Capital Gains Tax in India
Did you sell shares, capital assets, immovable property, or mutual funds? You’ll be liable to pay Capital Gains Tax and must disclose such income under the Head “Capital Gains”.
Are you searching forward to saving such Capital Gains Tax? You can easily save your tax liability by investing in schemes under Sections 54, 54F, 54EC, etc. In this article, we’ll discuss Capital Gains in detail.
What are Capital Gains?
As per sec. 45(1) of the Income Tax Act, 1961 provides that any profits or gains arising on the transfer of a capital asset affected in the previous year shall be chargeable under the head “Capital Gains”.
Tax point:
Following are the necessary conditions to satisfy to charge any income under the head “Capital Gains”: a. There must be a capital asset. b. The assessee transfers such capital assets. c. There must be profit or gain (including negative profit or gain) on such transfer. The transferred asset should be a capital asset at the time of transfer.
BASIS OF CHARGE
Such capital gains will be deemed to be the income and taxable of the previous year in which the transfer took place. However, in other cases, the capital gain is taxable in the previous year in which consideration is received instead of in the previous year in which transfer took place for example compulsory acquisition by the Government.
What is a Capital Asset?
CAPITAL ASSET [SEC. 2(14)] Amended
As per section 2(14), a capital asset means –
• Any kind of property held by an assessee, whether or not connected with his business or profession;
• Any securities held by a Foreign Institutional Investor who has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992;
• Any unit-linked insurance policy to which exemption u/s 10(10D) does not apply due to the applicability of the fourth and fifth provisos thereof (Where any unit-linked insurance policy (ULIP), is issued on or after 01-02-2021 and the premium payable for any of the previous years during the term of such policy exceeds `INR 2,50,000
• Where the premium is payable, by a person, for more than one ULIP, issued on or after 01-02-2021, the exemption shall apply only with respect to those ULIPs, where the average amount of premium does not exceed the aforesaid limit in any of the previous years during the term of any of those policies.)
Important Point-: Capital asset may be movable or immovable or tangible/corporeal (jewelry, furniture, property, etc.) or intangible/ incorporeal ( tenancy right, goodwill, copyright, patent, etc.) “Property” adds any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever – However, it does not include—
(1) Stock in trade
-Any Stock in trade, consumable stores, or raw materials held for business or profession.
(Though, any securities held by a Foreign Institutional Investor who has invested in such securities in accordance with the regulations made under the SEBI Act, 1992 will not be treated as stock-in-trade Treatment of gain on the sale of stock Such profit will be taxable under the head “Profits & gains of business or profession”)
(2) Personal effect
means any movable property held for the personal use of the assessee or for any dependent member of his family but besides the followings:
a. Jewellery b. Archaeological collections c. Drawings d. Paintings e. Sculptures; or f. any work of art Taxpoint –
-An immovable property and aforesaid assets held for personal use are not personal effects and hence are capital assets. For example. a house property although used for personal purposes cannot be considered a personal effect and will fall within the definition of capital assets.
-Securities are not a personal effect
-The personal effect includes wearing apparel, furniture, car, cycle, and scooter used by the assessee for personal purposes.
– Intangible asset does not have a personal effect.
Jewellery includes – • Any ornaments made of gold, silver, platinum, any other precious metal, or any alloy containing one or more of such precious metals. It is insubstantial whether or not such ornaments have any precious or semi-precious stones and whether or not such ornaments are worked or stitched into any wearing apparel;
• Precious or semi-precious stones whether or not set in any furniture, utensil, or other article or worked or stitched in any wearing apparel. For example. loose diamonds will be treated as jewellery.
Treatment of profit on the sale of personal effect
Any income on transfer of personal effect will not be treated as a capital gain. Such income is in the nature of capital receipt and hence shall not be taxed under any head.
(3) Agricultural land in a rural area
Agricultural land in India is not a capital asset excluding the following –
a. land which is situated within the jurisdiction of any Municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or Cantonment Board has a population of 10,000 or more; or b. in any area within the distance (Aerial distance), measured aerially,— Population of the municipality or cantonment board Area within the aerial distance from the local limits of such municipality or cantonment board is non-rural area More than 10,000 but not exceeding 1,00,000 Upto 2 kilometers
More than 1,00,000 but not exceeding 10,00,000 Upto 6 kilometers
More than 10,00,000 Upto 8 kilometers
Notes: i. Population, according to the last preceding census of which the relevant counts have been published before the first day of the previous year, shall be taken.
ii. If such land is not agricultural land, it will be treated as a capital asset irrespective of its location.
iii. If agricultural land is located outside India, it will be treated as a capital asset.
