MEANING OF CAPITAL GAIN – SEC.45 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’’ & shall be deemed to be the income of the previous year in which the transfer took place.

Profit or loss arising from transfer of capital assets is taxable under the head capital gains.

It is the fourth head of income.

CAPITAL GAIN

There must be a capital asset. The capital asset must be transferred. The transfer must have been taken place in

the previous year. There must be a gain arising from such

transfer. Ex:- Mr. X purchased a house for Rs. 2 lac in

2010 & sold it for Rs. 3 lac in 2012. So he earned Rs. 1 lac, it will be treated as capital gain from Income Tax point of view.

Requisites of Capital gains Section 45

Capital assets means property of any kind, whether movable or immovable, tangible or intangible like- land, building, furniture, silver, precious metal etc.

Capital assets Sec.2(14)

1. Stock in trade, consumable parts or raw material held for the purpose of business.

2. Personal effects (air conditioner, apparel etc.) for personal use by assesse.

3. Agricultural land in rural area (population <10000)4. In any area within such distance, not being more than

eight kilometers, from the local limits of any municipality or cantonment board .

5. 6.5 per cent Gold Bonds, 1977, or 7 per cent Gold Bonds, 1980, or National, Defence Gold Bonds, 1980, issued by the Central Government.

6. Special Bearer Bonds, 1991, issued by the Central Government;

7. Gold deposit bonds 1999, issued under Gold Deposit Scheme, 1999 notified by Central Govt.

Exceptions: capital asset

Land, building, flat, plot (immovable) Furniture, machinery (movable) Gold, silver, precious metals, jewellery,

precious stones etc. Urban agricultural land (population >

10000) Shares, securities, bonds as an investment. Goodwill, patent.

Examples of capital assets

1. Land, building, gold, silver etc- held by assessee for a period of less than 36 months (3yrs); immediately after the date of transfer.

2. Shares & securities- held by assessee for a period of less than 12 months ( 1 yr)

3. Depreciable assets, irrespective of holding period

Ex : Mr. X purchased a plot on 1st Aug 2010 for Rs. 2 lacs, sold it for Rs. 3 lacs on 1st Oct 2012.

Short term capital asset [2(42A)]

Computation of short term capital gain/ loss

Sales consideration Xxx

Less- Total of the following

1. Transfer expenses (advertisement, legal, brokerage) xxx

2. Cost of acquisition (purchase Price) xxx

3. Cost of improvement xxx

(-)xxx

Taxable Short term capital gain/lossPositive means gain, negative means loss

Xxx

On Jan 5, 2013; Mr. Mehta sold a house for Rs. 68,000 which was purchased on April 18, 2011 for Rs. 50,000. He spent 5,000 on renovation in Jan. 2012.

Solu :- House (STCA)

Numerical 1

Sales Consideration 68,000

Less- Total of following:

1. Transfer expenses -

2. Cost of acquisition (50,000)

3. Cost of improvement (5,000)

(55,000)

Taxable short term capital gain 13,000

1. An assessee purchased an old house for Rs. 3,60,000 on Jan 1 2011.

Paid Registration charges during purchase = Rs. 60,000

Improvement charges = Rs. 80,000 House sold for Rs. 7,50,000 on Aug. 1,2012 Brokerage is 30,000 and Other expenses

are 20,000 at the time of sale. A.Y is 2013-14 Ans. Short term capital gain 2,00,000

Numerical 2

Shares, securities, bonds, units held by assessee for more than 12 months.

Other assets like building, gold, plot, land, jewellery etc. held by the assessee for more tan 36 months.

Long term capital asset

Full value of consideration xxx

Less- Total of the following:

1. Transfer expenses xxx

2. `Indexed cost of acquisition xxx

3. Indexed cost of improvement xxx

(-)xxx

Taxable Long term capital gain/lossPositive means gain, negative means loss

xxx

Computation of long term capital gain/loss

Original Cost: means the purchase price of asset, cost of construction, registration charges, any improvement charges & brokerage .(time of acquiring the asset)

Cost before 1.4.1981: Original cost of acquisition

OrFair market value (which ever is more)

Cost of acquisiton

Indexed cost of acquisition (asset held prior ro 1981)

original cost index for the yr in or fair market value * which asset transferred on 1.4.1981 ex: 2012-13 (852) cost inflation index for 1981-82 i.e. 100 (base yr) If property acquired before 1.4.1981, then

index for 1981-82 is taken for the base yr Original cost = purchase price + registration or

installation etc. (current repairs not included)

For assets acquired after 1.4.1981. cost of acquisition * index for the yr in

which asset is transferred ex: 2012-13(852)

cost inflation index for the 1st year in which the asset was acquired

It includes the cost of all alterations or additions to any capital asset (except goodwill) on or after 1.4.1981

Interest on loan, current repairs, insurance premiums are not considered as cost of improvements.

