CAPITAL GAINS 4.

UNIT – 4 : CAPITAL GAINS

Proforma for computation of income under the head “Capital Gains”

Particulars Amt Amt

(`) (`)
Full value of consideration received or accruing as a result xxx
In case of a Short-term capital asset

of transfer
Less: Expenditure incurred wholly and exclusively in xxx
connection with such transfer (for e.g., brokerage on sale)

Net Sale Consideration xxx

Less: Cost of acquisition (COA) xxx
Cost of improvement (COI) xxx xxx

Short-term capital gain (STCG) xxx

Less: Exemption under sections 54B/54D xxx
Short-term capital gain chargeable to tax xxx
Full value of consideration received or accruing as a xxx
result of transfer
In case of a Long-

Less: Expenditure incurred wholly and exclusively in xxx

connection with such transfer (for e.g., brokerage on sale)

Net Sale Consideration xxx

term

Less: Indexed cost of acquisition (ICOA) xxx

CII for the year in which the asset is
transferred
Cost of CII for the year in which the asset was
×
acquisition first held by the assessee or P.Y. 2001-02,
whichever is later

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Accountants of India
 4.2 INCOME TAX LAW

Less: Indexed cost of improvement (ICOI) xxx xxx

CII for the year in which the asset is
[Grab your reader’s attention
with Cost
a great transferred
of quote from the xxx
×
document or
improvement use this space to
CII for the year in which the
emphasize a key point.improvement
To place took place
this text boxcapital
Long-term anywhere on the
gains (LTCG) xxx
page, just drag it.]
Less: Exemption under sections 54/54B/54D/54EC/54F xxx
[Refer Table at pages 4.441 – 4.443]
Long-term capital gains chargeable to tax xxx

Note: [Benefit of indexation will, however, not be available in

respect of long-term capital gains chargeable to tax under
section 112A and long-term capital gains from transfer of
bonds or debentures (other than capital indexed bonds issued
by the Government and sovereign gold bonds issued by RBI)]

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Accountants of India
 CAPITAL GAINS 4.3

Rate of tax on Short-term Capital Gains

Section Rate of tax

• Short-term capital gains arising on transfer of listed equity
111A shares, units of equity oriented fund and unit of business
trust1 - 15%, if STT has been paid on such sale.

Note - Short-term capital gains arising on transfer of other Short-term

Capital Assets would be chargeable at normal rates of tax.

Rates of tax on Long-term Capital Gains

Section Rate of tax

112A • Tax @10% on long-term capital gains exceeding ` 1,00,000

on the transfer of following long-term capital assets -
- listed equity shares,
- units of equity oriented fund (STT paid)

112 Long-term capital Rate of tax

asset
Unlisted securities, Non-corporate non-resident/foreign
or shares of a company - 10%, without the benefit of
closely held indexation and currency fluctuation
company Other Assessees - 20%, with indexation
benefit
Listed securities - 10%, without the benefit of indexation or
(other than a unit) - 20%, availing the benefit of indexation
or a zero-coupon whichever is more beneficial to the assessee
bond
Other Assets - 20%

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re© The Institute of Chartered
Accountants of India
a
 4.4 INCOME TAX LAW

Individual – STCG(shares) = 4,20,000

Tax = 420000-250000 = 170000 * 0.15 = 25,500

Old regime - upto 2,50,000 – Nil(BEL)

Upto 5,00,000 – 5%

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Accountants of India
 CAPITAL GAINS 4.5

Period of holding [Section 2(42A)]

STCA, if held for • Security (other than unit) listed in a recognized stock
≤ 12 months exchange
LTCA, if held for • Unit of equity oriented fund/unit of UTI
> 12 months • Zero Coupon bond

STCA, if held for

≤ 24 months • Unlisted shares
LTCA, if held for • Land or building or both
> 24 months
STCA, if held for
• Unit of debt oriented fund
≤ 36 months
• Unlisted securities other than shares
LTCA, if held for
• Other capital assets
> 36 months

4.1 INTRODUCTION
In this unit on capital gains, we begin our discussion with the definition of “capital
asset” and “transfer”. Thereafter, we will proceed to discuss the various
circumstances under which capital gains tax is levied. There are certain
transactions which are not to be regarded as transfer for the purposes of capital
gains. These transactions have also been discussed in this chapter. For computing
long-term capital gains, application of cost inflation index is necessary. Again,
there is a separate method of computation of capital gains in respect of
depreciable assets. Also, there are exemptions in cases where capital gains are
invested in specified assets. All these aspects are being discussed in this unit.
Section 45 provides that any profits or gains arising from the transfer of a capital
asset effected in the previous year will be chargeable to income-tax under the
head ‘Capital Gains’. Such capital gains will be deemed to be the income of the
previous year in which the transfer took place. In this charging section, two terms
are important. One is “capital asset” and the other is “transfer”.