Treatment of profit on the sale of agricultural land in a rural area of India
Profit on the sale of agricultural land in rural areas will not be treated as a capital gain. Such income is in the nature of capital receipt and hence will not be taxed under any head.
Municipality or Cantonment board Population – Upto 10,000 Agro Land not treated as Capital Asset. Local limit 2 Km
Within 10,001 to 1,00,000 Agro Land treated as Capital Asset-Local limit 6 Km
Within 1,00,001 to 10,00,000 Agro Land treated as Capital Asset- Local limit 8 Km
More than 10,00,000 Agro Land treated as Capital Asset Areas – Local limit Beyond 8 Km
(4) Gold Bonds Following gold bonds issued by the Central Government are not capital assets:
(i) 6.5% Gold Bond, 1977 (ii) 7% Gold Bonds, 1980; and (iii) National Defence Gold Bond, 1980
(5) Special Bearer Bond, 1991 issued by the Central Government is not a capital asset.
Note: It is not essential that the assessee should be the initial subscriber.
(6) Gold Deposit Bonds
Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999,
or deposit certificates issued under the Gold Monetisation Scheme, 2015 notified by the Central Government are not capital assets.
Note: Interest on aforesaid bonds or deposits are exempt [Sec. 10(15)]
TYPES OF CAPITAL ASSET
Capital Asset
Short-Term Capital Asset [Sec. 2(42A]- Short-Term Capital Asset means a capital held by an assessee for not more than 36 months immediately before the date of transfer.
Long-Term Capital Asset [Sec. 2(29A]- Long Term Capital Asset means a capital asset, which is not a short-term capital asset, is a long-term capital asset.
Exceptions
In the following cases, an asset shall be termed a short-term capital asset (STCA) if it is held for not more than the following period before the date of transfer:
12 months
Equity or preference share in a company (listed in India)
- Any security e.g. debenture, Government securities, etc. (listed in India)
- A unit of an equity-oriented fund1 (whether quoted or not)
- Zero-Coupon Bonds (whether quoted or not)
- Units of UTI (whether quoted or not)
Note:- “Equity Oriented Fund” means a fund set up under a scheme of a mutual fund specified u/s 10(23D) and:
i. In a case where the fund invests in the units of another fund that is traded on a recognized stock exchange,:
A. A minimum of 90% of the total proceeds of such fund is invested in the units of such other fund; and
B. Such other fund also invests a minimum of 90% of its total proceeds in the equity shares of domestic companies listed on a recognized stock exchange; and
ii. In any other case, a minimum of 65% of the total proceeds of such fund is invested in the equity shares of domestic companies listed on a recognized stock exchange.
Tax point: The %age of equity shareholding or unit held in respect of the fund, as the case may be, will be computed with reference to the annual mean of the monthly means of the opening and closing figures.
24 months
- Equity or preference share in an unlisted company
- Immovable property being land or building or both
Short-term capital gain (STCG) arises on the transfer of short-term capital assets (STCA) and long-term capital gain (LTCG) arises on the transfer of long-term capital assets (LTCA). However, any profit on the transfer of an asset on which depreciation is allowed as per WDV method u/s 32(1)(ii) shall be taxable as short-term capital gain (irrespective of their period of holding) [Sec. 50].
Tax on Long-Term Capital Gains
Presently, long-term capital gains are in general taxed at 20% + Surcharge and Education Cess. Long-term capital gains tax in the case of equities is 10% +Surcharge and Education Cess. if the total gain in a financial year exceeds Rs 1,00,000.
Tax on Short-Term Capital Gains
The short-term capital gains tax rate for equities and related assets is 15% + Surcharge and Education Cess. In the case of other assets, The short-term capital gain is taxable according to the income tax slab rate.
How to calculate the Period of Holding?
PERIOD OF HOLDING -While calculating the period of holding of any capital asset, the following points are to be kept in mind to decide the nature of the asset, whether short-term or long-term –
(a) Period after liquidation: In the case of shares, if the company goes into liquidation, the period after the date of the beginning of liquidation is to be excluded.
