in the case of indirect tax, the evasion of tax is not possible since the amount of

tax is charged on the goods and services.

4. The direct tax is levied on Persons, i.e. Individual, HUF (Hindu Undivided Family), Company,

Firm, etc. On the other hand, the indirect tax is levied on the consumer of goods and services.

5. The nature of a direct tax is progressive, but the nature of the indirect tax is regressive.

6. Direct tax helps in reducing the inflation, but the indirect tax sometimes helps in promoting the

inflation.

Similarities

Payable to the government. Penalty for the non-payment. Interest on Delayed Payment. Improper administration can lead to tax avoidance or tax evasion.

Conclusion

Both the direct and indirect tax has its own merits and demerits. If we talk about the direct taxes

they are equitable because they are charged on person, according to their paying ability. The

direct tax is economical because its cost of collection is less but however, it doesn’t cover every

section of the society.

On the other hand, if we talk about the indirect tax, they are easy to realize as they are included

in the price of the product and services, and along with that, it has an excellent coverage of every

section of the society. One of the best advantages of the indirect tax is, the rate of tax is high for

harmful products as compared to the other goods which are necessary for life.

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DIRECT TAX

INCOME TAX

An income tax is a tax that governments impose on financial income generated by all entities

within their jurisdiction. By law, businesses and individuals must file an income tax return every

year to determine whether they owe any taxes or are eligible for a tax refund. Income tax is a key

source of funds that the government uses to fund its activities and serve the public.

HEADS OF INCOME

Under chapter 4 of Income Tax Act, 1961 (Section 14), income of a person is calculated under

various defined heads of income. The total income is first assessed under heads of income and

then it is charged for Income Tax as under rules of Income Tax Act. According to Section 14 of

Income Tax Act, 1961 there are following heads of income under which total income of a person

is calculated:

» Heads of Income: Salary

» Heads of Income: House Property

» Heads of Income: Profit in Business/ Profession

» Heads of Income: Capital Gains

» Heads of Income: Other Sources

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CAPITAL GAINS

A capital gain is a profit that results from a sale of a capital asset, such as stock, bond or real

estate, where the sale price exceeds the purchase price. The gain is the difference between a

higher selling price and a lower purchase price. Conversely, a capital loss arises if the proceeds

from the sale of a capital asset are less than the purchase price.

Capital gains may refer to "investment income" that arises in relation to real assets, such

as property; financial assets, such as shares/stocks or bonds; and intangible assets.

When we buy any kind of property for a lower price and then subsequently sell it at a higher

price, we make a gain. The gain on sale of a capital asset is called capital gain. This gain is not a

regular income like salary, or house rent. It is a one-time gain; in other words the capital gain is

not recurring, i.e., not occur again and again periodically.

Opposite of gain is called loss; therefore, there can be a loss under the head capital gain. We are

not using the term capital loss, as it is incorrect. Capital Loss means the loss on account of

destruction or damage of capital asset. Thus, whenever there is a loss on sale of any capital asset

it will be termed as loss under the head capital gain.

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OBJECTIVE

After going through this lesson you will be able to understand the meaning of capital asset, types

of capital asset, what is not capital asset, computation of capital gain, types of capital gains etc.

You will also be learning how to calculate the capital gain of simple problems. The capital gain

is also an income and it is taxable too, at the end of the chapter you will also learn the tax

treatment of the capital gain.

BASIS OF CHARGE

The capital gain is chargeable to income tax if the following conditions are satisfied:

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.

DEFINITION   OF ‘CAPITAL ASSET’

As per S.2 (14) of the Income Tax Act, 1961, unless the context otherwise requires, the term

“capital asset” means:

(a) Property of any kind held by an assessee, whether or not connected with his business or

profession;

(b) Any securities held by a Foreign Institutional Investor which has invested in such securities

in accordance with the regulations made under the Securities and Exchange Board of India Act,

1992; but does not include:

(i) Any stock-in-trade, other than the securities referred to in sub-clause (b), consumable stores

or raw materials held for the purposes of his business or profession;

(ii) Personal effects, that is to say, movable property (including wearing apparel and furniture)

held for personal use by the assessee or any member of his family dependent on him, but

excludes:

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(a) jewellery;

(b) archaeological collections;

(c) drawings;

(d) paintings;

(e) sculptures; or

(f) any work of art.

Explanations:

1. For the purposes of this sub-clause, “jewellery” includes:

(a) 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

stone, and whether or not worked or sewn into any wearing apparel;

(b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article

or worked or sewn into any wearing apparel.

