Capital gains under Income Tax Act 1961

Any Income derived from a Capital asset movable or immovable is taxable under the head Capital Gains under Income Tax Act 1961. The Capital Gains have been divided in two parts under Income Tax Act 1961. One is short term capital gain and other is long term capital gain.

 Article explains Taxability of short term capital gains, Capital gains in case of depreciable assets, Capital Gain Where some assets are left in block of assets, Capital Gain When no assets are left in block of assets, Short term capital gain where land & building are sold together, Capital Gain when Capital asset transferred by the partner to the partnership firm, Capital gain in case of Dissolution of a Firm, Calculation of Capital gain from Plot and building , Taxation of Long term capital gains, Section 50C and Section wise Table on Exemptions from long term capital gain.

1. Short Term Capital Gains :

If any taxpayer has sold a Capital asset within 24 months and Shares or securities within 12 months of its purchase then the gain arising out of its sales after deducting therefrom the expenses of sale(Commission etc) and the cost of acquisition and improvement is treated as short term capital gain and is included in the income of the taxpayer.

The deduction u/s 80C to 80U can be taken from the income from short term capital gain apart from the short term capital gain u/s111A

i. Taxability of short term capital gains:

Section 111A of the Income tax Act provides that those equity shares or equity oriented funds which have been sold in a stock exchange and securities transaction tax is chargeable on such transaction of sale then the short term capital gain arising from such transaction will be chargeable to tax @15% from assessment year 2009-10 onwards.

The short term capital gains other than those u/s 111A shall be added to the income of the assessee and no such benefit is available on short term capital gains arising in other cases and they will be taxed normally at slab rates applicable to the assessee.

If an assessee does the business of selling and purchasing shares he cannot take advantage of section 111A or section 10(38). In this case income will be treated as business income.

ii. Capital gains in case of depreciable assets :

According to section 50 of Income tax act if an assessee has sold a capital asset forming part of block of assets (building, machinery etc) on which the depreciation has been allowed under Income Tax Act, the income arising from such capital asset is treated as short term capital gain.

iii. Where some assets are left in block of assets:

If a part of such capital asset forming part of a block of asset has been sold and after deducting the net consideration received from sale of such asset from the written down value of the block of such asset the written down value comes to NIL then the gain arising shall be treated as short term capital gain and in such case where written down value has become NIL no depreciation shall be available on such block of asset even if some assets are physically left in the block of assets.

iv. When no assets are left in block of assets:

If the whole of the capital assets forming part of a block of assets have been sold during a year and the assessee has suffered a loss after deducting the net sale consideration from the written down value of the block of assets then such loss shall be treated as short term capital loss and no depreciation shall be allowed from such block of assets.

It was decided by Chandigarh tribunal in (2004) 3 S.O.T. 521/ 83 T.T.J. 1057 if the whole of capital assets in a block have been sold in a year and some gain arises after the sale such gain shall not be treated as short term capital gain if some new asset has been purchased within the same year in the same block of assets and the total value of new and old capital assets in the same block is more than the sale consideration of the assets sold, since the block of asset does not cease to exist in such case as is required u/s 50(2). This can be explained with an example as below:

Written down value of 5 Machinery as on 01-04-2020 –  Rs. 500000

5 machinery sold on 01-05-2020 –  Rs. 600000

New Machinery purchased on 01-06-2020 – Rs. 250000

now in above cases the difference between the w.d.v and sale value i.e Rs 100000 can not be treated as short term capital gain in the year 2020-21 since new machinery has been purchased in the same block of asset afterwards in the same year and the total of new and old machinery is more than the sale value of the machineries sold as a result the block of asset continue to exist.

v. Short term capital gain where land & building are sold together:

Some times it happens that in a block of assets namely land & building, the whole of land & building is sold together. In such cases the capital gain on land and building should be calculated separately.

The Supreme Court has held in (1967) 65ITR 377 that depreciation is available on the value of building and not on the value of plot. Considering the above decision of Supreme Court, the Rajasthan High court in (1993)201 ITR 442 has held that Plot and building are different assets. If the assessee has purchased plot more than 2 years back and constructed building on it less than 2 years back then the gain arising on sale of plot shall be long term capital gain and the benefit of indexation shall be given on it whereas the gain arising on sale of building shall be short term capital gain and will be added to the income of the assessee. Therefore, both should be calculated separately.

