Category: Capital Gain

As per section 54G of the Income Tax Act, 1961, where any capital gain arises from the transfer of a capital asset, being machinery or plant or building or land or any rights in building or land used for the purposes of the business of an industrial undertaking situated in an urban area, effected in the course of, or in consequences of, the shifting of such industrial undertaking to any other area (other than urban area).

• Conditions
  

1. A capital asset used for industrial undertaking located in urban areas is transferred
   
2. Transfer of asset take place to areas other than urban areas
   
3. The assess within a period of one year before or 3 years after the date on which asset took place ;
   
   1. Purchased a new plant
      
   2. Acquired or construct building or land for business purpose
      
   3. Shifting the original asset and transfer the establishment of such undertaking to such area
      
   4. Incurred expenses on such purpose as may be specified
      

• Exemption:-
  

1. The amount of capital gain generated on transfer of capital asset
   
2. Cost and expenses incurred in 9(a) to (d)
   

• Asset is transferred within 3 years;-
  

  If the asset is transferred with in a period of 3 years the amount exempted earlier will be taken back
  

• Scheme of deposit:-
  

  If amount is not utilized before due date of submission of return, them it should be deposited in a capital gain deposit scheme.

As per section 48 of the income tax Act, 1961 the income chargeable under the head “Capital Gain” shall be computed by deducting from the value of the consideration received or accruing as result of transfer of the capital asset the following amounts, namely:-

1. Expenditure incurred wholly and exclusively in connection with such transfer.
   
2. The cost of acquisition of the asset and the cost of any improvement thereto. 

Section of 50 the Income tax act 1956 is applicable to Capital Asset which is forming the part of a block of assets in respect of which depreciation is allowed under Income Tax Act. However this provision is not applicable in case of power-generating unit claiming deprecation on SLM method.

Situation 1– when WDV is Zero [sec50 (1)]

When written down value of block of asset on last day of previous is zero

If step 1 is more than step 2 then difference taken as STCG & conversely, if step 1 is equal or less than step 2 then sec54 (1) is not applicable

Situation 2-Block is empty [sec 50(2)]

Section50 (2) is applicable when block of asset cease to exist on last day of previous year because all the asset in that block are empty

• Cost of acquisition –
  

• Compute capital gain/loss-
  

 

How to Claim Exemption from Capital gain tax on Transfer of a Long Term Capital Asset Other Than Residential House under Section 54F of the Income Tax Act,1961.

Conditions

• Only a Individual and Hindu undivided family can claim exemption
• Capital asset transferred is long-term capital asset other than residential house property
• The assessee within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house.
• Assessee should not owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or
• Assessee should not purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or 
• Assessee should not  constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; 

Exemption

In order to claim exemption under sec-54F, Residential house should be purchased by assess (old/new) or build a new Residential house

Not more than one Residential house property should be owned by taxpayer.

Amount of exemption will be =

The amount of the net consideration which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section139 in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit ; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset

Withdrawal of exemption in following circumstances

If all the above conditions are satisfied, then-

1. The capital gain is a chargeable to tax in the previous year in which transfer take place
   
2. Amount recorded in the books of company shall be taken as full value of consideration received.
   

Distribution of capital asset on dissolution of Firm section 45(4)

If all the above conditions are satisfied, then-

1. The capital gain is a chargeable to tax in the previous year in which transfer take place
   
2. Capital gain is calculated by taking fair market value of asset on date of transfer is taken as full value of consideration
   

Capital gains.

45. (1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F , 54G and 54H, be chargeable to income-tax under the head “Capital gains”, and shall be deemed to be the income of the previous year in which the transfer took place.

 (1A) Notwithstanding anything contained in sub-section (1), where any person receives at any time during any previous year any money or other assets under an insurance from an insurer on account of damage to, or destruction of, any capital asset, as a result of—

           (i)  flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or

          (ii)  riot or civil disturbance; or

         (iii)  accidental fire or explosion; or

         (iv)  action by an enemy or action taken in combating an enemy (whether with or without a declaration of war),

then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax under the head “Capital gains” and shall be deemed to be the income of such person of the previous year in which such money or other asset was received and for the purposes of section 48, value of any money or the fair market value of other assets on the date of such receipt shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such capital asset.