2. For the purposes of this clause:

(a) the expression “Foreign Institutional Investor” shall have the meaning assigned to it in clause

(a) of the Explanation to section 115AD;

(b) the expression “securities” shall have the meaning assigned to it in clause (h) of section 2 of

the Securities Contracts (Regulation) Act, 1956;

(iii) agricultural land in India, not being land situate:

(a) in any area which is comprised within the jurisdiction of a municipality (whether known as a

municipality, municipal corporation, notified area committee, town area committee, town

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committee, or by any other name) or a cantonment board and which has a population of not less

than ten thousand; or

(b) in any area within the distance, measured aerially:

(I) not being more than two kilometres, from the local limits of any municipality or cantonment

board referred to in item (a) and which has a population of more than ten thousand but not

exceeding one lakh; or

(II) not being more than six kilometres, from the local limits of any municipality or cantonment

board referred to in item (a) and which has a population of more than one lakh but not exceeding

ten lakh; or

(III) not being more than eight kilometres, from the local limits of any municipality or

cantonment board referred to in item (a) and which has a population of more than ten lakh.

Explanation: For the purposes of this sub-clause, “population” means the population according to

the last preceding census of which the relevant figures have been published before the first day

of the previous year.

(iv) 6½ per cent Gold Bonds, 1977, or 7 per cent Gold Bonds, 1980, or National Defence Gold

Bonds, 1980, issued by the Central Government;

(v) Special Bearer Bonds, 1991, issued by the Central Government;

(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central

Government.

Explanation: 

“Property” includes and shall be deemed to have always included any rights in or in relation to

an Indian company, including rights of management or control or any other rights whatsoever.

Definitions of capital asset mainly distinguish the business assets from other assets for the

purpose of taxation under the head Capital Gains.

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TRANSFER

Capital gain arises on transfer of capital asset; so it becomes important to understand what is the

meaning of word transfer. The word transfer occupy a very important place in capital gain,

because if the transaction involving movement of capital asset from one person to another person

is not covered under the definition of transfer there will be no capital gain chargeable to income

tax. Even if there is a capital asset and there is a capital gain.

The word transfer under income tax act is defined under section 2(47). As per section 2 (47)

Transfer, in relation to a capital asset, includes sale, exchange or relinquishment of the asset or

extinguishments of any right therein or the compulsory acquisition thereof under any law.

In simple words Transfer includes:

a) Sale, exchange or relinquishment of asset

b) Extinguishment of right over asset

c) Compulsory acquisition under any law

d) Personal effects converted into Stock-in-trade

e) Maturity of zero coupon bonds

f) Allowing possession under transfer of property act, 1882

g) Allowing enjoyment of immovable property

Transfer includes:

i) Sale, exchange or relinquishment of a capital asset

A sale takes place when tide in the property is transferred for a price. The sale need not be

voluntary. An involuntary sale of a property of a debtor by a court at the instance of a decree

holder is also transfer of a capital asset.

An exchange of capital asset takes place when the title in one property is passed in consideration

of the title in another property.

Relinquishment of a capital asset arises when the owner surrenders his rights in property in

favour of another person. For example, the transfer of rights to subscribe the shares in a company

under a ‘Rights Issue’ to a third person.

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ii) Extinguishment of any rights in a capital asset

This covers every possible transaction which results in destruction, annihilation, extinction,

termination, cessation or cancellation of all or any bundle of rights in a capital asset. For

example, termination of a lease or of a mortgagee interest in a property.

iii) Compulsory acquisition of a capital asset under any law

Acquisition of immovable properties under the Land Acquisition Act, acquisition of industrial

undertaking under the Industries (Development and Regulation) Act etc.., are some of the

examples of compulsory acquisition of a capital asset.

iv) Conversion of a capital asset into stock-in-trade

Normally, there can be no transfer if the ownership in an asset remains with the same person.

However, the Income tax Act provides an exception for the purpose of capital gains. When a

person converts any capital asset owned by him into stock-in- trade of a business carried on by

him, it is regarded as a transfer. For example, where an investor in shares starts a business of

dealing in shares and treats his existing investments as the stock- in-trade of the new business,

such conversion arises and is regarded as a transfer. The Fair Market Value of the asset on the

date of such conversion shall be the Full Value of Consideration for the transfer.

v) Part performance of a contract of sale

Normally transfer of an immovable property worth Rs. 100/- or more is not complete without

execution and registration of a conveyance deed. However, section 53A of the Transfer of

Property Act envisages situations where under a contract for transfer of an immovable property,

the purchaser has paid the price and has taken possession of the property, but the conveyance is

either not executed or if executed is not registered. In such cases the transferer is debarred from

agitating his title to the property against the purchaser.

The act of giving possession of an immovable property in part performance of a contract is

treated as ‘transfer’ for the purposes of capital gains. This extended meaning of transfer applies

also to cases where possession is already with the purchaser and he is allowed to retain it in part

performance of the contract.

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vi) Transfer of rights in immovable properties through the medium of co-operative

societies, companies etc.

