Income from the head

CAPITAL GAINS
&
Its Computation
BY
SRIPAD C MADKAIKER

Conditions:
There should be a Capital asset;
The Capital Asset is transferred by the Assessee;
Such transfer takes place during the current previous
year;
Any profit or gain arises as a result of transfer;
Such profit or gain is NOT exempt from tax under sections
54, 54B, 54D, 54EC,54F, 54G AND 54GA.
PLEASE NOTE:
In

some cases Capital Gain is taxable in a year other than

the year in which the Asset is transferred;
Capital Gain can arise even if there is no Transfer.
2

Capital

Asset means property

of any kind
held by an Assessee,
whether or not connected
with
his
business
or
profession.
However

some Assets are excluded from

the definition of Capital Assets.
3

Any stock-in-trade (land for real estate),

consumable stores or raw materials held for
the purpose of his business or profession;
Personal
effects, i.e., movable property
(including wearing apparel and furniture,
excluding jewellery), held for personal use by
the assessee or any member of his family
dependent on him.
Agricultural land in India, (Rural) (has a
population of less than ten thousand according
to the last preceding census and In any area
within such distance, being more than eight
kilometers, from the local limits of any
municipality or cantonment board referred to
in item)

6.5 per cent Gold Bonds 1977,

or 7 per cent Gold Bonds 1980,
National, Defence Gold Bonds,
1980, issued by the Central
Government;
Special Bearer Bonds, 1991,
issued
by
the
Central
Government;
Gold Deposit Bonds issued under
the Gold Deposit Scheme, 1999
notified
by
the
Central
Government.
5

Only

Movable assets (including

wearing apparel & furniture) used by
the assessee or by the family members;
Should not be jewellery, archaeological
collections,
drawings,
paintings,
sculptures or any work of art;
If not a capital asset:- No capital gain
and will not be taxed under any other
heads.
6

 Jewellery

includes the following:

a. Ornaments made of silver, gold, 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 worked or sewn into any wearing
apparel;
b. Precious or semi precious stones ,
whether or not set in any furniture, utensils
or other articles or worked or sewn into any
wearing apparel.
7

 Capital

Asset held by an Assessee for NOT

more than 36 months;
Immediately prior to its date of transfer.
In the following cases , an asset, held for not
more than 12 months is treated as Short term
Capital Asset:
Equity or pref. shares, Units of UTI or Mutual
funds specified u/s 10(23D), Zero Coupon
Bonds. Pl note: may or may not be quoted.
Securities
like debentures, Government
Securities Should be quoted in a recognized
Stock exchange in India.
8

 If

it is not short term it becomes long term;

Tax incidence under Capital gains head
depends upon whether the capital gains is:

Short term or
Long term;

Long

term capital gains is generally taxed at

lower rates;
If the asset transferred is short term, capital
gain will be short term Capital gains;
Conversely, long term capital gain arises on
transfer of long term capital asset.
9

Computation Short term Capital Gain

1. Find out the full value of consideration

2. Deduct the following:

a) Expenditure incurred wholly and exclusively
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 & 54GA.
4. The balancing amount is the short-term capital gain.
(No deduction will be allowed in respect of payment of STT)
10

Find out the full value of consideration:

Deduct the following:

a. Expenditure incurred wholly and exclusively in connection

with such transfer;
b. Indexed Cost of acquisition;
c. Indexed Cost of improvement.

From the resulting sum deduct the exemption

provided by section 54, 54B, 54D, 54EC, 54F and
54G, and 54GA.

The balancing amount is the long-term capital gain.

(No deduction will be allowed in respect of payment

of STT)
11

HOW CALCULATED?
Cost

Index of the year of sale

Index of the year of acquisition of the present seller

COST:
Acquisition

cost of the present seller; or

Cost of acquisition of the previous owner(original)

in case the property was acquired by will or gift or
exchange of shares in case of amalgamation.
Or

Fair market value as on 1st April 1981 if Capital

Asset became the property of Assessee or previous
owner before 1st April 1981;
(COST or FMV whichever is higher, is taken)
12

Depreciable

asset;
Bonds or Debentures (other than capital
indexed
bonds
issued
by
the
Government);
Shares in or debentures of an Indian
company
acquired
by
utilizing
convertible foreign exchange (pl note
for NON RESIDENT)
Short term assets.
13

Note:Index for the financial year not for the assessment year

Financial year Index

Financial year Index

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

100
109
116
125
133
140
150
161
172
182
199
223
244
259

281
305
331
351
389
406
426
447
463
480
497
519
551
582
14

EXAMPLES

Compute the capital gains in the following assessment year 2008-09

(1)Mr. A, a land dealer, sells land on 1-7-2007 for Rs.15,00,000
which was acquired on 1-8-2003 for Rs. 6,00,000.
(2)Mr. B sells his personal motorcycle on 1-4-2007 for Rs.12,000
which was acquired on 1-4-2005 for Rs. 42,000.
(3) Mr. D sells rural agricultural land on 1-7-2007 for Rs. 14 lakhs.
The land was acquired on 1-3-01 for Rs. 8,50,000.
15

 1.

