Taxation of Capital Gain in India – FAQs

Capital asset means property of any kind held by a taxpayer. However, the following items are excluded from the definition of “capital asset”:

a. Any stock-in-trade, consumable stores, or raw materials held by a person for the purpose of his business or profession.

E.g., Motor car for a motor car dealer or gold for a jewellery merchant, are their stock-in-trade and, hence, they are not capital assets for them.

b. Personal movable effects of a person, that is to say, movable property including wearing apparels (*) and furniture held for use, by a person or for use by any member of his family dependent on him. E.g., Car used by a salaried employee for his personal use or for personal use of his family member is not a capital asset for him.

(*) However, jewellery, archeological collections, drawings, paintings, sculptures, or any work of art are not treated as personal effects and, hence, are included in the definition of capital assets.

The term jewellery has been given a wider meaning and includes ornaments made up of gold, silver, 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. It also includes precious or semi-precious stones, whether or not set in any furniture, utensil, or other article or worked or sewn into any wearing apparel.

c. Agricultural land situated in a rural area. Rural area means any area which is outside the jurisdiction of a municipality or a cantonment board (known by any name), which has a population of 10,000 or more and is not situated in any area within the distance measured aerially as given below :

Within 2 kilometers from the local limits of any municipality/cantonment board, which has a population of more than 10,000, but not exceeding 1,00,000.
Within 6 kilometers from the local limits of any municipality/cantonment board, which has a population of more than 1,00,000, but not exceeding 10,00,000.
Within 8 kilometers from the local limits of any municipality/cantonment board, which has a population of more than 10,00,000.
Population is to be considered according to the figures of last preceding census of which relevant figures have been published before the first day of the year.

d. 6½% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government.
e. Special Bearer Bonds, 1991, issued by the Government

f. Gold Deposit Bonds issued under Gold Deposit Scheme, 1999.​

Any capital asset held by a person for a period of more than 36 months immediately preceding the date of its transfer will be treated as long-term capital asset.

However, in respect of certain assets like shares, units of specified mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months.

Illustration for better understanding

Mr. Kumar is a salaried employee. On 8th April, 2009, he purchased a piece of land and sold the same on 29th December, 2013. In this case, land is a capital asset for Mr. Kumar. He purchased the land on 8th April, 2009 and sold it on 29th December, 2013, i.e., after holding for a period of more than 36 months. Hence, the land will be a long-term capital asset.

Illustration for better understanding

Mr. Raj is a salaried employee. On 8th April, 2012 he purchased shares of SBI Ltd. and sold the same on 29th December, 2013. In this case, shares are capital assets for Mr. Raj. He purchased shares on 8th April, 2012 and sold them on 29th December, 2013, i.e., after holding them for a period of more than 12 months. Hence, shares are long-term capital assets.​

Any capital asset held by a person for a period of not more than 36 months immediately preceding the date of its transfer will be a short-term capital asset.

However, in respect of certain assets like shares, units of specified mutual fund, listed securities like debentures and Government securities, Units of UTI and Zero Coupon Bonds the period of holding to be considered is 12 months instead of 36 months.

Illustration for better understanding

Mr. Raj is a salaried employee. On 8th April, 2012, he purchased a piece of land and sold the same on 29th December, 2013. In this case, land is a capital asset for Mr. Raj. He purchased the land on 8th April, 2012 and sold it on 29th December, 2013, i.e., after holding it for a period of less than 36 months. Hence, land will be a short-term capital asset.

Illustration for better understanding​

Mr. Kumar is a salaried employee. On 8th April, 2013, he purchased shares of SBI Ltd. and sold the same on 29th January, 2014. In this case, shares are capital assets for Mr. Kumar. He purchased shares on 8th April, 2013 and sold them on 29th January, 2014, i.e., after holding them for a period of less than 12 months. Hence, shares are short-term capital assets.

Long term capital gain arising on account of transfer of long-term capital asset will be computed as follows:

Particulars

Rs.

Full value of consideration (i.e., Sales consideration of asset)

XXXXX

Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (E.g., brokerage, commission, advertisement expenses, etc.)