If the property is acquired before 1.4.1981 and cost of improvement incurred before 1.4.1981 will not be considered. Cost of improvement after 31.3.1981 is considered.

Cost of Improvement

Indexed cost of improvement (after 1.4.81)

Cost of improvement * Index for the yr in which

asset is transferred

cost inflation index for the yr of improvement

A plot was sold on June15,2012 for Rs. 2,08,000. Brokerage paid Rs. 8,000 on sales. Plot was purchased on 1st June 1999 for Rs. 45,000.

Solu :- Plot (LTCA)

Numerical 3

Full value consideration 2,08,000

Less : total of following

1. Transfer expenses- brokerage (8,000)

2. Indexed cost of acquisition

( 45,000*852)/389 (98,560)

3. Indexed cost of improvement - (1,06,560)

Taxable long term capital gain 1,01,440

Assessee purchased the house for Rs. 60,000 on 1st Aug 1986.

Improvement done by him for Rs. 40,000 in Jan 1988

Sold house on 1st Sep 2012 for Rs. 5,80,000 Brokerage paid for sale Rs. 10,000 Inflation index: 1986-87 = 140 1987-88 = 150 2012-13 = 852Compute LTCG for A.Y. 2013-14

NUMERICAL 4

INDEXED COST OF ACQUISITION:

= purchase pr. * index for 2012-13 index for 1st yr in which asset is acquired i.e. 1986-87 = 60000 * 852 140 = 3,65,143

WORKING NOTES:

INDEXED COST OF IMPROVEMENT:

= cost of improvement * index for 2012-13 index for the year of improvement i.e. 1987-88= 40,000 * 852 150= 2,27,200

final ans. Long term capital loss = 22,343

Long term bonds and securities, mainly debentures (actual cost taken)

Shares transferred outside stock exchange (long term)

Shares/debentures purchased by non-residents in foreign exchange (issued by Indian Company, purchased in foreign currency)

Indexation not allowed

Mr.X purchased debentures of ABC ltd. 12% debentures (listed) face value is Rs. 2,50,000 at par in 2003.

These debentures were sold for Rs.3,62,000 during previous year on 1st July 2012.

Brokerage was paid Rs.2,000 on sales. In 2012 he received interest on debentures

of Rs.30,000

Numerical 5

Sales consideration(LTCA) 3,62,000Less: total of the following: 1. Transfer exp 2,0002. Cost of acquisition 2,50,000 (-)2,52,000

LTCG 1,10,000

Solu:

Exemptions

Residential property converted into new residential property within 3 years or before 1 year or after 2 years (Section 54) LTCG

Cost of the new house or

Capital gain(whichever is less)

Agricultural land transferred and agricultural land purchased within two years(Section 54B) STCG OR LTGC

Cost of the new land or

Capital gain(whichever is less)

Compulsory acquisition of land and building of industrial undertaking. (Section 54D)Within a period of 3 yrs when he sells

Cost of the new land and building or

Capital gain(whichever is less)

Exemptions

EXEMPTIONS

Capital Gain (LTCG) is invested in notified bonds (Section 54EC) Example :NABARD, Rural Electrification Corporation Bonds , National Highway Authority etc.

• Max limit of investment is Rs.50lakh.

• Within 6 months of capital gain the assessee should invest the amt in such bonds. (wholly or partly)

(Redeemable after 3 years)• If invested amt is less than

capital gain; invested amt will be exempted.

• If any loan taken or bonds converted into money within 3 yrs, then tax on CG arising from original asset will be charged which was earlier exempted.

Other capital gain invested Residential property (Section 54F)(LTCG)

• Assessee who is an individual or HUF.

• If purchased 1 yr before or 2 years after the date of transfer or constructed within 3 years

• If only a part of net consideration is so invested

Cost of new asset x long term capital gain

Net Consideration arising

• If full amt. of net consideration is invested then entire capital gain is exempted.

• Net consideration = sales consideration – transfer exp (which tells the amt. of CG acquired after comparing it with purchase price)

Gain arising from transfer od any plant or other asset of industrial undertaking which was situated in notified urban area; Shifting of Industrial Undertaking from urban area to other area (Section 54G)

Exemption limit- Upto the cost of Industrial asset which can be a building, plant, machinery etc.

