1. Preconditions for charge u/s. 45

Income under the head “Capital Gains” can be charged only if the following three conditions are satisfied

a. There must be a “capital asset” [for definition of “capital asset” refer S. 2(14)];

b. There must be a “transfer” of such capital asset [for meaning of “transfer”, refer Ss. 2(47), 47 & 46(1)]; and

c. There must arise either profits or gains or loss out of such transfer.

2. Year of Chargeability

Capital Gains are generally charged to tax in the year in which “transfer” takes place (For exception to this general rule, refer column (4) of Table 3)

3. Mode of Computation

3.1 Income under the head Capital gains is to be computed as follows

3.2 Capital gains u/s. 48 are computed as follows:

Exceptions to S. 48:

1. In case of a non-resident, Capital Gains on transfer of shares in or debentures of an Indian company are to be computed firstly by converting cost of acquisition, full value of consideration and expenses incurred in connection with transfer into originally utilised foreign currency and reconverting the capital gains so computed into Indian rupees.
   Rule 115A prescribes the rates of conversion and reconversion for the purpose of calculation of capital gains in the above case. The rates of conversion and reconversion are as follows:

2. The benefit of indexation of cost will not be available for computation of Capital Gains on transfer of Bonds/Deb.

3. While calculating long-term capital gains (other than those covered under (a) and (b) above) cost of acquisition and cost of improvement are required to be indexed at prescribed indices (refer Table 2)

3.3 Capital gains u/s. 50 are computed as follows:

If the resultant figure is negative, the same is chargeable as deemed short-term capital gains u/s. 50.

If the resultant figure is positive and the entire block ceases to exist as such (for the reason that all the assets in that block are transferred during the year) the resultant figure indicates deemed short-term capital loss (refer CBDT Circular No. 469 dated 23-9-1986 — reported in 162 ITR (Stat) 21, 30).

If the resultant figure is positive and the block continues to exist (For the reason that at least one asset in the block continues to be owned by the assessee) then there will be no gains or losses and the assessee will be entitled to claim depreciation on the resultant figure.

3.4 Capital Gains u/s. 50B

Profit arising on slump sale of one or more undertakings would be chargeable to tax as Long-Term Capital Gain in the year of transfer if such undertakings have been owned and held by the assessee for at least 36 months before the date of transfer or as Short-Term Capital Gain if held for a shorter period.

The networth (as defined) of the undertakings would be regarded as the cost of acquisition and improvement. No indexation would be allowed in respect of such cost.

3.5 Indexation

In case the capital asset is a long-term capital asset, the cost of acquisition is to be increased by cost inflation index. The prescribed cost inflation index is given in column (2) of Table 2 below. Column (4) gives the multiplying factor in case of capital asset sold in financial year 2012-13.

For example, if cost of acquisition of an asset acquired in F.Y. 1994-95 is
`50,000, its indexed cost of acquisition in F.Y. 2012-13 would be `1,64,478 (i.e., 50,000 x 3.289575)

4. Exempt Capital Gains

Refer sections 10(33), 10(37), 10(38), sections 54 to 54GB and section 115F

5. Rate of Tax on Capital Gains

Refer “Rates of Tax” on click here

TABLE 1

CAPITAL GAINS ON SPECIFIC TRANSFERS

('C.A.' refers to Capital Asset)

Note :
1. As per Circular No. 768, dated 24th June, 1998, FIFO method shall be followed in case dematerialised securities. Where the investor has more than one security account, FIFO method shall be followed account wise.

2. As per Section 55A the AO may refer to the Valuation Officer for ascertaining the fair market value of the asset under following circumstances:

1. Where in view of the AO the value of the asset claimed by the assessee in accordance with the estimate made by a registered valuer, is less than is FMV or (w.e.f. 01.07.2012, section 55A, clause (a) is amended as follows:
   Where in view of the AO, the value of the asset claimed by the assessee in accordance with the estimate made by a registered valuer is at variance with its fair market value)

2. Where in view of the AO the value of the asset claimed by the assessee is less than the FMV by so much percentage or by so much amount as may be prescribed or

3. Having regard to the nature of the asset and other relevant circumstances, it is necessary to do so.

The amendment in clause (a) above is with effect from 1st July, 2012.

