Capital Gain Income Tax
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Today we brought to you “Capital Gains”. So let’s start for learn and understanding.
Meaning and Definition of Capital Gain
According to section 45(1) of the Income-tax Act, the profit arising from the transfer of any capital asset is called capital gain. Capital gain is considered to be the income of the previous year in which the capital asset is transferred. Thus any income will be taxable under the head Capital Gains only if all the following conditions are satisfied- 1. Is a capital asset, 2. That capital asset is transferred, 3. This transfer has taken place in the previous year, 4. 5. Profit generated as a result of transfer, 5. The profit generated above is not exempt from tax. Therefore, to understand the meaning of capital gain, it is necessary to understand both the terms (i) capital asset and (ii) transfer of capital asset. Capital asset As per section 2(14) from the assessment year 2015-16, capital asset means (a) any kind of property held by the taxpayer, whether such property is the business or profession of the assesses. related to or not; (b) any security held by a foreign institutional investor in which investment has been made in accordance with the rules made under the SEBI Act, 1992. Capital assets can be movable, immovable, tangible or intangible. But the following are not considered as capital assets
(i) Stock items, consumable stores and raw materials (other than security held by foreign institutional investors) for the use of the business and profession of the taxpayer.
(ii) any household article such as clothing, furniture, vehicles, television or electrical appliances, etc., for the personal (private) use of the taxpayer or any member of his dependent family. Offenses - Jewellery used for personal use, gold, silver, diamond jewellery, gold, silver or diamond-jewel studded clothes or furniture, utensils of valuable metals etc. and from the assessment year 2008-09 (a) Archaeological collection , (B) Drawings (C) Paintings (D) Any other work of art, etc., also come under the definition of capital asset, that is, all of them are considered as capital assets.
(iii) Rural Agricultural land in India : Provided that from the assessment year 2014-15, the agricultural land will be considered as capital property if it is located in the following area on the basis of aerial route (Aerial) - (a) Local within an area of two kilometers from the border, if the population thereof exceeds ten thousand but does not exceed one lakh (b) within an area of six kilometers from the local limit, if the population thereof exceeds one lakh but does not exceed ten lakhs (c) within an area of eight kilometers from the local limit, if the population there exceeds one million.
(iv) Gold Bond - 6% Gold Bond, 1977 or 7% Gold Bonds, 1980 or National Defense Gold Bonds, 1980 (no longer in circulation.)
(v) Special Bearer Bond, 1991 (no longer in vogue.)
(vi) Gold Deposit Bonds - Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government.
Computation of Capital Gain (Section 48)
The computation of capital gains can be divided into two parts-
Short Term Capital Gain or Loss (LTCG/ STCG )- Gain or loss arising from transfer of short term capital asset is called short term capital gain or loss. In other words, if the capital gain is from short-term capital assets, then the amount of consideration received or receivable on transfer of assets after deducting the following will be the short-term capital gain.
(1) the actual cost of acquiring the asset;
(2) if any improvement or addition has been made to the property, the cost of such improvement or addition; And
(3) Expenses of transfer of property like advertisement, brokerage, auction expenses etc. In short,
The short term capital gain is calculated as follows-
Sales consideration received on transfer of property
Less-1. Cost of acquisition
2. Cost of improvement
3. Transfer expenses
short term capital gains
Short-term capital loss - If the amount of consideration received from the transfer of property is less, then the difference amount will be considered as short-term capital loss. Short term capital loss can be made up by other short term or long term capital loss.
Long Term Capital Gain or Loss (LTCG/LTC) – Gain or loss arising from transfer of long term capital asset will be treated as long term capital gain or loss.
If the capital gain is from a long-term asset, then all the amounts mentioned above will be deducted from the consideration received from the transfer, but not the actual cost of the amounts mentioned in (1) and (2), but their indexed cost. The balance amount will be called long term capital gain.
In brief, as per Section 48 of the Income Tax Act, long-term capital gains are determined as follows:
Sale price or consideration of long-term capital asset
Subtract – Sum of the following items
(a) Transfer expenses
(b) Indexed cost of acquisition
(c) Indexed cost of improvement of the asset
Long term capital gains
Deduct Tax-exempt amount under section 5454854 D, 54EC, 54F, 54G and 54GA
Taxable long-term capital gain or loss
Note - (1) If the amount of consideration received from the transfer of long-term capital asset is less than the sum of the items to be deducted, that is, after subtracting the negative amount, then it is considered as a long-term capital loss. (2) Long-term capital loss can be set off only from long-term capital gains. (3) Capital gains arising from the assets on which depreciation is allowable under the head 'Income from business and profession' will always be short term. Hence their acquisition cost and escalation cost will not be indexed. (4) The 'Cost Escalation Index' notified by the Central Government is used to find the indexed cost.
Indexed cost of acquiring the asset
= cost price or cost x index of the year the asset was transferred / index of the year the asset was acquired
(Index for the year 1981-82 if the property was purchased before 1st April, 1981)
Indexed Cost of Improvement of Property = Improvement Expense x Index of Character of Transfer / Index of Year of Improvement Expense
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