Capital Gain

What is Capital Gain?

Profits or gains arising from the transfer of a capital asset made in a previous year is taxable as capital gains under the head “Capital Gains” in current assessment year. 
The definition of Capital Asset and Transfer are important and explained below.

Capital Asset:

Capital Assets are the properties of any kind (except below) held by a person whether or not connected with his / her business or profession.

• Stock-in-trade, consumable stores or raw-material held for business or profession.
• Items for personal effects like furniture, motor vehicles etc. (Jewellery [ including gold, silver, stone], Archaeological Collections, Drawings, Paintings, Sculptures or any work of art are Capital Assets.)
• Agriculture Land in India - it should not be situated in area within the jurisdiction of municipality, notified area committee, town area committee , cantonment board which has a population of not less than 10,000.
• Few bonds issued by Government of India (6.5% Gold Bonds 1977, 7% Gold Bonds 1980, National Defence Gold Bonds, 1980 and Special Bearer Bonds, 1991 issued by the Central Government, Gold Deposit Bonds under Gold Deposit Scheme, 1999 notified by the Central Govt).

Capital Assets are classified under two categories (Short Term & Long Term) depends upon the length for which the capital asset was held before the transfer.

Short Term Capital Asset: Capital Assets held for 36 months or less than are treated as Short Term Capital Asset. However shares of a Company, the units of Unit Trust of India or any specified Mutual Fund or any security listed in any recognized Stock Exchange are to be considered as Short Term Capital Assets if held for twelve months or less.

Long Term Capital Asset: Capital Assets held for more than 36 months are treated as Long Term Capital Asset. However shares of a Company, the units of Unit Trust of India or any specified Mutual Fund or any security listed in any recognized Stock Exchange are to be considered as Long Term Capital Assets if held for more than twelve months.

Transfer:

The word transfer defined as below under Income Tax act section 24(7):

• Sale of asset.
• Exchange of asset.
• Relinquishment of capital asset (surrender of asset).
• Extinguishment of any right on asset.
• Compulsory acquisition of capital asset under any law.

Note: Capital asset given as a gift or transferred through will not considered as transfer.

Types of Capital Gain:

Capital Gains are classified based on type of Capital Assets. Its important to under its classification to calculate the Capital Gain Tax. There are two types of Capital Gains:

Short Term Capital Gain:

Transfer of a Short Term Capital Asset gives rise to Short Term Capital Gains (STCG). Its calculated as below:

STCG = Full Value of Consideration - (Cost of Acquisition + Cost of Improvement + Cost of Transfer) - (Exemption provided by sections 54B, 54D, 54G).

Long Term Capital Gain:

Transfer of a Long Term Capital Asset gives rise to Long Term Capital Gains (LTCG). Its calculated as below:

LTCG = Full Value of Consideration received or accruing - (Indexed Cost of Acquisition + Indexed Cost of Improvement + Cost of Transfer) - (Exemption provided by sections 54, 54B, 54D, 54EC, 54ED, 54F & 54G).

Where, 
Indexed Cost of Acquisition = Cost of Acquisition X (CII of year of transfer / CII of year of Acquisition)

Indexed Cost of  Improvement = Cost of Improvement X (CII of year of Transfer / CII of year of Improvement)

CII - Cost Inflation Index.

Full Value of Consideration:

Full value of consideration includes the whole or complete sale price or exchange value or compensation including enhanced compensation received in respect of capital asset in transfer. 
The following points are important to note in relation to full value of consideration:

• The consideration may be in cash or kind.
• The consideration received in kind is valued at its fair market value.
• It may be received or receivable.
• The consideration must be actual irrespective of its adequacy.

Cost of Acquisition:

It includes any expense at the time of acquiring capital asset under transfer, i.e., the purchase price, expenses incurred up to acquiring date in the form of registration, storage etc. It also includes expenses incurred on completing transfer.

Cost of Improvement:

It includes the capital expenditure incurred by assesse for making any addition / improvement (Protecting or Curing the title) in the Capital Asset. In other words all expenditure which are incurred to increase the value of Capital Asset.

Cost of Transfer / Expenditure on Transfer:

It includes the expenditure incurred wholly and exclusively for transfer of capital asset. Examples of expenditure on transfer are the commission or brokerage paid by seller, any fees like registration fees, cost of stamp papers, travelling expenses and litigation expenses etc. 

CII - Cost Inflation Index:

Its used while calculating Indexed Cost of Acquisition and Indexed Cost of Improvement. CII value for each financial year defined as below:

Financial Year	Cost Inflation Index
1981-82	100
1982-83	109
1983-84	116
1984-85	125
1985-86	133
1986-87	140
1987-88	150
1988-89	161
1989-90	172
1990-91	182
1991-92	199
1992-93	223
1993-94	244
1994-95	259
1995-96	281
1996-97	305
1997-98	331
1998-99	351
1999-2000	389
2000-01	406
2001-02	426
2002-03	447
2003-04	463
2004-05	480
2005-06	497
2006-07	519
2007-08	551
2008-09	582
2009-10	632
2010-11	711
2011-12	785

Capital Gain Tax:

Capital Gain Tax calculated on Capital Gain. There are two type of Capital Gain Tax:

Long Term Capital Gain Tax:

Long Term Capital Gain Tax will be calculated as 20% of Long Term Capital Gain.

Short Term Capital Gain Tax:

There will be no separate formula for calculating Short Term Capital Gain Tax. Short Term Capital Gain (STGC) will be included in Total Income and will be taxed as per Income Tax Slab / Rate of individual for assessment year.

Examples of calculating Capital Gain & Capital Gain Tax:

Example 1:
Person X purchased a house property for Rs. 1, 00,000 on 31st July 2000. Constructed the first floor in March 2003 for 1, 10,000. The house property was sold for Rs. 5, 00,000 on 1st April 2005. The expenses incurred on transfer of asset were Rs. 10,000.

In this case property possessed by person more than 36 months, Long Term Capital Gain (LTCG) will be applied.

LTCG = Full Value of Consideration received or accruing - (Indexed Cost of Acquisition + Indexed Cost of Improvement + Cost of Transfer)

Full Value Consideration = 5,00,000/-
Indexed Cost of Acquisition =  Cost of Acquisition X (CII of year of transfer / CII of year of Acquisition) = 1,00,000 X (497/406) = 1,22,414/-
Indexed Cost of Improvement = Cost of Improvement X (CII of year of Transfer / CII of year of Improvement) = 1,10,000 X (497/447) = 1,22,304/-.
Cost of Transfer = 10,000/-

LTCG = 5,00,000 - (1,22,414 + 1,22,304 + 10,000) 
        = 2,45,282/-

Long Term Capital Gain Tax = 20 % LTCG = 49,056/-.

Example 2:
In above example consider, Person X purchased property on 31 January 2003.

In this case property held by person less than 36 months, so Short Term Capital Gain (STCG) will be calculated.

STCG = Full Value of Consideration - (Cost of Acquisition + Cost of Improvement + Cost of Transfer)

STCG = 5,00,000 - (1,00,000 + 1,10,000 + 10,000)
        = 2,80,000/-.

This LTCG included in Total Income of person and Income Tax will be calculated based on Income Tax Slab / Rate for individual for particular assessment year.