4.2 CAPITAL ASSET

Definition: According to section 2(14), a capital asset means –
(a) property of any kind held by an assessee, whether or not connected with
his business or profession;

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Accountants of India
 4.6 INCOME TAX LAW

(b) any securities held by a Foreign Institutional Investor which has

invested insuch securities in accordance with the SEBI regulations.
However it doesn’t include -
(i) Stock-in trade: 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;

(ii) Personal effects: 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.
EXCLUSIONS:
(a) jewellery;
(b) archaeological collections;
(c) drawings;
(d) paintings;
(e) sculptures; or
(f) any work of art.
In case of a resident
individual or a Hindu
Undivided Family (HUF),
the long-term capital gain
(iii) taxable
Rural u/s
agricultural land
112 or 112A or in India i.e., agricultural land in India which is not
situated in any
short-term specified
capital gainarea.
taxable u/s 111A shall be
As per the definition, only rural agricultural lands in India are excluded from
reduced
the purview by of the the
term ‘capital asset’. Hence urban agricultural lands
unexhausted basic
constitute capital assets.
exemption limit and the
balance shall be subject to
tax.

No deduction under
Chapter VI-A can be
claimed in respect of such
long- term capital gain
chargeable to tax u/s 112
or u/s 112A or short-term
capital gain chargeable to
© Thetax u/s 111A.
Institute of Chartered
Accountants of India
Rebate u/s 87A is not
 CAPITAL GAINS 4.7

(iv) Specified Gold Bonds: 6½% Gold Bonds, 1977, or 7% Gold Bonds, 1980, or
National Defence Gold Bonds, 1980, issued by the Central Government;
(v) Special Bearer Bonds, 1991 issued by the Central Government;
(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or
deposit certificates issued under the Gold Monetisation Scheme, 2015 and
Gold Monetisation Scheme, 2018 notified by the Central Government.

Definition of
Jewellery- Jewellery is
a capital asset and the
profits or gains arising
from the transfer of
jewellery held for
personal use are
chargeable to tax
under the head “capital
gains”. For this
purpose, the
expression ‘jewellery’
includes the following:
(i) Ornaments made
of gold, silver,
platinum or any
other precious
metal or any alloy
containing one or
more of such
precious metals,
whether or not
containing any
precious or
semi-precious
stones and
whether or not
worked or sewn
into any wearing
apparel;
(ii) Precious or semi-
preciousof Chartered
© The Institute stones,
whether
Accountants or not
of India
set in any
4.348

CAPITAL ASSET
[Section 2(14)]

LAW
TAX
ME
INCO
Property of any kind held by an Any securities held by a FII which has
assessee, whether or not connected invested in such securities as per SEBI
with his business or profession Regulations

EXCLUSIONS

whatsoever.
other
or control or any
of management
including rights
Indian company,
relation to an
rights in or in
included
have
be deemed to
includes and shall
‘ Property’
Note
Stock-in-trade, Personal Effects Rural 6½ Gold Bonds, Gold Deposit Bonds
consumable [i.e., movable Agricultural 1977, 7% Gold issued under Gold

always
stores, raw property including Land Bonds, 1980, Deposit Scheme, 1999/

rights

any
materials held wearing apparel and National Defence Deposit Certificates

–
for business or furniture held for Gold Bonds, 1980, issued under Gold
profession personal use by the Special Bearer Monetisation Scheme,
assessee or his Bonds, 1991 issued 2015 /2018 notified by
family] by the Central Govt. the Central Govt.

EXCLUSIONS FROM PERSONAL EFFECTS

Jewellery Archaeological Drawings Paintings or Any work of art

collections Sculptures

These assets are hence, capital assets u/s 2(14)

 CAPITAL GAINS 4.9

4.4 TRANSFER: WHAT IT MEANS? [SECTION

2(47)]
The Act contains an inclusive definition of the term ‘transfer’. Accordingly, transfer
in relation to a capital asset includes the following types of transactions—
(i) the sale, exchange or relinquishment of the asset; or
(ii) the extinguishment of any rights therein; or
(iii) the compulsory acquisition thereof under any law; or
(iv) the owner of a capital asset may convert the same into the stock-in-trade of
a business carried on by him. Such conversion is treated as transfer; or
(v) the maturity or redemption of a zero coupon bond; or
(vi) Part-performance of the contract: Sometimes, possession of an immovable
property is given in consideration of part-performance of a contract.

© The Institute of Chartered

Accountants of India
 4.10 INCOME TAX LAW

© The Institute of Chartered

Accountants of India

(vii) Lastly, there are certain types of transactions which have the effect of
transferring or enabling the enjoyment of an immovable property.