Land dealer sells land comes under

business income as land comes under stock in
trade. Income from business (15,00,0006,00,000) is Rs.9,00,000
2.Motor cycle comes under personal effect. It
is not a capital asset, therefore there is no
capital gain. The gain or loss does not come
under any other head also.
3.Rural agricultural land is not a capital Asset.
It does not attract
tax under the head
capital gains on its transfer or under any
other head.
16

X is a dealer in shares . He held 1,000 shares of Rs.100 each in

AA ltd., which he valued at cost on 31.3.1989. On 1.5.1999,
he was offered 2 shares of BB ltd of the face value of Rs.10
each in exchange of 1 share of AA ltd. He accepted the offer.
The said shares of BB ltd were held in stock on 31.3.2000 and
were valued by X @ Rs.1, 00,000 on the ground that he had
not incurred any cost over and above what he had originally
paid for shares of AA ltd. Is he correct?
Exchange of shares at the time of amalgamation or absorption
does not amount to transfer. The cost of acquisition of BB Ltd
shares is the cost of acquisition of AA Ltd shares 49(1)

17

EXAMPLES CONTINUED

Shri Kamal purchases a personal diamond set for Rs.

42,00,000 on 15-7-06. On 15-12-07 he sold this set for Rs.
62,00,000. The expenses on transfer were Rs. 45,000.
compute his capital gain.

Answer:
Jewellery includes diamond which is not a personal effect.
Sale
Rs.62,00,000
Less: Expenses related to sale
45,000
Net sale consideration
61,55,000
Less:Cost of acquisition
Rs.42,00,000
Capital gains
Rs.19,55,000
Just a Reminder:
If not held for more than three years it becomes
short term capital asset.
And therefore is SHORT TERM CAPITAL GAINS
18

Gold-capital gain

Gold is not a personal effect. It is a capital asset.

Ms. Richa purchases gold jewels for Rs. 8,50,000 on 2/4/2004. She
studded the jewels with diamonds of Rs. 32,00,000 on 15th April
2004. On 12-1-2008 She sold the jewels for Rs. 94,50,000. The
expenses on transfer were Rs. 9,24,500. compute capital gain.
Answer
Sale
94,50,000
Less :Expenses to sale
9,24,500
Net sale consideration
85,25,500
Less: Index cost of acquisition
9,75,729
(8,50,000 x 551/480)
Index cost of improvement
36,73,333
(32,00,000 x 551/480)
Long term capital gain
38,76,438
19

Flat rate- 20% + 3% (Educational Cess + Secondary and

Higher Education Cess)

If

listed shares/securities/units are transferred and

the benefit of indexation is not taken then long
term capital gains is taxable at 10% + Ed Cess +
SHEC.

If the cap asset which is transferred is equity shares or

units of equity oriented MF & transaction is subject to
securities transaction tax, the long term cap gains is not
chargeable to tax.
In such cases, if its short term cap asset taxed at 15% +
Education Cess.

20

1. Capital gain on transfer of US 64[Section 10(36)]both long term and short term
2. Long term capital gain on transfer of BSE-500 Equity
Shares[10(36)]-long term (Not relevant now)
3.Compulsory
acquisition of urban agriculture
land[10(37)]-long term and short term.-individual and
HUF.
4. Securities not chargeable to tax if covered under
transaction tax-such as units of equity linked Mutual
Fund, Shares issued by domestic companies.
5. Capital gain arising in the reconstruction or revival
of power generation business [10(41)]

21

 54:

Gains from transfer of residential house property;

54B: Transfer of land used for agricultural Purposes;
54D: Compulsory acquisition of land & buildings,
forming part of industrial undertaking:
54EC: Any long term Capital Asset & investment in
certain Bonds(Specified Asset);
54F: Transfer of a long term Capital Asset other than
a House Property;
54G:Transfer of assets in shifting of industrial
undertaking from urban area; and
54GA: Transfer of assets in shifting of industrial
undertaking from urban area to any SEZ.
22

Conditions to be satisfied :
Only an Individual or an HUF can claim;
The Capital Asset is a residential house whose income is taxable
under the head "income from house property" ;
The house property, which may be self-occupied or let out, is a
long term capital asset;

Purchase a residential house property (old or new) one year before

or two years after or construct new residential house property
within 3 years from the date of transfer (date of commencement
irrelevant);

The amount invested in purchasing or constructing (including the

amount deposited in deposit scheme) new residential property is
exempted (Maximum exemption is Capital Gains)

The house property, so purchased or constructed, SHOULD not

be transferred within a period of 3 years from the23 date of purchase

The

amount of capital gain that arise on

transfer of the new house,
together with the amount of capital
gains exempted earlier,
will be chargeable to tax in the year of
the sale of the new house property.
Whole of the amount will be taxed as
short term capital gain.
24

Conditions to be satisfied:
Only an Individual can claim;
Transfers Agricultural land;
Used by taxpayer or his parents for Agricultural purposes at
least for 2 years preceding the date of transfer;
Purchases another land for agricultural purpose within a
period of 2 years from the date of such transfer;

The amount invested in purchasing new Agricultural

land(including the amt. deposited in deposit scheme) is
exempted (Maximum exemption is Capital Gains)

The new Agricultural land, so purchased, SHOULD not be

transferred within a period of 3 years from the date of
25
purchase.

