What is capital gain tax?
Capital gain is one of the head of income tax . Capital gain tax is levied on gain on transferring assets. Asset must be included in definition of capital asset as per section 2(14).
Definition:
“Capital asset” means
Property of any kind held by an assessee, whether or not connected with his business or profession, but does not include the following:
1. Stock in trade, raw materials, and consumable stores held for the purposes of business or profession. so if you are selling stock, capital gain tax will not arisen.
2. Personal effects of movable nature, such as furniture, utensils, and vehicles held for personal use by the assessee or any dependent member of the family: Kindly note that transfer of personal effects like jewelry, archaeological collections, drawings, paintings, sculptures or any work of art is taxable.
3. Agricultural land in India which is situated in any rural area.
- Any asset situated within the jurisdiction of municipality and its population should be less than 10000 as per last census.
- If not situated within jurisdiction of municipality, it should be situated under certain kilometers specified by central government.
So tax is not levied on transfer of rural agricultural land.
4. Gold bonds issued by government of India including gold deposit bonds issued under the gold deposit scheme notified by the central government.
Capital gain is further segregated in three categories.
1. Capital gain on transfer of depreciable asset.
2. Capital gain on transfer of non depreciable asset.
3. Capital gain on slump sale.
Meaning:
Depreciable asset: It means asset on which depreciation is allowed under income tax act. Example: Plant and machinery, furniture, patent, books, vehicle etc.
Non depreciable asset: It means asset on which depreciation is not allowed under income tax act. Example: Land.
Slump sale: It means sale of whole business for some amount. In it, price is paid in lump sum and not for each asset separately.
Capital gain is segregated in long term capital gain and short term capital gain.
Short term capital gain:
Capital asset held by the assessee for less than 36 months before the date of its transfer is a short term capital asset. However share in company or any other security listed in a recognized stock exchange in India, units of UTI and units of a mutual fund or zero coupon bond will be treated short term capital asset if it is held for less than 12 months. Gain arisen on transfer of short term capital asset is short term capital gain.
Long term capital gain:
Asset held more than specified time above is long term capital asset and gain arisen on transfer of long term capital asset is long term capital gain.
Calculation of short term capital gain on Non depreciable asset:
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Sale consideration
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1
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Less expenses for transfer
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2
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Net sale consideration
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3=1-2
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Less cost of acquisition
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4
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Cost of improvement
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5
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|
Gross capital gain
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6=3-(4+5)
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Less exemption u/s 54B, 54D, 54G and 54GA
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7
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Net capital gain payable
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8=(6-7)
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Calculation of long term capital gain on Non depreciable asset:
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Sale consideration
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1
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Less expenses for transfer
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2
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Net sale consideration
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3=1-2
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Less indexed cost of acquisition
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4
|
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Indexed Cost of improvement
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5
|
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Gross Capital gain
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6=3-(4+5)
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Less exemption u/s 54,54B, 54D,54EC, 54F, 54G, 54GA
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7
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New capital gain payable
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8=(6-7)
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Calculation of capital gain on slump sale
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Sale consideration of slump sale
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1
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Less Net worth
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2
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Capital gain
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3 (1-2)
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Calculation of capital gain on depreciable asset:
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Sale consideration
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1
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Less expense incurred for transferred
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2
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Less WDV of the block
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3
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Less asset acquired during the year
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4
|
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Short term capital gain/(loss)
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5=1-(2+3+4)
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Note: capital gain or loss on sale of depreciation asset will arise when all the assets are sold or sale consideration exceeds amount of all the block of asset.
Tax Rates:
For long term capital gain: 20%
Benefits to individual/HUF: When resident individuals and HUF, if the basic exemption limit is not exhausted by any other income, long term capital gain shall be reduced by the exhausted limit and only the balance shall be taxed.
Let me explain,
If Kumar has Rs. 120000 income under the head salary and 300000 Rs capital gain in financial year 2013-14, Long term capital gain tax will be payable on Rs. 2,00,000 (3,00,000-80,000). Basic exemption limit for F.Y. 13-14 is Rs. 2,00,000.
Same benefit is available to short term capital gain.
When assessee transfers long term capital asset like listed securities, units of UTI, mutual funds, zero coupon bonds, assessee has two options for calculation of capital gain.
Option 1:
He can pay tax on 10% of capital gain without the benefit of indexation.
Option 2:
He can pay tax on 20% of capital gain with the benefit of indexation.
Now question is what is indexation?
In simple language, indexation means calculation of cost of asset with keeping of mind inflation from the purchase of asset to sale of asset.
Cost inflation index is declared by central government for each financial year.
Exemption:
Long term capital gain arising from sale of equity share of a company or a unit of equity oriented fund which are listed in a recognized stock exchange is exempt from tax u/s 10(38).