Example 2:
A enters into an
agreement for the sale
of his house. The
purchaser gives the
4.5 SCOPE AND YEAR OF CHARGEABILITY
entire sale
[SECTION
consideration to A. A 45]
hands over complete
(i) General Provision [Section 45(1)]
rights of posses- sion to
Any profits or gains since
the purchaser arisinghefrom the transfer of a capital asset effected in the
previous
has realised the than
year (other entireexemptions covered under this chapter) shall be
chargeable
sale to Income-tax under this head in the previous year in which the
consideration.
transfer tookIncome-tax
Under place. Act,
Year the above transaction
of chargeability- is
Capital gains are chargeable as the income of the
considered
previous year in aswhich
transfer.
the sale or transfer takes place. In other words, for
determining the year of chargeability, the relevant date of transfer is not the date
of the agreement to sell, but the actual date of sale i.e., the date on which the
effect of transfer of title to the property as contemplated by the parties has taken
place4.
However, as already noted, Income-tax Act has recognised certain transactions as
transfer in spite of the fact that conveyance deed might not have been executed
and registered. Power of Attorney sales as explained above or co-operative
society transactions for acquisition of house are examples in this regard.
(ii) Insurance Receipts [Section 45(1A)]
Where any person receives any money or other assets under any insurance from an
insurer on account of damage to or destruction of any capital asset, as a result of
- flood, typhoon, hurricane, cyclone, earthquake or other convulsion of
nature,
- riot or civil disturbance,
- accidental fire or explosion or
- because of action by an enemy or action taken in combating an enemy
© The Institute of Chartered
Accountants of India
 CAPITAL GAINS 4.11

(whether with or without 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 head “Capital gains” and shall be deemed tobe the income of
the such person for the previous year in which such moneyor other
asset was received.
Full value of consideration: In order to compute capital gains, the value of any
money or the fair market value of other assets on the date of such receipt shall be
deemed to be the full value of the consideration received or accruing as a result
of the transfer of such capital assets.
(iii) Conversion or treatment of a capital asset as stock-in-trade [Section 45(2)]
A person who is the owner of a capital asset may convert the same or treat it as
stock-in-trade of the business carried on by him. As noted above, the above
transaction is a transfer.
As per section 45(2), notwithstanding anything contained in section 45(1), being
the charging section, the profits or gains arising from the above conversion or
treatment will 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.
Full value of consideration: In order to compute the capital gains, the fair
market value of the asset on the date of such conversion or treatment shall be
deemed to be the full value of the consideration received as a result of the
transfer of the capital asset.

Components
asset into stock-in- trade

Conve
rsion
of
capital
© The Institute of Chartered
Accountants of India
 4.12 INCOME TAX LAW
of income arising ess income
M
on sale of stock-
a
in-trade FMV on the date of conversion
n (-) Cost/Indexed Cost of
n acquisition/ improvement
e
Capital r
Indexation benefit would be
Gains considered in relation to the
o year of conversion of capital
f asset into stock-in-trade

C
Sale price of stock-in-trade (-)
Business o FMV on the date of conversion
Income m
p
u
t
a
t
i
o
n

o
f

c
a
p
i
t
a
l
g
a
i
n
s

a
n
d

b
u
s
i
n
© The Institute of Chartered
Accountants of India
 CAPITAL GAINS 4.13

Note – Both Capital Gains and Business income are chargeable to tax in the
year in which stock-in-trade is sold or otherwise transferred.

(iv) Compensation on compulsory acquisition [Section 45(5)]

Sometimes, a building or some other capital asset belonging to a person is taken over
by the Central Government by way of compulsory acquisition. In that case, the
consideration for the transfer is determined by the Central Government of RBI. When
the Central Government pays the above compensation, capital gains may arise. Such
capital gains are chargeable as income of the previous year in which such
compensation is received.

© The Institute of Chartered

Accountants of India
 4.14 INCOME TAX LAW

4.8TRANSACTIONS NOT REGARDED AS

TRANSFER [SECTION 47]
Section 47 specifies certain transactions which will not be regarded as transfer for
the purpose of capital gains tax:
(1) Total or partial partition of a HUF: Any distribution of capital assets on
the total or partial partition of a HUF [Section 47(i)];
(2) A gift or will or an irrevocable trust: Any transfer of a capital asset under
a gift or will or an irrevocable trust;
However, this clause shall not include transfer under a gift or an irrevocable
trust of a capital asset being shares, debentures or warrants allotted by a
company directly or indirectly to its employees under the Employees' Stock
Option Plan or Scheme offered to its employees in accordance with the
guidelines issued in this behalf by the Central Government [Section 47(iii)].
(3) Transfer of capital asset by holding company to its wholly owned
Indian subsidiary company: Any transfer of capital asset by a company to
its subsidiary company [Section 47(iv)]