The

amount of capital gain that arise on

transfer of the new Agricultural land,
together with the amount of capital
gains exempted earlier,
will be chargeable to tax in the year of
the sale of the new land.
Whole of the amount will be taxed as
short term capital gain.
26

Conditions:
All persons can claim;
Capital Asset may be short term or long term;
Compulsory acquisition of any land or building forming part
of an industrial undertaking;
such land or building was used by the assessee for the
purpose of the industrial undertaking for at least 2 years
preceding the date of compulsory acquisition ;
the assessee has, within a period of 3 years after that date,
purchased any other land or building or right in any other
land/ building or constructed any other building for the
purpose of shifting or re-establishing the said undertaking or
setting up another industrial undertaking. 27

The amount invested in purchasing new land &

Building (including the amt. deposited in deposit
scheme) is exempted (Maximum exemption is
Capital Gains)

The new land & building , so purchased, SHOULD

not be transferred within a period of 3 years from
the date of purchase.

If so, the amount of exemption given earlier under

section 54D would be taken back and taxed as short
term capital gain
28

 Conditions:

All persons can claim;

Long term Capital Asset is transferred;

Within 6 months from the date of transfer invested the

whole or any part of capital gains, in Bonds issued by NHAI,
REC;

The amount invested in specified Asset is exempted (Maximum

exemption is Capital Gains);
The Specified Asset, so acquired, SHOULD not be transferred/
offered as security for loan, within a period of 3 years from the
date of acquisition.
If so, the amount of exemption given earlier under section 54D
29
would be taken back and taxed as long term capital
gain

Conditions to be satisfied :

Only an Individual or an HUF can claim;

The Capital Asset is a long term capital asset but other than a
residential house property" ;

Purchase a residential house property (old or new) within one

year before or two years after or construct new residential house
property within 3 years from the date of transfer (date of
commencement irrelevant);

Should not own more than one residential house property(other

than the new house), on the date of transfer;

Exemption :
Cost of New house X (Capital gains net sale consideration
)
30

 The

house property, so purchased or constructed,

SHOULD not be transferred within a period of 3 years
from the date of purchase or construction.

Should

not purchase within two years or construct

within three years a residential house, other than the new
house.
In the above circumstances:
The amount of capital gains exempted earlier, will
be chargeable to tax in the year of transfer of the
new house or purchase of another residential
house ;
It will be taxed as long- term capital gain.
31

 The

shifting of such industrial undertaking to any area

other than an urban area, and
the assessee has, within a period of 1 year ,before
or 3 years after the date on which the transfer took
place, purchased a new machinery or plant for the
purposes of business of the industrial undertaking
Sec.54GA Shifting from urban to Special Economic
Zone
Industry
1year before or 3 years after transfer
New asset can not be transferred with in 3 years.
32

Investments in House and NHAI (54 and 54EC)

Exercise:5
Mr. JP Verma purchased a residential house on 1/7/1993 for Rs 5,20,000.
He sold this house on 1/8/2007 for Rs 25,00,000 and paid 1% brokerage.
He invested Rs 1,50,000 in the 3 year bonds of National Highway Authority
of India on 25/01/2008.
He purchased a residential house on 1/6/2008 for
Rs.8,50,000 and
deposited Rs.2,20,000 in nationalized bank under capital gain scheme
account.
Analyze tax implications of the above transaction for the assessment year
2008-2009
Answer:5.
Is the bond purchased within 6 months from the date of transfer of
property. It was done.
The amount deposited before the last date of filing in a nationalised bank.
It was done.
Is the House purchased within two years from the date of transfer of
property. It was done.
33

Sale consideration
Rs.25,00,000
Less: Expenditure to transfer
Rs. 25,000
(1% x 25,00,000)
Net sale consideration
Rs.24,75,000
Less: Indexed cost of acquisition
Rs.11,74,262
(5,20,000 x 551/244)
Long term capital gain
Rs.13,00,738
Less:deduction U/S 54( Investment in House
Property)
Rs.8,50,000
Less: deposit under capital gain scheme
Rs.2,20,000
(deposited before filing returns)
Less: amount invested in NHA Bonds
Rs.1,50,000
(Deposited with in 6 months from the
date of sale U/S 54EC)
Taxable capital gain
Rs.80.738
Will be taxed @20% plus education cess on the tax.

