TAXATION OF CAPITAL

GAINS

MDI 2004
Tarun Chaturvedi

Contents
Chargeability
Capital

Assets

Transfer

of Assets

Computation
Terms

of Capital Gains

used in computation

Computation
Tax

of Capital Gains

in special cases

shelters available

What is Capital Gains Tax?

Any profit or gains arising on the transfer of a

capital asset is chargeable to tax under the head
Capital Gains in the previous year in which the
transfer took place.

Essential elements of
taxation of capital gains
Capital Asset

Tax shelters

Transfer

Taxable
Cap Gains

Who is liable
To pay

Year of tax

Capital Assets
Taxable

Goodwill,
Route Permits

Capital Asset

Non-taxable

Controlling Interest
in a company

Tenancy Rights

Currency
appreciation if
currency kept for
purchase of raw
materials

Etc.

Etc.

Right to buy shares

Lease rights

What is a Capital Asset?

Property of any kind, held for business or not, except:
1.

Stock in trade, raw materials & cons. held for business;

2.

Personal effects of the assessee, i.e. moveable property

held for his or any family members personal use;

3.

Agricultural land not situated in

1.

An area having a population > 10,000;

2.

Any area as specified by the Government.

4.

6.5% Gold Bonds

5.

Special Bearer Bonds; and

6.

Gold Deposit Bonds

Extremely

wide
definition. All assets
not specifically
excluded are taxable

Capital Assets the exceptions

Personal effects being movable property
Should be moveable property; and
Held for personal use of self / family
Examples of personal effects
Gold and silver coins held for puja
Property held for personal use on ceremonies
Furniture etc.
Examples of personal effects
Foreign Stamp collection
Securities
Loose diamonds etc.

Capital Assets the exceptions

Agricultural land in a rural area
Municipal area having population < 10,000; and
As may be specified by the government
Use of land is immaterial, it has to be within the
above definition.
If land does not fulfill the above definition,
irrespective of the use, it can not be labelled as an
agricultural land.

Capital Assets the exceptions

Stock in trade, raw materials etc.
Simple logic, since these are held for sale, the surplus
arising thereon is treated as business income under
section 28.
Gold Bonds, Special Bearer Bonds and Gold Deposit
Bonds

Capital Assets- Types

Long Term

Capital Asset

Short Term

The period of holding the asset determines the type of

capital asset
Long Term = Asset held for > 36 months
In the following cases Long Term = > 12 months
Equities / preference shares
Listed securities

Capital Assets- Types

The period of holding in certain peculiar cases

Shares held in amalgamation / demerger / liquidation

Applicability of section 49(1)
Bonus and Right shares
Shares in the demat form
Transfer of land after construction of building

Capital Assets- Types

The reason for division into short term and long term

Difference in tax incidence

LTCG taxed at a flat rate after benefit of indexation
STCG included in income and taxed at normal rates

What is Transfer?
Transfer in relation to a capital asset includes:
1.

Sale

2.

Exchange;

3.

Relinquishment of the asset / rights therein;

4.

Extinguishment of rights in an asset;

5.

Compulsory acquisition under any law;

6.

Transfer of enjoyment of immovable property including

transactions covered by section 53A of the Transfer of
Property Act.
Inclusive definition

does not exhaust

other forms of
transfer

What is not a Transfer?

The important ones are listed below:
1.

Gift / Will;

2.

Holding and subsidiary transfers;

3.

Transfer of shares and assets in amalgamations;

4.

Transfer of shares and assets in demerger;

5.

Conversion of bonds / debentures into shares;

6.

Transfer in cases of conversion of firm / prop concerns into

a company.
Some

of these are
useful planning
tools

Computation of capital gains

The following steps are involved:
Full Value of the consideration
Less

Expenditure on transfer
Cost of Acquisition
Cost of improvement

CAPITAL GAINS
This may be long term or short term
Each

term has its

own legal meaning

Computation of capital gains

Full Value of the consideration:

Normal English meaning adopted by law

Some Interesting cases

Real Estate transactions

Conversion of asset into stock in trade

Insurance compensation

Computation of capital gains

Indexed Cost of Acquisition:

Unique concept

Available only incase of long term capital assets

Beneficial to the assessee

Increases the original cost of acquisition by a notional

amount

Applies to cost of improvement also

This

is the main
benefit of LTCG

Computation of capital gains

Some special cases:

Conversion into stock in trade

Self generated assets

Bonus and right shares / right entitlement

Distribution on liquidation by companies

Conversion of shares into debentures

Receipt of insurance claim

Buy back of shares

Slump sale

Thank You

THANK YOU