Income from capital gain

1. Basis of charge -: Normally any income revenue in nature is taxed. However any
capital gain from sale of capital asset is taxed under the head income from capital
gain. For charging capital gain as income following conditions must be fulfilled
A. There should be capital assets
B. There should be transfer of capital asset
C. Such transfer should takes place in previous year
D. There should be profit or gain

A. Capital Assets -: Capital assets means any kind of property held by the assesse. It
includes tangible or intangible. Any property weather related to business or not is
included in the definition of capital asset. Thus capital asset means Land &
building, Machinery, goodwill, tenancy right, patent, trademark etc.
However following assets are excluded from definition of capital assets
1. Stock in trade or raw material held for business and profession -: Sale of
such assets are chargeable under the head income from business & profession.
E.g. for builder sale of flat or shop constructed by him current asset i.e. stock
in trade, and not capital assets. Profit on sale of flat/shop by builder will be
taxed under the head income from business and profession and not capital
gain.
2. Personal effects -: It includes
a. Movable property, including wearing apparel and furniture
b. Held for his personal use or for use of any member of family dependent on
him
c. However personal effects excludes jewelry, ornaments of gold, silver,
platinum or any precious metal(even if part of wearing apparel) ,
archaeological collection, drawings, sculpture, or any work of art
3. Agricultural land : Agriculture land in India, which is not situated in urban
area.
4. 6.5% Gold bonds, 7% Gold bonds, National defence gold bond issued by
central Govt.
5. Special bearer bond
6. Gold deposit bond issued under Gold deposit scheme

B. Capital Asset Must be transferred : Following transactions are treated as

transfer
1. Sale / exchange/ relinquishment -: Sale means transfer of asset for some
valuable consideration paid or payable, where title of asset along with
possession gets transferred to buyer. Exchange means sale of property where

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 consideration is in kind. Relinquishment means giving up, surrender of right.
E.g surrender or tenancy right, surrender of right by co-owner.

2. Compulsory acquisition of land by government or nationalization

3. Conversion of capital asset into stock -: If person starts business of dealing

in gold and introduced his gold jewelry as capital. In such case conversion of
jewelry in to capital will be treated as transfer of asset.

4. Part performance of contract - : Transfer of property is incomplete even if

full payment of consideration is made by buyer and possession of property is
also received. As per transfer of property Act deal is complete only when
conveyance deal is registered. Even such incomplete transfer is considered as
transfer of asset

5. Flats in co-operative society -: In case of co-operative society, building / flats

in building are owner by society. When flat is sold, only right of occupation is
transfer. Its ownership remains with society only. The meaning of transfer as
per income tax act includes such transfer of right of occupation.

6. Zero coupon Bond -: In case of zero coupon bond redemption on maturity is

treated as transfer.

2. Short Term/ Long term capital asset -: Depending upon holding period, assets is
classified as short term or long term capital asset.
Capital Assets

Shares/ securities Assets Other than

Shares/ securities

When When When When

Holding Holding Holding Holding
period is 12 period is period is 36 period is
months or more than months or more than
less than 12 12 months, Less than 36 months,
It is Long 2 It is Long
month , It is 36 months,
Short term term It is Short term
Capital Capital term Capital
Asset Asset Capital Asset
 1. Shares / securities -: It includes equity shares, preference shares, debentures,
govt. securities like bonds, T-bills, units or mutual funds and zero coupon bond.
2. Calculation of month -: Month for this purpose should be ascertained on date to
date basis e.g. 24april 23 may etc.
3. Computing holding period -: Holding period is calculated from the date of
purchase till preceding day of date of transfer. In following cases period of
holding is to be calculated as follows
A. In case of shares of company in liquidation, period from date of purchase till
date on which company goes into liquidation is to be taken as holding period.
Period subsequent to date on which company goes into liquidation should be
excluded.
B. In case of assesse becomes owner of asset in circumstances u/s 49 (i.e gift,
will, inheritance) holding period of assesse shall include holding period of
previous owner also.
C. In case of shares held in Indian company which becomes assets of the assesse
in the scheme of amalgamation, the holding period of shares of amalgamating
company also should be added.
D. In case of demerger, the holding period of shares of demerged company, also
should be added, for calculating holding period of shares of resulting
company.
E. In case of sweat equity shares issued to employee or former employee at free
of cost or at concessional rate, the holding period is to be taken from date of
allotment till preceding day of date of transfer.