34

INHERITANCE OF A PROPERTY & SUBSEQUENT SALE

Exercise: 06

Mr. Muthu purchased a house property on 15/6/1977 for Rs

7,50,000. In December 1980 he incurred
a n
expenditure of Rs75,000 on its re-roofing and change its
flooring. After renovation the market value of the house
was quoted at Rs8,00,000 on 1/4/1981.He died on
15/10/1999.
His daughter,Mrs. Pearl applied for mutation of the house
in her name and paid Rs20,000 as transfer duty and
other legal charges .The mutation process was
completed on 15/03/2000.She added one room in 20012002 at a cost of Rs 50,000.She sold the house on
1/04/2008 for Rs30,00,000 and paid 1% brokerage .She
purchased a plot on 15/5/2008 for Rs3,50,000.
She engaged on expert architect to prepare the design of
modern house and supervise its construction. Architect
fees are agreed at 5% of the cost of construction. He
spent Rs12,00,000 on its construction .The construction
of the house was completed on 15/7/2008. compute
capital gain for the assessment year 2009-10.
35

1. Any improvement before 1st April 1981 can

not be considered as improvement.Compare
the
cost
of
Rs.7,50,000
with
Rs.
8,00,000(FMV) which ever is higher is
considered as cost of acquisition as the
property is transferred to Mrs.Pearl by will.

2. Index to be calculated from 1999-2000 as

she had received the property on 15/03/2000.

36

Answer-06
Sale consideration
Less: Expenditure to transfer
Net sale consideration
Less: Indexed cost of acquisition
(8,00,000 x 582/(1999-2000)389)
Less: Indexed cost of improvement
(20,000 x 582/389)
Less: Indexed cost of improvement
(50,000 X 582/426)
Long term capital gain
Less: deduction U/S 54
(Construction of house Property
( 350000 + 1200000 + 60000)
Taxable capital gain

Rs.30,00,000
Rs. 30,000
Rs.29,70,000
Rs.11,96,915

Rs. 29,923
Rs. 68,310

Rs.16,74,852

Rs.16,10,000
Rs. 64,852

37

Sale of new house and withdrawal of exemption 54

Exercise:07
Mr. Benedict purchased residential house property on 1/10/1998
for Rs.8,40,000.He sold it on 10/04/2007 for Rs28,70,000 and
paid Rs50,000 as stamp duty & registration charges. He
purchased a residential house for Rs 16,00,000 on
1/10/2007.He sold the new house on 15/01/2009 for
Rs15,50,000 Compute capital gain for the assessment year
2008-2009 and 2009-10
Answer:07
Sale
28,70,000
Less: Expenses related to transfer
50,000
Net sale consideration
28,20,000
Less: Indexed cost of acquisition
13,18,632
(8,40,000 x 551/351(98-99)
Long term capital gain
15,01,368
Less: Deduction U/S 54
15,01,368
As investment in house property is more than capital gain
38
entire capital gain is exempted.

 Assessment
Sale

year 2009-10
15,50,000

Less:

cost of acquisition
( 16,00,000 15,01,368)
98,632
Short term capital gain
14,51,368
Long
term capital gain which was
exempted earlier, is taxed, if the new
house transferred with in 3 years from the
date of acquisition, i.e. 15,01,368 is a
short term capital gain plus the gain on
sale of new property.
39

Exercise:08

X an individual purchased a site on April 21,2001 for Rs.2,00,000. He completed

construction of a building thereon on April 21, 2005 at a cost of Rs.10,00,000.

He sold the property consisting of site and building on December 7, 2007 for
Rs.20,00,000(land Rs. 5,00,000 and the balance for building).

X seeks your opinion on the nature of capital gain arising to him from the sale of
property for the assessment year 2008-09.
Answer:
Even though land and building are sold together while computing capital gain we
have to differentiate and calculate capital gain individually.
Since land was purchased three year before, the gain is long term from land.
whereas building is constructed within three years before the date of sale, the gain
arising from such building is short term.
1.Sale consideration of land (long term)
less: Indexed cost of acquisition: land: 2,00,000 X 551/426
Long term capital gain
2. Sale value of Building
(short term)
less: cost of acquisition (not indexed as short term)
40
Short term capital gain

5,00,000
2,58,685
2,41,315
15,00,000
10,00,000
5,00,000

Residential building and Sec.54

Exercise:09
Mr.Santhanam an owner of 3 houses sells a residential house
property in Chennai for Rs.40,90,000 on may 23,2007.
This house was purchased by him on April 1,1987 for
Rs.2,90,000.
On 1st January, 2007, he purchased a flat in Bombay for Rs.18,
70,000 for the purpose of the residence of his daughter.

