Capital Gains

4.5 Sections 45 to 55A deal with the provisions relating to computation of income from capital gains. Gains arising from the transfer of a capital asset are either short-term or long-term depending upon the period for which the assets giving rise to capital gains were held by the tax payer. A gain is short term if the asset was held for a period upto 36 months. In the case of share of a company, listed security, unit of Unit Trust of India or of any other specified mutual fund, this period is 12 months. All other gains i.e. those arising from assets held for more than this period are called 'Long-term capital gains'.

4.5.1 Capital gain is computed by deducting from the full value of transfer consideration the following:-

1. the cost of acquisition (or the written down value) of and cost of improvement in the asset;
2. the amount of expenditure incurred in connection with such transfer.

The resultant amount in case of short term capital gains is taxable in full at the normal rate of taxation applicable to the tax payer.

4.5.2 In case of the following self-generated assets where there is no cost incurred by the assessee, the law provides for the cost of acquisition to be taken as 'NIL' :-

i. Goodwill or a right to manufacture produce or process any article or thing.

ii. Tenancy rights

iii. Stage carriage permit

iv. Loom hours

4.5.3 In case of slump sale of an undertaking or a division thereof, its net worth is to be taken as cost of acquisition. This cost of acquisition is not to be indexed as stated in para 4.5.4.

4.5.4 There are special provisions for computation of long term capital gains. In such cases, the actual cost of acquisition and the cost of improvement of the asset is adjusted to take account of inflation in terms of the Cost Inflation Index which is notified by the Central Government every year. For those assets which are
acquired prior to 1st April, 1981, the actual cost can be taken to be its fair market value as on 1st April, 1981 which is than adjusted for inflation in the same manner. The notified cost inflation index is as under:-

4.5.5 Long term capital gains computed after taking into consideration the indexed cost of acquisition and/or cost of Irnprovement is taxable for and from the assessment year 1988-89 at the flat rate of 20% irrespective of the residential status of the assessee. Exceptions are made in the case of certain categories of non-residents and NRIs (Refer para 7.3.4 and 11.3). In respect of gains arising from transfer of listed securities or unit tax so computed @.20% will be limited to 10% of capital gain worked out without indexation benefit.

No indexation benefit is available on bonds and deben­tures as also in respect of Global Depository Receipts purchased by a resident employee under ESOP in foreign currency.

4.5.6 In case of non-residents, protection against loss arising from fluctuation in rupee value is provided in computation of capital gains if the share or debenture of an Indian company was acquired by utilising foreign currency. This is done to ensure that the amount of capital gains chargeable to tax is not influenced by the exchange rate fluctuation and represents only the accretion in value. The manner of granting such protection is mentioned in para 7.3.1 of Chapter VII.

4.5.7 Transfer of a capital asset in a scheme of amalgamation or demerger is not regarded as a transfer for the purpose of capital gains when the amalgamated or the resulting company is an Indian company. Further, transfer of a capital asset being shares in Indian companies from one foreign company to another, in a scheme of amalgamation or demerger would not be regarded as a transfer if certain conditions are satisfied (para 7.3.2). Exemption from tax is also provided, subject to fulfillment of certain condition, when assets are transferred as a result of succession of a sole proprietory concern or a firm by a company.

4.5.8 In case the capital gain arising from transfer of an asset is used for acquiring similar assets within a specified period, the whole or the proportionate amount of capital gain is not included in the income depending upon whether the whole of the capital gains is so used or only part of it is used for acquiring a new asset. Such cases are gains from residential house, agricultural land and from transfer of industrial undertaking (For details sections 54, 54B and 54G may be referred to). Gains from any long term asset if used for purchase or construction of residential house where the person has only one residential house is also exempt (Sec. 54F). Similarly gain arising from transfer of any long-term capital asset is exempt-wholly or proportionately as the case may be-if the net consideration in respect of such transfer is wholly or partly invested, within a period of six months, in any of the bonds, debentures, shares of a public company or units of a mutual fund specified by the Board for the purpose of Section 54EA and notified in the official gazette. The assessee has the option to invest only the amount of capital gain in assets specified by the Board for the purpose of Section 54EB in which case the gain will be wholly or proportionately exempt depending upon whether whole or part of the gain is so invested. The new assets cannot be transferred or converted into money within three years (if the net consideration was invested) and within seven years (if the capital gain only was invested). In the event of such transfer or conversion, the gains exempted on investment are brought to tax in the year of transfer or conversion of new assets and Rural Development or by the National Highways Authority of Indian which are redeemable after five years. However gains arising from transfers after 31.3.2000 will be required to be invested only in bonds issues by National Bank for Agriculture.