Usually flats in multi-storeyed building and other dwelling units in group housing schemes are

registered in the name of a co-operative society formed by the individual allottees.

Sometimes companies are floated for this purpose and allottees take shares in such companies. In

such cases transfer of right to use and enjoy the flat is effected by changing the membership of

co-operative society or by transferring the shares in the company. Possession and enjoyment of

immovable property is also made by what is commonly known as ‘Power of Attorney’ transfers.

All these transactions are regarded as transfer.

vii) Transfer by a person to a firm or other Association of Persons [AOP] or Body of

Individuals [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 be construed as transfer.

viii) Distribution of capital assets on Dissolution

Normally, distribution of capital assets on dissolution of a firm/AOP/BOI is also not considered

as transfer for the same reasons as mentioned in (vii) above. However, under the capital gains,

this is considered as transfer by the firm /AOP/BOl and therefore gives rise to capital gains for

the firm/AOP/BOI.

ix) Distribution of money or other assets by the Company on liquidation

If a shareholder receives any money or other assets from a Company in liquidation, the

shareholder is liable to pay capital gains as the same would have been received in lieu of the

shares held by him in the company. However, if the assets of a company are distributed to the

shareholders on its liquidation such distribution shall not be regarded as transfer by the company.

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x) The maturity or redemption of a zero coupon bond

Here, a zero coupon bond means a bond issued by any infrastructure capital company or

infrastructure firm or public sector company on or after 1st June, 2005 in respect of which no

payment or benefit is received or receivable before maturity or redemption and which has been

specifically notified by the Central Govt.

TYPE OF CAPITAL ASSETS

A. Short Term Capital Asset

Capital asset held for not more than 36 months immediately prior to the date of transfer shall be

deemed as short-term capital asset. However, following assets held for not more than 12 months

shall be treated as short-term capital assets:

a) Equity or preference shares in a company which are listed in any recognized stock exchange in

India;

b) Other listed securities;

c) Units of UTI;

d) Units of equity oriented funds; or

e) Zero Coupon Bonds.

Note: Unlisted shares held for not more than 24 months immediately prior to the date of transfer

shall be treated as short-term capital asset.

B. Long Term Capital Asset

Capital Asset that held for more than 36 months or 12 months, as the case may be, immediately

preceding the date of transfer is treated as long-term capital asset.

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PERIOD OF HOLDING

The period of holding shall be determined as follows:

Different situations How to calculate the period of holding

Shares held in a company in liquidation The period subsequent to the date on which the

company goes into liquidation shall be

excluded.

Capital asset which becomes the property of

the assessee in the circumstances mentioned in

section 49(1) read with section 47 [i.e., when

an asset is acquired by gift, will, succession,

inheritance or the asset is required at the time

of partition of family or under a revocable or

irrevocable trust or under amalgamation, etc.]

The period for which the asset was held by the

previous owner should be included (cost of

acquisition in this case shall be computed in

the manner provided in Para 10)

Allotment of shares in amalgamated Indian

company in lieu shares held in amalgamating

company

The period of holding shall be computed from

the date of acquisition of shares in the

amalgamating company.

Right shares The period of holding shall be computed from

the date of allotment of right shares.

Right entitlement The period of holding will be considered from

the date of offer to subscribe to shares to the

date when such right entitlement is renounced

by the person.

Bonus shares The period of holding shall be computed from

the date of allotment of bonus shares.

Issue of shares by the resulting company in a

scheme of demerger to the shareholders of the

demerged company

The period of holding shall be computed from

the date of acquisition of shares in the

demerged company.

Membership right held by a member of

recognised stock exchange

In case of shares as well as trading/clearing

rights, the period for which the person was a

member of the stock exchange immediately

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prior to such demutualization/corporatization

shall be included.

Flat in a co-operative society The period of holding shall be computed from

the date of allotment of shares in the society.

Sweat equity shares allotted by employer The period of holding shall be reckoned from

the date of allotment or transfer of such equity

shares (applicable from the assessment year

2008-09)

Unit of a business trust [allotted pursuant to

transfer of shares as referred to in section

47(xvii)]

The period of holding shall include the period

for which shares were held by the assessee.

Units allotted to an assessee pursuant to

consolidation of two or more scheme of a

mutual fund as referred to in Section 47(xviii)

The period of holding of such units shall

include the period for which the unit or units in

the consolidating scheme of the mutual fund

were held by the assessee.

Shares in a company acquired by the non-

resident assessee on redemption of Global

Depository Receipts referred to in Section

115AC(1)(b)

The period of holding of such shares shall be

reckoned from the date on which a request for

such redemption was made.