(b) Date of transfer: For computing, the period of holding of a capital asset, the date on which the asset is transferred is to be excluded.
(c) Conversion of preference shares into equity shares: In such cases, the period of holding includes the period for which the owner held the preference shares. Similarly, the period of holdings of units in the consolidated plan of the scheme of the mutual fund includes the period for which units in a consolidating plan of a mutual fund scheme were held by the owner.
Transfer in relation to Capital Asset [SEC. 2(47)]
Section 2(47) gives an inclusive definition of “transfer”, in relation to a capital asset.
(a) Sale, Exchange & Relinquishment of the asset; or
(b) Extinguishment of any right in an asset; or
(c) Mandatory acquisition of an asset under any law; or
(d) Conversion of asset into stock-in-trade by the owner; or
(e) Any transaction of immovable property u/s 53A of the Transfer of Property Act, 1882; or
(f) Any transaction which has the effect of transferring or enabling the enjoyment of any immovable property. or
(g) Maturity or redemption of a zero coupon bond
Tax point: – Aforesaid definition is symbolic and not exhaustive
-Aforesaid definition is admissible only in relation to capital assets and not otherwise.
Explanation 2 to section 2(47) clears that ‘transfer’ includes and shall be deemed to have always included:
• discarding of or parting with an asset or any interest therein, or
• creating any interest in any asset in any manner whatsoever,
directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been featured as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India.
Exchange
Exchange includes barter which means mutual transfer or exchange of ownership of one thing for the ownership of another
Notes: In the case of exchange though there is only one transaction the tax liability arises for both parties. The sale consideration shall be considered as the fair market value of assets received.
Relinquishment of the asset
Relinquish literally means ‘to withdraw from’ or ‘to abandon’ or ‘to give up anything or any right’ or ‘to cease to hold’ or ‘to surrender. Hence, relinquishment means the act of surrendering. In other words, it means the interest of a person in a property is either given up, abandoned, or surrendered. Still, the property in which the right is relinquished continues to exist.
Tax point: -Right of the assessee in the asset is given up or abandoned;
– Asset itself continues to exist after such relinquishment and becomes the property of someone else.
– There should be mutual consent of the parties. A unilateral action of writing off the claim in the books of account cannot be treated as relinquishment.
Extinguishment of any right in an asset– Extinguishment literally means ‘to put a sum end to’ or ‘total destruction’ or ‘blot out of existence or ‘annihilation’. Extinguishment does not mean the extinguishment of the asset itself but the extinguishment of the holder’s right to the asset and such right cannot be held by someone else
Incidences of extinguishments – • Cancellation of licenses: Abandonment of a project and termination of the industrial license, shall be treated as transfer. • Reduction of share capital: When a part of the share capital is paid to the shareholder by a company, such reduction of share capital shall be treated as an extinguishment of proportionate right in the shares and such shareholder shall be liable to capital gain. When there is a reduction of capital by a company and amounts are distributed to shareholders, such amount has two components – (a) Distribution attributable to accumulated profits i.e. chargeable as deemed dividend u/s 2(22)(d); (b) Distribution attributable to capital i.e. subject to tax u/s 45
Forfeiture of share: Forfeiture or surrender of shares hints at extinguishment or relinquishment of the right of shareholders in such shares, which have been forfeited by the company. As in CIT vs Vania Silk Mills Pvt. Ltd it was held that the term extinguishment includes all possible transactions which result in the destruction, annihilation, termination, cessation, or cancellation of any right in an asset whether corporeal or incorporeal. Though there is no consideration in case of share forfeiture or surrender, still such a transaction will be treated as a transfer and liable to capital gain.
Compulsory acquisition of an asset under any law- Normally, a sale means a common will full agreement between two or more parties. But for the aim of sec. 2(47), the transfer includes the necessary acquisition of any property under any law in force.
Conversion of asset into stock in trade by the owner- Normally, a transfer needs two or more parties, but in Income-tax Act even one party’s abetment may constitute a transfer. As per sec. 2(47)(iv) where an asset is converted by the owner into or treated by him as ‘stock in trade of the business carried on by him, such conversion or treatment shall constitute a transfer.
Any transaction of immovable property u/s 53A of the Transfer of Property Act- Any transaction of immovable property in which possession is permitted against the part performance of the contract will be treated as transfer [Sec. 53A of the Transfer of Property Act, 1882].
