Income from Capital Gain in India

Every Person when he /she sells any immovable property shares, mutual funds, or any other asset capital asset , then that income proceeds are subject to capital gain taxation.

Section 45 of the Income Tax Act, 1961 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 “Capital Gain”

Such capital gains will be deemed to be the income of the previous year in which the transfer took place.

Two terms to be noted are as follows

Capital asset

According to section 2(14), a capital asset means –

(a) property of any kind held by an assessee, whether or not connected with his business or profession;
(b) any securities held by a Foreign Institutional Investor who has invested in such securities in accordance with the SEBI regulations.
However, it does not include—
(i) Any stock-in-trade  consumable stores or raw materials held for the purpose of the business or profession of the assessee;
(ii) 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 –
(a) Jewelry;
(b) Archaeological collections;
(c) Drawings;
(d) Paintings;
(e) Sculptures; or
(f) Any work of art.
(iii) Rural agricultural land in India
(iv) 6½% Gold Bonds, 1977, or 7% Gold Bonds, 1980, or National Defence Gold Bonds, 1980, issued by the Central Government;
(v) Special Bearer Bonds, 1991, issued by the Central Government;
(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999, notified by the Central Government.

Rural agricultural land means

Rural area for the above purpose is as follows –

From the assessment year 2014-15 – Any area which is outside the jurisdiction of a municipality or cantonment board having a population of 10,000 or more and also which does not fall within a distance (to be measured aerially) given below –

For the above purpose, “population” means the population according to the last preceding census, in which the relevant figures were published before the first day of the previous year.

Up to the assessment year 2013-14 – Any area which is outside the jurisdiction of a municipality or cantonment board having a population of 10,000 or more and also which does not fall within such notified* distance [up to 8 kilometres – see Notification No. SO 10(E), dated January 6, 1994] from the local limits of such municipality or cantonment board.

Agricultural land:

The following guiding factors to be considered while determining the nature and character of the land :

• Whether the land was classified in the revenue record as agricultural and whether it was subject to the payment of land revenue, this factor alone will not be conclusive.
• Whether the land was actually or ordinarily used for agricultural purposes at or about the relevant time.
• Whether such user of the land was for a long period or whether it was of a temporary character or by way of a stop-gap arrangement.
• Whether the income derived from agricultural income carried on in the land bore any rational proportion to the investment made in purchasing the land.
• Whether the land, on the relevant date, had ceased to be put to agricultural use; if so, whether it was put to an alternative use; whether such cesser and/or alternative user was of a permanent or temporary nature.
• Whether the land, though entered in the revenue record, had never been actually used for agriculture, whether the owner meant or intended to use it for agricultural purposes.
• Was the land itself developed by plotting and providing roads and other facilities?
• Whether there were any previous sales of portions of the land for non-agricultural use.

All these factors would not be present or absent in any case. In each case, one or more of these factors may make appearance and the ultimate decision will have to be reached on a balanced consideration of the totality of circumstances.

Transfer:

It provides an inclusive definition of “transfer” in relation to the capital asset of income tax return filing

(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 a transfer; or
(v) The maturity or redemption of a Zero Coupon Bond or
(vi) Part-performance of the contract: Sometimes, possession of the immovable property is given in consideration of part-performance of a contract; or
(Vii) Lastly, there are certain types of transactions that have the effect of transferring or enabling the enjoyment of the immovable property. Even the power of attorney transactions is covered.

Explanation 2 to section 2(47) clarifies that ‘transfer’ includes and shall be deemed to have always included:

1. Disposing of or parting with an asset or any interest therein or
2. Creating any interest in any asset in any manner whatsoever

Directly or indirectly, – absolutely or conditionally, – voluntarily or involuntarily by way of an agreement (whether entered into in India or outside India) or otherwise.

Types of capital gain

Depending on the tenure of holding an asset, gains against an investment can be broadly divided into the following types –

Short-term capital gain

If an asset is sold within 36 months of acquisition, then the profits earned from it are known as short-term capital gains

However, tenure varies in the case of different assets. For Mutual Funds and listed shares, Long term capital gain happens if an asset is sold after holding back for 1 year.

Long-term capital gain

The profit earned by selling an asset that has been held for more than 36 months is known as long-term capital gains. After 31 March 2017, the holding period for non-moveable properties was changed to 24 months. However, this is not applicable to movable assets such as jewellery, debt-oriented Mutual Funds, etc.

The nature of capital assets can be determined as follows

The asset is considered to be long-term in the following cases

Calculation of Capital Gains

The calculations of capital gains are dependent on the type of assets and their holding period.  A few terms that an individual must know before calculating gains against their capital investments are here as follows –

Full value consideration 

It is the consideration that is received by a seller for the transfer of a capital asset.

Cost of acquisition 

The cost of acquisition is the value of an asset bought by the seller at the time of purchase.

Cost of improvement 

The cost of improvement is the amount of expenses incurred by a seller in making any additions or alterations to a capital asset.

Note: Indexation benefit on cost of acquisition and cost of improvement is applicable only for long-term capital asset

Tax Rates

Tax on Short-Term and Long-Term Capital Gains

Cost of Inflation Index for Capital Gains

• As per Section 48, Second Provision of Income Tax Rates, the cost of acquisition and cost of improvement is increased by applying the Cost indexation index for computing long-term capital gains.
• Once the CII is applied, the cost is known as the Indexed cost of Acquisition and Indexed Cost of Improvement.
• Cost Inflation Index in relation to the previous year means such index may be notified by the central government, having regard to 75% of the average rise in the Consumer Price Index (Urban) for the immediately preceding year to such previous year.

The benefit of indexation will not apply to

• Short-term capital gains
• Capital-indexed bonds issued by the government
• Sovereign gold bonds issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme 2015
• There will be no indexation benefit for depreciable assets since capital gains are considered to be short-term capital gains.

The cost Inflation Index is as follows.