3. As per newly introduced section 50D (with effect from 1st April 2013), where the consideration received or accruing as a result of the transfer of a capital asset by an assessee is not ascertainable or cannot be determined, then, for the purpose of computing income chargeable to tax as capital gains, the fair market value of the said asset on the date of transfer shall be deemed to be the full value of the consideration received or accruing as a result of such transfer.

4. The definition of agricultural land has been amended and divided into three categories based on population and shortest aerial distance. Notification by Central Government now not required.

Cost of Acquations

Please click here for Exempt Capital Gain

Notes

1. If the new asset is transferred, within a period of 3 years from the date of purchase/construction, the cost shall be reduced, in the year of transfer, by the gains exempted earlier.

2. If the gains are not reinvested as specified, before the due date of filing the return u/s. 139(1), then the amount not so reinvested is required to be deposited on or before that date in an account in a specified bank/institution and utilised for the purchase/construction of the relevant asset in accordance with the notified scheme within specified time limit in order to continue availing of the benefit of exemption [For the notified scheme, See 172 ITR (St.) 91].

3. Industrial land or building must have been used for the purposes of the business of the undertaking. New asset must be purchased/constructed for the purposes of shifting/reestablishing/setting up industrial undertaking.

4. The assessee must not own more than one residential house other than the new house on the date of the transfer of the original asset.

5. The assessee must neither purchase within two years after or construct within three years after the day of transfer, any other residential house other than the one in which reinvestment is made nor transfer the new asset within 3 years from the date of its acquisition/construction, otherwise the amount of gains earlier exempted shall be deemed to be LTCG in the year of such transfer.

6. The industrial undertaking must have been situated in an urban area and the transfer must have been effected as a result of shifting to a non-urban area.

7. The industrial undertaking must have been situated in an urban area and the transfer must have been effected as a result of shifting to a Special Economic Zone as defined in clause (za) of the Special Economic Zones Act, 2005.

8. ‘Foreign Exchange Asset’ means any of the assets listed in Note 9 below which assessee has acquired or purchased with, or subscribed to in convertible foreign exchange.

9. A 'Specified Asset' u/s. 115F means :

1. Shares in an Indian company;

2. Debentures issued by Indian company which is not a pvt. company;

3. Deposits with an Indian company which is not a private company;

4. Any security of the Central Government as defined in S. 2(2) of the Public Debt Act;

5. Other notified assets.

10. In case of compulsory acquisition of asset under any law, time for reinvestment or deposit in specified assets, of sale proceeds or capital gains as the case may be, as prescribed by Ss. 54, 54B, 54D, 54EC and 54F shall be reckoned from the date of receipt of compensation as per provisions of
    S. 54H.

11.  Board Cir. No. 471 dtd. 15-10-1986 (162 ITR (St) 41) has clarified that cases of allotment of flats under the self financing scheme of the Delhi Development Authority (DDA) should be treated as cases of ‘construction’ for the purposes of Ss. 54 and 54F.
    Similarly, the Board Cir. No. 672 dtd. 16-12-1993 (205 ITR (St) 47) has clarified that allotment of flats/houses by co-op. societies and other institutions, whose schemes of allotment and construction are similar to those of DDA (as mentioned in para 2 of aforesaid Cir. No. 471), would be treated as ‘construction’ for the purposes of Ss. 54 and 54F.

12. Board Cir. No. 667 dt. 18-10-1993 (204 ITR (St) 103) has clarified that for the purpose of computing exemption u/s. 54 or 54F, the cost of the plot together with cost of the building will be considered as cost of new asset, provided the acquisition of the plot and also the construction thereon are completed within the period specified in these sections.

13. Where new asset is transferred within 3 years from date of its acquisition, or converted into money or any loan/advance is taken on securities of specified bond, the amount of gains earlier exempted shall be deemed to be LTCG in the year of such transfer or conversion.

14. Cost of specified asset shall not be considered for:

    — rebate u/s. 88 up to Assessment Year 2005-06;

    — deduction u/s. 80C from Assessment Year 2006-07.
     

15. Where new asset is transferred within 3 years from date of its acquisition or converted into money or any loan/advances is taken on the security of specified assets, amount of gains earlier exempted shall be deemed to be LTCG in year of such transfer or conversion.

16. Where new asset is transferred within one year from date of its acquisition, amount of gains earlier exempted shall be deemed to be LTCG in the year of such transfer.