Any transaction which has enabled the enjoyment of any immovable property- Any transaction which has the outcome of transferring or enabling the enjoyment of any immovable property whether by way of becoming a member of, or acquiring shares in a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner, is treated as transfer. Property held by a member of a company, co-operative society, or other association of persons to whom a building or a part thereof is allotted or leased under the House Building Scheme of the company or association, is treated as deemed owner of that building or a part thereof. Under the scheme of owning flats in co-operative housing societies, the legal ownership in the flats can be said to vest in the individual members themselves and not in the co-operative societies. Therefore for all purposes including attachment and recovery of tax, etc., the individual member should be regarded as the legal owner.
Tax point – Assessee is a member of a company, cooperative society, or other AOP.
– He has been allotted or leased a building on account of such membership.
TRANSACTIONS NOT REGARDED AS TRANSFER (SEC. 46 & 47) Amended
By virtue of sec. 46(1) and sec. 47 the following transactions do not constitute a transfer for the purpose of capital gain –
Section Transaction 46(1) Any distribution of capital assets in the event of liquidation by a company to its shareholders shall not be treated as a transfer in the hands of the company.
47(i) Any distribution of capital assets on the total or partial partition of a HUF.
47(iii) Any transfer of a capital asset under a gift or will or an irrevocable trust. Exception: Gift of shares acquired through an Employees Stock Option Plan (ESOP) shall be treated as a Transfer.
47(iv) Any transfer of a capital asset by a 100% holding company to its Indian subsidiary company.
47(v) Any transfer of a capital asset by a 100% subsidiary company to its Indian holding company
47(vi) Any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company to the amalgamated company if the amalgamated company is an Indian company. Tax point– Transfer must be in a scheme of amalgamation.
– The transferee company must be an Indian company.
47(via) Any transfer, in a scheme of amalgamation, of a capital asset being a share or shares held in an Indian company, by the amalgamating foreign company to the amalgamated foreign company, if – (a) At least 25% of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company; and (b) Such transfer does not attract tax on capital gains in the country, in which the amalgamating company is incorporated
Tax point –Such transfer is in a scheme of amalgamation by the amalgamating foreign company to the amalgamated foreign company.
A transferred asset must be a capital asset a share or shares held in an Indian company.
At least 25% of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company.
Such transfer does not attract tax on the capital gain in the country, in which the amalgamating company is incorporated.
47(viaa) Any transfer of a capital asset by a banking company to a banking institution in a scheme of amalgamation of such banking company with a such banking institution sanctioned and brought into force by the Central Government u/s 45(7) of the Banking Regulation Act, 1949.
47(viab) Any transfer, in a scheme of amalgamation, of a capital asset, being a share of a foreign company, (referred to in Explanation 5 of sec.9(1)(i)), which derives, directly or indirectly, its value substantially from the share or shares of an Indian company, held by the amalgamating foreign company to the amalgamated foreign company, if a. at least 25% of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company;
and a. such transfer does not attract tax on capital gains in the country in which the amalgamating company is incorporated.
47(viiac) & (viiad) -Any transfer, in a relocation, of a capital asset by the original fund to the resulting fund;
-Any transfer by a shareholder or unit holder or interest holder, in a relocation, of a capital asset being a share or unit or interest held by him in the original fund in consideration for the share or unit or interest in the resultant fund.
Tax point –Original fund means a fund established or incorporated or registered outside India, which collects funds from its members for investing it for their benefit and fulfills the following conditions:
a) the fund is not a person resident in India;
b) the fund is a resident of a country or a specified territory with which an agreement referred to in sec. 90or 90A has been entered into, or is established or incorporated or registered in a notified country or a specified territory;
c) the fund and its activities are subject to applicable investor protection regulations in the country or specified territory where it is established or incorporated or is a resident, and
d) fulfills such other conditions as may be prescribed;
Relocation means the transfer of assets of the original fund, or of its wholly owned special purpose vehicle, to a resultant fund on or before 31-03-2023, where consideration for such transfer is discharged in the form of share or unit or interest in the resulting fund to,
a. shareholder or unit holder or interest holder of the original fund, in the same proportion in which the share or unit or interest was held by a such shareholder or unit holder or interest holder in such original fund, in lieu of their shares or units or interests in the original fund; or
b. the original fund, in the same proportion as referred above, in respect of which the share or unit or interest is not issued by a resultant fund to its shareholder or unit holder or interest holder;
Resultant fund means a fund established or incorporated in India in the form of a trust or a company or a limited liability partnership, which—
a. has been granted a certificate of registration as a Category I or Category II or Category III Alternative Investment Fund, and is regulated under the Securities and Exchange Board of India (Alternative Investment Fund) Regulations, 2012 made under the Securities and Exchange Board of India Act, 1992 or International Financial Services Centre Authority Act, 2019; and
b. is located in any International Financial Services Centre as referred to in sec. 80LA(1A) 47(viiae)-Any transfer of a capital asset by India Infrastructure Finance Company Ltd to an institution established for financing the infrastructure and development, set up under an Act of Parliament and notified by the Central Government.