3. How capital gain are computed - :

Capital gain on transfer of short term capital assets is short term capital gain and
capital gain on transfer of long term capital asset is long term capital gain. It is
calculated as follows

Calculation of short term capital gain

Particulars Amount
Full Value of consideration ( S.P)
XXXX
(-) Transfer exp. -
XX
Net Selling price XXXX
Less
1. Cost of Acquisition
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 XXXX
2. Cost of Improvement XXXX
+XXXX
Short Term Capital Gain XXXX

Calculation of Long term capital gain

Particulars Amount
Full Value of consideration ( S.P) XXXX
(-) Transfer exp. - XX
Net Selling price XXXX
Less
1. Indexed Cost of Acquisition
XXXX
2. Indexed Cost of Improvement XXXX
+XXXX
Long Term Capital Gain XXXX

a) Full value of consideration -: It means total value received or receivable in

future on transfer of capital asset. Consideration may be received in future in
installments over a period of years. However total consideration receivable is
taken into account for calculating capital gain. In other word capital gain is taxed
on accrual basis and not on cash basis. (subject to few exception)

b) Expenses on transfer -: Exp. on transfer like brokerage, commission, travelling

exp. are deducted from full value of consideration.

c) Actual cost of acquisition -: Cost paid for acquiring title of assets, along with
expenses incidental there to will be considered as cost of acquisition. E.g. amount
of stamp duty
and registration, brokerage on purchase of building will be added in the cost of
acquisition of building.

4. Deemed cost of acquisition - : Following are the cases where owner of the property
might not have actually paid cost of acquisition. In such case special rules apply.
They are as follows
A. Cost to previous owner - : When the capital asset becomes the property of
assesse under section 49(1)
1. Gift/will/inheritance

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 2. Distribution of asset by HUF at the time of total or partial partition
3. When individual converts his/her self-acquired assets into HUF
4. Dissolution of partnership fim/AOP/BOI
5. Distribution of asset on liquidation of company
6. Transfer of asset by wholly own Indian subsidiary to its holding company.
7. Transfer of asset by Indian holding company to its subsidiary company.
8. Transfer of asset by amalgamating company to amalgamated company.
In all above cases assesse have acquired asset without paying consideration. In
such cases, cost to previous owner will be considered as cost of acquisition to
assesse. E.g. Mr. X acquired sold building which he acquired from his father,i.e.
Mr. Y as per will. The cost of acquisition for Mr. X will be considered as cost of
acquisition for Mr. Y. Similarly if Mr. Y had acquired building from his
partnership firm as a partner of firm on its dissolution, then cost of acquisition by
firm will be considered as cost of acquisition by Mr.X.
In case cost to previous owner cannot be ascertained, the fair market value of asset
as on date of it becomes property of previous owner is taken as cost of acquisition
to previous owner
B. Cost of shares acquired by conversion of debenture - : When shares of the
company are received in exchange for wholly/partly convertible debenture, cost of
debenture so converted into equity shares will be taken as cost of acquisition of
shares. E.g. Mr. X purchased 100 partly convertible debenture of Rs. 100 each at
120/- per debenture. i.e. for 12,000/- After few years he got 20 equity shares on
part conversion of debenture. After conversion, debenture were quoted at Rs. 60/-
per debenture. In such case cost of acquisition of shares will be taken as Rs.
6,000/- i.e. 12,000 6000 ( 100 * 60) [cost of debenture value of debenture after
conversion. ]

C. Cost of ESOP / SWEAT EQUITY shares - : In case of ESOP or sweat equity

share cost of acquisition will be taken as fair market value as on date of allotment
will be taken as cost of acquisition.

D. Depreciable asset -: Refer to Depreciation topic in income from business and

profession.

