Basic of Capital Gains

Topic Covers:

1. Introduction
2. Capital Assets u/s 2(14)
3. Holding Period
4. Transfer u/s 2(47)
5. Transactions not consider as transfer

Introduction

Capital gain arises when capital assets are transferred and this transfer results in profit or loss. For the chargeability of capital gain, there must be a transfer of capital asset. In this article we discuss the meaning of “Capital assets”, and “Transfer” and know about the holding period, types of capital gain and exceptions.

Capital Assets u/s 2(14)

Let’s understand first the meaning of capital assets. A "capital asset" is a most important concept in understanding the taxation of capital gains. The definition of a capital asset is provided under Section 2(14) of the Income Tax Act:
Any Kind of Property: A capital asset can encompass any kind of property, regardless of whether it is held in connection with the assessee's business or profession. The word property includes both movable and immovable assets, tangible (e.g., furniture, jewellery) and intangible (e.g., goodwill, copyright) assets.
Securities Held by Foreign Institutional Investors: Securities held by Foreign Institutional Investors (FIIs) who have invested in accordance with the regulations under the Securities and Exchange Board of India Act, 1992 is also covered in this definition.
Certain Unit-Linked Insurance Policies: Unit-linked insurance policies (ULIPs) for which exemption under Section 10(10D) does not apply due to the fourth and fifth provisos thereof. These provisos set limits on the premium payable for ULIPs issued on or after a certain date.

Exclusions from the Definition of Capital Asset:

The definition of a capital asset is comprehensive but some specific categories of assets are not included. Following are exclusions from the definition of a capital asset:
Stock in Trade: Stock-in-trade, consumable stores, or raw materials for held for business or profession are not considered capital assets. And  profit arising from the sale of such assets is taxable under the head "Profits and Gains of Business or Profession."
Personal Effects: Movable properties which are held for the personal use of the assessee or their dependent family members have personal effects. However, specific items are excluded from this definition. Personal effects include items such as clothing, furniture, cars, cycles, and scooters used for personal purposes. Excluded items encompass jewellery, archaeological collections, drawings, paintings, sculptures, or any works of art.

Holding Period

Period of holding of capital assets is important to know the types of capital gain. It is short-term or long-term capital gain.

Short-term Capital gain:

Capital assets held for less than 36 months immediately before the date of transfer will be treated a short-term capital assets. However, the following assets held for less than 12 months shall be treated as short-term capital assets:

1. Equity or preference shares in a company which are listed in any recognized stock exchange in India;
2. Other listed securities;
3. Units of UTI;
4. Units of equity-oriented funds; or
5. Zero-Coupon Bonds. Note: Unlisted shares and immovable property (being land or building or both) held for not more than 24 months immediately prior to the date of transfer shall be treated as short-term capital assets.

Long-term Capital Gain

1. Equity or preference share in a listed Indian company (held for more than 12 months).
2. Any security like debentures, government securities, etc., listed in India (held for more than 12 months).
3. A unit of an equity-oriented fund (whether quoted or not).
4. Zero-Coupon Bonds (whether quoted or not).
5. Units of UTI (whether quoted or not).
6. Equity or preference share in an unlisted company (held for more than 24 months).

Immovable property, i.e., land or building or both (held for more than 24 months).

Exception to the long-term capital asset rule:

Any gain on the transfer of an asset on which depreciation is allowed as per the Written Down Value (WDV) method under Section 32(1)(ii) shall be taxable as short-term capital gain, regardless of the period of holding.

Transfer u/s 2(47)

Meaning of "Transfer" under Section 2(47):

The definition of "transfer" under Section 2(47) of the Income Tax Act is crucial for determining when a capital gain arises. It includes various scenarios where an asset is considered to be transferred, and capital gains may become taxable. Here are the key components of the definition of "transfer":

Transfer in relation to a capital asset includes:

1. Sale, Exchange & Relinquishment of the asset;
2. Extinguishment of any right in an asset;
3. Compulsory acquisition of an asset under any law;
4. Conversion of asset into stock-in-trade by the owner;
5. Any transaction of immovable property u/s 53A of the Transfer of Property Act, 1882;
6. Any transaction which has the effect of transferring or enabling the enjoyment of any immovable property.
7. Maturity or redemption of a zero coupon bond

Transactions not considered as transfer

Capital gains are taxed in the previous year in which the asset is transferred. However, there are exceptions to this rule, such as in the case of compulsory acquisition by the government, where capital gains may be taxable in the year in which the consideration is received rather than in the year of the actual transfer.

To charge any income under the head of "Capital Gains," the following essential conditions must be satisfied:

1. Existence of a Capital Asset: There must be a capital asset involved in the transaction. A capital asset can include various assets like land, buildings, securities, jewellery, etc.
2. Transfer of the Capital Asset: The assessee (taxpayer) must transfer the capital asset to another party. Transfer can occur through various means, such as sale, exchange, gift, or any other mode of disposal.
3. Profit or Gain on Transfer: There should be a profit or gain (which can also include negative profit or loss) arising from the transfer of the capital asset. In other words, the difference between the sale consideration and the cost of acquisition should result in either a profit or a loss.
4. The Capital Asset at the Time of Transfer: The asset being transferred should qualify as a capital asset at the time of transfer. Certain assets may be excluded from the definition of capital assets, such as stock-in-trade, personal effects, agricultural land in rural areas, etc.

In summary, capital gains are taxable when there is a transfer of a capital asset, resulting in a profit or loss. It's essential to consider the specific conditions and exemptions outlined in the Income Tax Act to determine the taxability of capital gains in different scenarios.

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