CAPITAL GAIN

24-9-2012

INTRODUCTION
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.

CAPITAL ASSET
According to section 2(14), a capital asset means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include 1. any stock-in-trade, consumable stores or raw materials held for the purpose of the business or profession of the assessee; 2. 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, but excludes 3. jewellery; 4. archaeological collections; 5. drawings; 6. paintings; 7. sculptures; or 8. any work of art.

CAPITAL ASSETS
1. 2. 3. In other words, Agricultural land situated within the limits of any municipality or cantonment board having a population of 10,000 or more according to the latest census will be considered as capital asset. Further, agricultural land situated in areas lying within a distance of 8 kms from the local limits of such municipality or cantonment board will also be considered as capital asset. 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. Precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel will also be considered as capital asset 6% Gold Bonds, 1977, or 7% Gold Bonds, 1980, or National Defence Gold Bonds, 1980, issued by the Central Government; will also be considered as capital asset

4.

5.
6.

Special Bearer Bonds, 1991 issued by the Central Government; will also be considered as capital asset
Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government. will also be considered as capital asset

SHORT TERM AND LONG TERM CAPITAL ASSETS

Section 2(42A) defines short-term capital asset as a capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer. Therefore, a capital asset held by an assessee for more than 36 months immediately preceding the date of its transfer is a long-term capital asset. However, in the case of company shares, various securities listed in a recognised Stock Exchange in India, units of the Unit Trust of India and of Mutual Funds specified under section 10(23D) or a Zero Coupon Bond, the said assets will be considered as longterm capital assets if they are held for more than 12 months. Further, in the case of a capital asset being a share or any other security or a right to subscribe to any share or security where such right is renounced in favour of any other person, the period shall be calculated for treating the capital asset as a short-term capital asset from the date of allotment of such share or security or from the date of offer of such right by the company or institution concerned

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. For example, A enters into an agreement for the sale of his house. The purchaser gives the entire sale consideration to A. A hands over complete rights of possession to the purchaser since he has realised the entire sale consideration. Under Income-tax Act, the above transaction is considered as transfer; or (vii) Lastly, there are certain types of transactions which have the effect of transferring or enabling the enjoyment of an immovable property. For example, 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 above transaction is a transfer. Even power of attorney transactions are covered.

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), 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. 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.

EXAMPLE 1
A is the owner of a car. On 1-4-2011, he starts a business of purchase and sale of motor cars. He treats the above car as part of the stock-in-trade of his new business. He sells the same on 31-3-2012 and gets a profit of ` 1 lakh. Discuss the tax implication.
Solution Since car is a personal asset, conversion or treatment of the same as the stock-in-trade of his business will not be trapped by the provisions of section 45(2). Hence A is not liable to capital gains tax.

EXAMPLE 2
A is the owner of a foreign car. He starts a firm in which he and his two sons are partners. As his capital contribution, he transfers the above car to the firm. The car had cost him ` 2,00,000. The same is being introduced in the firm at a recorded value of ` 3,50,000. Discuss. Solution Car is not capital asset but is a personal effect. Section 45(3), as explained above, covers only cases of transfer of capital asset as contribution and not personal effects. Hence, the above transaction will not be subject to capital gains tax.

TRANSACTIONS 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:

Any distribution of capital assets on the total or partial partition of a HUF; Any transfer of a capital asset under a gift or will or an irrevocable trust; Any transfer of a capital asset by a company to its subsidiary company. Any transfer of capital asset by a subsidiary company to a holding company; 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. Any transfer in a scheme of amalgamation of shares held in an Indian company by the amalgamating foreign company to the amalgamated foreign company. Any transfer, in a scheme of amalgamation of a banking company with a banking institution sanctioned and brought into force by the Central Government under section 45(7) of the Banking Regulation Act, 1949, of a capital asset by such banking company to such banking institution. Any transfer by a shareholder in a scheme of amalgamation of shares held by him in the amalgamating company.

EXAMPLE 3
M held 2000 shares in a company ABC Ltd. This company amalgamated with another company during the previous year ending 31-3-2012. Under the scheme of amalgamation, M was allotted 1000 shares in the new company. The market value of shares allotted is higher by ` 50,000 than the value of holding in ABC Ltd. The Assessing Officer proposes to treat the transaction as an exchange and to tax ` 50,000 as capital gain. Is he justified? Solution In the above example, assuming that the amalgamated company is an Indian company, the transaction is squarely covered by the exemption explained above and the proposal of the Assessing Officer to treat the transaction as an exchange is not justified.