This scheme is applicable for sections 54, 54(b), 54(d), 54(f), 54(g)

If the assessee can not utilise the capital gain before the due date of filing of Return of Income for purchasing or constructing new asset, like residential house, agricultural land, machinery etc. then he must deposit the unutilised money of capital gain in this scheme in a public sector bank to avail exemption under aforesaid sections.

Capital Gains Account Scheme-1988

Owner of residential house since 1992. Sold the house in previous yr 2012-13 long term capital gain = Rs. 4 lacs. He

wants to purchase a new residential house but he could not do so till the due date 31.7.2013-

1. pay tax on long term gain OR 2. deposit the amount of gain under

Capital Gains Account Scheme 1988 in a bank before filing of return. (LTCG will be exempted in assessment yr 2013-14)

Now if he purchases a new house in 2014 for 3,00,000 & withdraws the amount, it will not be taxable

Remaining 1 lac if not utilised for specified purpose and withdrawn then it will be taxable in the prev. year of withdrawal

FIXED ASSET:1. Short term capital asset– less than 36

months2. Long term capital asset- more than 36

months

SHARES & SCEURITIES:1. Short term capital asset – less than 1 yr2. Long term capital asset – more than 1 yr

Asset Holding period:

1. Find out the full value of consideration.2. Deduct the following:   a. Expenditure incurred in connection with

such transfer. b. Cost of acquisition. c. Cost of improvement.3. From the resulting sum deduct the

exemption provided by section 54B, 54D and 54G.

4. The balancing amount is the taxable short-term capital gain.

Computation of Short term capital gain

1. Find out the full value of consideration.

2. Deduct the following:   a. Expenditure incurred in connection with such transfer   b. Indexed Cost of acquisition

- before 1.4.1981 - after 1.4.1981   c. Indexed Cost of improvement.

3. From the resulting sum deduct the exemption provided by section 54, 54B, 54D, 54EC, 54F and 54G.

4. The balancing amount is the taxable long-term capital gain.

Computation of Long term capital gain

Mr. ABC sold a house for Rs.15,00,000 on 1st Dec 2012 which was purchased by him in 1980 for Rs.1,50,000

On 1st May 2013 he invested Rs. 1,00,000 in NHAI specific Bonds.

He spend Rs.14,000 in 2006-07 for improvement of the house. He also spend Rs.2,000 on normal repairs of the house.

He paid 3% brokerage and transfer expenses of Rs.10,000 on selling the house.

On 1st April 1981 the fair market value of house was Rs.1,20,000

Index

Numerical 6

Year Index value

1981-82 100

2006-07 519

2012-13 852

Sales consideration (LTCA) 15,00,000

Less: 1. Transfer exp (3% brokerage+ other exp) 45,000+10,000 (-)55,0002. Indexed cost of acquisition (before 1.4.81)Original cost * 2012-13 index base yr index

= 1,50,000*852 (-)12,78,000

100

Solu:-

3. Indexed cost of improvementCost of imprv.* 2012-13 index 2006-07 index= 14,000* 852 (-)22,983 519 Total of 1,2,&3 = (-) 13,55,983 LTCG = 1,44,017LESS: EXEMPTIONS u/s 54ECInvestment in notified bondsOf NHAI

(-)1,00,000 Taxable LTCG

44,017

An assesse holds shares & bonus shares are allotted to him on the basis of his holding without any payment.

CASE I:Original Shares and Bonus Shares acquired before 1.4.1981 (transferred during the prev. yr then cost of acquisition wil be as under)

1. In case of original shares- Actual Cost or market value on 1.4.1981 (Higher Value)

2. In case of Bonus Shares – Market value on 1.4.1981

Bonus Shares(allotted by a company to its existing shareholders)

Mr. X bought 500 shares of ABC Ltd. @ Rs. 40 on Jan 1978.

Company allotted bonus share in the ratio 5:2 1st April 1980

On 1.4.1981 the fair market value of the share was Rs. 60.

Ans. Cost of acquisition for original & bonus share would be Rs. 60

Example :

CASE II: Original shares acquired before 1.4.1981 and bonus share after 31.3.1981

1. Actual cost or Fair Market Value on 1.4.1981 (Higher Value)

2. Bonus Share :NIL

EX:- Mr. X purchased 1000 shares of ABC Ltd. on 1.4.1975 @ Rs 50. Fair market value of share was Rs. 45 each on 1.4.1981. The company allotted bonus shares in the ratio 1:1 in 1987. Cost of acquisition?

CASE III : Original Shares and bonus shares issued after 31.3.1981

1. Original shares :Actual Cost2. Bonus Shares :NIL

EX: Mr. X purchased 2,000 shares of ABC Ltd. On 1.8.1983 @ Rs 48.Bonus shares allotted on 1st June 1989.