Transactions in shares and securities not given

above:

1) Date of purchase (through stock exchanges)

of shares and Securities

2) Date of transfer (through stock exchanges)

of shares and securities

3) Date of purchase/transfer of shares and

securities (transaction taken place directly

between parties and not through stock

exchanges)

a) Date of purchase by broker on behalf of

investor.

b) Date of broker’s note provided such

transactions are followed up by delivery of

shares and also the transfer deeds.

c) Date of contract of sale as declared by

parties provided it is followed up by actual

delivery of shares and the transfer deeds.

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4) Date of purchase/sale of shares and

securities purchased in several lots at different

points of time but delivery taken subsequently

and sold in parts

5) Transfer of a security by a depository (i.e.,

demat account)

d) The FIFO method shall be adopted to

reckon the period of the holding of the

security, in cases where the dates of purchase

and sale cannot be correlated through specific

number of scrips.

e) The period of holding shall be determined

on the basis of the first-in-first-out method.

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COMPUTATION OF CAPITAL GAIN:

Computation of capital gain depends upon the nature of the capital asset transferred during the

previous year, vis-à-vis, short-term capital asset, long-term capital asset or depreciable asset.

Capital gain arising on transfer of short-term capital asset or depreciable asset is considered as

short-term capital gain, whereas transfer of long-term capital asset gives rise to long-term capital

gain.

The capital gains on transfer of capital asset shall be computed in the following manner: - See

more at:

Short-term capital assets

[Section 48]

Long-term capital assets

[Section 48]

Depreciable asset

[Section 50]*

Full value of consideration

Less: Cost of acquisition of

asset

Less: Cost of improvement

Less: Expenditure incurred

wholly and exclusively in

connection with such transfer

Full value of consideration

Less: Indexed Cost of

acquisition (See Note 1)

Less: Indexed Cost of

Improvement (See Note 1)

Less: Expenditure incurred

wholly and exclusively in

connection with such transfer

WDV of block of asset at the

beginning of previous year

Add: Actual cost of assets

falling within that block

acquired during the year

Less: Full value of

consideration of assets

transferred during the year

Less: Expenditure incurred

wholly and exclusively in

connection with such transfer

* Short-term capital gain or loss from sale of depreciable asset will arise only in the following

two situations:

a) When on last day of the previous year, WDV of the block of asset is nil; or

b) When on last day of the previous year, block ceases to exist.

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Note 1: Indexed Cost of Acquisition and Improvement [Second Proviso to Section 48]

a) In case of transfer of long-term capital assets, indexed cost of acquisition and indexed cost of

improvement shall be deducted from the full value of consideration;

b) Indexed cost of acquisition and Indexed cost of improvement shall be computed with

reference to Cost Inflation Index (‘CII’) in the following manner:

Indexed Cost of

Acquisition =

[(Cost of Acquisition) × (CII for the year of transfer)]

(CII for the year of acquisition or for the Financial Year 1981-82,

whichever is later)

Indexed Cost of

Improvement =

[(Cost of Improvement) × (CII for the year of transfer)]

CII for the year of Improvement

However, there are some cases where benefit of indexation is not available, which are as under:

SECTION CAPITAL ASSET TRANSFEROR

Third

provison to

section 48

Bonds or debentures.

Note: However, indexation benefit is available on two type of

bonds, namely,-

• Capital indexed bonds (issued by the Government)

• Sovereign Gold Bond (issued by the RBI under the

Sovereign Gold Bond Scheme, 2015)

Any person

112 Capital gains arising from transfer of unlisted shares (which is

taxable at concessional rate of 10%) as calculated without

giving effect to first proviso to Section 48

Non-resident

50A Depreciable asset (other than an asset used by a power

generating unit eligible for depreciation on straight line basis)

Any person

50B Undertaking/division transferred by way of slump sale as

covered by section 50B

Any person

115AB Units purchased in foreign currency as given in section 115AB Offshore fund

115AC Global depository receipts (GDR) purchased in foreign Non-resident

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currency as given in section 115AC

115ACA Global depository receipts (GDR) purchased in foreign

currency as given in section 115ACA

Resident

individual –

employee

115AD Securities as given in section 115AD Foreign

Institutional

Investors

CII in relation to a previous year means such index, as Central Government notifies on year to

year basis.

The Central Government has notified the following Cost Inflation Indexes:

Financial Year CII Financial Year CII Financial Year CII

1981-82 100 1993-94 244 2005-06 497

1982-83 109 1994-95 259 2006-07 519

1983-84 116 1995-96 281 2007-08 551

1984-85 125 1996-97 305 2008-09 582

1985-86 133 1997-98 331 2009-10 632

1986-87 140 1998-99 351 2010-11 711

1987-88 150 1999-00 389 2011-12 785

1988-89 161 2000-01 406 2012-13 852

1989-90 172 2001-02 426 2013-14 939

1990-91 182 2002-03 447 2014-15 1024

1991-92 199 2003-04 463 2015-16 1081

1992-93 223 2004-05 480 2016-17 1125

Computation of capital gain in case of sale of shares or debentures of an Indian company

purchased by a non-resident in foreign currency [first provision to section 48]

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In such a case, capital gain shall be determined as under:-

Full Value of

Consideration

(X)

Find out sale consideration in Indian currency and convert it into same foreign

currency, which was used to acquire the capital asset, at average exchange

rate* on the date of transfer.