EXAMPLE 4
Mr. A purchased gold in 1970 for ` 25,000. In the P.Y. 2011-12, he gifted it to his son at the time of marriage. Fair market value (FMV) of the gold on the day the gift was made was ` 1,00,000. State whether capital gain tax liability arise or not?

Solution As per the provisions of section 47(iii), transfer of a capital asset under a gift is not regarded as transfer for the purpose of capital gains. Therefore, capital gains tax liability does not arise in the given situation.

EXAMPLE 5
A house property is purchased by a Hindu undivided family in 1945 for 20,000. It is given to one of the family members in the P.Y. 2011-2012 at the time of partition of the family. FMV on the day of partition was ` 12,00,000. State whether capital gain tax liability arise or not? Solution As per the provisions of section 47(i), transfer of a capital asset (being in kind) on the total or partial partition of Hindu undivided family is not regarded as transfer for the purpose of capital gains. Therefore, capital gains tax liability does not arise in the given situation.

EXAMPLE 6
Mr. B purchased 50 convertible debentures for 40,000 in 1995 which are converted in to 500 shares worth 85,000 in November 2011 by the company. State whether capital gain tax liability arise or not?

Solution As per the provisions of section 47(x), 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 is not regarded as transfer for the purpose of capital gains. Therefore, capital gains tax liability does not arise in the given situation.

COMPUTATION OF CAPITAL GAIN

Computation of Short-term capital gain Computation of Long-term capital gain Find out the full value of consideration Find out the full value of consideration Deduct the following Deduct the following Expenditure incurred wholly and exclusively Expenditure incurred wholly and in connection with such transfer. exclusively in connection with such Cost of acquisition. transfer Cost of improvement Indexed Cost of acquisition Indexed Cost of improvement. From the resulting sum deduct the exemption provided by section 54B, 54D and 54G. From the resulting sum deduct the The balancing amount is the short-term Capital exemption provided by section 54, 54B, 54D, Gain. 54EC, 54ED, 54F and 54G.

The balancing amount is the long-term Capital Gain.

Key Concepts
Full value of consideration: Whole price without any deduction whatsoever. Expenditure incurred wholly and exclusively in connection with such transfer: Expenditure incurred which is necessary to affect such transfer e.g. stamp duty, registration etc. Cost of acquisition of an asset: Value for which it was acquired. Expenses of capital nature for completing or acquiring the title to the property may be included in the cost of acquisition. Cost of improvement: In relation to goodwill of a business or a right to manufacture, produce or process any article or thing, the cost of improvement is taken to be nil. In relation to any other capital asset- Where the capital asset became the property of the assessee before April 1, 1981 the cost of improvement includes all expenditure of capital nature incurred in making any addition/alteration to the capital asset on or after April 1, 1981 by the owner. In any other case, the cost of improvement refers to all expenditure of a capital nature that is incurred in making any additions or alterations to the capital asset by the assessee or the previous owner.

EXAMPLE 7
Mr. X & sons, HUF, purchased a land for ` 40,000 in 1991-92. In 199596, a partition takes place when Mr. A, a coparcener, is allotted this plot valued at ` 80,000. In 1996-97, he had incurred expenses of 1,85,000 towards fencing of the plot. Mr. A sells this plot of land for 15,00,000 in 2011-12 after incurring expenses to the extent of 20,000. You are required to compute the capital gain for the A.Y. 2012-13. Cost Inflation Index Financial year Cost Inflation Index 1991-92 199 1995-96 281 1996-97 305 2011-12 785

Solution Computation of taxable capital gains for the A.Y. 2012-13

Particulars Sale consideration Less Expenses Incurred for transfer Net Consideration Less) Indexed cost of acquisition (40,000 785/281) Less) Indexed cost of improvement (1,85,000 785/305) Long term capital gains 1,11,744 4,76,148 5,87,892 8,92,108 Rs. Rs. 15,00,000 20000 14,80,000

EXAMPLE 8
Mr. B purchased convertible debentures for 5,00,000 during August 1998. The debentures were converted into shares in September 2002. These shares were sold for 5,00,000 in August, 2011. The brokerage expenses is 50,000. You are required to compute the capital gains in case of Mr. B for the assessment year 2012-13. Cost Inflation Index Financial Year Cost Inflation Index 1998-99 351 2002-03 447 2005-06 497 2011-12 785

Solution Computation of taxable capital gains for the A.Y. 2012-13

Particulars
Rs. Rs.