© The Institute of Chartered

Accountants of India
 CAPITAL GAINS 4.15

Conditions:
(i) The parent company or its nominee must hold the whole of the shares
of the subsidiary company;
(ii) The subsidiary company must be an Indian company.
(4) Transfer of capital asset by a subsidiary company to its 100% holding
company, being an Indian company: Any transfer of capital asset by a
subsidiary company to the holding company [Section 47(v)]
Conditions:
(i) The whole of shares of the subsidiary company must be held by the
holding company;
(ii) The holding company must be an Indian company.
Exception - The exemption mentioned in 3 or 4 above will not apply if a
capital asset is transferred as stock-in-trade.
(5) Transfer of capital asset by amalgamating company to amalgamated
Indian company, in a scheme of amalgamation: Any transfer, in a scheme
of amalgamation, of a capital asset by the amalgamating company to the
amalgamated company if the amalgamated company is an Indian company
[Section 47(vi)]
(6) Transfer of capital asset by the demerged company to the resulting
Indian company, in a scheme of demerger: Any transfer in a demerger, of
a capital asset by the demerged company to the resulting company, if the
resulting company is an Indian company [Section 47(vib)].
(7) Transfer or issue of shares by a resulting company, in a scheme of
demerger: Any transfer or issue of shares by the resulting company, in a
scheme of demerger to the shareholders of the demerged company, if the
transfer is made in consideration of the demerger of the undertaking
[Section 47(vid)].
(8) Transfer of shares by a shareholder in a scheme of amalgamation: Any
transfer by a shareholder, in a scheme of amalgamation, of shares held by
him in the amalgamating company [Section 47(vii)].

© The Institute of Chartered

Accountants of India
 4.16 INCOME TAX LAW

Conditions:
(i) The transfer is made in consideration of the allotment to him of any
share/s in the amalgamated company, except where the shareholder
itself is the amalgamated company;
(ii) The amalgamated company is an Indian company.

(9) Transfer of specified capital asset to the Government or university etc.:

Any transfer of any of the following capital asset to the Government or to
the University or the National Museum, National Art Gallery, National
Archives or any other public museum or institution notified by the Central
Government to be of national importance or to be of renown throughout
any State
(i) work of art
(ii) archaeological, scientific or art collection
(iii) book
(iv) manuscript
(v) drawing
(vi) painting
(vii) photograph or
(viii) print [Section 47(ix)].
(10) Transfer on conversion of bonds or debentures etc. into shares or
debentures: Any transfer by way of conversion of bonds or debentures,
debenture stock or deposit certificates in any form, of a company into shares
or debentures of that company [Section 47(x)].
(11) Conversion of preference shares into equity shares: Any transfer by way
of conversion of preference shares of a company into equity shares of that
company [Section 47(xb)].

4.10 MODE OF COMPUTATION OF CAPITAL

GAINS [SECTION 48]
(i) Computation of capital gains: The income chargeable under the head
‘capital gains’ shall be computed by deducting the following items from the
© The Institute of Chartered
Accountants of India
 CAPITAL GAINS 4.17
full value of the consideration received or accruing as a result of the transfer
of the capital asset:
(1) Expenditure incurred wholly and exclusively in connection with such
transfer.
(2) The cost of acquisition and cost of any improvement thereto.
(ii) No deduction in respect of STT: No deduction shall, however, be allowed
in computing the income chargeable under the head “Capital Gains” in
respect of any amount paid on account of securities transaction tax (STT)
under Chapter VII of the Finance (No.2) Act, 2004.
(iii) Cost inflation index: Under section 48, for computation of long-term
capital gains, the cost of acquisition and cost of improvement will be
increased by applying the cost inflation index (CII). Once the cost inflation
index is applied to the cost of acquisition and cost of improvement, it
becomes indexed cost of acquisition and indexed cost of improvement.
This means an amount which bears to the cost of acquisition, the same
proportion as CII for the year in which the asset is transferred bears to the
CII for the first year in which the asset was held by the assessee or for the
year beginning on 1st April, 2001, whichever is later.
Similarly, indexed cost of any improvement means an amount which bears
to the cost of improvement, the same proportion as CII for the year in which
the asset is transferred bears to the CII for the year in which the
improvement to the asset took place.
Example 3:
A person may become a
member of a co-
operative society,
company or other
association of persons
which may be building
houses/flats. When he
pays an agreed
amount, the society etc.
hands over possession
of the house to the
person concerned. No
conveyance is
registered. For the
purpose of income-tax,
© The the above
Institute transaction is
of Chartered
a transfer.
Accountants of India
 4.18 INCOME TAX LAW

The cost inflation indices for the financial years so far have been
notified as under:
Financial Year Cost Inflation Index
2001-02 100
2002-03 105
2003-04 109
2004-05 113
2005-06 117
2006-07 122
2007-08 129
2008-09 137
2009-10 148
2010-11 167
2011-12 184
2012-13 200
2013-14 220
2014-15 240
2015-16 254
2016-17 264
2017-18 272
2018-19 280
2019-20 289
2020-21 301
2021-22 317
2022-23 331

Land – 2005– COA – 10 L

(117)
Sold – 2015 – FVC – 40 L
(254)
LTCG –
Full value of cons - 40 L
(-) Indexed COA - 21.70L
(10x254/117)
LTCG = 18.30L
Tax 18.30 x 20% = 3.66 L
© The Institute of Chartered
Accountants of India
 CAPITAL GAINS 4.19