Cost of acquisition for original shares will be Rs. 48 & for bonus shares = nil

Mr X purchased 1,000 shares of Glaxo Ltd. @200 per share in 1979. The company allotted one bonus shares for every two shares held in March 1988. He sold 300 shares (original) and 400 Bonus Shares @ Rs.950 on 1 June 2012.Fair Market Value on 1.4.1981 was Rs.250 per share.

Compute :1. When he sold directly.2. When he sold through exchange (Securities

Transaction Tax, STT paid)

Numerical 7

1. Original shares LTCA

Sales consideration (300*950) 2,85,000Less: Index cost of acquisition(before 1.4.1981)Actual cost @ 200 or FMV @ 250Whichever is high= 300 * 250 = 75,000= 75,000 * 852 (-)6,39,000 100 ans. (-) 3,54,000

Solu:1 Direct sale

2. Bonus shares ( without index cost) Sales consideration (400*950) 3,80,000Less: cost of acquisition nil ans. 3,80,000

LTCG = (-) 3,54,000 + 3,80,000 = 26,000

Solu:2 Sale through stock exchange & Securities Transaction Tax STT paid shall not be taxable

Find out the long and short term gains in the following Cases:

a. Mrs. Mittal purchased a house on 1st May 2011 for Rs.30,000 and sold @Rs.36,000 on 31st Aug 2013 b. Mr. X purchased some residential plots on

1st Jan 2011 for Rs.40,000 and sold @Rs.60,000 on 1st Feb 2014

Numerical 8

c. Mr. Y sold office building for Rs.2,40,000 on 24th June 2013 which was purchased in June 2007 @Rs.1,60,000. Its written down value was Rs. 90,000 on 1st April,2013. (deduct)

He also sold shares for Rs.24,000 through BSE which was purchased on 1st July 2010 @Rs.9,000. Security Transaction Tax paid is Rs.25

d. Mrs ABC sold a residential house for Rs.35,70,000 on 1st Aug 2013 and brokerage paid is Rs.70,000. the house was purchased in 1980 for Rs.2,50,000 and registration charges paid Rs.30,000.She purchased a new flat for Rs8,00,000 on 1st Jan 2014 and paid registration charges Rs.40,000

e. Mr. Ram sold an agricultural land for Rs.17,000 during previous year. The land was owned by him since last 5 years which was purchased for Rs.4,000. The land is village where population is of 8,000.

f. Mr. Sham sold his motor car which was for his personal use for Rs.80,000 on 1st Nov 2013. The car was bought by him on 1st Dec 2010 for Rs.1,48,000.

g. On Sep 2013 Mr. Lal sold a flat for Rs.5,00,000 which was purchased by him on 1st Jan 1970 for Rs.70,000. Its fair market value was Rs.40,000 on 1st April 1981

Mr. Mohan Toshniwal transferred the following assets during the prev. yr 2013-14—

1. A residential house sold on 10th Sept. 2013 for Rs. 10 lac, spent Rs. 10,000 as transfer exp. The house was ancestral. On 1st April 1981 the market value was Rs. 1 lac.

2. A building which was used in his own business was sold on 1st Dec. 2013 for Rs. 4 lac & brokerage paid @ 2% on the amt of deal. The WDV of the house was Rs. 3,20,000. On 1st April 2013. The house was occupied by him in 1987.

NUMERICAL 9

A residential plot was sold on 1st June 2013 for Rs. 1,65,000. Rs 3,000 on advertisement & Rs. 2,000 on brokerage were paid. The plot was purchased by him in 1980 for Rs. 32,000. Rs. 8,000 was paid for colony development charges and Rs. 5,000 for registration charges.

Profit on sale of an agricultural land situated in village, population = 4,000 was Rs.35,000. The land was in his occupation for the last three yrs.

He received Rs. 80,000 from sale of shares of a Company. He earned profit Rs. 30,000. These shares were purchased on 1st July 2004 and sold by him on 1.11.13 through National Stock Exchange and Securities Transaction Tax, Rs. 100 has been paid. Before the transfer he received Rs.3,880 dividend on these shares.

Compute taxable income from capital gains.

Mr X sells his house in Mangalore on 24 Aug 2013 for Rs. 35,20,000 and incurs expenditure of Rs.20,000 in transfer

Cost of Acquisition for him in 1978 was Rs.1,80,000 and on 1 April 1981 is Rs.3,00,000 . On Jan 16, 2014 he purchased a flat in Mangalore for Rs. 5,00,000 and deposit Rs.1,00,000 in the capital gain scheme