Sale consideration
Less Expenses Incurred for transfer Net Consideration Less) Indexed cost of acquisition (5,00,00 785/447) Long term capital gains

15,00,000
50,000 14,50,000 8,78,076 5,71,924

Note : For the purpose of computing capital gains, the holding period is considered from the date of allotment of these shares i.e. September 2002 August 2010.

EXAMPLE 9
Mr. C purchases a house property for Rs. 1,06,000 on May 15, 1963. The following expenses are incurred by him for making addition/alternation to the house property: a. Cost of construction of first floor in 1972-73 , Rs. 1,35,000 b. Cost of construction of the second floor in 1983-84, Rs. 3,10,000 c. Reconstruction of the property in 1992-93 Rs. 2,50,000 Fair market value of the property on April 1, 1981 is Rs. 4,50,000. The house property is sold by Mr. C on August 10, 2011 for Rs 80,00,000 (expenses incurred on transfer: `50,000). Compute the capital gain for the assessment year 2012-13. Cost Inflation Index Financial year Cost Inflation Index 1981-82 100 1983-84 116 1992-93 223 2011-12 785

Solution Computation of taxable capital gains for the A.Y. 2012-13

Particulars
Rs. Rs. 50,000 79,50,000 35,32,500 29,77,890 65,10,390 14,39,610

Sale consideration
Less Expenses Incurred for transfer Net Consideration Less) Indexed cost of acquisition (Note 1) Less) Indexed Cost of Improvement (Note 2) Long term capital gains

80,00,000

Note : For the purpose of computing capital gains, the holding period is considered from the date of allotment of these shares i.e. September 2002 August 2010.

Working Notes
Indexed cost of acquisition is computed as follows: Rs. 4,50,000 785/100 = Rs. 35,32,500 Fair market value on April 1, 1981 (actual cost of acquisition is ignored as it is lower than market value on April 1, 1981.) Indexed cost of improvement is determined as under: ` 1. Construction of first floor in 1972-73 (expenses incurred prior to April 1, 1981 are not considered) Nil 2. Construction of second floor in 1983-84 (i.e., Rs. 3,10,000 785 / 116) 20,97,845 3. Alternation/reconstruction in 1992-93 (i.e., Rs. 2,50,000 785 / 223) = 8,80,045 Total Indexed cost of improvement: Rs. 29,77,890

TAX TREATMENT OF SELF GENERATED ASSETS

SELF GENERATED ASSET: An asset which does not cost anything to the assessee in terms of money in its creation or acquisition is a self generated asset. When the goodwill, right to manufacture, etc are purchased and later on transferred, the purchase price will be taken at the cost of acquisition and the cost of improvement is taken as nil. A similar rule is applicable when the right to manufacture, produce or process any article/ thing or right to carry on any business are purchased and later on transferred. If the other asset is purchased and later on sold, then the actual purchase price and the improvement cost are taken as the cost of the acquisition and cost of improvement. In other words, the rules given in the above table are applicable only in respect of self generated assets. Even if the aforesaid assets were acquired before 1/4/1981, the option of adopting the fair market value as on the said date is not available. Transfer of self generated goodwill of a profession, a new formula patented by the inventor to grow seedless oranges is not chargeable to tax.

TAX TREATMENT OF SELF GENERATED ASSETS

Self Generated Assets Consideration Goodwill of the Actual business (not of profession); right to manufacture, produce, or process any article or thing or right to carry any business Tenancy rights, route Actual permits, loom hours, trademark, brand name associated with the business Cost of Acquisition Nil Cost of Improvement Nil Transfer Exp. Actual Capital Gain consideration minus Expenses on transfer

Nil

Actual

Actual

consideration minus cost (or indexed cost) of improvement minus expenses on transfer.

TAX TREATMENT IN CASE OF BONUS SHARES

Capital gain on transfer of bonus shares shall be calculated as follows:
Different Situations Special Provisions Cost of acquisition of bonus Fair Market Value as on 1-4-81 is taken as shares allotted before 1-4-81 the cost of acquisition. Cost of acquisition of bonus Cost of Acquisition is taken as Zero. shares allotted on or after 1-4-81 Period of Holding the Bonus The period of holding shall be determined Shares from the date of allotment of bonus shares and not from the date of acquisition of original shares.

