Capital Gain

வசையிலா வண்பயன் குன்றும் இசையிலா

யாக்கை பொறுத்த நிலம்.              - குறள் 239

Capital Gain

Capital gain is denoted as the net profit that an investor makes after selling a capital asset exceeding the price of purchase. The entire value earned from selling a capital asset is considered as taxable income. To be eligible for taxation during a financial year, the transfer of a capital asset should take place in the previous fiscal year.

Financial gains against a sale of an asset are not applicable to inherited property. It is considered only in case of transfer of ownership. According to The Income Tax Act, assets received as gifts or by inheritance are exempted in the calculation of income for an individual.

Buildings, lands, houses, vehicles, Mutual Funds, and jewelry are a few examples of capital assets. Also, the rights of management or legal rights over any company can be considered as capital assets. 

The following are not included under capital assets – 


Types of Capital Gain

Depending on the tenure of holding an asset, gains against an investment can be broadly divided into the following types – 


If an asset is sold within 36 months of acquisition, then the profits earned from it is known as short term capital gains. 


For instance, if a property is sold within 27 months of purchase, it will come under short term capital gains. 

However, tenure varies in the case of different assets. For Mutual Funds and listed shares, Long term capital gain happens if an asset is sold after holding back for 1 year.


Illustration

Mr. Raj is a salaried employee. On 8 th April, 2014, he purchased a piece of land and sold the same on 29 th J une , 201 6 . In this case, land is a capital asset for Mr. Raj. He purchased the land on 8 th April, 2014 and sold it on 29 th J une , 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 8 th July, 2015, he purchased shares of SBI Ltd. (listed in BSE) and sold the same on 29 th J une , 2016 . In this case, shares are capital assets for Mr. Kumar. He purchased shares on 8 th July, 2015 and sold them on 29 th J une , 2016 ​, i.e., after holding them for a period of less than 12 months. Hence, shares are short-term capital assets. 

The profit earned by selling an asset that is in holding for more than 36 months is known as long-term capital gains. After 31st March 2017, a holding period for non-moveable properties was changed to 24 months. However, it is not applicable in case of movable assets such as jewelry, debt-oriented Mutual Funds, etc.

Illustration

Mr. Kumar is a salaried employee. On 8 th April, 2009, he purchased a piece of land and sold the same on 29 th June, 2016. In this case, land is a capital asset for Mr. Kumar. He purchased the land on 8 th April, 2009 and sold it on 29 th J une , 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 8 th April, 2015 he purchased shares of SBI Ltd. (listed in BSE) and sold the same on 29 th J une , 201 6 . In this case, shares are capital assets for Mr. Raj. He purchased shares on 8 th April, 2015 and sold them on 29 th June, 2016, i.e., after holding them for a period of more than 12 months. Hence, shares are long-term capital assets. ​


Furthermore, a few assets are considered as short-term capital assets if the holding period is less than 12 months. Here is a list of assets that are considered according to the rule mentioned above – 


All the assets mentioned above are considered as long-term capital assets if they are held for 12 months or more. In case of any asset acquired by inheritance or gift, then the period for which an asset is owned by a previous owner is considered. Furthermore, in the case of bonus shares or right shares, the period of holding is considered from the date of allotment.

Here is a duration chart on an income generated against the sale of assets –

Type of asset Short term duration Long term duration 

Immovable assets (e.g. real estate) Less than 2 years More than 2 years

Moveable property(e.g. Gold) Less than 3 years More than 3 years

Listed Shares Less than 1 year More than 1 year 

Equity Oriented Mutual Funds Less than 1 year More than 1 year

Debt Oriented Mutual Funds Less than 3 years More than 3 years

Calculation of Capital Gains

The calculations of capital gains are dependent on the type of assets and their holding period. A few terms that an individual must know before calculating gains against their capital investments are here as follows – 


To calculate the value of short term capital gain, the full amount of consideration is required to be determined at first. 

From the obtained value

1. cost of acquisition, 

2.cost of improvement and 

3.the total expenditure incurred concerning the transfer of ownership has to be deducted. 

This resultant value will be the capital gain on investments.

Indexed Cost of Acquisition

The cost of acquisition is calculated on the present terms by applying the CII (Cost Inflation Index). It is done to adjust the values by taking into account the inflation that takes place over the years while holding the asset.

The indexed cost of acquisition can be estimated as the ratio of the Cost Inflation Index (CII) of the year when an asset was sold by a seller and that of the year when the property was acquired or the financial year 2001-2002, whichever is later multiplied by the Cost of acquisition.

