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Income from Capital Gains

Income from Capital Gains

Under the Income Tax Act, any profits or gains arising from the transfer of a capital asset effected in the previous year, shall be chargeable to income tax under the head 'capital gains' and shall deemed to be the income of the previous year in which the transfer took place unless such capital gain is exempted under the prescribed exemptions.

'Capital gains' means any profit or gains arising from transfer of a capital asset. If any Capital Asset is sold or transferred, the profits arising out of such sale are taxable as capital gains in the year in which the transfer takes place. Capital gains is the difference between the price at which the capital asset was acquired and the price at which the same asset was sold. In technical terms, capital gain is the difference between the cost of acquisition and the fair market value on the date of sale or transfer of asset.

Under the existing provisions of Section 2(14), a 'capital asset' means, property of any kind held for personal use by the assessee, whether or not connected with his business or profession, personal effects held for personal use by the assesseee or any number of his family dependent on him are excluded from the ambit of the definition of capital asset. The only asset that is in the nature of personal effects, but is included in the definition of capital asset is jewellery and ornaments. However, with effect from assessment year 2008-09, archeological collections, drawings, paintings, sculptures or any work of art have also been excluded from the meaning of personal effects and transfer of such personal effects will also attract capital gains tax. Capital Assets are of two types i.e., long term and short term. A capital asset held for 36 months or less before it is sold or transferred.is called as a short-term capital asset and if the period exceeds 36 months, the asset is known as a long-term capital asset. In case of shares, debentures and mutual fund units the period of holding required is only 12 months. Transfer of a short term capital asset gives rise to "Short Term Capital Gains" (STCG) and transfer of a long capital asset gives rise to "Long Term Capital Gains" (LTCG). Different rates of tax apply for gains on transfer of the long term and short-term capital assets. Gains on short-term capital asset are taxed as regular income.


Computation of Capital Gains

Capital gains are to be computed by deducting the following three amounts from the consideration money received on transfer of the asset :

  • The actual cost of the asset or its estimated market value as on 1.4.81, if acquired earlier

    Where the asset was purchased, the actual cost is the price paid. But, where the asset was acquired by way of exchange for another asset, the actual cost is the fair market value of that other asset as on the date of exchange. Any expenditure incurred in connection with such purchase, exchange or other transaction e.g. brokerage paid, registration charges and legal expenses also forms a part of this cost. Sometimes advance is received against agreement to transfer a particular asset. Later on, if the advance is retained by the tax payer or forfeited for other party's failure to complete the transaction, such advance is to be deducted from the actual cost.

  • The cost of improvement, if any, for the asset

    The cost of improvement means, all expenditure of a capital nature incurred in making additions or alternations to the capital asset. However, any expenditure which is deductible in computing the income under the heads Income from House Property, Profits and Gains from Business or Profession or Income from Other Sources (Interest on Securities) would not be taken as cost of improvement. Cost of improvement for goodwill of a business, right to manufacture, produce or process any article or thing is NIL.

  • Expenses incurred on transfer of the asset.

In case of a long-term capital asset, the costs are increased as per a Cost inflation index for the year.


Exemptions from Capital Gains

There are certain cases where the transfer of capital assets is taking place but the capital gain arising out of such transactions is exempt from income tax. Such exemptions are of two types :

  • Exemption of capital gains under section 10 of the Income Tax Act. It contains exempted capital gain in the hands of various categories of persons.

  • Exemptions of capital gains under the following sections :

    • Profit on sale of property used for residence(Section 54)

    • Capital gain on transfer of land used for agricultural purposes not to be charged in certain cases(Section 54B)

    • Capital gain on compulsory acquisition of lands and buildings not to be charged in certain cases (Section 54D)

    • Capital gain not to be charged on investment in certain bonds(Section 54EC)

    • Capital gain on transfer of certain listed securities or unit, not to be charged in certain cases(Section 54ED)

    • Capital gain on transfer of certain capital assets not to be charged in case of investment in residential house(Section 54F)

    • Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area (Section 54G)


Other Categories

Taxation of Individuals
Who is liable to pay income tax
Sources of Income
Income from Salaries
Income from Capital Gains
Income from House property
Income from Profits & gains of business or profession
Income from other sources
Taxation of Partnerships
Customs Duties (Import Duty and Export Tax)
Wealth Tax
Taxation of Corporates
Taxation of Agents
Excise Duty
Permanent Account Number (PAN)
Taxation of other forms of business entities
Taxation of Trusts
Taxation of Small Scale Industries
Joint Venture Companies
Cooperative Societies
Taxation of Representative offices
Service Tax
Value Added Tax (VAT)


India has a well developed tax structure. The power to levy taxes and duties is distributed among the three
tiers of Government, in accordance with the provisions of the Indian Constitution. The main taxes/duties that
the Union Government is empowered to levy are:- Income Tax (except tax on agricultural income,
which the State Governments can levy), Customs duties, Central Excise and Sales Tax and Service Tax. The principal taxes levied by the State Governments are:- Sales Tax (tax on intra-State sale of goods), Stamp Duty (duty on transfer of property), State Excise (duty on manufacture of alcohol), Land Revenue (levy on land used for agricultural/non-agricultural purposes), Duty on Entertainment and Tax on Professions & Callings. The Local Bodies are empowered to levy tax on properties (buildings, etc.), Octroi (tax on entry of goods for use/consumption within areas of the Local Bodies), Tax on Markets and Tax/User Charges for utilities like water supply, drainage, etc.

In the wake of economic reforms, the tax system in India has under gone a radical change, in line with the
liberal policy. Some of the changes include:- rationalization of tax structure; progressive reduction in peak
rates of customs duty; reduction in corporate tax rate; customs duties to be aligned with ASEAN levels;
introduction of value added tax; widening of the tax base; tax laws have been simplified to ensure better compliance. Tax policy in India provides tax holidays in the form of concessions for various types of investments. These include incentives to priority sectors and to industries located in special area/ regions. Tax incentives are available also for those engaged in development of infrastructure.