Where the plot has been purchased more than three years back and the building has been constructed on it less than 2 years back, it is advisable that in the sale deed the sale value of plot and building should be shown separately for more clarity and if the consolidated sale value of the Plot and building has been written in the sale deed then the valuation of plot and building should be done separately from a registered valuer.

vi. Capital asset transferred by the partner to the partnership firm:

As per section 45(3) of the Income Tax Act 1961 if any partner in a firm transfers his asset to the firm then the capital gain on such asset as arising to the partner shall be calculated by presuming the sale value of such asset as is shown in the books of accounts of the firm and not the market value of the asset.

whether such gain is treated as long term or short term will be decided as below:

a) If the depreciation has been claimed on the asset transferred to the firm then in view of section 50(2) the gain arising there from will be treated as short term capital gain.

b) If the partner has been the owner of the asset for more than 24 months and no depreciation has been claimed on it then the gain arising from such asset shall be treated as long term capital gain.

vii. Capital gain in case of Dissolution of a Firm:

As per section 45(4) of the Income Tax Act where any partnership firm or AOP or BOI is dissolved and the Capital assets of the such firm or AOP or BOI are transferred by way of distribution of assets to the partners at the time of Dissolution in such case the gain arising from such transfer to the partners will be treated as capital gain and the firm will be liable for paying tax on it in the year of distribution of the assets.

For the purpose of section 48 the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.

2. Long Term Capital Gain:

A Capital Asset held for more than 24 months and 12 months in case of shares or securities is a long term capital asset and the gain arising therefrom is a long term capital gain. Long term capital gains are arrived at after deducting from the net sale consideration of the long term capital asset the indexed cost of acquisition and the indexed cost of improvement
of the asset.

The Central govt notifies cost inflation index for every year. The indexed cost of acquisition is calculated by multiplying the actual cost of acquisition with C.I.I of the year in which the capital asset is sold and divided by C.I.I of the year of purchase of capital asset. Similarly the indexed cost of improvement can be calculated by using the C.I.I of the year in which the capital asset is improved. Where the capital asset was acquired before the year 2001 then the cost of acquisition shall be the fair market value or the actual cost of its acquisition which ever is higher. The Fair market value of a capital asset can be known by the valuation of the registered valuer.

i. The cost inflation index table:

Financial year	Cost Inflation Index
2001-02	100
2002-03	105
2003-04	109
2004-05	113
2005-06	117
2006-07	122
2007-08	129
2008-09	137
2009-10	148
2010-11	167
2011-12	184
2012-13	200
2013-14	220
2014-15	240
2015-16	254
2016-17	264
2017-18	272
2018-19	280
2019-20	289
2020-21	301

If a capital asset has been subjected to depreciation then no indexation benefit is allowed on sale of such capital asset in view of section 50(2) as discussed above.

ii. Capital gain from Plot and building should be separately calculated:

As discussed above plot and building are separate assets and the capital gain on above should be calculated separately. If the plot is purchased more than 2 years back and building has been constructed within 2 years the capital gain on plot will be considered as long term and the capital gain on building will be treated as short term capital gain.

iii. Taxation of Long term capital gains:

The long term capital gains are taxed @ 20% after the benefit of indexation as discussed above. No deduction is allowed from the long term capital gains from section 80C to 80U. But in case of individual and HUF where the income is below the basic exempted limit the shortage in basic exemption limit is adjusted against the long term capital gains.

Section 112(1) provides that any capital gain arising from a long term capital asset being the listed securities which are sold outside the stock exchange the long term capital gain shall be calculated on such securities as below:

a) Tax arrived at @ 20% on such long term capital gain after indexation u/s 48 or

b) Tax arrived at @ 10 % on such long term capital gain without indexation

Whichever is less.

The long term capital gain on equity shares or units of equity oriented mutual fund which are sold in the stock exchange and on which securities transaction tax is paid, is exempt u/s 10(38).

iv. Section 50C:

The provisions of Section 50C of the Act states that where the consideration received or accruing as a result of  transfer by an assessee of a capital asset, being land or building or both, is less than the stamp duty value for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer.

From the above, it is apparent that the provisions of Sec. 50C of the Act will get attracted where a capital asset, being land or building or both is transferred for a consideration, which is less than the stamp duty value. Thus, the basic condition for invoking the provisions of Section 50C of the Act is that the asset transferred should be a capital asset as per Section 2(14) of the Act.