47(viiaf)- Any transfer of a capital asset, under a plan approved by the Central Government, by a public sector company to another notified public sector company or to the Central Government or to a State Government
47(vib)- Any transfer, in a scheme of demerger, of capital assets by the demerged company to the resulting company, if the resulting company is an Indian company.
47(vic)- Any transfer, in a scheme of demerger, of a capital asset, being a share or shares held in an Indian company, by the demerged foreign company to the resulting foreign company, if –
a) The shareholders holding not less than three-fourths in value of the shares of the demerged foreign company continue to remain shareholders of the resulting foreign company; and
b) Such transfer does not attract tax on the capital gain in the country, in which the demerged foreign company is incorporated: Taxpoint: Such transfer is in a scheme of demerger by the demerged foreign company to the resulting foreign company.
The transferred asset must be a capital asset a share or shares held in an Indian company. Shareholders holding not less than 75% in value of the shares of the demerged foreign company continue to remain, shareholders of the resulting foreign company Such transfer, does not attract tax on capital gains in the country, in which the demerged foreign company is incorporated
47(vica)- Any transfer in a business reorganization, of a capital asset by the predecessor co-operative bank to the successor co-operative bank or to the converted banking company
47(vicb)- Any transfer by a shareholder, in a business reorganization, of a capital asset being a share or shares held by him in the predecessor co-operative bank if the transfer is made in consideration of the allotment to him of any share or shares in the successor co-operative bank or to the converted banking company
47(vicc)- Any transfer in a demerger, of a capital asset, being a share of a foreign company (referred to in Explanation 5 of sec. 9(1)(i)), which derives, directly or indirectly, its value substantially from the share or shares of an Indian company, held by the demerged foreign company to the resulting foreign company, if
a. the shareholders, holding not less than 3/4th in value of the shares of the demerged foreign company, continue to remain shareholders of the resulting foreign company; and
b. such transfer does not attract tax on capital gains in the country in which the demerged foreign company is incorporated. Provided that the provisions of sections 391 to 394 of the Companies Act, 1956 shall not apply in case of demergers referred to above.
47(vid-) Any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company, if the transfer or issue is made in consideration of demerger of the undertaking.
47(vii) Any transfer by a shareholder, in a scheme of amalgamation, of share(s) held by him in the amalgamating company, if –
a) The transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company except where the shareholder itself is the amalgamated company, and b) The amalgamated company is an Indian company.
47(viia) Any transfer of a capital asset, being foreign currency convertible bonds or Global Depository Receipts referred to in sec. 115AC(1), made outside India by a non-resident to another non-resident.
Tax point:-Transferred assets must be either ‘foreign currency convertible bonds or ‘Global Depository Receipts’. The transfer has been made by a non-resident to another non-resident. The transfer has been made outside India.
47(viiaa) Any transfer, made outside India, of a capital asset being rupee denominated bond of an Indian company issued outside India, by a non-resident to another non-resident Taxpoint: In case of a non-resident, any gains arising on account of appreciation of rupee against a foreign currency at the time of redemption of rupee denominated bond of an Indian company held by him, shall be ignored for the purposes of computation of full value of consideration under this section
47(viiab) Any transfer of a capital asset, being—
a. bond or Global Depository Receipt referred to in sec. 115AC(1); or
b. rupee-denominated bond of an Indian company; or c. derivative, or d. other notified securities made by a non-resident on a recognized stock exchange located in any International Financial Services Centre provided the consideration for such transaction is paid or payable in foreign currency.
