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4. Income from capital gain:

Any profit or gain arises from the sale of a capital asset is a capital gain. This gain or profit is considered as a income and hence charged to tax under Income Tax act. This is called capital gains tax, which can be divided in to short-term or long-term capital gains. Profits or gains arising from transfer of a capital asset known as “Capital Gains” and are charged to tax under the head “Capital Gains”.

Here Capital Assets is defined as follows:

  • a) Property held by an assessee, whether or not connected with business/ profession.
  • b) Securities held by a FII which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992.

However Capital Asset should not consider following.

  • a. Stock, consumables or raw material, held for the purpose of business or profession
  • b. Personal goods such as Jewellery, apparel, clothes and furniture, drawings etc. held for personal use
  • c. Gold bonds 6’1/2% of 1977 ,gold bonds 1980 7% , national defence gold bonds 1980 issued by the central government, special bearer bonds of 1991 and Gold deposit bond issued under the gold deposit scheme 1999.
  • d. Agricultural land in rural India(Rural India specification has elaborate below).
    • Not being more than 2 KMs, if population of such area is more than 10,000 but not exceeding 1 lakh.
    • Not being more than 6 KMs, if population of such area is more than 1 lakh but not exceeding 10 lakhs.
    • Not being more than 8 KMs, if population of such area is more than 10 lakhs.

Types of Capital Assets:

A) Short-term capital asset :

A) Short-term capital asset : Any asset which is held for not more than 36 months or less is a short-term capital asset. However, the criteria of 36 months have been reduced to 24 months in the case of immovable property being land, building, and house property, from fy 2017-18. For instance, if house property sell after holding it for a period of 24 months, any income arising will be treated as long-term capital gain provided that property is sold after 31st March 2017.

B) Long-term capital asset :

B) Long-term capital asset : Any asset that is held for more than 36 months is a long-term capital asset. The reduced period of aforementioned 24 months is not applicable to movable property such as jewellery, debt-oriented mutual funds etc. It will be classified as a long-term capital asset if held for more than 36 months as earlier. Some assets are considered short-term capital assets when these are held for 12 months or less. This rule is applicable if the date of transfer is after 10th July 2014.


However equity & preference shares which are listed in a recognised stock exchange in India listing of shares is not mandatory if transfer of such shares took place on or before July 10, 2014, units of equity oriented mutual funds, debentures and Government securities, and Zero Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months When the above listed assets are held for a period of more than 12 months, they are considered as long-term capital asset.

Assets acquired by gift: The period of this assets was acquired by the previous owner is also included while determining, whether it’s a short term or long-term capital asset. In the case of bonus shares or rights shares, the period of holding is counted from the date of allotment.

Tax on Short-Term and Long-Term Capital Gains :

a. Tax on long-term capital gain:

a. Tax on long-term capital gain: Long-term capital gain is taxable @ 20% plus surcharge and education cess. Also Long-term capital gain @ 10% is available, when it will arising from sale of listed securities exchange and it exceeds Rs. 1,00,000 (Section 112A). The securities may be UTI, mutual fund, Zero coupon bond, share, stock, bond, debentures

b. Tax on short-term capital gain:

b. Tax on short-term capital gain when securities transaction tax is not applicable: If securities transaction tax is not applicable, the short-term capital gain is added in income tax return and the taxpayer is taxed according to the income tax slab. Also if securities transaction tax is applicable, the short-term capital gain is taxable @ 15% plus surcharge and education cess.

With effect from Ay 2019-20, The Finance Act, 2018 inserts a new Section 112A with effect from Assessment Year 2019-20. As per the new section, capital gains arising from transfer of equity share in a company or unit of an equity oriented fund or unit of a business trust shall be taxed @ 10 per cent of such capital gains exceeding Rs. 1,00,000. This concessional rate of 10 per cent will be applicable in below cases.

  • In a case of an equity share in a company, securities transaction tax has been paid on both acquisition and transfer of such capital asset.

  • In a case a unit of an equity oriented fund or a unit of a business trust has been paid on transfer of such capital asset. The cost of acquisitions of a listed equity share acquired by the taxpayer before February 1, 2018, shall be deemed to be the higher of following. a) The actual cost of acquisition of such assets or
    b) Lower of Fair market value of such shares as on January 31, 2018 or
    c)Actual sales consideration accruing on its transfer. The Fair market value of listed equity share shall mean its highest price quoted on the stock exchange as on 31st January, 2018.

  • Zero coupon bonds can avail of the benefit of indexation, the capital gains so computed will be charged to tax @ 20% plus surcharge and ed. cess, if do not avail of the benefit of indexation, the capital gain so computed is charged to tax @ 10% plus surcharge and ed. cess.

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Computation of long-term Capital gains :

Particulars Amounts
Full value of consideration (Sales of an asset) XXX
Less: Expenditure incurred in connection with transfer of capital asset (brokerage, commission, advertisement etc.) XXX
Net Sales XXX
Less: Indexed cost of acquisition. XXX
Less: Indexed cost of improvement. XXX
Long term Capital gain XXX

Computation of short-term Capital gains :

Particulars Amounts
Full value of consideration (Sales of an asset) XXX
Less: Expenditure incurred in connection with transfer of capital asset (brokerage, commission, advertisement etc.) XXX
Net Sales XXX
Less: Indexed cost of acquisition. XXX
Less: Indexed cost of improvement. XXX
Short term Capital gain XXX

Indexed cost of acquisition is computed.=

Cost of acquisition × Cost inflation index of the year of transfer of capital asset
Cost inflation index of the year of acquisition

Indexed cost of improvement is computed.=

Cost of improvement × Cost inflation index of the year of transfer of capital asset.

Tax on Equity and Debt Mutual Funds:

Gains made on the sale of debt and equity funds are treated differently. Funds invest heavily in equities exceeding 65% of their total portfolio is known as an equity fund.
Funds On or after 11 July 2014 On or before 10 July 2014t
Short-Term Gains Long-Term Gains Short-Term Gains Long-Term Gains
Debt Funds At tax slab rates for individuals. At 20% with indexation. At tax slab rates for individual. 10% without indexation or 20% with indexation whichever is lower
Equity Funds 15% NIL 15% NIL

If debt mutual funds have to be held for more than 36 months, it will treat as a long-term capital asset. So investors would have to remain invested in these funds for at least three years to take the benefit of long-term capital gains tax. If redeemed within 3 years, the capital gains will be taxed as per income tax slab.

Some Basic Exemption:

  • Exemption under section 54 is available when the capital gains from the sale of house property are reinvested into buying another house property. The new property can be purchased either 1 year before the sale or 2 years after the sale of the property.

  • The exemption under sec. 54 is available, when the capital gains from the sale of house property are reinvested into buying or constructing two another house properties (as per Budget 2019, the exemption of the capital gains was limited to only 1 house property).The exemption on two house properties will be allowed once in the lifetime of a taxpayer, provided the capital gains do not exceed Rs. 2 crores.

  • Exemption is available under Section 54EC when capital gains from sale of the first property are reinvested into specific bonds as Rs. 50 lakhs issued by National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC).
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