For short term capital gain:
Short term capital gain arising from sale of equity share of a company or a unit of equity oriented fund which are listed in a recognized stock exchange and STT is paid is taxable at the rate of 15%.
Short term capital gain arising from any other asset is taxable as per slab rate of assessee. It is added in total income and tax will be applicable as per tax slab.
Capital gain is huge burden of tax on seller of asset. But you can save your tax smartly by claiming expenses on sell, purchase cost, improvement cost and choosing right investment in property.
When a person sells the property, he has to pay expenses towards sale like brokerage, commission, legal expense etc. These expenses are allowed for reduction of amount of net consideration. Understand it with example, Mr. Nitesh has sold his plot for Rs. 2,00,000. He had paid Rs. 10,000 as brokerage, Rs. 14,000 as legal expense. In this case, net consideration will be Rs. 2,00,000 – (Rs. 10,000 + Rs. 15,000) = Rs. 1,75,000.
Which expenditures are allowed as expenditure on transfer in capital gain head?
1. Brokerage/commission
2. Cost of stamp
3. Registration fees born by the vendor
4. Travelling expenditure in connection with transfer
5. Litigation expenditure for claiming compensation or enhancement of compensation awarded in compulsory expenditure.
6. Amount paid to tenant to get property vacated is deductible.
7. Payment made to co operative society to get NOC is allowed. Damodar G. Nagalia v. CIT.
Cost of acquisition:
Cost of acquisition is purchase value of property. Following expenditures are included in cost of acquisition.
1. Interest on money borrowed for purchase or construction of asset.
2. Litigation expenditures for registration of shares.
3. If property is under mortgage for loan and purchaser paid loan installment to release property , that expenditure will be considered as cost of acquisition.
If asset is acquired by certain modes like
Ø gift,
Ø will
Ø partition of HUF
Ø inheritance
Cost of previous owner will be adopted as the cost of acquisition.
Cost of acquisition of certain assets is NIL
Ø self generated goodwill
Ø stage carriage permits
Ø loom hours
Ø bonus shares
Ø right to subscribe in right shares
Ø any right to manufacture, produce or process any article or thing
Ø a right to carry business
Cost of acquisition for long term asset.
Indexation benefit is available for long term asset.
Indexation means increase cost with regard to inflation. Suppose Assessee purchased asset in 1990 for Rs. 2,00,000. It is obvious that in 2013, the purchase price is different for same asset. That’s why the cost will be indexed (increase with regard to inflation) to compute the capital gain.
Formula for indexation:
Cost of acquisition / fair market value as on 1st st April, 1981 as the case may be
Index factor for the base year 1981-82 or the first year in which the asset is held by assessee , whichever is later
X Index factor for the year of transfer.
Cost of improvement:
After purchasing asset, you have also did expenses for improvement of asset. Example- make additional floor of asset, purchase of big prarts of machinery to improve asset’s life.
These expenses can be claimed as cost of improvement while calculating capital gain.
Cost of improvement done by previous owner is also allowed for deduction. Indexed cost of improvement is allowed for cost incurred after 1/4/81. If assessee or previous owner incurred improvement expenditure before 1/4/81, it is not allowed for deduction of capital gain.
For long term capital gain, indexation of cost of improvement is allowed.
Formula:
Cost of improvement incurred after 1st st April, 1981
Index factor for the year in which the improvement is made by assessee or previous owner
X Index factor for the year of transfer.
No indexation benefit for following:
Ø Bonds and debentures
Ø Sale of shares or debentures for non residents
Ø When option of 10% tax rate is chosen for long term capital gain
Ø Short term capital gain
Ø Slump sale of business
Example:
Mr. Prakash has Purchased one house for Rs. 5,00,000 in F.Y. 2002-03. He incurred Rs. 2,00,000 to build new floor in F.Y. 2005-06. He sold the house in F.Y. 2011-12 for 20,00,000. (index factor for the year 2002-03- 447 , for the year 2005-06 – 497, for the year 2011-12 – 785)
Computation of Long term capital gain:
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Sale consideration
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20,00,000
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Less Indexed cost of acquisition
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5,00,000/447*785
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8,78,076
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Less Indexed cost of improvement
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2,00,000/497*785
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3,15,895
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Gross capital gain
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8,06,029
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Exemption under section 54 to section 54GA is available on capital gain after fulfilling certain conditions.
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mem i need help for capital gain my details as under:
my client purchase one business industrial gala of Rs. 10.70Lacs in AY 2004-05 and depriciation claim for next 5 years AY 2008-09 wdv Rs. 6.30Lacs as on 31-03-08. after onward business close & gala given for rent. till AY 2015-16 income from rent under head rent from house property. at present AY 2016-17 gala sold out of Rs.45Lacs & new office premises purchase of Rs. 55Lacs.
in this fect how to calculate capital gain ? pl advise