Suppose, a person acquired an asset at Rs. 50 Lakh in the financial year 2004-2005 and she decided to transfer the property in the fiscal year 2018-19. The CII of the financial year 2004-05 and 2018-19 were 113 and 280 respectively.

Therefore, the indexed cost of acquisition will be 50 X 280 / 113 = Rs. 123.89 Lakh.

Indexed Cost of Improvement

The indexed cost of the improvement is calculated by multiplying the associated cost of improvement that was required to the CII of the year divided by the CII of the year in which the improvement took place.

Tax Exemptions on Capital Gains

Sec 54 - Profit on sale of property used for residence

Assessee : Individual / HUF


Type of asset transferred : Residential House Property


Type of transfer : LTCG


New asset purchased : One Residential House From AY 2021-22 If CG is less then or equal to 2 crores 

                                         (*Two residential houses can purchased and this option is available only once for an assessee)


Time Limit for investment in new asset : Purchase - Within 1 year before or 2 years after transfer Construction - Within 3 years from transfer


Exemption Amount : Long-Term Capital Gain or Cost of new asset whichever lesser


CGAS* available : Yes - deposit by return filing due date


Additional Conditions :

1. If new asset is sold within 3 years, amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon

2. If the amount in CGAS is not utilized within the prescribed time limit, such unutilized amount will be taxable as capital gains

Sec 54B - Capital gain on transfer of land used for agricultural purposes

Assessee : Individual / HUF


Type of asset transferred : Land used for agricultural purposes by the individual / his parent / HUF as the case may be for 2 years prior to transfer


Type of transfer : LTCG


New asset purchased : Agricultural land


Time Limit for investment in new asset : Within 2 years from the date of transfer


Exemption Amount : Long-Term Capital Gain or Cost of new asset (land)whichever lesser


CGAS* available : Yes - deposit by return filing due date


Additional Conditions :

1. If new asset is sold within 3 years, amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon

2. If the amount in CGAS is not utilized within the prescribed time limit, such unutilized amount will be taxable as capital gains

Sec 54D - Compulsory acquisition of land and building used in an industrial undertaking

Assessee : Any assessee


Type of asset transferred : Land or building forming part of an industrial undertaking used for the same in the past 2 years prior to transfer


Type of transfer : LTCG


New asset purchased : Land or building for shifting or re-establishing the industrial undertaking


Time Limit for investment in new asset : Within 3 years from the date of transfer


Exemption Amount : Long Term Capital Gain or Cost of new asset (land/building)whichever lesser


CGAS* available : Yes - deposit by return filing due date


Additional Conditions :

1. If new asset is sold within 3 years, amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon

2. If the amount in CGAS is not utilized within the prescribed time limit, such unutilized amount will be taxable as capital gains

Sec 54E, 54EA, 54EB - Investment in specified securities

Assessee : Any assessee


Type of asset transferred : Long-term capital asset


Type of transfer : LTCG


New asset purchased : Specified securities - includes government securities, savings certificates, units of UTI, specified debentures, etc.


Time Limit for investment in new asset : Within 6 months from the date of transfer


Exemption Amount : Cost of new asset x Capital Gain / Net consideration (maximum up to the capital gain)


CGAS* available : No


Additional Conditions :

1. If new asset is sold within 3 years, amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon

2. If a loan is taken on the security of the new specified asset within 3 years, the same will be treated as capital gains

Sec 54EC - Investment in certain bonds

Assessee : Any assessee


Type of asset transferred : Land or building or both


Type of transfer : LTCG


New asset purchased : NHAI bonds or REC bonds, redeemable after 5 years


Time Limit for investment in new asset : Within 6 months from the date of transfer


Exemption Amount : Cost of new asset x Capital Gain / Net consideration (maximum up to capital gain)


CGAS* available : No


Additional Conditions : 

1. If new asset is sold within 5 years (3 years before F.Y. 2018-19), amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon

2. If a loan is taken on the security of the new specified asset within 3/5 years, the same will be treated as capital gains

3. Investment in specified bonds should not exceed Rs. 50 lakhs during the current and succeeding fiscal year

Sec 54EE - Investment in units of a specified fund

Assessee : Any assessee


Type of asset transferred : Long-term capital asset


Type of transfer : LTCG


New asset purchased : Units notified by Central Government


Time Limit for investment in new asset : Within 6 months from transfer


Exemption Amount : Cost of new asset x Capital Gain / Net consideration (maximum up to capital gain)


CGAS* available : No


Additional Conditions : 

1. If new asset is sold within 3 years, amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon

2. If a loan is taken on the security of the new specified asset within 3 years, the same will be treated as capital gains

