TAXATION OF CAPITAL
GAINS
MDI 2004
Tarun Chaturvedi
Contents
Chargeability
Capital
Assets
Transfer
of Assets
Computation
Terms
of Capital Gains
used in computation
Computation
Tax
of Capital Gains
in special cases
shelters available
What is Capital Gains Tax?
Any profit or gains arising on the transfer of a
capital asset is chargeable to tax under the head
Capital Gains in the previous year in which the
transfer took place.
Essential elements of
taxation of capital gains
Capital Asset
Tax shelters
Transfer
Taxable
Cap Gains
Who is liable
To pay
Year of tax
Capital Assets
Taxable
Goodwill,
Route Permits
Capital Asset
Non-taxable
Controlling Interest
in a company
Tenancy Rights
Currency
appreciation if
currency kept for
purchase of raw
materials
Etc.
Etc.
Right to buy shares
Lease rights
What is a Capital Asset?
Property of any kind, held for business or not, except:
1.
Stock in trade, raw materials & cons. held for business;
2.
Personal effects of the assessee, i.e. moveable property
held for his or any family members personal use;
3.
Agricultural land not situated in
1.
An area having a population > 10,000;
2.
Any area as specified by the Government.
4.
6.5% Gold Bonds
5.
Special Bearer Bonds; and
6.
Gold Deposit Bonds
Extremely
wide
definition. All assets
not specifically
excluded are taxable
Capital Assets the exceptions
Personal effects being movable property
Should be moveable property; and
Held for personal use of self / family
Examples of personal effects
Gold and silver coins held for puja
Property held for personal use on ceremonies
Furniture etc.
Examples of personal effects
Foreign Stamp collection
Securities
Loose diamonds etc.
Capital Assets the exceptions
Agricultural land in a rural area
Municipal area having population < 10,000; and
As may be specified by the government
Use of land is immaterial, it has to be within the
above definition.
If land does not fulfill the above definition,
irrespective of the use, it can not be labelled as an
agricultural land.
Capital Assets the exceptions
Stock in trade, raw materials etc.
Simple logic, since these are held for sale, the surplus
arising thereon is treated as business income under
section 28.
Gold Bonds, Special Bearer Bonds and Gold Deposit
Bonds
Capital Assets- Types
Long Term
Capital Asset
Short Term
The period of holding the asset determines the type of
capital asset
Long Term = Asset held for > 36 months
In the following cases Long Term = > 12 months
Equities / preference shares
Listed securities
Capital Assets- Types
The period of holding in certain peculiar cases
Shares held in amalgamation / demerger / liquidation
Applicability of section 49(1)
Bonus and Right shares
Shares in the demat form
Transfer of land after construction of building
Capital Assets- Types
The reason for division into short term and long term
Difference in tax incidence
LTCG taxed at a flat rate after benefit of indexation
STCG included in income and taxed at normal rates
What is Transfer?
Transfer in relation to a capital asset includes:
1.
Sale
2.
Exchange;
3.
Relinquishment of the asset / rights therein;
4.
Extinguishment of rights in an asset;
5.
Compulsory acquisition under any law;
6.
Transfer of enjoyment of immovable property including
transactions covered by section 53A of the Transfer of
Property Act.
Inclusive definition
does not exhaust
other forms of
transfer
What is not a Transfer?
The important ones are listed below:
1.
Gift / Will;
2.
Holding and subsidiary transfers;
3.
Transfer of shares and assets in amalgamations;
4.
Transfer of shares and assets in demerger;
5.
Conversion of bonds / debentures into shares;
6.
Transfer in cases of conversion of firm / prop concerns into
a company.
Some
of these are
useful planning
tools
Computation of capital gains
The following steps are involved:
Full Value of the consideration
Less
Expenditure on transfer
Cost of Acquisition
Cost of improvement
CAPITAL GAINS
This may be long term or short term
Each
term has its
own legal meaning
Computation of capital gains
Full Value of the consideration:
Normal English meaning adopted by law
Some Interesting cases
Real Estate transactions
Conversion of asset into stock in trade
Insurance compensation
Computation of capital gains
Indexed Cost of Acquisition:
Unique concept
Available only incase of long term capital assets
Beneficial to the assessee
Increases the original cost of acquisition by a notional
amount
Applies to cost of improvement also
This
is the main
benefit of LTCG
Computation of capital gains
Some special cases:
Conversion into stock in trade
Self generated assets
Bonus and right shares / right entitlement
Distribution on liquidation by companies
Conversion of shares into debentures
Receipt of insurance claim
Buy back of shares
Slump sale
Thank You
THANK YOU