5. Indexed cost - : Computation of indexed cost of acquisition/improvement depends

upon following two factors.
1. Weather asset acquired by the assesse directly or u/s 49(1) as explained above
2. Weather asset acquired by the assesse or previous owner before April 1981 or
after April 1981

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 The various situation arising out of different combinations of above factors are
as follows.
A. Asset acquired directly by the assesse after 1.4.1981 - : In this case cost of
acquisition or improvement is to be calculated as follows

Cost of acquisition/ improvement * CII of year of sale

Indexed Cost of Acquisition =
Or improvement CII of year of Acquisition/ improvement

B. Asset acquired directly by the assesse before 1.4.1981- The indexes are
available from 1981. However if the asset is acquired by owner before 1981, to
give assesse benefit of indexation we take market value as on 1.4.1981. Normally
due to inflation market value as on 1.4.1981 is higher than cost of acquisition. But
in exceptional case, cost of acquisition may be more than market value as on
1.4.1981. Indexed cost in such case is to be calculated as follows

Market value as on 1.4.81 or * CII of year of Sale

Indexed Cost of Acquisition = cost of acquisition whichever is high
CII of year 1981 i.e. 100

Note -: Market value as on 1.4.1981 includes any improvement made before

1.4.1981, hence any improvement made before 1.4.1981 should be ignored.

C. Asset acquired by the assesse u/s 49(1) before 1.4.1981 -: In such case asset is
acquired by assesse without paying consideration, before 1.4.1981. So in such
cases cost of previous owner is taken as cost to assesse. As previous owner has
acquired capital asset before 1.4.1981 its indexed cost will be calculated as
follows

Higher of Market value as on 1.4.81 or * CII of year of sale

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Indexed Cost of Acquisition = cost of acquisition by previous owner
CII of year of 1981 i.e. 100
 Note -: Market value as on 1.4.1981 includes any improvement made before
1.4.1981, hence any improvement made before 1.4.1981 should be ignored.

D. Asset acquired by the assesse u/s 49(1) after 1.4.1981, but acquired by
previous owner before 1.4.1981 - : In such case asset is acquired by assesse
without paying consideration after 1.4.9181. So in such case cost to previous
owner is taken as cost of acquisition. While calculating indexed cost we will take
market value as 1.4.1981 or cost of acquisition whichever is higher. However
index of year of acquisition of assesse will be taken. Similar to earlier cases any
improvement before 1.4.1981 is ignored.

Market value as on 1.4.81 or * CII of year of sale

Indexed Cost of Acquisition = cost of acquisition by previous owner
CII of year of Acquisition by assesse

E. Asset acquired by the assesse u/s 49(1) after 1.4.1981, but acquired by
previous owner also after 1.4.1981- In such case both assesse and previous
owner have acquired after 1.4.1981. And in both the cases index was available.
Hence for indexation we take cost to previous owner but index of year of
acquisition by the assesse.

6.
Cost of acquisition by previous * CII of year of sale
Indexed Cost of Acquisition =
CII of year of Acquisition by assesse

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7. Capital gain in special cases - :

A. Receipt of insurance claim -: Normally insurance claim received on destruction

of asset, is not chargeable to tax. However if following 2 conditions are satisfied it
will be taxed.
1. Compensation is received due to damage or destruction of any capital asset.
2. And such damage/destruction is due to A) Flood , typhoon ,cyclone or other
natural disasters, b) riot or civil disturbance c) accidental fire explosion, d) war
by enemy.
Claim received for above will be charged u/h income from capital gain. Gain
shall be deemed to be income in the year money is actually received. In case of re-
instatement policy, fair market value of asset received as compensation as on the
date of receipt will be taken as full value of consideration.
However when insurance compensation received is revenue receipt, e.g. for loss
of stock in trade it will be considered as income from business and profession and
not from capital gain.
B. Conversion of asset into stock in trade -: When a person converts his capital
asset into stock in trade, it will be considered as transfer in that year itself.
Normally tax liability accrues in the year of transfer, but in this case capital gain
tax is payable in the year of sale of such stock in trade.
For calculating capital gain fair market value as on date of transfer will be taken
as full value of consideration.
Value appreciation from date of acquisition till date of conversion in stock in trade
will be considered as income from capital gain. Whereas value appreciation from
the date of conversion into stock till date of sale will be taxed as income from
business profession. Both income will be taxed in the year of sale of such stock in
trade.
Period of holding starts from date of acquisition of asset till date of conversion in
to stock in trade. Depending upon holding period capital gain will be taxed as
short term or long term. In case of long term capital gain, index of year of transfer
(conversion into stock) is to be taken for calculating indexed cost of acquisition.