Explanation.—For the purposes of this sub-section, the expression “insurer” shall have the meaning assigned to it in clause (9) of section 2 of the Insurance Act, 1938 (4 of 1938).]

 (2) Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.

(2A) Where any person has had at any time during previous year any beneficial interest in any securities, then, any profits or gains arising from transfer made by the depository or participant of such beneficial interest in respect of securities shall be chargeable to income-tax as the income of the beneficial owner of the previous year in which such transfer took place and shall not be regarded as income of the depository who is deemed to be the registered owner of securities by virtue of sub-section (1) of section 10 of the Depositories Act, 1996, and for the purposes of—

           (i)  section 48; and

          (ii)  proviso to clause (42A) of section 2,

the cost of acquisition and the period of holding of any securities shall be determined on the basis of the first-in-first-out method.

Explanation.—For the purposes of this sub-section, the expressions “beneficial owner”, “depository” and “security” shall have the meanings respectively assigned to them in clauses (a), (e) and (l) of sub-section (1) of section 2 of the Depositories Act, 1996.

(3) The profits or gains arising from the transfer of a capital asset by a person to a firm or other association of persons or body of individuals (not being a company or a co-operative society) in which he is or becomes a partner or member, by way of capital contribution or otherwise, shall be chargeable to tax as his income of the previous year in which such transfer takes place and, for the purposes of section 48, the amount recorded in the books of account of the firm, association or body as the value of the capital asset shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.

(4) The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.

(5) Notwithstanding anything contained in sub-section (1), where the capital gain arises from the transfer of a capital asset, being a transfer by way of compulsory acquisition under any law, or a transfer the consideration for which was determined or approved by the Central Government or the Reserve Bank of India, and the compensation or the consideration for such transfer is enhanced or further enhanced by any court, Tribunal or other authority, the capital gain shall be dealt with in the following manner, namely :—

          (a)  the capital gain computed with reference to the compensation awarded in the first instance or, as the case may be, the consideration determined or approved in the first instance by the Central Government or the Reserve Bank of India shall be chargeable as income under the head “Capital gains” of the previous year in which such compensation or part thereof, or such consideration or part thereof, was first received]; and

          (b)  the amount by which the compensation or consideration is enhanced or further enhanced by the court, Tribunal or other authority shall be deemed to be income chargeable under the head “Capital gains” of the previous year in which such amount is received by the assessee;

      (c)  where in the assessment for any year, the capital gain arising from the transfer of a capital asset is computed by taking the compensation or consideration referred to in clause (a) or, as the case may be, enhanced compensation or consideration referred to in clause (b), and subsequently such compensation or consideration is reduced by any court, Tribunal or other authority, such assessed capital gain of that year shall be recomputed by taking the compensation or consi-deration as so reduced by such court, Tribunal or other authority to be the full value of the consideration.

Explanation.—For the purposes of this sub-section,—

           (i)  in relation to the amount referred to in clause (b), the cost of acquisition and the cost of improvement shall be taken to be nil;

          (ii)  the provisions of this sub-section shall apply also in a case where the transfer took place prior to the 1st day of April, 1988;

         (iii)  where by reason of the death of the person who made the transfer, or for any other reason, the enhanced compensation or consideration is received by any other person, the amount referred to in clause (b) shall be deemed to be the income, chargeable to tax under the head “Capital gains”, of such other person.

(6) Notwithstanding anything contained in sub-section (1), the difference between the repurchase price of the units referred to in sub-section (2) of section 80CCB and the capital value of such units shall be deemed to be the capital gains arising to the assessee in the previous year in which such repurchase takes place or the plan referred to in that section is terminated and shall be taxed accordingly.

Explanation.—For the purposes of this sub-section, “capital value of such units” means any amount invested by the assessee in the units referred to in sub-section (2) of section 80CCB.

