4.1 CAPITAL GAINS
Profit or gains arising from the transfer of a capital asset during the previous year is taxable as "Capital Gains" under section 45(1) of the Income Tax Act, . The taxability of capital gains is in the year of transfer of the capital asset.
4.2 CAPITAL ASSET
As defined in section 2(14) of the Income Tax Act, it means property of any kind held by the assessee except:
Agricultural land, except land situated within or in area upto 8 kms, from a municipality, municipal corporation, notified area committee, town committee or a cantonment board with population of at least 10,000.
4.3 TYPE OF CAPITAL GAINS
When a capital asset is transferred by an assessee after having held it for at least 36 months, the capital gains arising from this transfer is known as Long Term Capital Gains. In case of shares of a company or unit of UTI or a unit of a Mutual Fund, the minimum period of holding for long term capital gains to arise is 12 months. if the period of holding is less than above, the capital gains arising there from are known as Short Term Capital Gains. It may be mentioned here that Long Term Capital Gains are taxed at a flat rate of 20%, the benefit of indexing the cost of acquisition is available and a number of exemptions there from are also available, specified in Section 54 to section 54G of the Income Tax Act. The Finance Act 1999 has provided that in case of transfer of a long term capital asset, being listed securities, if the tax payable exceeds 10% of the amount of capital gains computed without indexing the cost of acquisition, then such excess would be ignored for the purpose of computing the tax payable by the assessee.
4.4 COMPUTATION OF CAPITAL GAINS (Sec.48)
Capital gain is computed by deducting from the full value of consideration, for the transfer of a capital asset,the following:-
Cost of acquisition of the asset(COA):- In case of Long Capital Gains, the cost of acquisition is indexed by a factor which is equal to the ratio of the cost inflation index of the year of transfer to the cost inflation index of the year of acquisition of the asset. Normally, the cost of acquisition is the cost that a person has incurred to acquire the capital asset. However in certain cases, it is taken as following
- When the capital asset becomes a property of an assessee under a gift or will or by succession or inheritance or on partition of Hindu Undivided Family or on distribution of assets, or dissolution of a firm, or liquidation of a company, the COA shall be the cost for which the previous owner acquired it, as increased by the cost of improvement till the date of acquisition of the asset by the assessee.
- When shares in an amalgamated Indian company had become the property of the assessee in a scheme of amalgamation, the COA shall be the cost of acquisition of shares in the amalgamating company.
- Where the capital asset is goodwill of a business, tenancy right, stage carriage permits or loom hours the COA is the purchase price paid, if any or else nil.
- The COA of rights shares is the amount which is paid by the subscriber to get them. In case of bonus shares, the COA is nil
- If a capital asset has become the property of the assessee before 1.4.81, the assessee may choose either the fair market value as on 1.4.81 or the actual cost of acquisition of the asset as the COA.
indexed cost of improvement will be taken.
4.5 IMPORTANT EXEMPTIONS FROM LONG TERM CAPITAL GAINS
Section 54: In case the asset transferred is a long term capital asset being a residential house, and if out of the capital gains, a new residential house is constructed within 3 years, or purchased 1 year before or 2 years after the date of transfer, then exemption on the LTCG is available on the amount of investment in the new asset to the extent of the capital gains. It may be noted that the amount of capital gains not appropriated towards purchase or a public This amount should subsequently be used for construction may be deposited in the Capital Gains Account Scheme of sector bank before the due date of filing of Income Tax Return. purchase or construction of a new house within 3 years.
Section 54F: When the asset transferred is a long term capital asset other than a residential house , and if out of the consideration, investment in purchase or construction of a residential house is made within the specified time as in sec. 54, then exemption from the capital gains will be available as:
(i) If cost of new asset is greater than the net consideration received, the entire capital gain is exempt.
(ii) Otherwise, exemption = Capital Gains x Cost of new asset/ Net consideration. It may be noted that this exemption is not available, if on the date of transfer, the assessee owns any house other than the new asset. It may be noted that the Finance Act 2000 has provided that with effect from assessment year 2001-2002, the above exemption shall not be available if assessee owns more than one residential house, other than new asset, on the date of transfer. Investment in the Capital Gains Account Scheme may be made as in Sec.54.
Section 54EA: If any long term capital asset is transferred before 1.4.2000 and out of the consideration, investment in specified bonds/debentures/shares is made within 6 months of the date of transfer, then exemption from capital gains is available as computed in Section 54F.
Section 54EB: If any long term capital asset is transferred before 1.4.2000 and investment specified assets is made within a period of 6 months from the date of transfer, then exemption would be available as computed in section54F
Section 54EC: This section has been introduced from assessment year 2001-2002 onwards. It provides that if any long term capital asset is transferred and out of the consideration, investment in specified assets (including bonds issued by National Bank for Agricultural & Rural) Development or by National Highway Authority of India or by Rural Electrification Corporation is made within 6 months from the date of transfer, then exemption would be available as computed in Sec. 54F.
Section 54ED: This section has been introduced from assessment year 2002-03 onwards, It provides that if a long term capital asset, being listed securities or units, is transferred and out of the consideration, investment in acquiring equity shares forming part of an eligible issue of capital is made within six months from the date of transfer, then exemption would be available as computed in Sec. 54F.
4.6 LOSS UNDER CAPITAL GAINS -can not be set off against any income under any other head but can be carried forward for 8 assessment years and be set off against capital gains in those assessment years.
4.7 EXEMPT INCOME
income arising from certain types of transfer of capital assets shall be treated as exempt income. S.10(33)
provides for exemption of income arising from transfer of units of the US 64 (Unit scheme 1964) S.10(36)
provides that income arising form transfer of eligible equity shares held for a period of 12 months
or more shall be exempt.
The Finance Act'2004 has introduced section 10(38) of the I.T, Act which provides that no capital gains shall arise in case of transfer of equity shares held as a long term capital asset by an individual or HUF w.e.f . 01.04.2005 provided such a transaction is chargeable to 'securities transaction tax'.
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