On March 1, 2008, Mr.Santhanam sold the house in Bombay for

Rs, 42,10,000.
Compute the capital gain arising on the two transactions.
Is Mr.Santhanam eligible for exemption under sec.54 in respect of
the second sale?
41

Exercise:10
Mr. Nimbus purchased agriculture land for Rs5,00,000 on 1/1/2000 at
Bhiwani city.
His nephew P is cultivating the land.
N sold the land on 1/06/2007 for Rs15,00,000.He incurred Rs56,495 on
its sale by way of legal charges.
He purchased agriculture land of Rs10,00,000 on 15/02/2008. Compute
capital gain for the assessment year 2008-2009.
Answer:
Urban agricultural land is a capital asset. Long term capital asset
Computation:
Sale
Rs. 15,00,000
Less:- expenditure related to sale
Rs.
56,495
Net sale consideration
Rs. 14,43,505
Less: Indexed cost of acquisition
Rs. 7,08,226
(5,00,000 x 551/389)
Long term capital gain
Rs. 7,35,279
Less: deduction U/S 54B (investment 10 lacs)
Rs. 7,35,279
Taxable capital gain
NIL
42

Sale of agricultural land

Exercise-11
Mr. S owns an agriculture land which he inherited from his
father on 15/6/1997.
His father purchased it on 1/6/1994 for Rs.4,50,000.
Mr. S. purchased further agriculture land on 1/1/2005 for
Rs.7,50,000.
He sold the inherited agriculture land on 15/12/2007 for
Rs.10,00,000 and incurred legal expenses amounting
Rs.30,000 on its sale .
Compute capital gain for the assessment year 2006-2007
Answer:
Agricultural land in rural area is not a capital asset.
Sale of such asset does not come under section 45.
There is no capital gain.
43

Exercise 11:
Mr. K owns an industrial undertaking started on 1/01/2002 .
The State Government has acquired the land of the undertaking on
15/02/2005.
The land was purchased on 1/1/2002 for Rs.5,00,000 .
Government paid compensation of Rs. 15,00,000 on 31/12/2007.
On 15/03/2008 ,K purchased land for Rs.6,50,000 for the undertaking.
K also purchased 3 year Redeemable bonds of Rs 3,50,000 of Rural
Electrification Corp Ltd.
Compute capital gain for the assessment year 2008-09.
Answer:
Compulsory acquisition amounts to transfer(2007-08 p.y)
Sale consideration(first compensation received)
15,00,000
Less: Index cost of acquisition
5,63,380
(5,00,000 x480(2004-05)/426(2001-02)
Long term capital gain
9,36,620
Less: Amount invested in an another industry 54D
6,50,000
Less:Invested in Rural Electrification bonds 54EC
3,50,000
Taxable long term capital gain is
NIL

44

Exercise: 15
Mr.N sells white silver on April 7 2007 for Rs 4,17,700 (Rs7000
being expenses on transfer ) .The White Silver were purchased by
him on 26 July 1984 for Rs 26000. Can he claim exemption under
section 54F by purchasing a residential house for Rs 16,00,000 ?
Answer:
Silver is a part of gold.It is a capital asset.
The assessee can own one more house other than the existing
house to the extent of net sale consideration.
Net sale consideration=Rs.4,17,700-7000
=
4,10,700
Less : Indexed cost of acquisition
1,14,608
(26,000 x551/125)
Long term capital gain
2,96,092
He can claim full exemption U/S 54F if he invests in a house
property Rs.4,10,700. Since he invests 16,00,000 in a house
property the entire capital gain is exempted.
The assessee can not buy another house with in three years.

45

Exercise:16
Mr. KM sold on 31/12/2007 an agriculture land, purchased
during the year 2001-2002 for Rs16,50,000 and incurred
selling expenses ,amounting Rs50,000. Indexed cost of
acquisition of the agriculture land during the year 20082009 is Rs7,20,000
He purchased a residential plot on 15/4/2008 for
Rs4,00,000 and deposited Rs 8,00,000 in SBI under capital
gain scheme account on 31/10/2008 ,being the due date of
furnishing the return of income. He owns a small
residential house, inherited by him 2001-2002 on the death
of his mother.
Compute capital gain for the assessment year 2008-2009

Answer: next slide

46

Sale consideration
16,50,000
Expenses to transfer
50,000
Net sale consideration
16,00,000
Less: Index cost of acquisition
7,20,000
Long term capital gain
8,80,000
Amount invested in an another Asset (54F)
Rs.4 lakhs + 8 lakhs
Exempted long term capital gain
(8,80,000 X (12,00,000/16,00,000)
6,60,000
Taxable long term capital gain
(880,000-6,60,000)
2,20,000
Note:The assessee moved from one nature to another
therefore, he has to invest entire net sale consideration
to claim full exemption. If partly invested
47
proportionately exempted.