47(viib)-Any transfer of a capital asset, being a Government Security carrying a periodic payment of interest, made outside India through an intermediary dealing in the settlement of securities, by a non-resident to another non-resident
47(viic) Any transfer of Sovereign Gold Bond issued by the RBI under the Sovereign Gold Bond Scheme, 2015, by way of redemption, by an assessee being an individual.
47(ix)- Any transfer of a capital asset being a work of art, archaeological, scientific or art collection, book, manuscript, drawing, painting, photograph or print, to the Government or a University or the National Museum, National Art Gallery, National Archives or any such other public museum or institution as may be notified by the Central Government in the Official Gazette to be of national importance or to be of renown throughout any State or States.
47(x)- Any transfer by way of conversion of bonds or debentures, debenture-stock, or deposit certificates in any form of a company into shares or debentures of that company.
47(xa)- Any transfer by way of conversion of bonds referred to in sec. 115AC(1)(a) into shares or debentures of any company
47(xb)- Any transfer by way of conversion of preference shares of a company into equity shares of that company
47(xii)- Any transfer of land of a sick industrial company, made under a scheme prepared and sanctioned u/s 18 of the Sick Industrial Companies (Special Provisions) Act, 1985 where such sick industrial company is being managed by its workers’ co-operative. Such transfer must have been made during the period commencing from the previous year in which the said company has become a sick industrial company and ending with the previous year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses.
47(xiii)- Any transfer of a capital asset by a firm to a company as a result of a succession of the firm by a company in the business carried on by the firm subject to the following conditions:
a) All assets and liabilities of the firm relating to the business immediately before the succession become the assets and liabilities of the company.
b) All the partners of the firm immediately before the succession become the shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of succession.
c) The partners of the firm do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company; and
d) The aggregate of the shareholding in the company of the partners of the firm is not less than 50% of the total voting power in the company and their shareholding continues to be as such for a period of 5 years from the date of succession.
Tax point:- Transfer must have taken place as a result of a succession of the firm to a company. All assets and liabilities related to the business must have been transferred.
All the partners become the shareholders of the company in their capital ratio (as of the date of the succession)
The whole consideration shall be paid by allotment of shares in the company
Partners (altogether) must hold at least 50% of the total voting power of the company
Lock in period for the above share is 5 years from the date of succession. Any transfer of a capital asset to a company in the course of demutualization or corporatization of a recognized stock exchange in India as a result of which an association of persons or body of individuals is succeeded by such company, subject to the following conditions –
a. All assets and liabilities of the AOP or BOI relating to the business immediately before the succession become the assets and liabilities of the company;
b. The demutualization or corporatization of a recognized stock exchange in India is carried out in accordance with a scheme for demutualization or corporatization which is approved by the SEBI
47(xiiia)-Any transfer of a membership right of a recognized stock exchange in India for the acquisition of shares and trading or clearing rights in that recognized stock exchange in accordance with a scheme for demutualization or corporatization which is approved by SEBI
47(xiiib) Any transfer of –
a. a capital asset or intangible asset by a private company or unlisted public company (hereafter referred to as the company) to a limited liability partnership (LLP); or
b. a share(s) held in the company by a shareholder as a result of the conversion of the company into a limited liability partnership (LLP) shall not be regarded as a transfer if the following conditions are satisfied:
i. All the assets and liabilities of the company immediately before the conversion become the assets and liabilities of the LLP;
ii. All the shareholders of the company immediately before the conversion become the partners of the LLP and their capital contribution and profit sharing ratio in the LLP are in the same proportion as their shareholding in the company on the date of conversion;
iii. The shareholders of the company do not receive any consideration or benefit other than by way of share in profit and capital contribution in the LLP;
iv. The aggregate of the profit sharing ratio of the shareholders of the company in the LLP shall not be less than 50% at any time during the period of 5 years from the date of conversion;
v. The total sales, turnover or gross receipts in the business of the company in any of the 3 previous years preceding the previous year in which the conversion takes place does not exceed ` 60 lakh;
vi. The total value of the assets as appearing in the books of account of the company in any of the 3 previous years preceding the previous year in which the conversion takes place does not exceed ` 5 crores; and
vii. No amount is paid (directly or indirectly) to any partner out of the balance of accumulated profit standing in the accounts of the company on the date of conversion for a period of 3 years from the date of conversion.
