Indian Income Tax

Capital Gain In Indian Tax system

Section 45 to 55A of the Income-tax act, 1961 deal with the capital gains. Section 45 of the Act, provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save otherwise provided in section 54, 54B, 54D, 54EA, 54EB, 54F 54G and 54H [with effect from 1-4-1991] be chargeable to income-tax under the head ''Capital Gains'' and shall be deemed to be the income of the previous year in which the transfer took place.

Doubts may arise as to whether 'Capital Gains' being capital receipt cab be brought to tax as income. It may be noted that the ordinary accounting canons of distinctions between a capital receipt and a revenue receipt are not always followed under the Income-tax Act. Section 2(24) of the Income-tax Act specifically provides that ''income'' includes 'any capital gains chargeable under section 45'.

The requisites of a charge to income tax, of capital gains under section 45 are :-

  1. There must be a capital asset.
  2. The capital asset must have been transferred.
  3. The transfer must have been effected in the previous year.
  4. There must be a gain arising on such transfer of a capital asset.

Short-term and long-term capital gains:
Gains on sale of capital assets held for more than three years (one year for listed securities or mutual fund units) are treated as long-term capital gains and are taxed at concessional rates compared short-term capital gains.

While calculating taxable long-term capital gains, the cost of acquisition and the cost of improvement are linked to a cost inflation index. As a result, the indexed cost of acquisition is deducted from the sale consideration received, to arrive at the capital gain.

Long-term capital gains are taxed at a flat rate of 20 per cent for individuals and foreign companies, and 30 per cent for domestic companies. Long-term capital gains on the transfer of shares/bonds issued in a foreign currency under a scheme notified by the Indian Government are taxed at 10 per cent.

Capital Gain

An income that is derived from the sale of an investment is known as Capital gain. Capital investment can be in the form of a home, a farm, a ranch, a family business, or a work of art. When any kind of property is purchased at a lower price & then sold at a higher price, the seller makes a gain. Then this sale of a capital asset is known as capital gain.

This type of gain is a one-time gain and not a regular income such as salary or house rent. Hence we can say that capital gain is is not recurring.

Capital Gain Tax/ Tax Liability of Capital Gain

Tax liability of capital gains arises when all of the following conditions are satisfied:

  • There is a capital asset
  • The assessee must have transferred the capital asset during the previous year
  • There is a profit or gain arising as a result of transfer known as capital gain
  • Such capital gain should not be exempt u/s 54, 54B, 54D, 54EC, 54 ED, 54F, 54G or 54GA.

What is a Capital Asset?

Any kind of property (movable, immovable, tangible, intangible) held by an assessee, whether or not connected with his business or profession, is nothing but a "Capital Asset".

The following assets are excluded from the definition of capital Asset:-

  • Stock-in-trade, consumable stores, raw materials held for the purpose of business/profession
  • Items of personal effects, that is, personal use excluding jewellery, costly stones, silver, and gold
  • Agricultural land in India
  • Specified Gold Bonds and special Bearer Bonds
  • Gold Deposit Bonds

Types of Capital Assets:

Two types of Capital Assets are present as follows:

Short Term Capital Assets [STCA]: An asset which is held by an assessee for less than 36 months, immediately before its transfer, is called Short Term Capital Asset. In other words, an asset, which is transferred within 36 months of its acquisition by assessee, is called Short Term Capital Asset. However, if the investment is in the form of mutual funds/company shares, the allowed time duration is one year

Long Term Capital Assets [LTCA]: An asset, which is held by an assessee for 36 months or more, immediately before its transfer, is called Long Term Capital Asset. In other words, an asset which is transferred on or after 36 months of its acquisition by assessee, is Long Term Capital Asset. Selling mutual funds and company shares after one year also constitutes a long-term capital gain.

Transfer of capital assets

  • Transfer of capital assets includes the following:-
  • Sale of asset
  • Exchange of asset
  • Relinquishment of asset (that is surrender of asset)
  • Extinguishments of any right on asset
  • Compulsory acquisition of asset

Capital gain tax rates

Incase of short-term capital gains, you will be taxed depending on the tax slab relevant to you after you have added the capital gain to your annual income. However if the transaction was levied with Securities Transaction Tax (STT), your gain will be taxed 10%.

Incase of long term capital gains, you will be taxed 20%. When the transaction is levied with STT, you don't need to pay any tax on your gain. In this case, you can either calculate your capital gain using an indexed acquisition cost, or choose not to opt for indexing.

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