3. Investment in specified units should not exceed Rs. 50 lakhs during the current and succeeding fiscal year

Sec 54F - Investment in residential house

Assessee : Individual / HUF


Type of asset transferred : Any long-term capital asset other than residential house


Type of transfer : LTCG


New asset purchased : Residential house property


Time Limit for investment in new asset : Purchase - Within 1 year before or 2 years after transfer Construction - Within 3 years from transfer


Exemption Amount : Cost of new asset x Capital Gain / Net consideration (maximum up to capital gain)


CGAS* available : Yes - deposit by return filing due date


Additional Conditions :

1. If new asset is sold within 3 years, amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon

2. If the amount in CGAS is not utilized within the prescribed time limit, such unutilized amount will be taxable as capital gains

3. The Individual/HUF cannot own more than 2 house properties (i.e., existing House property and new house property). If another house property is purchased, amount of exemption allowed earlier will be chargeable as capital gains

Sec 54G, 54GA - Shifting of industrial undertaking from urban area to SEZ / Rural area.

Assessee : Any assessee


54GA : Shifting of industrial undertaking from urban area to SEZ

54G : Shifting of industrial undertaking from urban area to Rural area


Type of asset transferred : Capital asset being plant, machinery, land, building or rights in land or building that is used in an industrial undertaking situated in an urban area


Type of transfer : STCG / LTCG


New asset purchased :

Shifting of industrial undertaking involving:

1. Purchase of new plant/machinery

2. Acquisition of land or construction of a building

3. Shifted old asset and transferred undertaking to a new area

4. Incurred specified expenses


Time Limit for investment in new asset : 1 year before and 3 years after the date of transfer


Exemption Amount : Long-Term Capital GainORCost of new asset whichever lesser


CGAS* available : Yes - deposit by return filing due date


Additional Conditions :

1. If new asset is sold within 3 years, amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon

2. If the amount in CGAS is not utilized within the prescribed time limit, such unutilized amount will be taxable as capital gains

Sec 54GB - Transfer of residential property by the eligible assessee and made Investment in Startups 

(Applicable only if transfer made before 31.03.2017. In case investment is made in an eligible startup, transfer to be made before 31.03.2019)


Assessee : Individual / HUF


Type of asset transferred : Residential property (house or a plot of land)


Type of transfer : LTCG


New asset purchased : 


Equity shares in an eligible company

1.  Newly incorporated

2.  Engaged in the business of manufacture or eligible business

3.  Assessee has >50% share / voting rights

4. Small or Medium enterprise under MSMEA, 2006 or is an eligible startup


Time Limit for investment in new asset : By return filing due date


Exemption Amount : Long-Term Capital GainORCost of new asset whichever lesser


CGAS* available : Available to the eligible company - by return filing due date


Additional Conditions :

1. If new asset is sold within 5 years, amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon.

2. Eligible company to utilize subscription money for the purchase of new plant and machinery subject to certain conditions within 1 year. If not, such unutilized amount shall be chargeable to tax as capital gains.

3. If the amount in CGAS is not utilized by the eligible within the prescribed time limit, such unutilized amount will be taxable as capital gains

*CGAS stands for Capital Gains Accounts Scheme i.e., a type of account opened with a bank or specified institution that essentially acts as a means to park the capital gains until it can be used for its prescribed purpose. 

Note:

HUF – Hindu Undivided Family REC – Rural Electrification Corporation

LTCG – Long-term capital gain STCG – Short-term capital gain

COA – Cost of Acquisition SEZ – Special Economic Zone

NHAI – National Highway Authority of India

Frequently Asked Questions

I have sold my residential house property in May 2019 and realised long term capital gains, what are the reinvestment options to get exemptions form capital gain tax ? 

You, can reinvest in the purchase of new residential house property and claim exemption under section 54 at the time of filing a return provided all other conditions are satisfied. 

In the April 2020 I sold a long term capital asset being house property and the gain amount is less than 2 crores, can I reinvest in two house properties ? 

Yes, from AY 2021-22 you can invest in two house properties if your capital gain is less than 2 crores and claim exemption under section 54 provided all other conditions are satisfied. Please note that this option is available only once for assessee, if you have taken this option once in a AY you will not be eligible for any of the AY’s 

What do you mean by commercial property?

Commercial property refers to real estate property that is used for business activities. Commercial property usually refers to buildings that house businesses, but it can also refer to land that is intended to generate a profit, as well as larger residential rental properties. Commercial ro property includes malls, grocery stores, office buildings, manufacturing shops, and much more.

From an investment perspective, commercial property has traditionally been seen as a sound investment. The initial investment costs of the building and the costs associated with customization for tenants are much higher than residential real estate, but the overall returns are also higher, and some of the common headaches that come with tenants aren’t present when dealing with a company and clear leases.