Thus, a rural agricultural land, not being a capital asset u/s. 2(14) of the Act is beyond the ambit of Section 50C of the Income Tax Act, 1961 and any transfer of a rural agricultural land for a consideration, which is less than the stamp duty value is out of purview of Section 50C.

v. Section wise Table on Exemptions from long term capital gain:

Section	Asset	Assessee	Holding Period of Original Assets	Whether Re-investment Necessary —Time Limit	Other Conditions / Incidents	Quantum
54	Residential House Property	Individual HUF	2 years	Yes — In Residential House, within 1 year before, or 2 years after the date of transfer (if purchased) or 3 years after the date of transfer (if constructed). **Where capital gain does not exceed Rs 2 crore, the assessee has the option to purchase/ construct two houses. This option is available once in a lifetime of assessee.		The amount of gains, or the cost of new asset, whichever is lower
54B	Agricultural Land	Individual & HUF	Use for 2 years	Yes — In Agricultural Land, within 2 years after the date of transfer.	Assessee or his parents or HUF must have used the land for agricultural purpose for preceding two years	As above
54D	Industrial Land or Building or anyrighttherein	Any Assessee	Use for 2 years	Yes — In Industrial Land, Building, or any right therein within 3 years after the date of transfer.	Must have been compulsorily acquired and used for business of Industrial undertaking for preceding 2 years	As above
54EC	Land or Building or both (w.e.f. 2019-20)	Any Assessee	2 Years	Yes — Investment of whole or any part of capital gain in ‘specified assets’. (Refer Note 1)Investment should be made within 6 months from the date of transfer		Lower of the Capital Gain or the actual amount invested in specified assets.However the aggregate investment made by assessee in the specified asset, during the financial year in which the original asset/ assets are transferred and in the subsequent financial year should not exceed 50,00,000/-
54EE	Any Long Term Capital Asset	Any Assessee	1 year for listed shares, Listed Securities, Units of UTI/ Mutual Fund specified u/s 10(23D), Zero coupon bonds, 2 years for unlisted shares and land and building, 3 years for other capital assets	Yes — Investment of whole or any part of capital gain in ‘long term specified assets’ as stipulated in the section. Investment should be made within 6 months from the date of transfer. (Note 2)		Investment made by an assessee in the long term specified asset, from capital gains arising from the transfer of one or more original assets. During the financial year in which the original asset or assets are transferred and in the subsequent financial year does not exceed Rs 50,00,000/-
54F	Any Capital Asset (not being a residential house)	Individual HUF	1 year for listed shares, listed securities, unit of UTI/ Mutual Fund specified u/s 10(23D), Zero-coupon bonds, 2 years for unlisted shares and any immovable property other than residential house, 3 years for other capital assets	Purchase of one Residential House in India within 2 years after or 1 year prior to date of transfer or construction of one residential house in India within 3 years from date of transfer		If cost of new asset is more than the net consideration of original asset, the whole of the gains is exempt. If cost of specified asset is less than net consideration, proportionate amount of the gains will be exempt i.e. Capital Gain * Cost of new Asset / Net Consideration on sale of asset.
54G	Land or Building or any right therein or Plant or Machinery in Urban Area used for the business	Industrial undertakings in urban area shifting to an area other than urban area	No Period specified	Acquire similar assets and incur expenses on shifting original asset, within 1 year before or 3 years from the date of transfer		The amount of gains, or the aggregate cost of new asset and shifting expenses, whichever is lower.
54GA	Land or Building or any right therein or Plant or Machinery in Urban Area used for the business	Industrial undertakings in urban area shifting to any Special Economic Zone	No period specified	Acquire similar assets and incur expenses on shifting original asset, within 1 year before, or 3 years from the date of transfer		The amount of gains, or the aggregate cost of new asset and shifting expenses, whichever is lower
54GB	Long Term Capital asset being a residential property (a house or a plot of land)	Individual & HUF	2 years	a. Subscribe to equity shares of an eligible company before due date of return filingb. The company within 1 year of subscription should utilize the amount for purchase of new asset		If cost of new asset is more than the net consideration of original asset, the whole of the gains is exempt. If cost of specified asset is less than net consideration, proportionate amount of the gains will be exempt i.e. Capital Gains * Cost of New Asset/ Net Consideration on sale of asset.

Note:

1. “specified asset” for making any investment under this section,—

(i)  on or after the 1st day of April, 2007 but before the 1st day of April, 2018, means any bond, redeemable after three years and issued on or after the 1st day of April, 2007 but before the 1st day of April, 2018;

(ii)  on or after the 1st day of April, 2018, means any bond, redeemable after five years and issued on or after the 1st day of April, 2018,

by the National Highways Authority of India constituted under section 3 of the National Highways Authority of India Act, 1988 (68 of 1988) or by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956 (1 of 1956) or any other bond notified in the Official Gazette by the Central Government in this behalf.

2. Long term specified asset means unit or units issued before 01/04/2019 of fund notified by Central Government in this behalf.

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