47(xiv)- Where a sole proprietary concern is succeeded by a company in the business carried on by it as a result of which the sole proprietary concern sells or otherwise transfers any capital asset to the company, subject to the following conditions –
a) All assets and liabilities of the sole proprietary concern relating to the business immediately before the succession become the assets and liabilities of the company;
b) Proprietor holds not less than 50% of the total voting power in the company and his shareholding continues to remain as such for a period of 5 years from the date of succession; and
c) The sole proprietor does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company.
Tax point- Transfer must have taken place as a result of a succession of the proprietorship concern to a company.
All assets and liabilities related to the business must have been transferred.
The whole consideration shall be paid by allotment of shares in the company.
The proprietor must hold at least 50% of the total voting power of the company.
Lock in period for the above share is 5 years from the date of succession. Note: Sec. 47(xiii) & (xiv) exempts the capital gain on the transfer of capital assets and not stock in trade. Therefore, if stock is transferred at profits, it will be taxable as business income.
47(xv) Any transfer in a scheme for lending of any securities under an agreement or arrangement, which the assessee has entered into with the borrower of such securities and which is subject to the guidelines issued by the SEBI or the RBI.
47(xvi)- Any transfer of a capital asset in a transaction of a reverse mortgage under a scheme made and notified by the Central Government
47(xvii-) Any transfer of a capital asset, being a share of a special purpose vehicle (referred to in sec. 10(23FC)) to a business trust in exchange for units allotted by that trust to the transferor.
47(xviii- Any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating scheme of a mutual fund, made in consideration of the allotment to him of a capital asset, being a unit or units, in the consolidated scheme of the mutual fund. The exemption is available only for the consolidation of two or more schemes of an equity-oriented fund or of two or more schemes of a fund other than an equity-oriented fund.
“Consolidated scheme” means the scheme with which the consolidating scheme merges or which is formed as a result of such a merger.
“Consolidating scheme” means the scheme of a mutual fund that merges under the process of consolidation of the schemes of mutual fund in accordance with the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 made under the Securities and Exchange Board of India Act, 1992.
In the case of a capital asset, being a unit or units, which becomes the property of the assessee in consideration of a transfer referred to in this clause. The period of holding shall include the period for which the unit or units in the consolidating scheme of the mutual fund were held by the assessee.
47(xix)- Any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating plan of a mutual fund scheme, made in consideration of the allotment to him of a capital asset, being a unit or units, in the consolidated plan of that scheme of the mutual fund.
COMPUTATION OF CAPITAL GAINS [SEC. 48]
Short-term Capital Gain means the gain arising on the transfer of short-term capital asset [Sec. 2(42B)].
Long-term Capital Gain means the gain arising on the transfer of long-term capital asset [Sec. 2(29B)].
Computation of Short-Term Capital Gain (STCG)
At a glance, computation of capital gain of _____ for the Assessment Year ……..
Particulars Details Amount
Sale consideration (Full value of consideration) ****
Less: Expenses on transfer ****
Net sale consideration ****
Less: i) Cost of acquisition ****
ii) Cost of improvement **** ****
Short-Term Capital Gain ****
Less: Exemption u/s 54B, 54D, 54G, etc. (****)
Taxable Short-Term Capital Gain *****
Note: No deduction shall be allowed in computing the income chargeable under the head “Capital gains” in respect of any sum paid on account of securities transaction tax.
The meaning of terms used in the computation:
(i) Sale consideration (full value of consideration)- It refers to the sale value of the asset (in form of money or money’s worth).
Consideration in installments: In case, consideration is receivable in installments in different years, the entire value of the consideration shall be taxable in the year of transfer.
Fair market value is deemed to be the full value of consideration in certain cases [Sec. 50D]: Where the consideration received or accruing as a result of the transfer of a capital asset by an assessee is not ascertainable or cannot be determined, then, for the purpose of computing income chargeable to tax as capital gains, the fair market value3 of the said asset on the date of transfer shall be deemed to be the full value of the consideration received or accruing as a result of such transfer.
(ii) Expenses on transfer- It means any expenditure incurred wholly and exclusively in connection with such transfer such as brokerage or commission incurred for securing buyer, cost of stamp and registration fee by the vendor, traveling expenses, etc. It is reduced from sale consideration to get net sale consideration. Notes:
(a) Expenditure must be necessary to affect the transaction and should not be vague
(b) Expenditure on transfer may be incurred prior to or after completion of the transfer
(c) If expenditure has been allowed as a deduction under any other heads of income then the same cannot be claimed as a deduction u/s 48.
