Direct and Indirect

Taxes.
Group No: 16.
Class: SYBMS.
Div: B.
Semester: 4.
Date: 12/02/2011.
Topic: Income from Capital
Gains.
Prof. In-charge: Prof Ridhi
Sharma.

Group Members.

91. Tejal Wairkar.

92. Karishma Yadav.
94. Suvarna Bhokare.
95. Aakash Hinger.
96. Saurabh Tandel.

ACKNOWLEDGEMENT
I owe a great many thanks to a great many people
who helped and supported me during the making of
this project.
My deep thanks to Professor Ridhi Sharma the Guide
of the project for guiding with attention and
care.
I would also thank my Institution and my faculty
members without whom this project would have been
a distant reality.

Introduction:

Income from Capital Gains is the fourth head of income under

which total income is computed and assessed. In actual practice
computation of income under this head is a very complex exercise
due to interpretation of various sections, subsections etc. under
which this head of income is covered. The sections which are
relevant are:
Section 45: This lays down the chargeability and incomes
chargeable under this head.
Section 48: This lays down the mode or the manner of computation
of capital gains.
Section 49: This lays down the manner in which cost can be
determined with reference to certain modes of acquisition.
Section 50: This deals with special provision for computation of
capital gains in case of depreciable assets.
Section 54: This deals with exemption available for profit on sale
of property used for investment in residential property.
Section 55: This defines the term cost of acquisition and cost of
improvement for the purpose of section 49.

Definitions:
Income from Capital Gains arises on Transfer of certain Capital
assets. Before actually discussing the sections on computing
Income from Capital Gains the definitions of Capital Assets
and Transfer need to be understood along with certain other
important definitions. The same are as follows:

Capital Asset:

Capital Asset is defined to include property of any kind, whether

fixed or circulating, movable or immovable, tangible or intangible.
According to Section 2(14), Capital Asset means property of any
kind held by an assessee, whether or not concerned with business
or profession. The following assets are, however, excluded from
the definition of capital assets.
1. Any stock-in-trade, consumable stores or raw materials held
for the purposes of business or profession.
2. Personal effects of movable nature, such as furniture,
utensils, and vehicles held for personal use by assessee or any
dependent member of his family.
3. Agricultural land in India which is not situated in any
specified area as given u/s 21(1A).
4. 6.5 per cent of gold bonds, 1977 or 7 per cent gold bonds,
1980 or National Defence gold bonds, 1980 issued by the
Central Government.
5. Special Bearer Bonds, 1991.
6. Gold Deposit Bonds issued under Gold Deposit Scheme,
1999.
Transfer:
The definition of Transfer is very important as it is only when a
capital asset is transferred that the gains are taxable under this
head.
Short Term Capital Asset:
As per section 2 (42A) of the Income Tax Act, 1961 Short Term
Capital Asset means a capital asset held by an assessee for not
more than 36 months, immediately prior to its date of transfer.
However, in the following case an asset, held for not more than 12
months, is treated as short-term capital asset-

a.
b.
c.
d.
e.

Equity or preference shares in a company.

Securities listed in a recognized stock exchange in India.
Units of Units Trust of India (UTI).
Units of a mutual fund specified under section 10 (23D).
Zero coupon bonds.

For shares, securities, and units the period of holding is upto 12

months for being called a Short Term Capital Asset, whereas for all
other capital assets like land, building, flat, etc. the said period of
holding is upto 36 months.
Long Term Capital Asset:
As per section 2 (29A) of the Income Tax Act, 1961 a long term
capital asset is defined as a capital asset which not a short term
capital i.e. If a capital asset is held for more than 36 months the
capital asset would become a long term capital asset.
Why Capital Assets Are Divided In Short/Long Term Assets?
The tax incidence under the head capital gains depends upon
whether the capital gain is short-term or long-term. Long-term
capital gain is generally taxable at a lower rate. If the asset
transferred is a short-term capital asset, capital gain will be shortterm capital gain. Conversely, long-term capital gain arises on
transfer of a long-term capital asset.
In the case of transfer of a depreciable asset, capital gain is taken
as short-term capital gain, irrespective of period of holding.

Capital Gains:

Short Term Capital Gain:

This is defined as a capital gain arising from the transfer of a short
term capital asset. Short Term Capital Gains are included in the
total income of an assessee and taxed at the normal applicable rate
of income (30% in most cases).
Long Term Capital Gain:
This is defined as a capital gain arising from the transfer of a long
term capital asset. Though Long Term Capital Gains are included
in the total income of an assessee, they are taxed at a confessional
rate of tax of 20% (or 10% in certain cases).

Computation of Capital Gains:

Computation of capital gain depends upon the nature of capital
asset transferred, viz, short-term capital asset or long-term capital
asset. Capital gain arising on transfer of short term capital asset is
called as short term capital gain, whereas transfer of long term
capital asset generates long term capital gain. The tax incidence is
generally higher in the case of short-term capital gain as compared
to long-term capital gain.
As per section 48, of the Income Tax act, 1961 the income
chargeable under the head Income from Capital Gains shall
computed by deducting from the value of consideration received or
accruing as a result of the transfer of the capital asset the following
amounts:
expenditure incurred wholly and exclusively in connection with such
transfer
The cost of acquisition of the asset and the cost of improvement thereto.

