Income From Capital

Gain

Dr. Rajinder Singh

Vohra Assistant Professor
Department of Commerce
Guru Nanak Khalsa College,
YNR
 Capital Gain

➢ It includes Income from Transfer of Capital

assets.

➢ Capital asset

➢ Transfer

➢ Procedure of Computation of Capital Gain/ loss.

 CAPITAL ASSET

➢ Capital Asset includes the followings:

1. Capital asset is the property of an assessee whether

connected with
❖ Business or not,
❖ Tangible or intangible,
❖ Fixed or floating,
❖ Movable or immovable.
2. Security held by Foreign Institutions Investors (FIIs)

2. 3. Any unit linked Insurance policy to which exemption

under clause (10D) of section 10 doesn’t apply.
Certain things which are not
included in capital assets.

1. Stock in trade

1. Personal movable items like TV, VCR, Wearing Cloths, Car,

etc.
(Except jewellary, Drawings, etc.)
Certain things which are not
included in capital assets.
3. Agricultural land
Provided it is not situated.
I. In an area which is within the limit of municipality or
cantonment board having population of 10,000 or more.
II. In an area which is outside Municipal Limits or
Cantonment Board.
a. Within two kilometers from the limits of
municipality if population of that area is from 10,000-1, 00,000.
b. Within six kilometers from the limits of municipality if
population of that area is from 1, 00,000-10, 00,000.
c. Within eight kilometers from the limits of
municipality if
population of that area is above 10, 00,000.
Certain things which are not
included in capital assets.

4. a) 6½% Gold Bond 1977.

b) 7% Gold Bond 1980.
c) National defense gold Bond 1980.

5. Gold Deposit Bond issued under Gold deposit Scheme

1999.

6. Special Bearer Bond 1991.

 KINDS OF CAPITAL ASSET

There are two types of capital

assets.

1. Short term capital asset.

1. Long term capital asset.

 Capital Assets Are divided into two
parts

a) Financial Assets: - it includes four types of assets;

i) Listed Securities.
ii) Equity oriented fund.
iii) Unit of UTI
iv) Zero coupon bonds

b) Non-Financial Assets: - it includes all the capital assets except

the financial assets.
 SHORT TERM CAPITAL ASSETS

FINANCIAL ASSETS NON-FINANCIAL ASSETS

If Financial assets are held by If Non-financial assets are held

assessee for 12 months or less than by assessee for 36 months or less
12 months before transfer, then these than 36 months before its transfer,
types of assets are called as short term then these types of assets are called
capital assets. as short term capital assets.
However, if land or building or
both, unlisted shares of a company are
held for 24 months or less than 24
months, they are termed as short term
capital asset.
 SHORT TERM CAPITAL GAIN

 Any gain or loss arising from the transfer of short term

capital
assets is called short term capital gain/loss.

 If there is any short-term capital loss, it may be adjusted

from
Short-term capital gain/Long-term capital gain.
 LONG TERM CAPITAL ASSETS

FINANCIAL ASSETS NON-FINANCIAL

ASSETS
If Financial assets are held by If Non-financial assets are held
assessee for more than 12 by assessee for more than 36
months before its transfer, months before its transfer, then
then these types of assets are these types of assets are called
called as long term capital as long term capital assets.
assets. However, if land or building
or both,
unlisted shares of a company
are held for more than 24
 LONG TERM CAPITAL GAIN

 Any gain or loss arising from the transfer of long term capital
asset is called long term capital gain/loss.

 If there is any Long-term capital loss, it may be adjusted from

Long-
term capital gains only.
 Self Generated Assets

➢ There are certain self generated assets like goodwill, tenancy

right, stage carriage permit, and loom hours, own right to
manufacture, produce or process articles.

➢ IMPORTANT NOTE: - As these assets are self generated so when

we
sale these assets the cost of acquisition is taken as nil.
TRANSFER OF CAPITAL ASSET u/s 2 (47)
 Transfer includes

➢ Sale, Exchange, Relinquishment of any asset.

➢ The extinguishments of any right therein.

➢ It compulsory acquisition under any law.

➢ Where the assessee converts his capital asset into stock in

trade.

➢ To handover the possession of an immovable property in

the part performance of a contract for the transfer of the
property

➢ Maturity or Redemption of zero coupon bonds.

