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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)
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