TAX TREATMENT IN CASE OF RIGHT SHARES

Cost of acquisition in different situations is as follows: Different Situations Original shares (on the basis of which the tax payer becomes entitled to right shares) Right entitlement (which is renounced by the assessee in the favour of the person) Right shares acquired by the taxpayer by exercising his right entitlement. Right shares purchased by the person in whose favour the rights are renounced. Cost of Acquisition Amount actually paid for acquiring the shares Nil

Amount actually paid by the taxpayer for acquiring the asset. Purchase price paid to renouncer of rights entitlement plus amount paid to the company which has allotted the right shares.

Example 10
ABC Ltd., converts its capital asset acquired for an amount of ` 50,000 in June, 1991 into stock-in-trade in the month of November, 2008. The fair market value of the asset on the date of conversion is ` 2,00,000. The stock-in-trade was sold for an amount of ` 3,50,000 in the month of December, 2011. What will be the tax treatment? Financial year Cost Inflation Index 1991-92 199 2008-09 582 2011-12 785

Solution
The capital gains on the sale of the capital asset converted to stock-in-trade is taxable in the given case as the conversion was done after April 1, 1985. It arises in the year of conversion (i.e. P.Y. 2008-09) but will be taxable only in the year in which the stock-in-trade is sold (i.e. P.Y. 2011-12). Profits from business will also be taxable in the year of sale of the stock-in-trade (i.e. P.Y. 2011-12).

Solution Computation of Gross Total Income for the A.Y. 2012-13

Particulars
Rs. 3,50,000 2,00,000 2,00,000 146231 53769 203769 1,50,000 Rs.

Profit and Gains from Business and Profession

Sale Proceeds of the stock in trade Less Cost of stock in trade(FMV on date of conversion) Long Term Capital Gains
Full value of the consideration (FMV on the date of the conversion)

Less Indexed Cost of Acquisition (50,000 *582/199) Gross Total Income

Note: For the purpose of indexation, the cost inflation index of the year in which the asset is converted into stock-in-trade should be considered.

Example 11
Ms. Usha purchases 1,000 equity shares in X Ltd. at a cost of ` 15 per share (brokerage 1%) in January 1978. She gets 100 bonus shares in August 1980. She again gets 1100 bonus shares by virtue of her holding on February 1985. Fair market value of the shares of X Ltd. on April 1, 1981 is ` 25. In January 2012, she transfers all her shares @ ` 120 per share (brokerage 2%). Compute the capital gains taxable in the hands of Ms. Usha for the A.Y. 201213 assuming: (a) X Ltd is an unlisted company and securities transaction tax was not applicable at the time of sale. (b) X ltd is a listed company and the shares are sold in a recognised stock exchange and securities transaction tax was paid at the time of sale. Financial year Cost Inflation Index 1981-82 100 1984-85 125 2011-12 785

Solution Computation of Capital Gain for A.Y. 2012-13 (1000 Original Shares)
Particulars
Rs. Rs.

Sale Proceeds (1000 * 120)

Less Brokerage paid(1,20,000 *2%) Net Sale Consideration Less Indexed Cost of Acquisition (25 * 1000 * 785 /100) Long Term Capital Loss

1,20,000
2,400 1,17,600 1,96,250 (78650)

Solution Computation of Capital Gain for A.Y. 2012-13 (100 Bonus Shares)
Particulars
Rs. Rs.

Sale Proceeds (100 * 120)

Less Brokerage paid(12,000 *2%) Net Sale Consideration Less Indexed Cost of Acquisition (25 * 100 * 785 /100) Long Term Capital Loss

12,000
240 11,760 19625 (7865)

Solution Computation of Capital Gain for A.Y. 2012-13 (1100 Bonus Shares)
Particulars
Rs. Rs.

Sale Proceeds (1100 * 120)

Less Brokerage paid(1,32,000 *2%) Net Sale Consideration Less Indexed Cost of Acquisition Long Term Capital Loss
Long term capital gain (A+B+C) Rs. 42,845

1,32,000
2,640 1,29,360 Nil 129360

Note: Cost of acquisition of bonus shares acquired before 1.4.1981 is the FMV as on 1.4.1981 (being the higher of the cost or the FMV as on 1.4.1981). (b) The long-term capital gains on transfer of equity shares through a recognized stock exchange on which securities transaction tax is paid is exempt from tax under section 10(38). Hence, the taxable capital gain is Nil.