To summarise, the computation of capital gains under section 48

is as under:

(A) Short Term Capital Gain

Full value of consideration
Less: Expenses incurred in connection with the transfer
Net consideration (A-B)
Less: Cost of acquisition and Cost of improvement
Gross capital gains (C-D)
Less: Exemption
Net Capital Gains (E-F)

Rs.
XX
XX
XX
XX
XX
XX
XX

(B) Long Term Capital Gain

Full value of consideration
Less: Expenses incurred in connection with the transfer
Net consideration (A-B)
Less: Indexed Cost of acquisition and Indexed Cost of
improvement
Gross capital gains (C-D)
Less: Exemption
Net Capital Gains (E-F)

Rs.
XX
XX
XX
XX
XX
XX
XX

What is full value of consideration?

Full value of consideration is the consideration received or
receivable by the transferor in full lieu of assets, which he has
transferred. Such consideration may be received in cash or kind. If
it is received in kind, then fair market value of such assets is taken
as full value of consideration.
The full value of consideration does not mean market value of that
asset which is transferred.

What is cost of acquisition?

Cost of acquisition of an asset is the value for which it was
acquired by the assessee. Expenses of capital nature for completing
or acquiring the title to the property are includible in the cost of
acquisition.

What is cost of improvement?

Cost of improvement is capital expenditure incurred by an assessee
in making any additions/improvement to the capital asset. It also
includes any expenditure incurred to protect or complete the title to
the capital assets or to cure such title. To put it differently, any
expenditure incurred to increase the value of the capital asset is
treated as cost of improvement.

How to determine indexed cost of acquisition and

indexed cost of improvement?
Section 48 (3) defines the term indexed cost of acquisition as the
amount which bears to the cost of acquisition, the same proportion
as Cost Inflation Index for the year in which the asset is transferred
bears to the Cost Inflation Index for the first year in which the
asset was held by the assessee or for the year beginning on April 1,
1981, whichever is later.
Similarly, indexed cost of improvement is defined as an amount
which bears to the cost of improvement, the same proportion as
Cost Inflation Index for the year in which the asset is transferred
bears to the Cost Inflation Index for the year in which the
improvement to the asset took place.

Cost Inflation Index for any year means such index as the
Central Government may, having regard to 75% of average rise in
the Consumer Price Index for urban non-manual employees of the
immediately preceding previous year to such previous year, by
notification in the Official Gazette, specify in this behalf.
Financial Year
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96

Cost Inflation
Index
100
109
116
125
133
140
150
161
172
182
199
223
244
259
281

Financial Year
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10

Cost Inflation
Index
305
331
351
389
406
426
447
463
480
497
519
551
582
632

Cost of acquisition with reference to certain modes of

acquisition and certain capital assets:
Cost to previous owner deemed to be cost of acquisition:
The cost to previous owner is deemed to be cost of acquisition to
the assessee in case where capital asset becomes the property of
assessee under any mode of transfer described below:
1. acquisition of property on any distribution of assets on the
total or partial partition of HUF;
2. acquisition of property under a gift or will;
3. acquisition of property;
by succession, inheritance or devolution, or
on any distribution of assets on the dissolution of firm,
body of individuals or other association of persons
where such dissolution had taken place before April 1,
1987 or
on any distribution of assets on the liquidation of a
company, or
under a transfer to a revocable or an irrevocable trust,
or
on any transfer by a wholly-owned Indian subsidiary
company from its holding company, or
on any transfer, by an Indian holding company from its
wholly owned subsidiary company or
on any transfer in a scheme of amalgamation as is
referred to in section 47 (6)
4. acquisition of a property by a HUF whose one of its members
has converted his self-acquired property into joint family
property after December 31, 1969.

Option of taking cost of acquisition as the Fair Market value as on

April 1, 1981:
In the following cases, the assessee may take at his option, either
the actual cost or the fair market value of the asset, as on April 1,
1981 as cost of acquisition
1. where the capital asset become the property of the assessee
before April 1, 1981, or
2. where the capital asset become the property of the assessee
by any mode referred to in section 49 (1) and the capital asset
become the property of the previous owner before April 1,
1981.
It can be observed that:
The option is available only when an asset was acquired
by the assessee before April 1, 1981.
When option is available, the cost of the asset or fair
market value as on April 1, 1981 whichever is higher, is
taken as the cost of acquisition.

BIBLIOGRAPHY
STUDENTS GUIDE TO INCOME TAX
BY Dr. VINOD K. SINGHANIA.
MONICA SINGHANIA.
DIRECT AND INDIRECT TAXES
VIPUL PRAKASHAN.

THANK YOU.