Cost of

acquisition (Y)

Find out the cost of acquisition in Indian currency and convert it into foreign

currency at average exchange rate on the date of acquisition.

Expenditure on

sale (Z)

Find out the expenditure on transfer in Indian currency and convert it into same

foreign currency at average exchange rate on the date of transfer (not on the

date when expenditure is incurred).

Capital gain

(X-Y-Z)

The capital gains as computed in after reducing the cost of acquisition and

expenditure from the full value of consideration shall be reconverted into

Indian currency at buying rate** on the date of transfer.

* Average exchange rate means the average of the telegraphic transfer buying rate and

telegraphic transfer selling rate of the foreign currency initially utilized in the purchase of capital

asset.

** Buying rate is the telegraphic transfer buying rate of such currency.

Full Value of Consideration

Full value of consideration is the consideration received or receivable by the transferor in lieu of

assets, which he has transferred. Such consideration may be received in cash or in kind. If it is

received in kind, then fair market value (‘FMV’) of such assets shall be taken as full value of

consideration.

However, in the following cases “full value of the consideration” shall be determined on notional

basis as per the relevant provisions of the Income-tax Act, 1961:

24

S.

No

.

Nature of transaction Sectio

n

Full Value of Consideration

1 Money or other asset received

under any insurance from an

insurer due to damage or

destruction of a capital asset

45(1A) Value of money or the FMV of the asset (on

the date of receipt)

2 Conversion of capital asset into

stock-in-trade

45(2) FMV of the capital asset on the date of

conversion

3 Transfer of capital asset by a

partner or member to firm or

AOP/BOI, as the case may be,

as his capital contribution

45(3) Amount recorded in the books of accounts of

the firm or AOP/BOI as the value of the

capital asset received as capital contribution

4 Distribution of capital asset by

Firm or AOP/BOI to its partners

or members, as the case may be,

on its dissolution

45(4) FMV of such asset on the date of transfer

5 Money or other assets received

by share- holders at the time of

liquidation of the company

46(2) Total money plus FMV of assets received on

the date of distribution less amount assessed

as deemed dividend under section 2(22)(c)

6 Buy-back of shares and other

specified securities by a

company

46A Consideration paid by company on buyback

of shares or other securities would be deemed

as full value of consideration. The difference

between the cost of acquisition and buy-back

price (full value of consideration) would be

taxed as capital gain in the hands of the

shareholder.

Note: if shares are not listed on a recognized

stock exchange, domestic companies would

liable to pay additional tax at 20% under

section 115QA on the distributed income (i.e.

25

buy-back price as reduced by the amount

received by the company for issue of such

shares)

7 Shares, debentures, warrants

(‘securities’) allotted by an

employer to an employee under

notified Employees Stock

Option Scheme and such

securities are gifted by the

concerned employee to any

person

Fourth

Proviso

to

Section

48

Fair Market value of securities at the time of

gift

8 In case of transfer of land or

building, if sale consideration

declared in the conveyance deed

is less than the stamp duty value

50C The value adopted or assessed or assessable

by the Stamp Valuation Authority shall be

deemed to be the full value of consideration

Note: Where the date of agreement (fixing the

amount of consideration) and the date of

registration for the transfer of property are not

the same, the value adopted or assessed or

assessable by Stamp Valuation Authority on

the date of agreement may be taken as full

value of consideration.

9 If consideration received or

accruing as a result of transfer

of a capital asset is not

ascertainable or cannot be

determined

50D FMV of asset on the date of transfer

(applicable from the assessment year 2013-

14)

26

Cost of Acquisition

Cost of acquisition of an asset is the amount for which it was originally acquired by the assessee.

It includes expenses of capital nature incurred in connection with such purchase or for

completing the title of the property.

However, in cases given below, cost of acquisition shall be computed on notional basis:

S.

No

.

Particulars Notional Cost of Acquisition

1 Additional compensation in the case of

compulsory acquisition of capital assets

Nil

2 Assets received by a shareholder on liquidation of

the company

FMV of such asset on the date of

distribution of assets to the

shareholders

3 Stock or shares becomes property of taxpayer on

consolidation, conversion, etc.

Cost of acquisition of such stock or

shares from which such asset is

derived

4 Allotment of shares in an amalgamated Indian co.

to the shareholders of amalgamating co. in a

scheme of amalgamation

Cost of acquisition of shares in the

amalgamating co.