Example 12
On January 31, 2012, Mr. A has transferred self-generated goodwill of his profession for a sale consideration of ` 70,000 and incurred expenses of ` 5,000 for such transfer. You are required to compute the capital gains chargeable to tax in the hands of Mr. A for the assessment year 2012-13. Solution The transfer of self-generated goodwill of profession is not chargeable to tax. It is based upon the Supreme Courts ruling in CIT vs. B.C. Srinivasa Shetty. Hence, there is no taxable capital gains.

Example 13
Mr. Kay purchases a house property on April 10, 1978 for ` 35,000. The fair market value of the house property on April 1, 1981 was ` 70,000. On August 31, 1984, Mr. Kay enters into an agreement with Mr. Jay for sale of such property for ` 1,20,000 and received an amount of ` 10,000 as advance. However, as Mr. Jay did not pay the balance amount, Mr. Kay forfeited the advance. In May 1987, Mr. Kay constructed the first floor by incurring a cost of ` 50,000. Subsequently, in September 1987, Mr. Kay gifted the house to his friend Mr. Dee. On February 10, 2012, Mr. Dee sold the house for ` 8,00,000. Financial year Cost Inflation Index 1981-1982 100 1984-1985 125 1987-1988 150 2011-2012 785

Solution (Working Note)

For the purpose of capital gains, holding period is considered from the date on which the house was purchased by Mr. Kay, till the date of sale. However, indexation of cost of acquisition is considered from the date on which the house was gifted by Mr. Kay to Mr. Dee, till the date of sale. i.e. from September 1987 (P.Y. 1987-88) to February 2012 (P.Y. 2011-12). Indexed cost of acquisition = (70,000 785/150) = ` 3,66,333 Indexed cost of improvement = (50,000 785/150) = ` 2,61,667

Amount forfeited by previous owner, Mr. Kay, will not be considered.

Solution
Particulars
Rs. Rs.

Sale Consideration
Less Expenses Net Sale Consideration Less Indexed Cost of Acquisition (WN) Less Indexed Cost of Improvement(WN)
Taxable LTCG 3,66,333 2,61,667

8,00,000
Nil 8,00,000 6,28,000 1,72,000

Advance money received [Section 51]

It is possible for an assessee to receive some advance in regard to the transfer of capital asset. Due to the break-down of the negotiation, the assessee may have retained the advance. Section 51 provides that while calculating capital gains, the above advance retained by the assessee must go to reduce the cost of acquisition. However, if advance has been received and retained by the previous owner and not the assessee himself, then the same will not go to reduce the cost of acquisition of the assessee.

Example 14
Mr. X purchases a house property in December 1975 for ` 1,25,000 and an amount of ` 75,000 was spent on the improvement and repairs of the property in March, 1981. The property was proposed to be sold to Mr. Z in the month of May, 2003 and an advance of ` 40,000 was taken from him. As the entire money was not paid in time, Mr. X forfeited the advance and subsequently sold the property to Mr. Y in the month of March, 2012 for ` 30,00,000. The fair value of the property on April 1, 1981 was ` 3,90,000. What is the capital gain chargeable in the hands of Mr. X for the A.Y. 2012-13? Indexes: Financial year Cost Inflation Index 1981-82 100 2003-04 463 2011-12 785

Solution (Working Note)

Cost of acquisition (higher of fair market value as on April 1, 1981 and the actual cost of acquisition) 3,90,000 Less : Advance taken and forfeited 40,000 Cost for the purposes of indexation 3,50,000 Indexed cost of acquisition (` 3,50,000 x 785/100) 27,47,500

Solution
Particulars
Rs. Rs.

Sale Consideration
Less Expenses Net Sale Consideration Less Indexed Cost of Acquisition (WN) Taxable LTCG

30,00,000
Nil 30,00,000 27,47,500 2,52,500

EXEMPTIONS U/S 54, 54B AND 54D

Particulars Applicable to Sec.54 Individual and HUF Sec.54B Individual Sec.54D Any assessee

Nature of capital asset Long term residential Urban agricultural land Any industrial land or transferred house property (used as such for agro building used as such purpose for atleast 2 years for atleast 2 years. either by him or his Such capital asset has parents) been compulsorily acquired under the law. Nature of capital asset New Residential house New Agro land (whether Industrial land or acquired property in rural or urban area) building for shifting or reestablishing of the said undertaking.
Time limit for investment Purchase: Within 1 year Within 2 years after the Within 3 years after the before or 2 years after, the date of transfer. date of receipt of date of transfer. compensation. Construction: Within 3 years after the date of transfer.