Exercise:18
N sold shares held for the last 5 years to purchase a residential house .
He got Rs.20 Lakh as net consideration from their sale , giving rise to
capital gain of Rs.8 Lakh .
He deposited Rs.16 Lakh net consideration under capital gain scheme
account within the prescribed time limit.
However he could utilize only Rs 12 Lakh bank deposit to acquire a
residential house within the prescribed time limit which expires during the
previous year 2007-2008.
Compute capital gain for the assessment year 2008-2009
Answer:
Capital gain taxed exempted:
(8 x16/20)
Rs.6.4 lakhs
Capital gain taxed immediately
Rs.1.6 lakhs
Since only 12 lakhs utilised out of 16 lakhs the remaining 4 lakhs unutilised
portion; and
the capital gain on such 4 lakhs is taxable;
Therefore 1.6 lakhs (6.4 x4/16) is taxable as long term capital gain in the
assessment year 2008-09.
48

capital asset is converted by the owner thereof into

(or is treated by him as) stock-in-trade of a business
that is carried on by him,
Such conversion (or treatment) of the capital asset
shall also be treated as "transfer of the asset" and
hence chargeable to income tax.
Sec.45(2): Conversion amounts to transfer in the yr of
conversion, But taxed in the year such stock is sold.
Capital

gain =
FMV on the date of conversion into stock in trade
cost(Index) of acquisition.
Business gain = Sale Price - FMV
49

Urban agricultural land, stock in trade becomes a capital asset

Exercise:20
Mr. Rohit bought urban agricultural land for Rs. 16,50,000 on 15-5-1997.
He started the business of dealing in land on 2-5-04 and converted the said
land into stock in trade. The fair market value of the land as on 2-5-04 was
Rs 52,50,000. He sold his stock for Rs. 52,80,000 on 15-5-07.
calculate the capital gains of Mr. Rohit.
ANSWER:
1.Capital gain arises only when asset is transferred to third party. Capital
gain is taxed in the assessment year 2008-09
Sale consideration(FMV)
52,50,000
Less:Index cost of acquisition
23,92,749
(16,50,000 x *480(2004-05)/331(1997-98)
Long term capital gain
Rs.28,57,250
Note: when capital asset converted into stock in trade in the year of sale of
stock, two profit arise.1.Capital gain 2. Business profit.
Index has to be stopped only upto the date of conversion
2.Business profit =52,80,00- 52,50,000=Rs.30,000
50

When a capital asset is converted into stock in trade i.e.Doing business

out of gold in this problem,
it does not amount To transfer because one person can not transfer
to oneself. It Is not taxed in the year of conversion.
As per section 45 of the Income tax Act capital gain is taxed
if asset is transferred To third party.The year of sale has 2types of profits.
1. Capital gain 2.business profits.
1.

Computation of capital gain/ loss

Sale(fair market value)
= Rs.20,00,000
Less: Indexed cost of acquisition
(10,00,000 x 480/406)
=Rs.11,82,266
Long term capital gain
=Rs.8,17,734
2.business profits.
Difference between sale of stock and the fair market value on the date of conversion
18,00,000- 20,00,000=Rs.2,00,000(loss)
51

Sec.45(3),(4):
It amounts to transfer in the year of transfer to
partnership firm.
Capital Gain=Amount entered in the books of the firm-cost
(Index).
If retransferred to partners:
Capital gain=FMV-Book value in the partnership firm

52

Exercise:22
Mr. J joined the partnership firm on 15/7/2007with N,M &r with
equal shares . he contributed shares acquired on 1/5/1978 for Rs
1,20,000 fair market value on 1/4/1981 Rs.5,00,000 as his capital
in the firm his capital account was credited by Rs 22,50,000 though
the fair market value of the shares on the said date was Rs
24,40,000 compute capital gain for the assessment year 2008-2009
The value entered in the books of account of partnership firm is
considered as sale consideration. Fair market value on the date of
conversion to partnership firm is irrelevant.
Answer:22
Capital gain:
Sale consideration
Rs.22,50,000
Less: Indexed cost(fmv on 1st April 1981)
(5,00,000 x551/100)
Rs.27,55,000
Long term capital loss
Rs.5,05,000(assed in the hands of
partner who had transferred to the firm)

53

If the same asset is given back to partners at the time of

dissolution of firm capital gain is computed to the firm. It
is the difference between fair market value on the date of
re conversion and book entry in the firm (when asset was
given by the partner to the firm.)
Formula:
FMV as on the date of re-conversion- Book entry at the
time of conversion from partner to firm

54

Exercise:23 A firm X,Y,Z has made investment of Rs 10,00,000 on

15/7/1998 in the equity shares of Hello Ltd .It distributed the
investments on 15/7/2007 to its partner in their profit ratio 3:4:3
Accordingly a debit entry of Rs 3,00,000, Rs4,00,000,and
Rs3,00,000 was passed to the capital account of the partners
where as the fair market value of the investment at the date of
distribution was Rs 22,00,000. Is there any capital gain to the firm?
Answer:-23
The fair market value is
Rs. 22,00,000
(sale consideration)
Less: cost of acquisition
Rs. 15,69,800
10,00,000 x 551/351
Long term capital gain
Rs. 6,30,200
Note:-Since the asset belongs to the firm , while distributing the asset
attracts capital gain on the date of distribution to partners.Book
entry is not important. Book entry is important when partners
personal capital asset transferred by partner to the firm.
55

If

allotted before 1981 cost of

acquisition is FMV on 1st April
1981.