How to save tax on sale of commercial property?

The sale of capital assets may lead to capital gains and these gains may attract tax under the Income Tax Act. To save tax on these capital gains, a few capital gains exemption/deductions are available under sections 54, 54B, 54D, 54F etc. In the case of short-term capital gain, there’s no option to save capital gains tax on sale of property. The complete capital gain amount will be added to your income and you will be taxed as per the income tax slab you will fall into. Provisions of Section 54, 54EC and 54F of income tax apply only to the long-term capital gains tax on sale of property. Here are 3 ways you can claim exemption from capitals gains tax on sale of commercial property.

 Is the benefit of indexation available while computing capital gain arising on transfer of short-term capital asset? 

​​Indexation is a process by which the cost of acquisition/improvement of a capital asset is adjusted against inflationary rise in the value of asset (as discussed in earlier FAQ). The benefit of indexation is available only in case of long-term capital assets and is not available in case of short-term capital assets.​​ 

In respect of capital asset acquired before 1st April, 1981 is there any special method to compute cost of acquisition? 

​​Generally, cost of acquisition of a capital asset is the cost incurred in acquiring the capital asset. It includes the purchase consideration plus any expenditure incurred exclusively for acquiring the capital asset. However, in respect of capital asset acquired before 1st April, 1981, the cost of acquisition will be higher of the actual cost of acquisition of the asset or fair market value of the asset as on 1st April, 1981. This option is not available in the case of a depreciable asset.​ 

Are any capital gains exempt under section 10? 

Section 10 provides list of incomes which are exempt from tax Amongst these the major exemptions relating to capital gains are listed below:

 

Section 10(33) : Long-term or short-term capital gain arising on transfer of units of Unit Scheme, 1964 (US 64) (transferred on or after 1-4-2002).

 

Section 10(37) : An individual or Hindu Undivided Family (HUF) can claim exemption in respect of capital gain arising on transfer of agricultural land situated in an urban  area by way of compulsory acquisition. This exemption is available if the land was used by the taxpayer (or by his parents in the case of an individual) for agricultural purpose for a period of 2 years immediately preceding the date of its transfer. .

 

Section 10(38) : Long-term capital gain arising on transfer of equity shares or units of equity oriented mutual fund (*) or a unit of a business trust other than a unit allotted by the trust in exchange of shares of a special purpose vehicle as referred to in section 47(xvii), will be exempt from tax, if the following conditions are satisfied:

 

Note: Any long-term capital gain arising from a transaction undertaken in recognized stock exchange located in an International Financial Service Center shall be exempt from tax.  Such exemption is available if such transaction is undertaken in foreign current and even if no STT is paid on such transaction. [Inserted by the Finance Act w.e.f. 1-4-2017]

 

(*) Equity oriented mutual fund means a mutual fund specified under section 10(23D) and 65% of its investible funds, out of total proceeds of such fund are invested in equity shares of domestic companies.​

What is the meaning of stamp duty value and what is its relevance while computing capital gain in case of transfer of capital asset, being land or building or both? 

​​Stamp duty value means the value adopted or assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty.

 

As per section 50C ​​, while computing capital gain arising on transfer of land or building or both, if the actual sale consideration of such land and/or building is less than the stamp duty value, then the stamp duty value will be taken as full value of consideration, i.e., as deemed selling price and capital gain will be computed accordingly.

 

Illustration

Mr. Raja sold his bungalow for Rs. 80,00,000. The value adopted by the Stamp Valuation Authority of the bungalow for the purpose of payment of stamp duty is Rs. 84,00,000. In this situation, while computing taxable capital gain arising on transfer of bungalow, Rs. 84,00,000 will be taken as full value of consideration ( i.e., sale value of the bungalow). Thus, actual selling price of Rs. 80,00,000 (being less than stamp duty value) will not be taken into account while computing taxable capital gain.

 

Illustration

Mr. Karan sold his land for Rs. 25,20,000. The value adopted by the Stamp Valuation Authority of the bungalow for the purpose of payment of stamp duty is Rs. 20,00,000. In this situation, while computing taxable capital gain arising on transfer of land, Rs. 25,20,000 (being actual sale value) will be taken as full value of consideration. Thus, stamp duty value (being less than actual selling price) will not be taken into account while computing taxable capital gain.

 

What is the tax treatment of Advance money forfeited under a un-materialized contract for transfer of capital Asset?

 

Any advance received on transfer of capital asset shall be chargeable to tax under the head 'Income from other sources', if such sum is forfeited and the negotiations do not result in transfer of capital Asset.