➢ Conversion of business into limited company.

 Examples

 Example of Relinquishment of Asset:

Suppose a co-owner of a property having definite share

gives away his right in the property in favour of other owners, it is
called relinquishment of asset.
 Examples

 Example of Extinguishment of any right:

Suppose a promissory note is issued and the payment

against it is not asked for four years then after four years the right
of taking money doesn’t exists any more.
 Certain transaction not regarded
as transfer
.
1.
D i str ib utio n of c a p ital a sse ts o n to tal or p a r tial d ivisio n
of H U F .
2.
A ny tr a nsfe r u n d e r gift, w ill or irre v oc a b le tr ust.
3.
A ny tr a nsfe r b y sub sid iary c om p a n y to h old in g c o m p a n y.

S U B S ID IA R Y H O L D IN G
It w ill no t take n a s tra ns fe r if t w o c o nd itio ns m e n tio ne d b e lo w
a re
b e sa tis fie d.
➢
T he c o m p a n y to w ho m tra ns fe r is m a d e i.e . in the a b o ve
c a se hold ing c o m p a n y , is a n In d ia n c o m p a n y.
➢ H o ld ing co m pany h o ld s 100 % c a p ita l of
s ub s id ia ry c o m p a n y.
Certain transaction not regarded
as transfer.

4. Any transfer by holding company to subsidiary

company. HOLDING

SUBSIDIARY
It will not be taken as transfer if two conditions mentioned
below are satisfied.
➢ The company to whom transfer is made i.e. in
the above case subsidiary company, is an Indian
company.
➢ Holding company holds 100%
 Certain transaction not regarded
as transfer
.
5. A ny tra nsfer from A m algam a ting com p a ny to A m algam a ted com pa ny.
Am alga m a ting A m algam ated
It w ill not be taken as transfer if the amalga mated co m pany is an Ind ian
C o m pany.
6. T ransfer of S hare by shareholder of am alga m a ting com pa ny in the
schem e of am alg am a tion to am algam a ted com pa ny.
Share H o lder o f A m algam ating C o
A m algam ated C o
transferring S hares to A m alga m ated C o.
It w ill not be taken as transfer if
fo llowing two co nd itio ns are satisfied.
➢ A m algam ated C o. is an Ind ian C o m pany .
➢ S hare ho lder receives shares of A malgam ated C o.
 Certain transaction not regarded
as transfer
.
7. Any transfer of capital asset being work of; art, book, and
manuscript, photograph etc. to Government, University or to national
Museum.
8. Conversion of debentures, debenture stock, deposit certificate of
the company into shares or debentures of that company.
HOLDER of debentures, debentures stock,
Company Gives
Deposit certificates transfers these instruments
Shares or
To company
Debentures in turn
 Certain transaction not regarded
as transfer
.
9 . T ra n s fe r o f s h a re s o f a n I n d ia n c o m p a n y b y fo re i g n A m a lg a m a t i n g c o m p a n y
t o fo re i g n A m a l g a m a t e d C o m p a n y i n t h e s c h e m e o f a m a lg a m a t io n .
F o re i g n A m a l g a m a t i n g C o m p a n y c o .
A M A L G A M A T E D F O R E IG N C O .
T ra n s fe rr i n g S h a re s o f I n d ia n C o .

be taken as tra n s fe r if fo llo w i n g

T h is tra n s a c t io n w ill
n o t c o n d itio n s a re s a tis fi e d .
h o l d e r o f A m a lg a m a t i n g C o m p a n y
➢ At le a s t 25%
re m a insshtaoreb e s h a re h o ld e r o f A m a lg a m a t e d C o m p a n y .
➢ T h e c o u n t r y i n w h ic h s u c h fo re i g n A m a lg a m a t i n g
C o m p a n y is in c o rp o ra t e d d o e s n o t im p o s e ta x o n s u c h
tr a n s a c tio n .
Certain transaction not regarded
as transfer.

[Link] transfer of land by a sick company (A sick company is one

which is declared sick as per the provisions of sick
industrial companies act (SICA 1985) after it became sick and
before it is revived i.e. its net worth becomes equal to or
more than its accumulated losses.

[Link] a firm is succeeded by a company and due to this the

firms sells its assets to the company, in this case it will not
be treated as transfer, provided certain conditions are satisfied.

