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FAQs on Income Tax VI - Capital gains

    Mr. C.S. Sudheer | Thursday, January 15,2009, 06:24 PM
 

1. What is Capital Gain?

Capital gain is defined as gains derived on transfer of capital asset.

2. What is Capital Asset?

Under section 2(14) of the Income Tax Act, 1961 Capital Assets is defined as property of any kind held by assessee including property held for his business or profession. It includes all type real. property as well as all rights in property. It is also defined as gains on transfer of assets in which there is no cost of acquisition like :

  • Goodwill of business generated by assessee
  • Tenancy rights
  • Stage carriage permits
  • Loom hours
  • Right to manufacture
  • Processing & production of any article or things

3. Are there any assets that do not come under the heads of Capital Assets?

There are few assets which don't form a part of Capital Assets, which are as follows :

  • Stock of goods and raw materials used by assessee for his business or profession
  • Movable properties like wearing apparel, furniture, automobile, phone, household goods etc. Held by assessee. But Jewelry which is also an movable assets comes under heads of Capital Assets
  • Agricultural property in India. But agriculture land coming under municipal limits (in area having population more than 10,000) comes under Capital Assets. Agriculture lands within 8KM from municipal limit also comes Capital Assets if it is notified by the central government of India.
  • Few Gold Bonds issued by government
  • Few special bonds issued by central government like Special Bearer Bonds, 1991

4. What is Transfer of Capital Assets?

Under Section 2(47) of The Income Tax Act, 1961, transfer of capital assets is defined as :

  • Sale, exchange and relinquishment of assets
  • Extinguishment of any rights in capital assets
  • Acquisition of capital assets or rights
  • Conversion of capital asset by its owner as stock in trade of his business, it may be also a term transfer
  • Transfer of immovable property under Section 53A of Transfer of Property Act, 1882
  • Any transaction by which an assessee become enable to act as a member of cooperative society
  • Any transaction by which an assessee acquire shares in cooperative society

5. What rate of tax is payable on capital gains?

Short Term Capital gain*

Long Term Capital gain

Dividend Income

Dividend Distribution Tax

10%

Nil

Tax Free

Nil

*When the shares/units are sold within one year of purchase, it would be taxed as short term capital gains. Budget 2008 proposes the rate to be increased to 15%.

In case of MF schemes other than equity (where equity holding is less than 65 per cent) :

Short Term Capital gain

Long Term Capital gain

Dividend Income

Dividend Distribution Tax

As per your income slab

10% (20% with indexation)

Tax Free

14.025%(12.5% plus 10% surcharge+2% Education Cess)

6. How is long term capital gain calculated? Give example of Indexation

Capital gain =          full value of transfer consideration
Less :          (i) indexed cost of acquisition and/or improvement
                                          (ii) The amount of expenditure incurred in connection with such transfer.

No indexation benefit is available on bonds and deben¬tures as also in respect of Global Depository Receipts purchased by a resident employee under ESOP in foreign currency.

Indexation: Let's understand the concept of indexation with the help of an example.

Let's assume Mr. A purchased a capital asset for Rs. 10 Lakhs in 1993-94. He sold it in Year 2007-08 for Rs. 100 Lakhs.

Cost of inflation index (as published by the central government) for 1993-94 = 244
Cost of inflation index (as published by the central government) for 2007-08 = 551

Now, when a long-term capital asset is acquired after 1-4-1981, the formula for calculating the "Indexed Cost of Acquisition" would be as under-

Indexed Cost Inflation Index of F.Y.

                                        (2007-2008)
Acquisition Value     x    ----------------------------------------------------------------------------
                                        Cost Inflation Index of the year of Acquisition (1993-94)

Indexed cost of acquisition = 10, 00,000 x 551/244 = 22, 58,197

7. Is there a way to save capital gain tax on transfer of long-term capital assets?

Where the capital gain arises from the transfer of a long-term capital asset (original asset) and the assessee has, at any time within a period of six months after the date of such transfer, invested the whole or any part of capital gains in the long-term specified asset (LTSA), the capital gain tax can be saved as follows :

  • If the cost of LTSA >= capital gain arising from the transfer of the original asset - the whole of such capital gain shall not be taxed;
  • If the cost of LTSA < capital gain arising from the transfer of the original asset - capital gain x (capital gain/cost of acquisition of LTSA) shall not taxed.

Now if LTSA is transferred or converted (otherwise than by transfer) into money at any time within a period of three years from the date of its acquisition, the amount of capital gains arising from the transfer of the original asset not charged to capital gain tax u/s 45 shall be deemed to be the income chargeable as capital gains

In a case where the original asset is transferred and the assessee invests the whole or any part of the capital gain received or accrued as a result of transfer of the original asset in any LTSA and such assessee takes any loan or advance on the security of such specified asset, he shall be deemed to have converted (otherwise than by transfer) such specified asset into money on the date on which such loan or advance is taken.

Where the cost of LTSA has been taken into account for the above purposes, tax rebate u/s 88 on this would not be allowed.

LTSA means any bond redeemable after three years, issued,

  • On or after the 1st day of April, 2000, by the National Bank for Agriculture and Rural Development established under section 3 of the National Bank for Agriculture and Rural Development Act, 1981 (61 of 1981) or by the National Highways Authority of India constituted under section 3 of the National Highways Authority of India Act, 1988 (68 of 1988);
  • On or after the 1st day of April, 2001, by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956 (1 of 1956).
  • On or after the 1st day of April, 2002, by the National Housing Bank established under sub-section (1) of section 3 of the National Housing Bank Act, 1987 (53 of 1987) or by the Small Industries Development Bank of India established under sub-section (1) of section 3 of the Small Industries Development Bank of India Act, 1989 (39 of 1989).

8. What is Securities transaction tax (STT)?

Securities Transaction Tax is a tax that is levied on :

  • Purchase or sale of equity shares, derivatives or unit of an equity oriented fund at recognized stock exchanges
  • Sale of a unit of an equity oriented fund to the Mutual Fund itself

9. Is surcharge or Education cess is payable on STT?

No

10. If an investor has multiple demat accounts, does he calculate capital gains on the first-in-first-out (FIFO) basis on each demat account separately or just once across all demat accounts?

FIFO with reference to the particular account from where the shares are sold.

11. What is tax on sale of immovable property?

When the immovable property is sold within 36 months from the date of acquisition, the profit on such sale would be taxable as short-term capital gains. If property is sold after 36 months, the gain would be taxable as long-term capital gain.

12. What is the provision for carried forward & set-off of capital loss?

A capital loss (short-term/long-term) can be carried forward for a maximum period of 8 years from the assessment year in which the loss was first incurred.

A short-term capital loss can be set off against any capital gain (long-term and short-term); however a long-term capital loss can be set off only against a long-term capital gain.

Short-term capital gains can be adjusted against short-term capital losses. However a long-term capital loss can be set off only against a long-term capital gain.

Mr. C.S. Sudheer

Mr C.S.Sudheer is a management graduate. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.

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