If

acquired after 1st April 1981

cost of acquisition is NIL

56

Bonus shares
Exercise:
An assesses A had purchased 500 shares (of total face value of Rs.5000)
for Rs7, 000 in May 1986. He received 100 bonus shares of the value of Rs.10 each
from the same company in May 2005.He sold 500 original shares on 1-8-2007 for
Rs. 25,000.He sold 100 bonus shares on 30-08-2007 for Rs. 10,000. For the
assessment year 2008-09 calculate capital gains of Mr. A.

1.Answer:
Sale consideration
Rs.25,000
Less: Index cost of acquisition
(7000 x 551/140)
Rs.27,550
Long term capital loss
( Rs. 2,550 )
2.Sale of Bonus shares
Rs.10,000
Less: Index cost of acquisition
Nil
(no cost is incurred)
Long term capital gain
Rs.10,000
Total long term capital gains (10,000-2550)
7450
Note: If bonus shares were acquired before 1st April 1981 the cost of
acquisition is the fair market value as on 1st April 1981
to be considered.
57

Bonus shares

Exercise:
Mr. N bought 300 equity shares of Rs 100 each in 1985-86. He was
allotted bonus shares in the ratio of 1:1 in 1995-96 and gain in the
ratio of 1:2 in 1998-99. The current price of shares is Rs. 20.
Find out the taxable capital gains for the assessment year 2008-09 in
respect of the following situation if he sells the shares in May 2007:
1.He sells original holding 300 shares.
2.He sells bonus shares received in 1995-96.
3.He sells all the shares.
Answer: .
Sale value of original holding(300 x20)
Rs. 6,000
Less: Index cost(300 x 100 x551/133)
Rs.1,24,285
Long term capital loss
Rs.1,18,285
58

2. The entire sale consideration on bonus shares is a long term capital

gain(300 shares x 20) = Rs.6000. There is no cost for bonus shares if
acquired after 1st April 1981.
3. The bonus shares allotted in 1998-99 are 300 ie (1 share for 2 shares
held as on the date of issue of bonus shares)
Loss on original shares computed in 1
Rs.1,18,285
Profit on sale of 1st bonus shares
Rs. 6,000
Profit on sale on 2nd bonus shares Rs. 6000
Long term Capital loss
Rs.1,06,285

59

Cost

of acquiring right shares

cost of acquisition like any
other assets

60

Exercise:
Mr.Amal holds 500 shares of ABC Ltd., which were allotted to
him on 22.4.2003 @ Rs.30 per share. On 22nd July 2007 ABC
Ltd made right issue to the existing shareholders at the
rate of one share for every five shares held @ Rs. 40 per
share. Mr. Amal, instead of exercising his right to obtain
right shares, has exercised his right of renouncement to
Miss.Joewin by receiving Rs.10 per share.
1.Whether capital gain chargeable in the hands of Amal?
2. What will be the cost of the shares in the hands of Joewin?
Answer:-1.
Giving up ones right amounts to transfer.Mr.Amal has to
compute capital gain: 100 x 10=1000
2.Cost to Miss.Joewin is (40+10) x 100=Rs.5000

61

the period of acquiring the new asset under S 54, 54B,

54D, 54EC and 54F by the assessee or the period for
depositing or investing the amount of capital gain shall be
extended in relation to such amount of compensation as is
not received on the date of transfer.
The extended period shall be reckoned from the date of
receipt of the amount of compensation.

62

Exercise:
Mr. B purchased A ROAD SIDE BUILDING ON 15/9/1998 for Rs 10,20,000. UP
government acquired this building on 15/6/2002 to widen the road in public
interest .It paid compensation of Rs20,00,000 on 7/7/2004 which was
further enhanced by Rs5,00,000 on 15/12/2007.Analyse tax implication of
the compulsory acquisition.
Answer: The asset is compulsorily acquired by government, it amounts to transfer
on the date of acquisition.
It is taxed in the year of initial(first) compensation paid
Index in the numerator to be stopped in the year of compulsory acquisition.
Sale
20,00,000
Less: indexed cost of acquisition
12,98,974
(10,20,000 x 447/351)
Long term capital gain
7,01,026
(It is taxed in the year 2005-06 assessment year)
Further compensation received Rs.5,00,000 is fully taxed in the assessment
year 2007-08 as capital gain as the cost of acquisition was already
absorbed.
63

Compulsory acquisition
A piece of land owned by X located on near Hosur was acquired by NHAI
in the financial year 2004-05 but the award ordered in the financial year
2007-08.
This land was purchased by him in April 2,1977 for Rs,1000 the fair
market value of the land as on April 1, 1981 was Rs. 900.
The compensation was paid Rs.5,00,000.
Other piece of land located in Chennai purchased in April 2004 for Rs. 25
lakhs was also sold by him on February 2008 for Rs. 35 lakhs but sale
deed there of could not be executed by march 31 2008 .
The value for the purpose of stamp duty applied by the stamp valuation
authority was Rs. 38 lakhs
Compute the income chargeable to tax arising as a result of the
transaction in the Assessment year 2008-09