5 Conversion of debentures into shares That part of the cost of debentures in

relation to which such asset is acquired

by the assessee

6 Allotment of shares/securities by a co. to its

employees under ESOP Scheme approved by the

Central Government

a) If shares are allotted during 1999-

2000 or on or after April 1, 2009,

FMV of securities on the date of

exercise of option

b) If shares are allotted before April 1,

2007 (not being during 1999-2000),

the amount actually paid to acquire the

securities

27

c) If shares are allotted on or after

April 1, 2007 but before April 1, 2009,

FMV of securities on the date of

vesting of option (purchase price paid

to the employer or FBT paid to

employer shall not be considered)

7 Property covered by section 56(2)(vii) or (viia) The value which has been considered

for the purpose of Section 56(2)(vii) or

(viia)

8 Allotment of shares in Indian resulting company

to the existing shareholders of the demerger

company in a scheme of demerger

Cost of acquisition of shares in

demerged company ? Net book value

of assets transferred in demerger ? Net

worth of the demerged company

immediately before demerger

9 Cost of acquisition of original shares in demerged

company after demerger

Cost of acquisition of such shares

minus amount calculated above in

point 8.

10 Cost of acquisition of assets acquired by

successor LLP from predecessor private company

or unlisted public company at the time of

conversion of the company into LLP in

compliance with conditions of Section 47(xiiib)

Cost of acquisition of the assets to the

predecessor private company or

unlisted public company

11 Cost of acquisition of rights of a partner in a LLP

which became the property of the taxpayer due to

conversion of a private company or unlisted

public company into the LLP

Cost of acquisition of the shares in the

co. immediately before conversion

12 Depreciable assets covered under Section 50 Opening WDV of block of assets on

the first day of the previous year plus

actual cost of assets acquired during

the year which fall within the same

block of assets

28

13 Depreciable assets of a power generating unit as

covered under Section 50A*

WDV of the asset minus terminal

depreciation plus balancing charge

14 Undertaking/division acquired by way of slump

sale as covered under section 50B

Net worth of such undertaking

15 New asset acquired for claiming exemptions

under sections 54, 54B, 54D, 54G or 54GA if it is

transferred within three years

Actual cost of acquisition minus

exemption claimed under these

sections

16 Goodwill of business or trade mark or brand

name associated with business or right to

manufacture, produce or process any article or

thing or right to carry on any business or

profession, tenancy right, stage permits or loom

hours

a) If these assets were acquired by gift,

will, etc., under section 49(1) and the

previous owner had purchased these

assets: Cost of acquisition to the

previous owner

b) If the owner has purchased these

assets: Actual cost of acquisition

c) If these assets are self-generated:

Nil

17 Right shares Amount actually paid by assessee

18 Right to subscribe to shares (i.e., right

entitlement)

Nil

19 Bonus shares a) If allotted to the assessee before

April 1, 1981: Fair market value on

that date

b) In any other case: Nil

20 Allotment of equity shares and right to trade in

stock exchange, allotted to members of stock

exchange under a scheme of demutualization or

corporatization of stock exchanges as approved

by SEBI

a) Cost of acquisition of shares: Cost

of acquisition of original membership

of the stock exchange

b) Cost of acquisition of trading or

clearing rights of the stock exchange:

Nil

21 Capital asset, being a unit of business trust,

acquired in consideration of transfer as referred to

Cost of acquisition of shares as

referred to in section 47(xvii)

29

in section 47(xvii) [applicable from AY 2015-16]

22 Units allotted to an assessee pursuant to

consolidation of two or more scheme of a mutual

fund as referred to in Section 47(xviii)

Cost of acquisition of such units shall

be the cost of acquisition of units in

the consolidating scheme of the

mutual fund

23 Shares in a company acquired by the non-resident

assessee on redemption of Global Depository

Receipts referred to in Section 115AC(1)(b)

Cost of acquisition of such shares shall

be calculated on the basis of the price

prevailing on any recognized stock

exchange on the date on which a

request for such redemption was made.

24 Any other capital asset a) If it became property of taxpayer

before April 1, 1981 by gift, will, etc.,

in modes specified in section 49(1):

Cost of acquisition to the previous

owner or FMV as on April 1,1981,

whichever is higher

b) If it became property of taxpayer

before April 1, 1981: Cost of

acquisition or FMV as on April 1,

1981, whichever is more

c) If it became property of taxpayer

after April 1, 1981 by gift, will, etc., in

modes specified in section 49(1): Cost

of acquisition to the previous owner

d) If it became property of taxpayer

after April 1, 1981: Actual cost of

acquisition

* Terminal Depreciation/Balancing Charge:

a) Balancing Charge = Sales Consideration – WDV of the depreciable asset

b) Terminal Depreciation = WDV – Sales Consideration

30

When a depreciable asset (which was subject to depreciation on straight line basis) of a power

generating units is sold, discarded, demolished or destroyed then terminal depreciation shall be

deductible from sale consideration while computing capital gains, or balancing charge is taxable

in the relevant year, as the case may be.