1. Where in assessment year a capital asset is compulsory acquired under any low or asset which is not compulsory acquired but the consideration is approved or determine by the central govt. or RBI then the capital gain from such transfer will be chargeable to tax as the income of previous year in which such compensation or part of compensation is first received by the assessee
   
2. The amount by which the compensation is enhance shall be deemed as income under deducting cost of transfer related to such enhanced compensation
   

Computation of capital gain:

First Initial compensation [calculation in the year of receipt]

 

Enhanced compensation [in the year of actual receipt]

 

Where compensation received subsequently reduced by the court then the capital gain of that year in which compensation received was taxed shall be recomputed.

The income tax act grant total/ partial exemption from capital gain tax which may arise on transfer of residential house property by individual or HUF under section 54 of the income tax act but such exemption can only be claimed when individual fulfills the conditions given under section 54 of the income tax act. Also Read Which are the Assets not Taxed under Capital Gain Head of Income Tax Act

Conditions for claiming exemption from capital gain tax –

One should satisfied the following conditions in order to take exemption under sec-54

• Only a Hindu undivided family or individual can claim exemption
  
• Exemption is available only if capital asset transferred is residential house chargeable under head “Income from house property“.
  
• Capital asset transferred should be long term capital asset
  
• In order to claim exemption assess will have to construct or purchase a residential house old/new situated inside/outside India within given time limit.

  	Time -limit
  Purchasing a residential house	Purchased 1Yr before, or 2Yrs after the date of transfer
  Constructing residential house	Constructing should be completed within 3 years from date of transfer

  A person shall be entitled to claim exemption under section 54 of the Act even in respect of a self-occupied residential house.Circular : No. 538, dated 13-7-1989. (Also Read What do We Mean by Long Term Capital Gain Tax)

Amount of the exemption will be minimum of below two:

1. Amount of capital gain generated on transfer of a residential house or
   
2. Amount invested in purchasing or constructing a new Residential house.
   

In case person is not able to utilize the amount of capital gain before furnishing the return under section 139 of the income tax act, 1961 then he shall deposit the amount in such bank deposit as notified by the central government for such person before furnishing return under section 139(1) of the income tax act. Also Read What is Considered as Personal Effects and Jewellery under Income Tax for Capital Gain Tax

Provided such deposit is to be utilized for purchase or construction within given time limit under section 54(1) of the income tax. In case amount is not utilized or partially utilized with given time limit then such remaining amount will be taxable in year in which such time limit expires. Also Read Capital Gain Exemption by making Investment in certain bonds of REC and NHAI

Reference: Section 54 of the Income Tax Act, 1961

Profit on sale of property used for residence.

54. (1) Subject to the provisions of sub-section (2), where, in the case of an assessee being an individual or a Hindu undivided family], the capital gain arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head “Income from house property” (hereafter in this section referred to as the original asset), and the assessee has within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house, then], instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,—

(i) if the amount of the capital gain is greater than the cost of the residential house] so purchased or constructed (hereafter in this section referred to as the new asset)], the difference between the amount of the capital gain and the cost of the new asset shall be charged under section45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or

(ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain.

(2) The amount of the capital gain which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section139, shall be deposited by him before furnishing such return [such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section139 in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset :

Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,—

(i) the amount not so utilised shall be charged under section 45 as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and

(ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.

What do We Mean by Transfer and Transaction not Regarded as Transfer

Any profit arises on transfer of a capital asset is chargeable to tax under capital gain, if it Is not exempt under sec 54,54B, 54D, 54EC, 54F, 54G, 54GA.

Tax liability arises only if certain conditions are fulfilled. One of the basic conditions is that it should be capital asset as per income tax act and there must be the transfer of that capital asset and profit should arise from that transfer.

For the purpose of the taxability capital assets are divided into two category short term and long term. Any gain or loss arising from short term assets are known as short term capital gain or loss and any gain or loss arising from long term assets are known as long term capital gain or loss.

One of the basic criteria for dividing the assets is period of holding means for how long assets are owned by the assessee. And for asset to be treated as long term it should be owned for at least 36 months and for financial assets like equity shares, listed securities, units of mutual fund etc. tenure is reduced to 12 months.

Conditions for taxability of capital gain:-