– Mansi Kotriwar
Abstract:-
Any Income derived from a Capital asset movable or immovable is taxable under the top Capital Gains under tax Act 1961. The Capital Gains are divided in two parts under tax Act 1961. One is short term capital gain and other is long term capital gain. This paper explains Taxability of short term capital gains, Capital gains just in case of depreciable assets, financial gain Where some assets are left in block of assets, financial 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 future financial gain .
INTRODUCTION:-
Any profit or gain arising from transfer of capital asset held as investments are chargeable to tax under the head capital gains. The gain can be on account of short- and long-term gains. A capital gain arises only when a capital asset is transferred. Which means if the asset transferred is not a capital asset; it will not be covered under the head capital gains. Profits or gains arising in the previous year in which the transfer took place shall be considered as income of the previous year and chargeable to income tax under the head Capital Gains and the concept of indexation shall apply, if applicable.
Capital gains:-
Section 45 of tax Act, 1961 provides that any profits or gains arising from the transfer of a capital asset effected within the previous year are going to be chargeable to income-tax under the head ‘Capital Gains’. Such capital gains are going to be deemed to be the income of the previous year during which the transfer happened. In this charging section, two terms are important. One is ‘capital asset’ and the other is ‘transfer’.
Any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain. This gain or profit is comes under the category ‘income’, and hence you’ll got to pay tax for that quantity within the year during which the transfer of the capital asset takes place. This is called capital gains tax, which may be short-term or long-term.
Capital gains aren’t applicable to an inherited property as there’s no sale, only a transfer of ownership. The tax Act has specifically exempted assets received as gifts by way of an inheritance or will. However, if the one that inherited the asset decides to sell it, capital gains tax are going to be applicable.
Examples of assets are a flat or apartments, land, shares, mutual funds, gold among many others. There are two sorts of financial gains:
Short-term capital gain: capital gain arising on transfer of short term capital asset.
Long-term capital gain: capital gain arising on transfer of long term capital asset.
Capital gains can be taxed subject to the following conditions:
- The assessee must have owned a capital asset
- The assessee must have transferred the capital asset in the previous year.
- There must have been profit or gains as a result of such transfer
Computing capital gains
As per Section 10(38) of Income Tax Act, 1961 long-term capital gains on shares or securities or mutual funds on which Securities Transaction Tax (STT) has been deducted and paid, no tax is payable. Higher capital gains taxes will apply only on those transactions where STT isn’t paid.
Capital assets:-
According to section 2(14), a capital asset means –
- property of any kind held by an assessee, whether or not connected with his business or profession;
- any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the SEBI regulations.
However, it does not include—
- Any stock-in-trade [other than securities referred to in (b) above], consumable stores or raw materials held for the purpose of the business or profession of the assessee;
- Personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him.
- Short term capital assets:-
An asset held for a period of 36 months or less may be a short-term capital asset. The criteria of 36 months are reduced to 24 months for immovable properties like land, building and house property from FY 2017-18. For instance, if you sell house property after holding it for a period of 24 months, any income arising will be treated as long-term capital gain provided that property is sold after 31st March 2017.
- Long term capital assets:-
An asset that is held for more than 36 months is a long-term capital asset. The reduced period of the aforementioned 24 months isn’t applicable to movable property like jewellery, debt-oriented mutual funds etc. They will be classified as a long-term capital asset if held for more than 36 months as earlier. Some assets are considered short-term capital assets when these are held for 12 months or less. This rule is applicable if the date of transfer is after 10th July 2014 (irrespective of what the date of purchase is).
The assets are:
- Equity or preferred stock during a company listed on a recognized stock market in India
- Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock market in India
- Units of UTI, whether quoted or not
- Units of equity oriented mutual fund, whether quoted or not
- Zero coupon bonds, whether quoted or not
When the above-listed assets are held for a period of more than 12 months, they are considered as long-term capital asset.
In case an asset is acquired by gift, will, succession or inheritance, the period for which the asset was held by the previous owner is also included when determining whether it‘s a brief term or a long-term capital asset. In the case of bonus shares or rights shares, the period of holding is counted from the date of allotment of bonus shares or rights shares respectively
Income from capital gain and its provisions:-
Section 45 of the Income Tax Act, 1961 is the charging section of the income chargeable under the head Capital Gains. In the ordinary course, a transaction is subject to capital gain in the year of transfer of the capital asset. In case of the Joint Development Agreement (‘JDA’) or Specified Agreement (‘SA’) where the capital asset being land, building, or both are transferred to the developer, such transaction is taxable in the year of transfer. There was a big time gap between the year during which the transfer happened and therefore the year during which the consideration is received. Thereby, the owner of the capital asset faced difficulties in payment of taxes.
- Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, be chargeable to income-tax under the head “Capital gains”, and shall be deemed to be the income of the previous year in which the transfer took place. (1A) Notwithstanding anything contained in sub-section (1), where a person receives at any time during any previous year any money or other assets under an insurance from an insurer on account of injury to, or destruction of, any capital asset, as a result of-
- flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or
- riot or civil disturbance; or
- accidental fire or explosion; or
- action by an enemy or action taken in combating an enemy (whether with or without a declaration of war),
then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax under the top “Capital gains” and shall be deemed to be the income of such person of the previous year in which such money or other asset was received and for the purposes of section 48, value of any money or the fair market price of other assets on the date of such receipt shall be deemed to be the complete value of the consideration received or accruing as a results of the transfer of such capital asset. Explanation.—For the needs of this sub-section, the expression “insurer” shall have the meaning assigned thereto in clause (9) of section 2 of the Insurance Act, 1938 (4 of 1938).
- Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the complete value of the consideration received or accruing as a results of the transfer of the capital asset. (2A) Where a person has had at any time during previous year any beneficial interest in any securities, then, any profits or gains arising from transfer made by the depository or participant of such beneficial interest in respect of securities shall be chargeable to income-tax as the income of the beneficial owner of the previous year in which such transfer happened and shall not be considered income of the depository who is deemed to be the registered owner of securities by virtue of sub-section (1) of section 10 of the Depositories Act, 1996, and for the purposes of-
- section 48; and
- proviso to clause (42A) of section 2, the cost of acquisition and the period of holding of any securities shall be determined on the basis of the first-in-first-out method.
Explanation.—For the purposes of this sub-section, the expressions “beneficial owner”, “depository” and “security” shall have the meanings respectively assigned to them in clauses (a), (e) and (l) of sub-section (1) of section 2 of the Depositories Act, 1996.
- The profits or gains arising from the transfer of a capital asset by an individual to a firm or other association of persons or body of people (not being a company or a co-operative society) in which he is or becomes a partner or member, by way of capital contribution or otherwise, shall be chargeable to tax as his income of the previous year in which such transfer takes place and, for the purposes of section 48, the amount recorded in the books of account of the firm, association or body as the value of the capital asset shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.
- The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of people (not being a corporation or a co-operative society) or otherwise, shall be chargeable to tax because the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes 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.
- Notwithstanding anything contained in sub-section (1), where the financial gain arises from the transfer of a capital asset, being a transfer by way of compulsory acquisition under any law, or a transfer the consideration that decided or approved by the Central Government or the Federal Reserve Bank of India, and therefore the compensation or the consideration for such transfer is enhanced or further enhanced by any court, Tribunal or other authority, the capital gain shall be dealt with in the following manner, namely –
- the financial gain computed with regard to the compensation awarded within the first instance or, because the case could also be , the consideration determined or approved within the first instance by the Central Government or the Federal Reserve Bank of India shall be chargeable as income under the top “Capital gains” of the previous year during which such compensation or part thereof, or such consideration or part thereof, was first received; and
- the quantity by which the compensation or consideration is enhanced or further enhanced by the court, Tribunal or other authority shall be deemed to be income chargeable under the top “Capital gains” of the previous year during which such amount is received by the assessee :Provided that any amount of compensation received in pursuance of an interim order of a court, Tribunal or other authority shall be deemed to be income chargeable under the head “Capital gains” of the previous year in which the final order of such court, Tribunal or other authority is made;
- where in the assessment for any year, the capital gain arising from the transfer of a capital asset is computed by taking the compensation or consideration mentioned in clause (a) or, because the case could also be , enhanced compensation or consideration mentioned in clause (b), and subsequently such compensation or consideration is reduced by any court, Tribunal or other authority, such assessed capital gain of that year shall be recomputed by taking the compensation or consideration as so reduced by such court, Tribunal or other authority to be the complete value of the consideration. Explanation.- For the needs of this sub-section,-1. in reference to the quantity mentioned in clause (b), the value of acquisition and therefore the cost of improvement shall be taken to be nil;2. the provisions of this sub-section shall apply also during a case where the transfer happened before the first day of April, 1988;
3. where by reason of the death of the one that made the transfer, or for the other reason, the improved compensation or consideration is received by the other person, the amount referred to in clause (b) shall be deemed to be the income, chargeable to tax under the top “Capital gains”, of such other person. [(5A) Notwithstanding anything contained in sub-section (1), where the capital gain arises to an assessee, being an individual or a Hindu undivided family, from the transfer of a capital asset, being land or building or both, under a specified agreement, the capital gains shall be chargeable to income-tax as income of the previous year in which the certificate of completion for the entire or a part of the project is issued by the competent authority; and for the needs of section 48, the stamp tax value, on the date of issue of the said certificate, of his share, being land or building or both in the project, as increased by the consideration received in cash, if any, shall be deemed to be the complete value of the consideration received or accruing as a results of the transfer of the capital asset :
Explanation.—For the needs of this sub-section, the expression-
- “competent authority” means the authority empowered to approve the building plan by or under any law for the nonce in force;
- “specified agreement” means a registered agreement during which an individual owning land or building or both, agrees to permit another person to develop a true estate project on such land or building or both, in consideration of a share, being land or building or both in such project, whether with or without payment of part of the consideration in cash;
- “stamp duty value” means the worth adopted or assessed or assessable by any authority of the govt. for the aim of payment of stamp tax in respect of an immovable property being land or building or both.]
- Notwithstanding anything contained in sub-section (1), the difference between the repurchase price of the units mentioned in sub-section (2) of section 80CCB and therefore the capital value of such units shall be deemed to be the capital gains arising to the assessee within the previous year during which such repurchase takes place or the plan referred to in that section is terminated and shall be taxed accordingly.
Conclusion-
Section 45 of the Income Tax Act, 1961 deals with taxability on capital gains arising from the transfer of capital assets in the previous year. According to section 45 of the IT Act, the profit gained from the transfer of a capital asset in the previous year is considered to be a capital gain that is chargeable to income-tax. This income earned from the transfer of a capital asset is deemed to be the income of the year in which transfer took place.
References-