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 Income from business and profession is calculated by deducting fair market value
as on date of conversion from selling price.

C. Transfer of asset by partner to firm as capital contribution -:

Capital contribution by partner -: When asset is transferred by partner to firm
as capital contribution, then it will be taxed in the hands of partner. Amount
credited to partners capital a/c as capital contribution will be taken as full value
of consideration. Income from capital gain will accrue and taxed in the year of
such capital contribution. Period of holding will be from date of acquisition till
date of capital contribution. In case of long term capital gain index of year of
capital contribution will be taken.

Distribution of asset by firm to partner -: When asset is distributed by firm on

retirement/ dissolution, income from capital gain will be taxed in the hands of
firm. Fair market value as on date of transfer will be considered as full value of
consideration.
The same rule apply among transfer of asset between an association of person
and its members or Body of individual and its members.

D. Compensation paid on compulsory acquisition by Government-: In case an

asset compulsory acquired by law, capital gain is taxed in the year, in which such
compensation is received in part or in full. Initial compensation received will be
taken as full value of consideration. Holding period starts from date of acquisition
till date or transfer and not date of receipt of compensation. Index of date of
transfer is to be taken for calculating indexed cost of acquisition.
Sometimes assesse might ask for enhanced compensation. Such enhanced
compensation will be taxed in the year of receipt. Cost of acquisition in case of
enhanced compensation will be taken as nil. However exp. of litigation will be
deducted from enhanced compensation for calculating full value of consideration.
Such capital gain will be treated as short term or long term depending upon
weather original capital gain was short term or long term.
Capital gain on enhanced compensation will be taxed in the hands of assesse or
his successor.

8. Capital gain on sale of residential house - : Capital gain earned by individual or

HUF by way of sale of residential house is exempt from capital gain if
1. Capital asset must be building or land apparent thereto.
2. Capital gain must be long term.
3. Income of such property was charged under the income from house property.
Amount of exemption:- Amount of capital gain is reduced by total of following

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 A. Amount invested in construction of new residential house within period of at least
three years from the date of transfer.
B. Amount invested in purchase of new residential house, one year before date of
transfer or two years after date of transfer.
C. Amount deposited in Capital Gain Account Scheme 1988.
If total of above is less than capital gain, then remaining capital gain will be taxed in
the year of transfer. If amount of capital gain is less than total of above, there will be
no capital gain.
However if residential property purchased/constructed as above with the help of
capital gain, is sold within period of three years, its cost of acquisition will be taken as
nil. And entire selling price (after deducting exp. of transfer) will be taxed as income
from capital gain.
Amount of capital gain should be deposited in Capital gain deposit scheme before
furnishing return. And proof of deposit should accompany return. In case amount in
capital gain deposit scheme withdrawn for any purpose other than purchase of
residential house within time limit, it will be fully taxed as income from capital gain.

Cost of Inflation Index

Previous Year Previous Year Previous Year Previous Year & Previous Year &
& CII & CII & CII CII CII
1981-82 100 1988-89 161 1995-96 281 2002- 03 447 2009-10 632
1982-83 109 1989-90 172 1996-97 305 2003- 04 2010-11 711
1983-83 116 1990-91 182 1997-98 331 2004- 05 480 2011- 12 785
1984-85 125 1991-92 199 1998-99 351 2005- 06 497 2012- 13 852
1985-86 133 1992-93 223 1999-00 389 2006- 07 519 2013- 14 939
1986-87 140 1993-94 244 2000- 01 406 2007- 08 551 2014- 15 1024
1987-88 150 1994-95 259 2001- 02 426 2008- 09 582 2015- 16 1081

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