(iii) Cost of Acquisition [Sec. 55(2)]- Cost of acquisition includes expenditure incurred for acquiring the asset or completing the title of the asset. For instance –
• Sum paid for the discharge of mortgage debt to clear the charge over the property (created by the previous owner) is a part of the cost of acquisition.
• Litigation expenditure incurred by a shareholder to get the shares registered in his name will form part of the cost of the acquisition of shares.
(iv) Cost of Improvement [Sec. 55(1)(b)]- Cost of improvement means an expenditure incurred to increase the production quality of the asset. It includes all expenditures of a capital nature incurred in making any additions or alterations to the capital asset. Notes:
(a) Any expenditure which is deductible in computing the income chargeable under any other head of income shall not be treated as a cost of the improvement.
(b) An expenditure incurred by a shareholder to file a suit to amend articles of association, which results in appreciation of the value of the share shall be treated as a cost of the improvement.
COMPUTATION OF LONG-TERM CAPITAL GAIN (LTCG)
At a glance, computation of capital gain of _____ for the Assessment Year ………….
Particulars Details Amount
Sale consideration (Full value of consideration) ****
Less: Expenses on transfer ****
Net sale consideration ****
Less: i) Indexed cost of acquisition ****
ii) Indexed cost of improvement **** ****
Long-Term Capital Gain ****
Less: Exemption u/s 54, 54B, 54D, 54EC, 54F, etc. ****
Taxable Long-Term Capital Gain ****
Note: No deduction shall be allowed in computing the income chargeable under the head “Capital gains” in respect of any sum paid on account of securities transaction tax.
The meaning of terms used in the computation:
(i) Indexed cost of acquisition
“Indexed cost of acquisition” means the ‘cost of acquisition’ (as discussed in the case of short-term capital gain) adjusted according to the price level of the year of sale. As per explanation to sec.48, “Indexed cost of acquisition” is an amount which bears to the ‘cost of acquisition’ the same proportion as the Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on 1/4/2001, whichever is later.
Tax point: Indexed cost of acquisition = Cost of acquisition × Index of the year of transfer/ Index of the year of acquisition
(ii) Indexed cost of improvement “Indexed cost of improvement” means the ‘cost of improvement’ (as discussed in the case of short-term capital gain) adjusted according to the price level of the year of sale. As per explanation to sec. 48, “indexed cost of any improvement” is an amount, which bears to the cost of improvement the same proportion as the Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the year in which the improvement to the asset took place
Formula-Indexed cost of improvement = Cost of improvement × Index of the year of transfer/ Index of the year of improvement
(iii) Cost Inflation Index, in relation to a previous year, means such Index as the Central Government may, having regard to 75% of average rise in the Consumer Price Index (urban) for the immediately preceding previous year to such previous year, by notification in the Official Gazette, specify, in this behalf. The cost Inflation Index for different financial years is as follows:
Financial Year Index Financial Year Index Financial Year Index
2001-02 100 2011-12 184 2021-22 317
2002-03 105 2012-13 200
2003-04 109 2013-14 220
2004-05 113 2014-15 240
2005-06 117 2015-16 254
2006-07 122 2016-17 264
2007-08 129 2017-18 272
2008-09 137 2018-19 280
2009-10 148 2019-20 289
2010-11 167 2020-21 301
Note: Indexed cost of acquisition has to be ascertained with reference to the date of acquisition and not with reference to the date when such asset became a capital asset.
Treatment of assets acquired before 1/4/2001
Cost of acquisition -If an asset is acquired before 1/4/2001 then its cost of acquisition shall be higher than the following:
a) Actual cost of acquisition (ignoring cost of improvement incurred before 1/4/2001); or
b) Fair market value12 of the asset as of 1/4/2001 [Sec. 55]
Note: In case of a capital asset, being land or building or both, the fair market value of such asset on 01-04-2001 shall not exceed the stamp duty value, wherever available, of such asset as on 01-04-2001.
Exception: The option is not available in the case of –
• Asset on which depreciation is allowed u/s 32(1)(ii);
• Self-generated assets (other than bonus shares)
Cost of improvement- Any cost of improvement incurred by the assessee or the previous owner before 1/4/2001 shall not be considered.
Indexation- Where an asset is acquired before 1/4/2001, then indexation benefit shall be available from the year 2001-02.