[Link] a sole traders business is succeeded by a company and

due to this the firms sells its assets to the company, in this
case it will not be treated as transfer, provided certain
conditions are satisfied.
Certain transaction not regarded
as transfer.

13. Any transfer of capital asset in the scheme of demerger

by the
demerged company to the resulting Indian company.
[Link] a shareholder of demerged company transfers its shares
to the resulting company at the time of demerger and
the resulting company issues share to such shareholder.
[Link] case of business reorganization where a predecessor
cooperative bank transfers its capital assets to the
successor cooperative bank.
[Link] as a result of business reorganization the shareholder of
predecessor cooperative bank transfer its shares to
successor cooperative bank and gets new shares from it.
[Link] an Individual redeems any sovereign gold
bonds originally issued by the Reserve bank of India.
 COMPUTATION OF CAPITAL GAIN

➢ The study of computation of capital gain would be

done
in four different situations.
1. Computation of capital gain in case of long term capital asset.

Here the formula for calculation of LTCG is

Full value of sales consideration

1.
MinusIndexed cost of Acquisition
2. Indexed cost of Improvement
3. Expenses on transfer
-----------------------------------
-
Long term capital Gain/Loss
-----------------------------------
-
 COMPUTATION OF CAPITAL GAIN

• Computation of capital gain in case of long-term

capital
asset.
Note:-

All the LTCA get the benefit of indexing except bonds & debentures.
(But Govt. bounds are allowed to be indexed)

Formula of indexing

a) For indexed cost of Acquisition

Cost of Asset × Cost inflation index (CII) of the year in which the
asset is transferred (i.e. 2019-20)

Cost inflation index (CII) of the year in which the asset was first
held
 COMPUTATION OF CAPITAL GAIN

Example
 COMPUTATION OF CAPITAL GAIN

For index cost of improvement the formula

is
 COMPUTATION OF CAPITAL GAIN

2. Computation of short term capital

gain

Take full value of consideration

Minus
Cost of Acquisition
Cost of Improvement
Expenses of sales
--------------------------------------
Short Term Capital Gain/Loss
------------------------------------
 COMPUTATION OF CAPITAL GAIN

 Difference in calculation of LTCG

&STCG:

LT i) Cost of
CG Acquisition
ii) Cost of TO BE
improvement INDEXE
ST i) Cost of D
C Acquisition
G ii) Cost of NOT TO BE
improvement INDEXED
 COMPUTATION OF CAPITAL GAIN

3. Calculation of capital gain in case of Depreciable

Assets
U/S 50:

For this purpose a particular procedure is followed. As

we know that as per income tax rules depreciation is allowed
on BLOCK BASIS. Block is a group of assets of the same class on
which same rate of depreciation is allowed.
 COMPUTATION OF CAPITAL GAIN

Calculation of capital gain in case of depreciable

➢ Depreciable assets are never long-term, therefore, the question

of Indexation doesn’t arise.
➢ Previous year will be 2021-2022 i.e. from 01-04-2021 to 31-
03- 2022.
➢ First of all find out the written down value of the block of asset
on the first day of previous year.
➢ Now add in this Block if any purchase is made during the year.
➢ From the total value of the block (as is calculated above), deduct,
if
any asset is sold during the previous year.
 COMPUTATION OF CAPITAL GAIN

O p t i o n F ir s t O ption S eco n d

W h e n T o t a l a s s e t s o f B lo c k a r e n o t s o ld a n d W h e n t o t a l a s s e t s o f t h e b lo c k a r e n o t s o ld
s a l e p r i c e o f t h e s o ld a s s e t i s le s s t h a n th e b u t s a le p r i c e o f t h e s o ld a s s e t i s m o r e t h a n
v a lu e o f b lo c k . t h e v a lu e o f b lo c k .

