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Tax Planning

Income From Capital Gains

Now, in this unit, we will learn how income from capital gain is taxed. But before we start, let us have a brief understanding of the concept of Capital gains. 

 

In simple words, a capital gain occurs from selling as an asset at a higher price than the purchase price, or else it is considered as a capital loss. For instance, you bought ten shares of TCS at ₹2500/share, and a year later, you sold those ten shares at ₹3000/share leading to a capital gain of (3000-2500)=500x10= ₹5000. This amount is taxed by the government under the head capital gain from tax.

 

What is the section under which Income from Capital Gains (CG) is charged?

Section 45 of the Act states that profits or gains arising from the transfer of the capital asset shall be taxable under the income from capital gains.  The two important terms to be understood here is “transfer” and “capital asset”

 

Explain the terms Transfer & Capital Asset:

As per the provisions of section 2(14) of the Act, a capital asset means:

  • Any kind of property held by the assessee, whether related with the business or profession or not.
  • Any investment made in securities by the foreign institutional investors as governed by the SEBI guidelines
It excludes from the definition following:
  • Stock-in-trade
  • Personal effect
  • Rural agricultural land in India
  • Specified Gold Bonds
  • Special Bearer bonds, 1991
  • Gold Deposit Bonds
Transfer in relation to capital asset means the following:
  • Sale, exchange or relinquishment of the asset
  • The extinguishment of any rights therein
  • Compulsory acquisition
  • Owner of a capital asset converting it into stock-in-trade. This is referred to as transfer
  • Maturity or redemption of zero Coupon Bond(ZCB)
  • Part-performance of the contract

Explain the classification of Capital Assets:

The capital assets are divided under the following two heads:

 

Long term capital asset:

Any capital asset held for more than 36 months immediately preceding the date of transfer will be regarded as a capital asset.

 

However, in respect of certain assets the holding period differs:

  • In case of listed shares, units of equity oriented mutual funds, listed securities, units of UTI and ZCB, the period of holding (POH) will be 12 months
  • For unlisted shares, POH will be 24 months
  • For immovable property (w.e.f. 2018-19) will be 24 months

Short term capital asset:

Any capital asset other than land, building, listed & unlisted shares, Equity & Debt mutual funds  held for a period less than or equal to 36 months shall be treated as short term capital asset.

 

Show the computation of long term capital gain:

The process of computation of capital gain is as mentioned below:

 

Show the process of computation of short term capital gain:

 

 

What is indexation and its purpose?

Indexation is the benefit given in the case of long-term assets. While indexing, the cost of acquisition / cost of improvement of a capital asset are adjusted against the inflationary fluctuations of the asset.

 

How is indexation computed?

Indexation is done for cost of acquisition of the asset and for the cost of improvement:

 

Indexed cost of acquisition can be calculated as below:

 

Cost of acquisition (COA) * Cost inflation index (CII) for the year of transfer of the capital asset 
                                                                         CII of the year of acquisition

 

Indexed cost of improvement  can be calculated as below:

 

Cost of improvement (COI) * Cost inflation index (CII) for the year of transfer of the capital asset 
                                                                           CII of the year of acquisition

 

When is the benefit of indexation not available?

The benefit of capital gain is available only in case of long term capital asset, where the holding period is more than 36 months and not in case of short term capital gain.  

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