Cost to the Previous Owner [sec. 49(1)]

Cost to the previous owner shall be deemed to be the cost of acquisition in the hands of the

taxpayer in cases where a capital asset becomes the property of the assessee under any of the

modes given below:

a) On any distribution of assets on the total or partial partition of a HUF

b) Under a Gift or Will;

c) By Succession, Inheritance or Devolution;

d) On any distribution of assets on dissolution of a firm, BOI or AOP (where such dissolution

had taken place at any time before the 01-04-1987);

e) On any distribution of assets on liquidation of a company;

f) Under a transfer to a revocable or an irrevocable trust;

g) On any transfer by a holding company to its wholly owned Indian subsidiary company;

h) On any transfer by a wholly owned subsidiary company to its Indian holding company;

i) On any transfer by the amalgamating company to the Indian amalgamated company;

j) In a scheme of amalgamation, any transfer of shares held in a Indian company by a

amalgamating foreign company to the amalgamated Foreign company;

k) Consequent to transfer of share(in a scheme of amalgamation as referred to in Section

47(viab) of a foreign company which derives, directly or indirectly, its value substantially from

the share or shares of an Indian company held by amalgamating foreign company to the

amalgamated foreign company.

31

l) Consequent to transfer of capital asset by the demerged company to the resulting Indian

company. (in case of demerger)

m) Consequent to transfer of share (in case of demerger as referred to in Section 47(vic) of a

foreign company which derives, directly or indirectly, its value substantially from the share or

shares of an Indian company held by a demerged foreign company to resulting foreign company.

n) Any transfer, in a scheme of amalgamation of a banking company with a banking institution;

o) On any transfer in a scheme of business reorganization of a cooperative bank;

p) On any transfer in a scheme of conversion of private company or unlisted company into LLP;

q) On any transfer in case of conversion of Firm or Sole proprietary concern into Company;

r) By HUF where one of its members has converted his self-acquired property into joint family

property.

Note:

Where previous owner has also acquired the property in the aforesaid manner the ‘previous

owner’ of the property shall be construed as the last previous owner who acquired the property

by means other than those stated above.

32

Cost of Improvement [Sec. 55(1)(b)]

Cost of improvement, in relation to the capital assets shall include all capital expenditure

incurred in making addition or alteration to the capital assets by the assessee or the previous

owner. However, cost of improvement does not include any expenditure incurred prior to 01-04-

1981.

Cost of improvement shall be computed in the following manner:

S.

No

Particular Cost of Improvement

1 In relation to goodwill of a business, right to

manufacture, produce any article or thing or right to

carry on business or profession

NIL

2 In relation to capital asset which becomes property of the

assessee or previous owner before 01-04-1981

Any expenditure of capital

nature incurred on or after 01-

04-1981

3 In relation to capital asset which becomes property of the

assessee or previous owner before 01.04.1981 by way of

any mode specified under Section 49(1)

Any expenditure of capital

nature incurred on or after 01-

04-1981 by the assessee or the

previous owner

4 In relation to capital asset which becomes property of the

assessee or previous owner on or after 01.04.1981

Any expenditure of capital

nature incurred by the assessee

or the previous owner

5 In relation to capital asset which becomes property of the

assessee or previous owner on or after 01-04-1981 by

way of any mode specified under Section 49(1)

Any expenditure of capital

nature incurred by the assessee

or the previous owner

33

RATES OF TAX ON CAPITAL GAINS:

1. Short Term Capital Gains

a) Short-term capital gains shall be included in the gross total income of the taxpayer and will be

taxed at the normal rates;

b) Short-term capital gains arising from transfer of Equity Shares, Units of an Equity Oriented

Funds or a unit of a business trust which is chargeable to securities transaction tax shall be taxed

at 15% under Section 111A;

Note:-

Now benefit of reduced rate of tax (i.e., 15%) shall be available w.e.f. 1-4-2016 even in respect

of income arising from transfer of units of a business trust which were acquired by assessee in

lieu of shares of special purpose vehicle as referred to in section 47(xvii).

2. Long Term Capital Gains

a) Long-term capital gains are subject to tax at 20%;

b) Long-term capital gains arising from transfer of listed securities, units or a zero coupon bonds

shall be taxable at lower of following:

i.20% after taking benefit of indexation; or

ii.10% without taking benefit of indexation.

c) Long-term capital gains arising to a non-residents or foreign company from transfer of

unlisted securities shall be taxed at without giving benefit for indexation;

d) Long-term capital gains arising from transfer of listed securities, units of equity oriented or a

unit of business trust which is chargeable to STT shall be exempt from tax under Section 10(38).