64

Computation of income of X for the assessment year 2008-09

1.Initial compensation
=
500000
Less:Index Cost of acquisition (1000*480/100) =
4800
(1.Actual cost or market price as on 1st April 1981 whichever is
HIGHER )
2.Index to be stopped in the year of acquisition by NHAI)
Total Capital gain on such asset
=
495200
2.Full value of consideration
Less; index cost of acquisition
( Rs. 2500000*551/480)
Long term capital gain

=
=
=

3800000
2869792
930208

65

 The

cost of acquisition of the asset for which the

original owner acquired it, shall be deemed to
be the cost of acquisition of the asset as
increased by the cost of improvement of the
assets if any, incurred or borne by the previous
owner or the assessee as the case may be.

66

Inherited property
Exercise
Mr. Mohan inherits an urban plot of land on 17/09/2005 on the death of
his father who purchased it on 1/4/1999 for Rs 5,80,000. He paid
betterment charges of Rs.50,000 on 20/01/2006. On 15/03/2008 he sold
the plot for Rs.15,70,000. Compute capital gain if any advising him
proper tax planning to minimize his liability.
Answer:
Since the property was inherited, the holding period starts from 1-4-99 till
the date of sale(15-03-2008)- therefore it is a long term capital asset.
The cost of acquisition is the cost of acquisition of the original owner ie
Rs.5,80,000
Computation:
Sale
15,70,000
Less: cost of acquisition
6,43,018
5,80,000 x551/(2005-06)497
Betterment charges(no Index as it is less than 3 years) 50,000
Long term capital gain
8,76,982
67

 Inherited

Property

Exercise
Mr. M a member of HUF got jewels on 15/08/2000 on portion of HUF
which purchased it for Rs1,00,000 in 1979 and its fair market value on
1/4/1981 was Rs 3,20,000. M got the jewels ,re-designed and paid
remaking charges of Rs40,000 on 15/07/2006. He sold the jewels on
15/02/2008 for Rs 14,00,000 and paid 2% brokerage. compute tax
liability.
Answer:
It is inherited property. The cost
Sale consideration
Rs.14,00,000
Less: expenditure to transfer
Rs. 28,000
(2% x 14,00,000)
Net sale consideration
Rs.13,72,000
Less: Indexed cost of acquisition
Rs.4,34,286
(3,20,000 x 551/2000-2001 index ie 406)
Less:Cost of improvement(short term)
Rs. 40,000
Long term capital gain
Rs.8,97,714
Note:Index in the denominator to be only from the date the current seller
acquired such property

68

Exercise:
Mr. X purchased 1000 non-listed debentures of Rs.100 each
on 1st September 2002 and she sold all debentures @Rs.190
on 2nd January 2008.Compute capital gain.
Answer:
No index can be used for debentures.
Unlisted debentures take 3 years to become a long term.
Sale
(190 x1000)
Rs.1,90,000
Less: cost of acquisition
Rs.1,00,000
Long term capital gain
Rs. 90,000

69

Sale

of ones right: It comes under section 45

of the Income tax act-capital gain

Exercise:
Mr. Y holds 1000 shares in M ltd which offered its share holders on
1/07/2005 to subscribe one share of Rs50 each at par for every two shares
held in the company .
In market ,the share is being quoted at Rs.s120 per share .
However M sells his right on 31/1/2008 at Rs 30per share .
Y contends that he is not liable to any capital gain tax as no shares have
been allotted to him.
Do you agree ? Explain tax implication.
Answer:
Giving up ones right amounts to transfer. It attracts section 45 of Income tax
act.
The gain of transferring Mr. Ys right is 1000 x1/2 x30= 15,000. It is taxable.

70

 1.Invest

in house property to the extent of capital

gain on transfer of house property;
2.If it is in the same nature invest to the extent of
capital gain;
3.If you sell other than house property, you can
invest in a house property to the extent of net
sale consideration (different nature full net sale
consideration);
4.If you do not have an opportunity to invest in
the same previous year deposit the required sum
in a bank under capital gain account scheme to
avoid tax liability;
71

 5.If

you have already one house, you can invest in one

more house by selling other assets other than a house
property. Full value of consideration to be invested to
avoid tax liability(54F)
6. Do not transfer the new house/property purchased
within 3 years. If you do so it becomes a short term
capital gain. Exempted capital gain will be taxed as short
term.

72

 7.long

term Capital gain on shares exempted under

section10.
8.In case of compulsory acquisition, capital gain is
computed only from the date of first compensation
received and the assessee can construct within 3
years in house property.or buy within 2 years from
the date of compensation received.
9.Personal assets are not capital assets (which are
used in a day to day life. Sale of car which is used
for personal use are not taxed for capital gains.

73