Capital Gains

1. Preconditions for charge u/s. 45

Income under the head “Capital Gains” can be charged only if the following three conditions are satisfied

1. There must be a “capital asset” [for definition of “capital asset” refer S. 2(14)] :

   “Capital Asset” means––

   1. Property of any kind held by an assessee, whether or not connected with his business or profession;
   2. Any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992, but does not include––
      1. Any stock-in-trade [other than the securities referred to in sub-clause (b)].
      2. Personal effects of the assessee excluding diamonds, jewellery, archaeological collections, drawings, paintings, sculptures or any work of art;
      3. Agricultural land in India situated in a rural area;
      4. 6½% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Bonds, 1980 issued by the Central Government;
      5. Special Bearer Bonds, 1991 issued by the Central Government;
      6. Gold Deposit Bonds issued under Gold Deposit Scheme 1999 and deposit certificates issued under the Gold Monetisation Scheme, 2015 (Finance Act, 2016).

      Explanation 1 – “Property” includes any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever.

      Explanation 2 – (a) The expression “Foreign Institutional Investor” shall have the meaning assigned to it in clause (a) of the Explanation to section 115AD; (b) the expression “securities” shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation)
      Act, 1956.

2. There must be a “transfer” of such capital asset [for meaning of “transfer”, refer Sections 2(47), 47 & 46(1)]; and
3. There must arise either profits or gains or loss out of such transfer.

2. Year of Chargeability

Capital Gains are generally charged to tax in the year in which “transfer” takes place [for exception to this general rule, refer column (4) of Table 2].

3. Mode of Computation

3.1 Income under the head Capital Gains is to be computed as follows:

3.2 Capital Gains u/s. 48 are computed as follows:

* Section 51 – Where any sum of money, received as an advance or otherwise in the course of negotiations for transfer of a capital asset, has been included in the total income of the assessee for any previous year in accordance with the provisions of clause (ix) of sub-section (2) of section 56, then, such sum shall not be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition.

Exceptions to Section 48

1. In case of a non-resident, Capital Gains on transfer of shares in or debentures of an Indian company are to be computed firstly by converting cost of acquisition, full value of consideration and expenses incurred in connection with transfer into originally utilised foreign currency and reconverting the capital gains so computed into Indian rupees.

   Rule 115A prescribes the rates of conversion and reconversion for the purpose of calculation of capital gains in the above case. The rates of conversion and reconversion are as follows:

2. The benefit of indexation of cost will not be available for computation of Capital Gains on transfer of Bonds/Debentures/specified shares and units.
3. While calculating long-term Capital Gains (other than those covered under (a) and (b) above) cost of acquisition and cost of improvement are required to be indexed at prescribed indices.
4. Finance Act, 2016 has inserted proviso to Section 48 w.e.f. 1 April 2017 stating that while computing capital gains arising to a non-resident assessee on redemption of rupee denominated bond of an Indian company subscribed by him, the gain arising on account of appreciation of rupee against a foreign currency shall be ignored for the purpose of computation of full value of consideration. W.e.f. 1st April 2018, the benefit available to subscriber of bond is also extended to subsequent acquirer of such bonds.
5. For computing long-term Capital Gains arising on transfer of Sovereign Gold Bond issued by the RBI under the Sovereign Gold Bond Scheme, 2015, the cost of acquisition shall be indexed.

3.3 Capital Gains u/s. 50 are computed as follows:

If the resultant figure is negative, the same is chargeable as deemed short-term Capital Gains u/s. 50.

If the resultant figure is positive and the entire block ceases to exist as such (for the reason that all the assets in that block are transferred during the year) the resultant figure indicates deemed short-term capital loss (refer CBDT Circular No. 469 dated 23-9-1986 — reported in 162 ITR (Stat) 21, 30).

If the resultant figure is positive and the block continues to exist (for the reason that at least one asset in the block continues to be owned by the assessee) then there will be no gains or losses and the assessee will be entitled to claim depreciation on the resultant figure.

3.4 Capital Gains u/s. 50B

Profit arising on slump sale of one or more undertakings would be chargeable to tax as Long-Term Capital Gains in the year of transfer if such undertakings have been owned and held by the assessee for at least 36 months before the date of transfer or as Short-Term Capital Gain if held for a shorter period.

The net worth (as defined) of the undertakings would be regarded as the cost of acquisition and improvement. No indexation would be allowed in respect of such cost.

3.5 Indexation

In case the capital asset is a long-term capital asset (except for specified equity shares and equity oriented units), the cost of acquisition is to be increased by cost inflation index. For example, if cost of acquisition of an asset acquired in F. Y. 2004-05 is ₹ 50,000, its indexed cost of acquisition in F. Y. 2015-16 would be ₹ 50,000 x Index for the year of transfer divided by Index for the year of acquisition

From 1-4-2018, the base year of indexation is shifted from 1981 to 2001. The list of cost inflation index is as follows-

4. Exempt Capital Gains

Refer sections 10(33), 10(37), 10(38), sections 54 to 54GB and section 115F.

Finance Act, 2016 has inserted a proviso to section 10(38) whereby clause (b), relating to security transaction tax, shall not apply to a transaction undertaken on a recognised stock exchange located in any International Financial Services Centre and where the consideration for such transaction is paid or payable in foreign currency.

Finance Act, 2017 has inserted a provision to section 10(38) to provide that w.e.f. 1st April 2018 this exemption shall not apply to income arising from transfer of equity share, acquired on or after 1st October 2004 and such transaction were not chargeable to STT. However, exemption should continue to be available to certain acquisitions to be notified by the Central Government.

Exemption u/s. 10(38) has been withdrawn w.e.f. 1st April, 2018 and Long Term Capital Gains on sale of specified equity shares, units of equity oriented funds and units of business trust are taxable above ₹ 1,00,000/- at the rate of 10% without indexation benefit.

The final notification provides that all transactions of acquisitions of equity shares (acquired on or after 1st October 2004 and are not subject to STT) are notified under Section 10(38) except the following:

1. Acquisition of listed equity shares (not frequently traded on a recognised stock exchange in India) through a preferential issue, other than preferential issues to which Chapter VII of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009) does not apply;
2. Transaction of purchase of listed equity share in a company is not entered through a recognised stock exchange;
3. Acquisition of equity shares of a company during the period between the date on which the company is delisted and again relisted on a recognised stock exchange

The terms ‘frequently traded shares’, ‘listed’ and ‘recognised stock exchange’ are defined in the notification. The press release lists down certain mode of acquisitions where exemption should continue to be available (such as through IPO, FPO, bonus or right issue, etc.).

5. Rate of Tax on Capital Gains

Refer “Rates of Tax” on page 1

TABLE 1 – Long term Capita Assets – Minimum holding period

Proviso to section 2(42A) states that capital gains arising on unlisted shares of a company and units of a Mutual Fund specified under clause (23D) of section 10 transferred during the period beginning on the 1st day of April, 2014 and ending on the 10th day of July, 2014 will be considered as short-term if the said shares/units were held for not more than twelve months.