Friday, September 2, 2016

Taxation of Capital Gain in India

As per Wikipedia A capital gain is a profit that results from a disposition of a capital asset, such as stock, bond or real estate, where the amount realized on the disposition exceeds the purchase price. The gain is the difference between a higher selling price and a lower purchase price. Conversely, a capital loss arises if the proceeds from the sale of a capital asset are less than the purchase price. Capital gains may refer to “investment income” that arises in relation to real assets, such as property; financial assets, such as shares/stocks or bonds; and intangible assets.

Frequently Asked Questions on Taxation of Capital Gains in India

What incomes are charged to tax under the head “Capital Gains”?

Any profit or gain arising from transfer of a capital asset during the year is charged to tax under the head “Capital Gains”.

What is the meaning of capital asset?

Capital asset is defined to include:
a) Any kind of property held by an assesse, whether or not connected with business or profession of the assesse.
b) Any securities held by a FII which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992.

However, the following items are excluded from the definition of “capital asset”:
Any stock-in-trade, consumable stores, or raw materials held by a person for the purpose of his business or profession.g.,Motor car for a motor car dealer or gold for a jewellery merchant, are their stock-in-trade and, hence, they are not capital assets for them.
Personal effects of a person, that is to say, movable property including wearing apparels (*) and furniture held for use, by a person or for use by any member of his family dependent on him.(*) However, jewellery, archeological collections, drawings, paintings, sculptures, or any work of art are not treated as personal effects and, hence, are included in the definition of capital assets.

The term jewellery has been given a wider meaning and includes ornaments made up of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stones, and whether or not worked or sewn into any wearing apparel. It also includes precious or semi-precious stones, whether or not set in any furniture, utensil, or other article or worked or sewn into any wearing apparel.

Agricultural Land in India, not being a land situated:
Within jurisdiction of municipality, notified area committee, town area committee, cantonment board and which has a population of not less than 10,000;
Within range of following distance measured aerially from the local limits of any municipality or cantonment board:
not being more than 2 KMs, if population of such area is more than 10,000 but not exceeding 1 lakh;
not being more than 6 KMs , if population of such area is more than 1 lakh but not exceeding 10 lakhs; or
not being more than 8 KMs , if population of such area is more than 10 lakhs.

Population is to be considered according to the figures of last preceding census of which relevant figures have been published before the first day of the year.
6½% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government.
Special Bearer Bonds, 1991, issued by the Central Government
Gold Deposit Bonds issued under Gold Deposit Scheme, 1999.
Deposit certificates issued under the Gold Monetisation Scheme, 2015.

Following points should be kept in mind :
The property being capital asset may or may not be connected with the business or profession of the taxpayer. g.Bus used to carry passenger by a person engaged in the business of passenger transport will be his Capital asset.
Any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 will always be treated as capital asset, hence, such securities cannot be treated as stock-in-trade.

What is the meaning of the term ‘long-term capital asset’?

Any capital asset held by a person for a period of more than 36 months immediately preceding the date of its transfer will be treated as long-term capital asset.

However, in respect of certain assets like shares, units of specified mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months.

In case of unlisted shares in a company, the period of holding to be considered is 24 months instead of 36 months.

Illustration for better understanding

Illustration

Mr. Kumar is a salaried employee. On 8th April, 2009, he purchased a piece of land and sold the same on 29th June, 2016. In this case, land is a capital asset for Mr. Kumar. He purchased the land on 8th April, 2009 and sold it on 29th June, 2016, i.e., after holding for a period of more than 36 months. Hence, the land will be a long-term capital asset.

Illustration

Mr. Raj is a salaried employee. On 8th April, 2015 he purchased shares of SBI Ltd. (listed in BSE) and sold the same on 29th June, 2016. In this case, shares are capital assets for Mr. Raj. He purchased shares on 8th April, 2015 and sold them on 29th June, 2016, i.e., after holding them for a period of more than 12 months. Hence, shares are long-term capital assets.

What is the meaning of the term ‘short-term capital asset’?

Any capital asset held by a person for a period of not more than 36 months immediately preceding the date of its transfer will be a short-term capital asset.

However, in respect of certain assets like shares, units of specified mutual fund, listed securities like debentures and Government securities, Units of UTI and Zero Coupon Bonds the period of holding to be considered is 12 months instead of 36 months.

In case of unlisted shares in a company, the period of holding to be considered is 24 months instead of 36 months.

Illustration for better understanding

Mr. Raj is a salaried employee. On 8th April, 2014, he purchased a piece of land and sold the same on 29th June, 2016. In this case, land is a capital asset for Mr. Raj. He purchased the land on 8th April, 2014 and sold it on 29th June, 2016, i.e., after holding it for a period of less than 36 months. Hence, land will be a short-term capital asset.

Illustration

Mr. Kumar is a salaried employee. On 8th July, 2015, he purchased shares of SBI Ltd. (listed in BSE) and sold the same on 29th June, 2016. In this case, shares are capital assets for Mr. Kumar. He purchased shares on 8th July, 2015 and sold them on 29th June, 2016, i.e., after holding them for a period of less than 12 months. Hence, shares are short-term capital assets.


What is long-term capital gain and short-term capital gain?

Gain arising on transfer of long-term capital asset is termed as long-term capital gain and gain arising on transfer of short-term capital asset is termed as short-term capital gain. However, there are a few exceptions to this rule, like gain on depreciable asset is always taxed as short-term capital gain.

Why capital gains are classified as short-term and long-term?

The taxability of capital gain depends on the nature of gain, i.e. whether short-term or long-term. Hence to determine the taxability, capital gains are classified into short-term capital gain and long-term capital gain. In other words, the tax rates for long-term capital gain and short-term capital gain are different. Similarly, computation provisions are different for long-term capital gains and short-term capital gains.

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