© The Institute of Chartered

Accountants of India
 4.20 INCOME TAX LAW

4.11 ASCERTAINMENT OF COST IN SPECIFIED

CIRCUMSTANCES [SECTION 49]
A person becomes the owner of a capital asset not only by purchase but also by
several other methods. Section 49 gives guidelines as to how to compute the cost
under different circumstances.
(1) Cost to previous owner deemed as cost of acquisition of asset: In the
following cases, the cost of acquisition of the asset shall be deemed to be
cost for which the previous owner of the property acquired it. To this cost,
the cost of improvement to the asset incurred by the previous owner or the
assessee must be added:
Where the capital asset became the property of the assessee:
(i) on any distribution of assets on the total or partition of a HUF;
(ii) under a gift or will;
(iii) by succession, inheritance or devolution;
(iv) on any distribution of assets on the liquidation of a company;
(v) under a transfer to revocable or an irrevocable trust;
(vi) under any transfer of capital asset by a holding company to its wholly
owned subsidiary Indian company or by a subsidiary company to its
100% holding Indian company, referred to in section 47(iv) and 47(v)
respectively;

ILLUSTRATION
Mr. Cee purchased a residential house on July 20, 2020 for ` 10,00,000 and made
some additions to the house incurring ` 2,00,000 in August 2020. He sold the house
property in April 2022 for ` 20,00,000. Out of the sale proceeds, he spent
` 5,00,000 to purchase another house property in September 2022.
What is the amount of capital gains taxable in the hands of Mr. Cee for the A.Y.2023-24?
SOLUTION
The house is sold before 24 months from the date of purchase. Hence, the house
is a short-term capital asset and no benefit of indexation would be available.

Particulars `
© The Institute of Chartered
Accountants of India
 CAPITAL GAINS 4.21
Sale consideration 20,00,000
Less: Cost of acquisition 10,00,000
Cost of improvement 2,00,000
Short-term capital gains 8,00,000

ILLUSTRATION 12
Long term capital gain of ` 75 lakh arising from transfer of building on
1.5.2022 will be exempt from tax if such capital gain is invested in the bonds
redeemable after five years, issued by NHAI under section 54EC. Examine with
reasons whether the given statement is true or false having regard to the
provisions of the Income-tax Act, 1961.
SOLUTION
False: The exemption under section 54EC has been restricted, by limiting
the maximum investment in long term specified assets (i.e. bonds of NHAI
or RECL or any other bond notified by Central Government in this behalf,
redeemable after 5 years) to ` 50 lakh, whether such investment is made
during the relevant previous year or the subsequent previous year, or both.
Therefore, in this case, the exemption under section 54EC can be availed
only to the extent of ` 50 lakh, provided the investment is made before
1.11.2022 (i.e., within six months from the date of transfer).
Capital Gains Account Scheme (CGAS)
Under sections 54, 54B, 54D and 54F, capital gains is exempt to the extent
of investment of such gains/ net consideration (in the case of section 54F) in
specified assets within the specified time. If such investment is not made
before the date of filing of return of income, then the capital gain or net
consideration (in case of exemption under section 54F) has to be deposited
under the CGAS.
Time limit
Such deposit in CGAS should be made before filing the return of income or
on or before the due date of filing the return of income, whichever is earlier.
Proof of such deposit should be attached with the return. The deposit can
be withdrawn for utilization for the specified purposes in accordance with
the scheme.
Consequences if the amount deposited in CGAS is not utilized within
the stipulated time of 2 years / 3 years
If the amount deposited is not utilized for the specified purpose within the
© The Institute of Chartered
Accountants of India
 4.22 INCOME TAX LAW
stipulated period, then the unutilized amount shall be charged as capital
gain of the previous year in which the specified period expires. In the case
of section 54F, proportionate amount will be taxable.

4.20 TAX ON SHORT TERM CAPITAL GAINS IN

RESPECT OF EQUITY SHARES/ UNITS OF AN EQUITY
ORIENTED FUND [SECTION 111A]
(i) Concessional rate of tax in respect of STCG on transfer of certain assets: This
section provides for a concessional rate of tax (i.e. 15%) on the short-term capital
gains on transfer of -
(1) an equity share in a company; or
(2) a unit of a business trust; or11
(3) a unit of an equity oriented fund
(ii) Conditions: The conditions for availing the benefit of this concessional rate are –
(1) the transaction of sale of such equity share or unit should be entered
into on or after 1.10.2004, being the date on which Chapter VII of the
Finance (No. 2) Act, 2004 came into force; and
(2) such transaction should be chargeable to securities transaction tax
under the said Chapter.
However, short-term capital gains arising from transactions undertaken in
foreign currency on a recognized stock exchange located in an International
Financial Services Centre (IFSC) would be taxable at a concessional rate of
15% even though STT is not leviable in respect of such transaction.
(iii) Adjustment of Unexhausted Basic Exemption Limit: In the case of
resident individuals or HUF, if the basic exemption is not fully exhausted by
any other income, then, such short-term capital gain will be reduced by the
unexhausted basic exemption limit and only the balance would be taxed at
15%. However, the benefit of availing the basic exemption limit is not
available in the case of non-residents.
(iv) No deduction under Chapter VI-A against STCG taxable under section
111A: Deductions under Chapter VI-A cannot be availed in respect of such
short-term capital gains on equity shares of a company or units of an equity
oriented mutual fund or unit of a business trust included in the total income
of the assessee.