EXEMPTIONS U/S 54, 54B AND 54D

Particulars Deduction (minimum of the following) Sec.54 Sec.54B Sec.54D Capital Gain; Capital Gain; Capital Gain; or or or Amount spent for Amount invested in the Amount so invested acquisition of new asset. new agro land. in the new asset. Revocation of benefit If the new asset is Same as Sec.54 Same as Sec.54 transferred within 3 years from the date of its acquisition, then earlier deduction claimed shall revoke and subtracted from the cost of new asset.

Exemptions U/S 54EC

Particulars Applicable to Nature of capital asset transferred Nature of capital asset acquired Time limit for investment Deduction (minimum of the following) Revocation of benefit Information Any assessee Any Long term capital asset Specified bonds redeemable after 3 years, issued by NHAI or RECL. Within 3 years after the date of transfer. Capital Gain; or Amount so invested in the new asset. If the new asset is transferred or converted into money within 3 years from the date of its acquisition, then earlier deduction claimed shall revoke and shall be treated as LTCG of the year in which condition is violated.

Exemptions U/S 54F

Particulars Applicable to Nature of capital asset transferred Nature of capital asset acquired Information Individual and HUF Any Long term capital asset other than a residential house property. New residential house property within prescribe time. Condition: On the date of transfer the assessee must not own more than one house property other than the new house. Purchase: Within 1 yea r before or 2 years after, the date of transfer., Construction: Within 3 years after the date of transfer. Capital Gain; or (Amount invested in the new house * Capital gain) / Net sale consideration. If the new asset is transferred/ or new asset acquired within 3 years then earlier deduction claimed shall revoke and shall be treated as LTCG.

Time limit for investment

Deduction (minimum of the following)

Revocation of benefit

EXEMPTIONS U/S 54G/54GA

Particulars Applicable to Nature of capital asset transferred Information Any assessee Land, Building, plant or machinery (whether short term or long term) used for purpose of an industrial undertaking. (In urban area as per Sec.54G) Condition : Sec.54G: The asset is transferred for shifting of industrial undertaking from urban to any area. Sec.54GA: The asset is transferred for shifting of industrial undertaking from any area to SEZ area. Assessee either - purchased new machinery or plant for shifting; or acquired building or land for shifting in new (non urban) area; or incurred expenses on shifting. Any time within 1 year before or 3 years after the date of transfer of asset. Capital Gain; or Amount so invested or expended.

Nature of capital asset acquired

Time limit for investment Deduction (minimum of the following)

Revocation of benefit

Same as Sec.54

Example 15
Mr. Cee purchased a residential house on July 20, 2008 for ` 10,00,000 and made some additions to the house incurring ` 2,00,000 in August 2008. He sold the house property in April 2011 for ` 20,00,000. Out of the sale proceeds, he spent ` 5,00,000 to purchase another house property in September 20 Financial year Cost Inflation Index 2006-07 519 2007-08 551 2011-12 785 What is the amount of capital gains taxable in the hands of Mr. Cee for the A.Y.2012-13?

Solution
Particulars
Rs. Rs.

Sale Consideration
Less Expenses Net Sale Consideration Less Cost of Acquisition Less Cost of Improvement Taxable LTCG

20,00,000
Nil 20,00,000 10,00,000 2,00,000 8,00,000

The house is sold before 36 months from the date of purchase. Hence, the house is a short-term capital asset and no benefit of indexation would be available. The exemption of capital gains under section 54 is available only in case of long-term capital asset. As the house is short-term capital asset, Mr. Cee cannot claim exemption under section 54. Thus, the amount of taxable short-term capital gains is ` 8,00,000.

Example 16
PQR Ltd., purchased a building for industrial undertaking in May 2003, at a cost of ` 4,00,000. The above property was compulsorily acquired by the State Government at a compensation of ` 8,00,000 in the month of January, 2012. The compensation was received in March, 2012. The company purchased another building for its industrial undertaking at a cost of ` 1,00,000 in the month of March, 2012. What is the amount of the capital gains chargeable to tax in the hands of the company for the A.Y. 2012-13? Financial year Cost Inflation Index 2003-04 463 2011-12 785

Solution
Particulars
Rs. Rs.

