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What is Capital Gain ?
In simple words, capital gain is the
income derived or the profit that is resulted from the sale of
an investment. A capital investment can be of any kind movable
or immovable, tangible or intangible such as farm, a ranch, a
home etc. Capital assets can occur both in real assets as well
as financial assets. Examples of real assets include property
whereas examples of financial assets include bonds or stocks.
The Following assets cannot be
treated as capital assets
Agricultural land that is situated in rural areas.
Inventories such as spares, raw material etc that are used for
the purpose of the assessees profession or business.
Movable property that is used for personal use of the assessee
or of his family members on him. Jewellery is an exception in
this case i.e. jewellery can be considered as a capital asset
though it is a movable property.
Gold deposit bonds issued under the Gold Deposit Scheme.
7 percent Gold Bonds, 1980 that is issued by the Central
Government.
Special Bearer Bonds, 1991 that is issued by the Central
Government.
National Defence Gold Bonds that is issued by the Central
Government.
6 ½ percent Gold Bonds, 1977 issued by the Central Government.
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Classification
Capital gains are classified into two types based on the period
for which the property was held. They are:
Long term capital gains.
Short term capital gains.
Realized capital gains.
Unrealized capital gains.
Long Term Capital Gains: If
the asset is held by the assessee for more than three years in
the case of immovable property, then it is regarded as long term
capital gains. While calculating long term capital gains the
cost inflation index can be applied and the gains are taxed at a
rate of twenty percent only.
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In order to
determine the period for which the capital gain is held by the
assessee, the following rules are important
If the shares become the property of the assessee in an Indian
company against the shares of an amalgamated company, then the
period or time for which the shares in the amalgamated company
were held by the assessee will be accounted.
In some companies securities or shares are allotted to its
workers or employees under a stock option scheme. When such
securities or shares are sold by the employee, he/she will be
accountable to capital gains tax on the sale value less cost of
acquisition or indexed cost of acquisition.
If the share is held by the company liquidation, then the
period successive to the date of liquidation will not be
counted.
If the person who has acquired the rights is subject to denial
of a rights issue, then the period would be considered from the
date of the offer of such rights by the firm or institution.
If the capital assets become the property of the assessee in
resolving the period, the period for which the capital asset was
held by the previous owner would also be accounted.
If a bonus is allotted without payment on the root of holding
of other financial asset, then the period shall be considered
from the date of allotment of such financial asset.
The counting of the period would start from the date of
allotment, for cases wherein case of rights issue of shares or
other securities pledged to by the assessee on the basis of his
rights.
For cases wherein the company buys back its own shares in
accordance with the rule, then the difference between the cost
of acquisition or index cost of acquisition and the value of a
consideration received by the shareholders would be considered
to be capital gains in the hands of the shareholders in the year
of buyback.
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Short Term
Capital Gains: In this case it is taxed like any
other normal income.
Realized
Capital Gains: If the actual sale of the asset
returns more money compared to the purchase price, then it is
regarded as realized capital gains.
Unrealized Capital Gains: If
the gain is only potential i.e. if it is known that the property
or the asset has increased in value but has not yet sold it is
regarded as unrealized capital gains.
Capital Gains Tax: It is a
voluntary tax penalty that is enforced on investment, capital
formation and productivity. The tax is paid only after an asset
is sold. riskless
profit.
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Transfer
Important thing to be noted under transfer is that in certain cases,
when a capital asset is transferred, the ownership of the asset
changes. But the transfer will not be subjected to capital gains
tax.
The Following gives the list of
transactions that are not subjected to capital Gains Tax
A capital asset that is transferred by a company to its wholly
owned Indian subsidiary company.
Assets that are distributed in kind by a company to its
shareholders on liquidation.
Transfer of land that is made by a sick industrial company under
the scheme prepared by BIFR wherein that sick industrial company is
managed by its workers cooperative, provided that transfer is made
during the period of sickness.
Capital assets that is distributed in kind by a Hindu Undivided
Family to its members at the time of total or partial partition.
Transfer made by a non-resident of foreign currency convertible
bonds or shares as specified by the Central Government to another
non-resident where the transfer is made outside India.
Capital assets that is transferred under a will or a gift.
Transfer that is made by the way of conversion of bonds or
debentures or deposits in any form of a company into debentures or
shares of that company.
A capital asset that is transferred by a wholly owned subsidiary
company to its Indian holding company.
In a scheme of amalgamation, if the shareholder transfers the
share that is held by the shareholder in the amalgamating company
and if the transfer is made against the allotment of a share of the
amalgamating company and the amalgamating company is an Indian
company.
In a scheme of amalgamation, any transfer of a capital asset by an
amalgamating company to the amalgamated company if the transferee
company is an Indian company.
A capital asset which is a work of art or of archaeological,
artistic or scientific importance to the government or to the
National Art Gallery or to a university and is transferred as may be
notified by the Central Government. Example includes Indira Gandhi
Center of Art.
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Article Contributed By: Jaya Suresh
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