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Accountants of India
 CAPITAL GAINS 4.23

4.21 TAX ON LONG TERM CAPITAL GAINS

[SECTION 112]
(i) Concessional rate of tax: Where the total income of an assessee includes
long-term capital gains, tax is payable by the assessee @20% on such long-
term capital gains. The treatment of long-term capital gains in the hands of
different types of assessees are as follows -
(1) Resident individual or Hindu undivided family: Income-tax payable at
normal rates on total income as reduced by long-term capital gains plus
20% on such long-term capital gains.
However, where the total income as reduced by such long-term capital
gains is below the maximum amount which is not chargeable to income-
tax then such long-term capital gains shall be reduced by the amount by
which the total income as so reduced falls short of the maximum amount
which is not chargeable to income-tax and the tax on the balance of such
long-term capital gains will be calculated @20%.
(2) Domestic Company: Long-term capital gains will be charged @20%.
(3) Non-corporate non-resident or foreign company:
(i) Long-term capital gains arising from the transfer of a capital asset,
being unlisted securities, or shares of a company not being a
company in which public are substantially interested, would be
calculated at the rate of 10% on the capital gains in respect of such
asset without giving effect to the indexation provision under
second proviso to section 48 and currency fluctuation under first
proviso to section 48.
(ii) In respect of other long-term capital gains, the applicable rate of
tax would be 20%.
(4) Residents (other than those included in (1) above): Long-term capital
gains will be charged @20%.
(ii) Lower rate of tax for transfer of listed securities and zero coupon bonds:
Where the tax payable in respect of any income arising from the transfer of a
listed security (other than a unit) or a zero coupon bond, being a long-term
capital asset, exceeds 10% of the amount of capital gains before indexation,
then such excess shall be ignored while computing the tax payable by the
assessee.

© The Institute of Chartered

Accountants of India
 4.24 INCOME TAX LAW

Consequently, long term capital gains on transfer of units and unlisted

securities are not eligible for concessional rate of tax@10% (without indexation
benefit). Therefore, the long-term capital gains, in such cases, is taxable@20%
(with indexation benefit).
However, in case of non-corporate non-residents and foreign companies, long
term capital gains arising from transfer of a capital asset, being unlisted
securities or shares in a company in which public are not substantially interested
are eligible for a concessional rate of tax@10% (without indexation benefit).
(iii) No Chapter VI-A deduction against LTCG: The provisions of section 112 make
it clear that the deductions under Chapter VIA cannot be availed in respect of the
long-term capital gains included in the total income of the assessee.
Tax on long-term capital gains [Section 112]
Person Rate Particulars
of
tax
1. Resident persons, In case of transfer
other than companies of listed securities
Resident Individuals 20% Unexhausted basic (other than units)
and HUF exemption limit can be and Zero Coupon
exhausted against LTCG Bonds, LTCG
taxable u/s 112 would be taxable
Resident AOPs and 20% Unexhausted basic at the lower of
BOIs exemption limit cannot the following
be adjusted against rates –
LTCG taxable u/s 112
Resident Firms and LLPs 20% (1) 10% without
2. Domestic companies 20% indexation
3. Non-corporate non- 20% Capital assets, other benefit; and
(2) 20% with
residents and foreign than unlisted securities
companies or shares of closely held indexation
benefit.
companies
10% Unlisted securities or
shares of closely held
companies (without
benefit of indexation or
foreign currency
fluctuation)

© The Institute of Chartered

Accountants of India
 CAPITAL GAINS 4.25

4.22 TAX ON LONG TERM CAPITAL GAINS ON

CERTAIN ASSETS [SECTION 112A]
(i) Concessional rate of tax in respect of LTCG on transfer of certain assets:
In order to minimize economic distortions and curb erosion of tax base,
section 112A provides that notwithstanding anything contained in section
112, a concessional rate of tax @10% will be leviable on the long-term
capital gains exceeding ` 1,00,000 on transfer of –
(a) an equity share in a company; or
(b) a unit of a business trust; or
(c) a unit of an equity oriented fund
(ii) Conditions: The conditions for availing the benefit of this concessional rate are –
(a) In case of equity share in a company, STT has been paid on acquisition
and transfer of such capital asset
(b) In case of unit of an equity oriented fund or unit of business trust, STT
has been paid on transfer of such capital asset.
However, the Central Government may, by notification in the Official Gazette,
specify the nature of acquisition of equity share in a company on which the
condition of payment of STT on acquisition would not be applicable.
Further, long-term capital gains arising from transaction undertaken on a
recognized stock exchange located in an International Financial Service
Centre (IFSC) would be taxable at a concessional rate of 10%, where the
consideration for transfer is received or receivable in foreign currency, even
though STT is not leviable in respect of such transaction.
(iii) Adjustment of Unexhausted Basic Exemption Limit: In the case of
resident individuals or HUF, if the basic exemption is not fully exhausted by
any other income, then such long-term capital gain exceeding ` 1 lakh will
be reduced by the unexhausted basic exemption limit and only the balance
would be taxed at 10%.
However, the benefit of adjustment of unexhausted basic exemption limit is
not available in the case of non-residents.
(iv) No deduction under Chapter VI-A against LTCG taxable under section
112A: Deductions under Chapter VI-A cannot be availed in respect of such
long-term capital gains on equity shares of a company or units of an equity