17. The benefit of exemption under section 54B extended to HUF with effect from 1st April, 2013.

18. Under section 54GB

    18.1 “Eligible company” means a company which fulfils the following conditions, namely:—

    1. it is a company incorporated in India during the period from the 1st day of April of the previous year relevant to the assessment year in which the capital gain arises to the due date of furnishing of return of income under sub-section (1) of section 139 by the assessee;

    2. it is engaged in the business of manufacture of an article or a thing;

    3. it is a company in which the assessee has more than 50% share capital or more than 50% voting rights after the subscription in shares by the assessee; and

    4. iv. it is a company which qualifies to be a small or medium enterprise under the Micro, Small and Medium Enterprises Act, 2006;

    18.2. “New asset” means new plant and machinery but does not include—

    1. any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person;

    2. any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest house;

    3. any office appliances including computers or computer software;

    4. any vehicle; or

    5. any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of business or profession” of any previous year.

    18.3. As per the section, the amount of the net consideration, which has been received by the company for issue of shares to the assessee, to the extent it is not utilised by the company for the purchase of the new asset before the due date of furnishing of the return of income by the assessee under section 139, shall be deposited by the company, before the said due date in an account in any such bank or institution as may be specified and shall be utilised in accordance with any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and the return furnished by the assessee shall be accompanied by proof of such deposit having been made

    18.4. If the equity shares of the company or the new asset acquired by the company are sold or otherwise transferred within a period of five years from the date of their acquisition, the amount of capital gain arising from the transfer of the residential property which was not charged to tax, shall be deemed to be the income of the assessee chargeable under the head “capital gains” of the previous year in which such equity shares or such new asset are sold or otherwise transferred, in addition to taxability of gains, arising on account of transfer of shares or of the new asset, in the hands of the assessee or the company, as the case may be.

    18.5. The exemption is available in case of any transfer of residential property made on or before 31st March, 2017.

    18.6. Section 54GB shall be effective from 1st April, 2013 and would accordingly apply from A.Y. 2013-14 and subsequent years.

NO TRANSFER FOR THE PURPOSES OF CAPITAL GAIN

Following transactions are not regarded as transfer for the purpose of Capital Gain. (S. 47)

Distribution/Transfer of a Capital Asset

1. On total or partial partition of H.U.F. [S. 47(i)]

2. Under a gift/an irrevocable trust (except shares, debentures or warrants issued under ESOP/ESOS) or under a will [S. 47(iii)]

3. By a company to its Indian subsidiary company if Parent company held all the shares of Indian subsidiary company [S. 47(iv)] (see notes 1 and 2)

4. By a subsidiary company to the Indian holding company if the Indian holding company held all the shares of the subsidiary company.
   [S. 47(v)] (see notes 1 and 2)

5. By the amalgamating company to the Indian amalgamated company in a scheme of amalgamation. [S. 47(vi)]

6. Being shares held in an Indian company by the amalgamating foreign company to the amalgamated foreign company in the scheme of amalgamation if [S. 47(via)]

1. at least 25% of share holders of the first company remains share holders of the later company, and

2. there is no capital gains tax on such transfer in the country of first company

7. A capital asset by a banking company to a banking institution in a scheme of amalgamation sanctioned and brought into force by the Central Government u/s. 45(7) of the Banking Regulation Act, 1949 [S. 47(viaa)]

8. By the demerged company to the resulting company if the resulting company is an Indian company. [S. 47(vib)]

9. Being share or shares held in an Indian company by the demerged foreign company to the resulting foreign company, if

   1. the share holders holding not less than 3/4th in the value of shares of the demerged foreign company continue to remain share holders of the resulting foreign company.

   2. there is no capital gain tax on such transfer in the country in which the demerged foreign company is incorporated. [S. 47(vic)]

10. Transfer by a predecessor co-operative bank to a successor co-operative bank in a business reorganisation.
    [S. 47(vica)]

11. Transfer of shares of a predecessor co-operative bank against shares of successor co-operative bank in a business reorganisation [S. 47(vicb)]

12. Transfer or issue of shares in case of a demerger to share holders of demerged company by resulting company [S. 47(vid)] (In the case of a demerger, there is a requirement under section 2(19AA)(iv) that the resulting company has to issue its shares to the share holders of the demerged company on a proportionate basis. It is proposed to amend the provisions of section 2(19AA) so as to exclude the requirement of issue of shares where resulting company itself is a share holder of the demerged company. The requirement of issuing shares would still have to be met by the resulting company in case of other share holders of the demerged company. This amendment will take effect from 1st day of April, 2013 and will accordingly apply to assessment year 2013-14 and subsequent assessment years.)

