Income from Capital Gains Tax

Understanding the provisions of capital gains- chargeability conditions, meaning of capital asset, short term capital gain and long term capital gain.

 

Income from Capital Gains is one of the five heads of income, taxable under the Income Tax Act. Capital gain is concerned with the transfer of capital asset.

Chargeability basis

  • The capital asset must be present.
  • Transfer of capital must take place.
  • Profit or loss must be there from such transfer.
  • Capital gain shouldn’t be exempted.

Capital asset: Any property whether or not connected with the business or profession of the assessee is a capital asset. Additionally, securities held by FII (Foreign Institutional Investor) according to SEBI Regulations are capital assets. Capital asset doesn’t include the following:

  • Stock-in-trade;
  • Agricultural land in India not located in any specified area;
  • Personal effects which can be moved such as furniture used by the assessee or family, utensils, etc.
    Note- The following are not included in personal effects- jewellery, archaeological collections, drawings, paintings, sculptures or any work of art.
  • Central Government 7% Gold Bonds & 6.5% bonds;
  • Central Government’s Bearer Bonds; and
  • Gold Deposit Bonds under Gold Deposit Scheme, 1999.

Capital Assets can be divided into Short Term and Long Term Capital Assets. Assets which are held for less than 36 months immediately preceding the date of transfer is Short Term Capital Assets. Assets other than Short term capital assets are Long Term Capital Assets.

 

Note- In case of the following financial securities 12 months is taken instead of 36 months:

  • Securities listed in the Recognised Stock Exchange in India; or
  • UTI units; or
  • Equity oriented fund’s units; or
  • Zero Coupon Bond.

Types of Capital Gain

  1. Short Term Capital Gain: This is incurred on the transfer of a short term capital asset.
  2. Long Term Capital Gain: The gain incurred on the transfer of a long-term capital asset.

It is necessary to bifurcate between long term and short term capital gain because the taxability is dependent upon the nature of capital gains. Short-term capital gains are taxed at the normal slab rates whereas; the long-term capital gains are taxed at a flat rate of 20%.

 

Computation of Long Term Capital gain: While computing Long term Capital Gain, indexation is done for the cost of acquisition and improvement. Cost Inflation Index (CII) is used for indexation. The factors of CII are notified for each financial year, taking 1981-82 as the base year.

 

Particulars Amount
Sales Consideration received 250000
Less: Expenditure incurred on the transfer of asset exclusively like brokerage, commission, etc. (5000)
Net Consideration 245000
Less: Indexed Cost of Acquisition (ICOA) (154872)
Less: Indexed Cost of Improvement (ICOI) (45868)
Long-term Capital Gain 44260

 

Computation of Short-term Capital Gains: The short term capital gain can be computed as under-

 

Particulars Amount
Sales Consideration received 300000
Less: Expenditure incurred on the transfer of asset exclusively like brokerage, commission, etc. (7500)
Net Consideration 292500
Less: Cost of Acquisition (COA) (175000)
Less: Cost of Improvement (COI) (30000)
Short-term Capital Gain 87500

 

Note- Indexation is a benefit given to adjust the capital asset value towards the inflationary rise in prices. In the case of short-term capital asset it is not required, and hence, no indexation is provided.