© The Institute of Chartered

Accountants of India
 4.26 INCOME TAX LAW
4.441

oriented mutual fund or unit of a business trust included in the total incomeof the assessee.
(v) No benefit of rebate under section 87A against LTCG taxable under section 112A: Rebate under section 87A is
not available in respect of tax payable @10% on LTCG under section 112A.

Exemption of Capital Gains [Sections 54 to 54F]

S. Particulars Section 54 Section 54B Section 54D Section 54EC Section 54F
No.
1 Eligible Individual/ HUF Individual/ HUF Any assessee Any assessee Individual/ HUF
Assessee
2 Asset Residential Urban Land & building Land or Any LTCA other
transferred House (LTCA) Agricultural forming part of an building or than
Land industrial undertaking both (LTCA) Residential
House.
Land & building have -

previous year.
to
previous year
preceding
immediately
(Urban) for the
Price
the Consumer
average rise in
to 75% of
having regard
Government
the
be notified by
index as may
means
previous year
relation to a
Index”
Inflation
“ Cost
3 Other Income from Land should be Assessee
Conditions such house used for been used for business should not own
should be agricultural of undertaking for at more than one

Central
chargeable purposes by least 2 years residential

Index
such

such
immediately preceding
under the head assessee or his house on the

in
the date of transfer.
“Income from parents or HUF date of transfer.
The transfer should be
house property” for 2 years He should not
by way of compulsory
immediately acquisition of the purchase within
preceding the 2 years or

S
GAIN
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CAPI
industrial undertaking
date of transfer construct within
3 years after the
date of transfer,
another
residential
house.
INCOME TAX LAW

4 Qualifying One Residential Land for being Land or Building Bonds of NHAI One Residential
asset i.e., asset House situated used for or RECL or any House situated

India
of
ntants
Accou
ered
Chart
te of
Institu
© The
in which in India/Two agricultural other bond in India
capital gains residential purpose notified by C.G.
has to be houses in India, (Urban/ Rural) (Redeemable
invested at the option of after 5 years)
the assessee,

4.442
where capital
gains does not
exceed ` 2 crore
5 Time limit for Purchase within Purchase within Purchase/ construct Purchase within Purchase within
purchase/ 1 year before or a period of 2 within 3 years after a period of 6 1 year before
construction 2 years after the years after the the date of transfer, months after or 2 years after
date of transfer date of transfer for shifting or re- the date of the date of
(or) establishing the transfer transfer
existing undertaking (or)
construct within
or setting up a new Construct
3 years after the
industrial undertaking. within 3 years
date of transfer
after the date
of transfer
6 Amount of Cost of new Cost of new Cost of new asset or Capital Gain or Cost of new
Exemption Residential Agricultural Land Capital Gain, amount invested Residential
House or two or Capital Gain, whichever is lower. in specified House ≥ Net
bonds, sale
houses, as the whichever is
whichever is consideration
case may be or lower, is exempt
lower. Maximum
4.443

Capital Gain, permissible of original

whichever is investment out asset, entire
lower, is exempt of capital gains Capital gain is
arising in any
exempt.
financial year is
CG = 100 lacs Cost of new
` 50 lakhs,
N house = 80 Residential
whether such
lac investment is House < Net
Exemption 54 = made in the sale
80 lacs current FY or consideration
subsequent FY of original
or both. asset,
proportionate
capital gain is
exempt.