13. Being shares held in the amalgamating company by a share holder in a scheme of amalgamation against the allotment of shares in the Indian amalgamated company “except
    where the share holder itself is the amalgamated company ”[S. 47(vii)]

14. Being bonds or shares referred to in S. 115AC(1), made outside India by a non-resident to another non-resident. [S. 47(viia)]

15. Being items of national importance specified in S. 47(ix) trf. to a University, National Museum, etc.

16. By conversion of bonds, debentures, etc. into shares or debentures of same company [S. 47(x)]

17. Conversion of Foreign Currency Exchangeable Bonds referred to in S. 115AC(1)(a) into shares or debentures of any company. [S. 47(xa)]

18. Being membership of a recognised stock exchange, on or before 31-12-1988, in exchange of shares by a person other than a company to a company “Membership of recognised stock exchange” is defined by explanation to S. 47(xi).

19. Being land of Sick Industrial company, under a scheme of SICA 1985, where suchcompany is managed by its workers co-operative. [S. 47(xii)]

20. Transfer of a capital asset where an AOP or a BOI is succeeded by a company in the course of demutualisation or corporatisation of a recognised stock exchange in India under a scheme approved by SEBI provided all the assets and liabilities of the AOP/BOI are taken over by the successor company. [S. 47(xiii)]

21. Sale/Transfer of any Capital Asset. where a firm/Sole Proprietary Concern (SPC) is succeeded by a company, provided following conditions are complied. [S. 47(xiii/xiv)]

IMPORTANT CONDITIONS FOR FIRMS

1. All partners become share holders in ratio of capital.

2. Aggregate shares of old partners not to reduce below 50% of the total voting power for min. 5 years.

3. All assets and liabilities are taken over by new company

4. Partners not to receive any benefit (other than shares) as a consideration

IMPORTANT CONDITIONS FOR SOLE PROPRIETARY CONCERN (SPC)

1. Proprietor’s shares not to reduce below 50% for minimum 5 yrs.

2. Conditions c & d of firms also applicable to SPC.
    

1. Transfer of a membership right in a recognised stock exchange for acquisition of shares, and trading or clearing rights under a scheme of demutualisation or corporatisation approved by SEBI. [S. 47(xiiia)]

2. Sale /transfer of capital asset where a private company or unlisted public company is converted into a limited liability partnership (LLP) provided following conditions are fulfilled: (see notes 2 and 3.) (S. 47(xiiib))

IMPORTANT CONDITIONS FOR CONVERSION INTO LLPS

1. All the assets and liabilities of the company before conversion are taken over by the new LLP

2. All the share holders of the company become the partners of the LLP. The profit sharing ratio and capital contribution are in the same proportion as their share holding in the company

3. The share holders do not receive any additional benefit

4. Aggregate profit sharing ratio of the old
   share holders not to reduce below 50% for min. 5 years.

5. The total assets, turnover or gross receipts of the company in any three years preceding the year of conversion do not exceed sixty lakhs

6. No amount is paid to the partners out of the accumulated profits as on the date of conversion for three years from the date of conversion.
    

1. Transfer in a scheme of lending of any securities subject to the guidelines issued by SEBI, established under sec. 3 of SEBI Act, 1992 (15 of 1992) (or RBI constituted under sec. 3(1) of the RBI Act, 1934) [S. 47 (xv)].

2. Transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the Central Government [S. 47(xvi)] (retrospective from A.Y. 2008-09).

3. Section 46 (1) : Where assets of the company are distributed to the share holders on liquidation of company, such distribution shall not be regarded as transfer by company.

Notes

Note 1 : If there is any transfer of a capital asset as a stock-in-trade after 29-2-1998 then clauses (iii) and (iv) given above will not apply.

Note 2 : Please refer S. 47A for withdrawal of exemption in certain cases.

Note 3 : The provisions of conversion of company into LLP and necessary conditions to be fulfilled are proposed by the Finance Bill, 2010. The same is yet to receive the Presidential assent .