S u p p o s e t h e r e a r e F o u r A s s e t s i n t h e b lo c k S u p p o s e t h e r e a r e fo u r a s s e t s i n t h e b lo c k .
I. 100000 I. 100000
I I. 200000 I I. 200000
I I I. 300000 I I I. 300000
I V. 400000 I V. 400000
- - - -- - -- -- - -- - - - -- - -- -- - --
T o tal 1000000 T o tal 1000000
- - - -- - -- -- - -- - - - -- - -- -- - --
(S a y) A sset N o . 1 (S a y) A sset N o . 1
is S o ld fo r 400000 is S o ld fo r 1200000
- - - -- - -- -- - -- - - - -- - -- -- - --
WDV 600000 STCG 200000
- - - -- - -- -- - -- - - - -- - -- -- - --
nd
st
I n 1 o p t io n n o c a p it a l g a in is t h e r e a s t h e r e I n 2 o p t io n t h o u g h a s s e t s N o . 2 ,3 ,4 a r e n o t
r e m a in s s o m e v a lu e in t h e b lo c k . s o ld b u t t h e v a lu e o f a s s e t N o . o n e is m o r e
t h a n t h e v a lu e o f b lo c k b y R u p e e s 2 ,0 0 ,0 0 0 / - ,
s o t h is R s 2 0 0 0 0 0 w o u ld b e c a lle d a s s h o r t
t e r m c a p it a l g a in .
 COMPUTATION OF CAPITAL GAIN

Option Third Option Four

When whole block is sold and sale price is When total block is sold and the sale and the
more than the value of block. sale price is less than the value of block

Suppose there are four assets in the Suppose there are four assets in the block.
block I. 100000 I. 100000
II. 200000 II. 200000
III. 300000 III. 300000
IV. 400000 IV. 400000
------------- -------------
Total 1000000 Total 1000000
------------- -------------
(Say) Total Block (Say) Total Block
is Sold for 1700000 is Sold for 700000
------------- -------------
STCG 700000 STCL 300000
------------- -------------
 COMPUTATION OF CAPITAL GAIN

4. Computation of Capital Gain in case of assets on which depreciation

is allowed on Straight line method u/s 50A

➢ Where any asset is sold on which depreciation is allowed

on straight line method, the rules mentioned in the previous
sections for calculating capital gain and the rules of cost of
acquisition shall be kept in mind. The cost of acquisition of such
asset would be the Written down value less the terminal
depreciation allowed in the year of transfer.
 COST OF ACQUISITION

➢ Means cost of acquiring the assets, it simply means the cost

of purchase/acquiring of a capital asset plus all expenses incurred
to acquire it.

• Suppose One Machine is purchased for Rs 200000 and

the expenses on purchase like; carriage, installation, labour
for installation are Rs 40000. The cost of Acquisition in this case
would be 200000 +40000 = 240000.
 COST OF ACQUISITION

 Following are the detailed rules regarding Cost of

Acquisition:

1. Cases where Cost to the previous owner is taken to be the cost

of
Acquisition.
 COST OF ACQUISITION

 Distribution of Asset on Partial or Complete partition of HUF

HUF (previous Owner of Asset) Member (Present Owner of Asset)

Here suppose the cost of the asset to HUF was 1,00,000, and
after becoming owner the present owner sells the asset acquired
from HUF, in this case the cost to the present owner i.e. Member
of HUF would be 1,00,000(As it was for the previous owner i.e. HUF).

• b. Transfer of asset under Gift, will, revocable or irrevocable trust.

• c. Transfer by succession, inheritance, devolution.

 COST OF ACQUISITION

• Transfer of capital asset by a subsidiary company to its

Indian
Holding company which holds its 100% share capital .
 COST OF ACQUISITION
 Transfer of capital asset by a Holding company to its 100%
owned
 Indian Subsidiary Company.
 COST OF ACQUISITION
 When an amalgamating Co. transfers assets to Indian
amalgamated
Co.
 COST OF ACQUISITION
 Where a foreign amalgamating company transfers its investment
in the share of an Indian company under the scheme
of amalgamation to foreign amalgamated company.
 COST OF ACQUISITION
• Where member of HUF converts his self acquired property as
the property of HUF.