India
Accountants of
Chartered
© The Institute of
FVC = 100 FVC jwellery = 100 lac
ICOA = 50
New house = 80 lac
LTCG = 50 Lac
Exemption u/s 54 F = Proportionate 80%
50 x 80% = 40L
LTCG taxable = 10 L

S
GAIN
TAL
CAPI
© The Institute of Chartered
Accountants of India INCOME TAX LAW

TEST YOUR KNOWLEDGE

Question 1
Mr. Mithun purchased 100 equity shares of M/s Goodmoney Co. Ltd. on 01-04-2006
at rate of ` 1,000 per share in public issue of the company by paying securities
transaction tax.
Company allotted bonus shares in the ratio of 1:1 on 01.12.2021. He has also
received dividend of ` 10 per share on 01.05.2022.
He has sold all the shares on 01.10.2022 at the rate of ` 4,000 per share through a
recognized stock exchange and paid brokerage of 1% and securities transaction tax
of 0.02% to celebrate his 75th birthday.
Compute his total income and tax liability for Assessment Year 2023-24, assuming
that he is having no income other than given above. Fair market value of shares of
M/s Goodmoney Co. Ltd. on 31.1.2018 is ` 2,000.
Answer
Computation of total income and tax liability of Mr. Mithun for A.Y. 2023-24
Particulars `
Long term capital gains on sale of original shares
Gross sale consideration (100 x ` 4,000) 4,00,000
Less: Brokerage@1% 4,000
Net sale consideration 3,96,000
Less: Cost of acquisition (100 x ` 2,000) (Refer Note 2) 2,00,000
Long term capital gains 1,96,000
Short term capital gains on sale of bonus shares
Gross sale consideration (100 x ` 4,000) 4,00,000
Less: Brokerage@1% 4,000
Net sale consideration 3,96,000
Less: Cost of acquisition of bonus shares NIL
Short term capital gains 3,96,000
Income from other sources
Dividend received from M/s Goodmoney Co. Ltd. is taxable in the 2,000
hands of shareholders [200 shares x 10 per share]
Total Income 5,94,000

© The Institute of Chartered

Accountants of India
 CAPITAL GAINS 4.445

Tax Liability
Tax on dividend Nil
15% of (` 3,96,000 - ` 2,98,000, being unexhausted basic 14,700
exemption limit)
10% of (` 1,96,000 - ` 1,00,000) 9,600
24,300
Add: Health and education cess @4% 972
Tax payable 25,272
Tax payable (rounded off) 25,270

Notes:
(1) Long-term capital gains exceeding ` 1 lakh on sale of original shares
through a recognized stock exchange (STT paid at the time of acquisition
and sale) is taxable under section 112A at a concessional rate of 10%,
without indexation benefit.
(2) Cost of acquisition of such equity shares acquired before 1.2.2018 is higher
of
- Cost of acquisition i.e., ` 1,000 per share and
- lower of
Fair market value of such asset i.e., ` 2,000 per share and
Full value of consideration i.e., ` 4,000 per share.
So, the cost of acquisition of original share is ` 2,000 per share.
(2) Since bonus shares are held for less than 12 months before sale, the gain
arising there from is a short-term capital gain chargeable to tax@15% as
per section 111A after adjusting the unexhausted basic exemption limit
(` 3,00,000 less ` 2,000, being the amount of dividend). Since Mr. Mithun is
over 60 years of age, he is entitled for a higher basic exemption limit of
` 3,00,000 for A.Y. 2023-24.
(4) Brokerage paid is allowable since it is an expenditure incurred wholly and
exclusively in connection with the transfer. Hence, it qualifies for deduction
under section 48(i).
(5) Cost of bonus shares will be Nil as such shares are allotted after 1.04.2001.
(6) Securities transaction tax is not allowable as deduction.

© The Institute of Chartered

Accountants of India
 4.446 INCOME TAX LAW

Question 2
Aarav converts his plot of land purchased in July, 2004 for ` 80,000 into stock-in-
trade on 31st March, 2022. The fair market value as on 31.3.2022 was ` 3,00,000.
The stock-in-trade was sold for ` 3,25,000 in the month of January, 2023.
Find out the taxable income, if any, and if so under which head of income and for
which Assessment Year?
Cost Inflation Index: F.Y. 2004-05:113; F.Y. 2021-22: 317.
Answer
Conversion of a capital asset into stock-in-trade is a transfer within the meaning
of section 2(47) in the previous year in which the asset is so converted. However,
the capital gains will be charged to tax only in the year in which the stock-in-
trade is sold.
The cost inflation index of the financial year in which the conversion took place
should be considered for computing indexed cost of acquisition. Further, the fair
market value on the date of conversion would be deemed to be the full value of
consideration for transfer of the asset as per section 45(2). The sale price less the
fair market value on the date of conversion would be treated as the business
income of the year in which the stock-in-trade is sold.
Therefore, in this problem, both capital gains and business income would be
charged to tax in the A.Y. 2023-24.

Particulars `
Capital Gains
Full value of consideration (Fair market value on the date of 3,00,000
conversion)
Less: Indexed cost of acquisition (` 80,000 × 317/113) 2,24,425
Long-term capital gain 75,575
Profits & Gains of Business or Profession
Sale price of stock-in-trade 3,25,000
Less: Fair market value on the date of conversion 3,00,000
25,000

© The Institute of Chartered

Accountants of India
 CAPITAL GAINS 4.447

Computation of taxable income of Mr. Aarav for A.Y.2023-24

Particulars `
Profits and gains from business or profession 25,000
Long term capital gains 75,575
Taxable Income 1,00,575

© The Institute of Chartered

Accountants of India