(XXXXX)

Net sale consideration

XXXXX

Less: Indexed cost of acquisition (*)

(XXXXX)

Less: Indexed cost of improvement, if any (*)

(XXXXX)

Long-Term Capital Gain

XXXXX

(*) Cost of acquisition is the purchase price of the capital asset and cost of improvement is the cost incurred on post purchase capital expenses incurred on additions/improvement to the capital asset. Indexation is a process by which the cost of acquisition/improvement is adjusted against inflationary rise in the value of asset. For this purpose, Central Government has notified cost inflation index for different years. The benefit of indexation is available only to long-term capital assets. For computation of indexed cost of acquisition/indexed cost of improvement, following factors are to be considered:

Year of acquisition/improvement
Year of transfer
Cost inflation index of the year of acquisition/improvement
Cost inflation index of the year of transfer
Indexed cost of acquisition is computed with the help of following formula :

Cost of acquisition × Cost inflation index of the year of transfer of capital asset ÷ Cost inflation index of the year of acquisition

Indexed cost of improvement is computed with the help of following formula :

Cost of improvement × Cost inflation index of the year of transfer of capital asset ÷  Cost inflation index of the year of improvement

Illustration for better understanding

Mr. Raja is a salaried employee. On 2nd May, 2000 he purchased a residential house consisting two floors for Rs. 8,40,000. In December, 2005 he constructed third floor at a cost of Rs. 1,00,000. The house is sold on 1st January, 2014. What will be the indexed cost of acquisition and indexed cost of improvement?

On the basis of formula discussed above, indexed cost of acquisition will be computed as follows :

Rs. 8,40,000 × 939  ÷ 406 = Rs. 19,42,759

Cost inflation index as notified by the Government for financial year 2013-14 is 939 and for financial year 2000-01 is 406.

On the basis of formula discussed above, indexed cost of improvement will be computed as follows :

Rs. 1,00,000 × 939 ÷ 497  = Rs. 1,88,934

Cost inflation index as notified by the Government for financial year 2013-14 is 939 and for financial year 2005-06 is 497.​

Short-term capital gain arising on account of transfer of short-term capital asset is computed as follows:

Particulars

Rs.

Full value of consideration (i.e., Sales value of the asset)

XXXXX

Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (E.g., brokerage, commission, advertisement expenses, etc.)

(XXXXX)

Net Sale Consideration

XXXXX

Less: Cost of acquisition (i.e., the purchase price of the capital asset)

(XXXXX)

Less: Cost of improvement (i.e., post purchase capital expenses incurred on addition/improvement to the capital asset)

(XXXXX)

Short-Term Capital Gain

XXXXX

​​Is the benefit of indexation available while computing capital gain arising on transfer of short-term capital asset?

​ Indexation is a process by which the cost of acquisition/improvement of a capital asset is adjusted against inflationary rise in the value of asset (as discussed in earlier FAQ). The benefit of indexation is available only in case of long-term capital assets and is not available in case of short-term capital assets.​

​ Generally, cost of acquisition of a capital asset is the cost incurred in acquiring the capital asset. It includes the purchase consideration plus any expenditure incurred exclusively for acquiring the capital asset. However, in respect of capital asset acquired before 1st April, 1981, the cost of acquisition will be higher of the actual cost of acquisition of the asset or fair market value of the asset as on 1st April, 1981. This option is not available in the case of a depreciable assets.​

​ Generally, transfer means sale, however, for the purpose of Income-tax Law transfer means the act of giving up your right on an asset. Thus, under Income-tax Law transfer includes sale, exchange or relinquishment of the asset or extinguishment of any rights therein or compulsory acquisition of asset under any law, etc.​

​ House sold by you is a capital asset. Any gain arising on transfer of capital asset is charged to tax under the head “Capital Gains”. Income-tax Law has prescribed the method of computing capital gain arising on account of sale of capital assets. Thus, to check the taxability in your case, you have to compute capital gain by following the rules laid down in this regard, and if the result is gain, then the same will be liable to tax.​

Section 10 provides list of incomes which are exempt from tax Amongst these the major exemptions relating to capital gains are listed below:

Section 10(33) : Long-term or short-term capital gain arising on transfer of units of Unit Scheme, 1964 (US 64) (transferred on or after 1-4-2002).