• Where a firm is succeeded by a company

• Where a sole traders business is succeeded by a company

• In case of business reorganization a

where cooperative bank transfers its predecessor
capital assets to cooperative bank. the
successor
• Where as a result of business reorganization the shareholder
of predecessor cooperative bank transfer its shares to
successor cooperative bank and gets new shares from it.
 COST OF ACQUISITION

2. Cost of shares or security

1st option
Where the share or security was acquired before 1-4-2001, in this case
the actual cost of acquiring these assets or the FMV of these assets as
on 1-4-2001 (Whichever is higher shall be taken as Cost of Acquisition).
EX
1-4-1990 Cost 100000 or FMV 1-4-2001 120000--- higher 120000

2nd option:
Where any share or security was acquired on or after 1-4-2001,
the
actual of acquiring these asset will be cost of acquisition.
1-4-2007 cost 300000
 COST OF ACQUISITION

3. Cost of acquisition in case where asset was

acquired
before 1-4-2001

where any asset was acquired before 1-4-2001, in this case

theof acquiring these assets or the FMV of these assets as
actual cost
on 1-4-2001 (Whichever is higher shall be taken Cost of
as Acquisition).
 COST OF ACQUISITION

• Cost of acquisition in case where case where cost

to previous owner is considered, and he acquired
the assets before 1-4-2001

Where any asset was acquired by the previous owner before 1-

4- 2001, in this case the actual cost of acquiring these assets or
the FMV of these assets as on 1-4-2001 (Whichever is higher
shall be taken as Cost of Acquisition to the present owner), shall
be taken as cost of acquisition to the present owner.
If capital asset is land or building of both the FMV of such asset
on the first day of April 2001 will be stamp duty value of such
asset on that date (if available)
 COST OF ACQUISITION

• Cost of Bonus share

➢ Where the shares have become the property of

assesses
bonus before 1-4-2001, in this case its cost would the FMV
as on 1-4-2001.
➢ Suppose bonus share were allotted in 1980 ---100 cost NIL
➢ 1-4-2001 FMV 20000 higher 20000 COA

➢ Suppose bonus allot 2005 cost NIL

➢ Where bonus shares have become the property of

assesses on or after 1-4-2001, the cost of acquisition will be NIL.
 COST OF ACQUISITION

• Cost of Acquisition of goodwill, right to

manufacture produce or process articles, tenancy right,
stage carrier, loom hours.

➢ If these assets are purchased, in this case the cost of

acquisition
would be actual purchase price paid to acquire these assets.
➢ If these assets are self generated then cost of acquisition shall
be NIL.
 COST OF ACQUISITION

• Cost of acquisition for right shares:-

This topic may be studied in three situations

➢ Where such right is exercised by the original share holder, then

the
purchase price of shares would be cost of acquisition.
➢ Where he transfers his right to another person, in this case the
cost of acquisition would be nil and whole amount of
sales consideration would be treated as capital gain.
➢ Cost of acquisition for the person who purchases the right
of shares, would be, the price given for purchasing right plus the
cost of shares paid to company.
 Suppose Mr. A is the shareholder of a paper mill having 100
shares.
In 2005 he was given a right to purchase 200 more shares.

 1. suppose he decides to buy the shares

 200X12= 2400 Cost of acquisition

 2. suppose he decides to renounce the right.

 right=-----kamal 500

 3. 500+2400= 2900
 COST OF ACQUISITION

• Where the shareholder of amalgamating company transfers his shares

to amalgamated company
• 10000-----------5000

• Cost of acquisition of shares/ debentures, where share holder

gets converted his Debentures, Debenture stock or Deposit certificate.
• 10000-----12000

• Cost of acquisition of employee stock option.

• Cost of acquisition in case of forfeiture of advance money received as a

result of previous agreement or negotiations. Money so forfeited shall
be the income of the person under the head Other sources w.e. from
1-4-2014.
 COST OF ACQUISITION

• Asset received without giving consideration or giving

less consideration
This topic is studied depending upon the nature of the asset
i.e. whether the asset is movable or immovable.

➢ In case where the asset is immovable: in this case the cost

of acquisition shall be the Stamp duty value.

➢ In case where the asset is movable: in this case the cost

of acquisition shall be the fair market value which was considered
for income tax purposes
 Cost of acquisition
 Transfer

 HUF (Cost-100000)------Member(Division)
 (HUF- previous owner)---Member (Present owner)----

 Sale 300000
 Cost 100000
 Cap Gain 200000
 Jewel sale 1010000
Sales consideration
 Minus Index cost of 4500
 acqui Expenses of 00
 Long term capital
transfer 10000
gain
Suppose he purchases a residential55000
house for 500000 0
Gross sale consi 1010000-
10000 = net sales consideration is
1000000

If he invests 1000000 then

exempted amount is
550000
550000/1000000X
 Section 54 G and 54 GA
 54 G urban- rural
 54 GA urban- SEZ