Note:

1. Now exemption from capital gains under Section 10(38) shall be available w.e.f. 1-4-2016

even in respect of long-term capital gains arising from transfer of units of a business trust which

were acquired in lieu of shares of special purpose vehicle as referred to in section 47(xvii) and on

which securities transaction tax has been paid.

2. Now exemption from long term capital gains under section 10(38) shall be available w.e.f

April 1, 2017 even where STT is not paid, provided that –

– transaction is undertaken on a recognised stock exchange located in any International

Financial Service Centre, and

– consideration is paid or payable in foreign currency

34

Illustration (Short term capital gains)

Mr. Punit purchased a residential flat on 02-05-2014 for Rs. 1000000. He paid on the same day

the stamp duty and registration charges of Rs. 48750 on purchase of flat. He sold the said flat on

17-03-2016 for Rs. 1200000. The cost inflation index for F.Y. 2013-14 is 939 and for F.Y. 2015-

16 is 1081. Compute his capital gain chargeable to tax for assessment year 2016-17.

Solution :

NAME OF ASSESSEE: MR. PUNIT STATUS: INDIVIDUAL

PREVIOUS YEAR: 2015-16 ASSESSMENT YEAR: 2016-17

RESIDENTIAL STATUS: R& OR

Particulars Rs. Rs.

INCOME FROM CAPITAL GAINS

Full value of flat sold 1200000

Less: purchase price of flat 1000000

Stamp duty & registration 48750 1048750

SHORT TERM CAPITAL GAINS 151250

NOTE:

Since the capital asset is held for less than 36 months, it is short term capital asset hence cost

inflation index is not applicable.

35

Illustration (long term capital gains)

Krishna purchased a vacant site for Rs. 300000 in April 1990. He constructed a residential

building during the year 2004-05 in the said site for Rs. 1500000. He carried out some further

extension of a construction in the year 2007-08 for Rs. 500000. Krishna sold the residential

building for Rs. 6500000 in January 2016. Compute his long term capital gain, for the

assessment year 2016-17 based on the above information. The cost inflation index are as follows:

Financial Year Cost Inflation Index

1990-91 182

2002-03 447

2004-05 480

2007-08 551

2015-16 1081

Solution:

NAME: KRISHNA STATUS: INDIVIDUAL- R & OR

PREVIOUS YEAR: 2015-16 ASSESSMENT YEAR: 2016-17

Particulars Rs. Rs.

Full value of consideration 6500000

Less: indexed cost of acquisition

(300000/index of 90-91*index of 15-16)

(300000/182*1081)

1781868

Less: indexed cost of improvement

(1500000/index of 04-05*index of 15-16)

(1500000/480*1081)

3378125

Less: indexed cost of improvement

(500000/index of 07-08*index of 15-16)

(500000/551*1081)

980944 6140937

Long term capital gain 359063

CONCLUSION:

36

The general misconception is that there is no advantage in earning short-term gain, since it

is taxed at the normal rates. However, what may be lost sight of is that the advantage flows from

the fact that a large portion of withdrawals is capital and, simultaneously, an equal amount from

the income gets converted into capital. In other words, you are consuming capital and investing

income.

Obviously, this principle would work only for the long-term investor. If you have a short-

term view and were to sell your entire holdings at one go, this investing strategy will not work.

Look at it any which way, the only way to make the dividend truly tax-free is to avoid it

altogether. The rule is simple - no dividend, no tax.

A capital gain is the difference between what an individual purchases an item for and

what they sell the item for. For instance, if you buy a stock for 45 dollars a share, but sell that

same stock a few years later for 60 dollars a share, then your capital gain on that stock is 15

dollars.

Capital gains do not apply to all items that an individual purchases. For instance,

disposable goods or food do not accumulate capital gains, even if you are able to sell them for

more than you originally paid for them. Rather, capital gains are limited to capital assets, which

are items that an individual buys for personal or investment purposes. Although stocks are the

most common example, this can also include real estate, jewelry, art, or fine goods.

When an individual inherits a capital asset, or is given a capital asset as a gift, this is also

subject to capital gains, even though the transaction is not precisely one of buyer-seller. In such

instances, the capital gain is the difference between the values of the item when purchased by the

gift-giver and when received by the gift-receiver.

37

BIBLIOGRAPHY:

- http://www.investopedia.com/terms/c/capitalgain.asp

- https://en.wikipedia.org/wiki/Capital_gain

- file:///C:/Documents%20and%20Settings/Savarmal/Desktop/Capital%20Gain

%20%E2%80%93%20All%20you%20want%20to%20know.html

- https://www.bankbazaar.com/tax/capital-gains-tax.html

- http://www.charteredclub.com/capital-gain-tax/

- http://taxguru.in/income-tax/taxation-capital-gains-india-frequently-asked-

questions-faqs.html

38