Section 10(37) : An individual or Hindu Undivided Family (HUF) can claim exemption in respect of capital gain arising on transfer of agricultural land situated in an urban area by way of compulsory acquisition. This exemption is available if the land was used by the taxpayer (or by his parents in the case of an individual) for agricultural purpose for a period of 2 years immediately preceding the date of its transfer.

Section 10(38) : Long-term capital gain arising on transfer of equity shares or units of equity oriented mutual fund (*), will be exempt from tax, if the following conditions are satisfied:

The asset transferred should be equity shares of a company or units of an equity oriented mutual fund.
The transaction should be liable to securities transaction tax at the time of transfer.
Such asset should be a long-term capital asset.
Transfer should take place on or after October 1, 2004.
(*) Equity oriented mutual fund means a mutual fund specified under section 10(23D)​ and 65% of its investible funds, out of total proceeds of such fund are invested in equity shares of domestic companies.​

​For provisions in this regard check tutorials on “Tax on Short-Term Capital Gains and Tax on Long-Term Capital Gains”.​

​ ​A taxpayer can claim exemption from certain capital gains by re-investing the capital gain into specified asset. The following table highlights the assets in respect of which the benefit of re-investment is available:

Section under which benefit is available Gain eligible for claiming exemption Asset in which the capital gain is to be re-invested to claim exemption
section 54 Long-term capital gain arising on transfer of residential house property. Gain to be re-invested in purchase or construction of residential house property.
section 54B Long-term or short-term capital gain arising on transfer of agricultural land. Gain to be re-invested in purchase of agricultural land.
section 54EC Long-term capital gain arising on transfer of any capital asset. Gain to be re-invested in bonds issued by National Highway Authority of India or by the Rural Electrification Corporation Limited.
section 54F Long-term capital gain arising on transfer of any capital asset other than residential house property. Net sale consideration to be re-invested in purchase or construction of residential house property.
section 54D Gain arising on transfer of land or building forming part of industrial undertaking which is compulsorily acquired by Government and was used for industrial purpose for a period of 2 years prior to its acquisition. Gain to be re-invested to acquire land or building for industrial purpose.
section 54G Gain arising on transfer of land, building, plant or machinery in order to shift an industrial undertaking from urban area to rural area Gain to be re-invested to acquire land, building, plant or machinery in order to shift the industrial undertaking from an urban area to a rural area
section 54GA Gain arising on transfer of land, building, plant or machinery in order to shift an industrial undertaking from urban area to any Special Economic Zone Gain to be re-invested to acquire land, building, plant or machinery in order to shift the industrial undertaking from urban area to any Special Economic Zone.
section 54GB​ Long-term capital gain arising on transfer of residential property (a house or a plot of land). The transfer should take place during 1st April, 2012 and 31st March 2017. The net sale consideration should be utilised for subscription in equity shares in an “eligible company”.
In order to claim the exemption on account of re-investment in various situations as discussed above, other conditions specified in the respective sections should be satisfied and the re-investment should be made within the period specified in the respective sections.

Stamp duty value means the value adopted or assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty.

As per section 50C​ , while computing capital gain arising on transfer of land or building or both, if the actual sale consideration of such land and/or building is less than the stamp duty value, then the stamp duty value will be taken as full value of consideration, i.e.,as deemed selling price and capital gain will be computed accordingly.

Illustration for better understanding

Mr. Raja sold his bungalow for Rs. 80,00,000. The value adopted by the Stamp Valuation Authority of the bungalow for the purpose of payment of stamp duty is Rs. 84,00,000. In this situation, while computing taxable capital gain arising on transfer of bungalow, Rs. 84,00,000 will be taken as full value of consideration (i.e., sale value of the bungalow). Thus, actual selling price of Rs. 80,00,000 (being less than stamp duty value) will not be taken into account while computing taxable capital gain.

Illustration for better understanding

Mr. Karan sold his land for Rs. 25,20,000. The value adopted by the Stamp Valuation Authority of the bungalow for the purpose of payment of stamp duty is Rs. 20,00,000. In this situation, while computing taxable capital gain arising on transfer of land, Rs. 25,20,000 (being actual sale value) will be taken as full value of consideration. Thus, stamp duty value (being less than actual selling price) will not be taken into account while computing taxable capital gain.

Source- Income Tax India Website – Republished with amendments