Sale Proceeds(Compensation Received)

Less Expenses Net Sale Consideration Less Indexed Cost of Acquisition(4,00,000 *0785/463) LTCG Less: Exemption U/s 54D (Cost of Acquisition of new undertaking) Taxable LTCG

8,00,000
Nil 8,00,000 6,78,186 1,21,814 1,00,000 21,814

Example 17
From the following particulars, compute the taxable capital gains of Mr. D for A.Y.2012-13Cost of jewellery [Purchased in F.Y.1990-91] Rs. 1,82,000 Sale price of jewellery sold in Jan 2012 Rs. 8,50,000 Expenses on transfer Rs. 7,000 Residential house purchased in March 2012 Rs. 5,00,000 Financial Year Cost Inflation Index 1990-91 182 2011-12 785 State the consequences if the new house is transferred within 3 years for Rs. 6,00,000?

Solution
Particulars
Rs. Rs.

Sales Consideration
Less Expenses on transfer Net Sale Consideration Less Indexed Cost of Acquisition(1,82,000 *785/182) LTCG Less: Exemption U/s 54F(58,000 * 5,00,000 / 8,43,000) Taxable LTCG

8,50,000
7,000 8,43,000 7,85,000 58,000 34,401 23,599

Consequences if the new house is transferred within a period of 3 years

Short-term capital gains would arise on transfer of the new house; and The capital gains exempt earlier under section 54F would be taxable as long-term capital gains. In the given example, if the new residential house is sold for ` 6,00,000 after say, 1 year, then Rs. 1,00,000 [i.e. ` 6,00,000 (-) ` 5,00,000] would be chargeable as shortterm capital gain of that year in which the new house is sold. Rs. 34,401, being the capital gains exempt earlier, would be taxable as long-term capital gains of that year in which the new house is sold.

Example 18
Mr. R holds 1000 shares in Star Minus Ltd., an unlimited company, acquired in the year 1981-82 at a cost of ` 25,000. He has been offered right shares by the company in the month of August, 2011 at ` 40 per share, in the ratio of 2 for every 5 held. He retains 50% of the rights and renounces the balance right shares in favour of Mr. Q for ` 10 per share in September 2011. All the shares are sold by Mr. R for ` 200 per share in January 2012 and Mr. Q sells his shares in December 2011 at ` 130 per share. What are the capital gains taxable in the hands of Mr. R and Mr. Q?

Financial year 1981-82 2011-12

Cost Inflation Index 100 785

Solution Computation of Capital Gain for A.Y. 2012-13 (1000 Original Shares)
Particulars
Rs. Rs.

Sale Proceeds (1000 * 200)

Less: Expenses Net Sale Consideration Less Indexed Cost of Acquisition (25 * 1000 * 785 /100) Long Term Capital Gain

2,00,000
2,00,000 1,96,250 3750

Solution Computation of Capital Gain for A.Y. 2012-13 (200 Right Shares)
Particulars
Rs. Rs.

Sale Proceeds (200 * 200)

Less: Expenses Net Sale Consideration Less Cost of Acquisition (40*200)(note 1) Long Term Capital Gain

40,000
40,000 8,000 32,000

Note 1: Since the holding period of these shares is less than 1 year, they are short term capital assets and hence cost of acquisition will not be indexed

Solution Computation of Capital Gain for A.Y. 2012-13 (200 Right Shares renounced in favour of MR Q)
Particulars
Rs. Rs.

Sale Proceeds (200 * 10)

Less: Expenses Net Sale Consideration Less Cost of Acquisition (40*200)(note 1) Long Term Capital Gain

2,000
2,000 NIL 2,000

Note 1: The cost of the rights renounced in favour of another person for a consideration is taken to be nil. The consideration so received is taxed as short-term capital gains in full. The period of holding is taken from the date of the rights offer to the date of the renouncement.

Solution Computation of Capital Gain in hands of MR Q for AY 2012-13

Particulars
Rs. Rs.

Sale Proceeds (200 * 130)

Less: Expenses Net Sale Consideration Less Cost of Acquisition (10 + 40 *200)(note 1) Short Term Capital Gain

26,000
26,000 10,000 16,000

Note: The cost of the rights is the amount paid to Mr. R as well as the amount paid to the company. Since the holding period of these shares is less than 1 year, they are short term capital assets and hence, cost of acquisition should not be indexed.