Nature of asset Short term capital asset

METHOD OF COMPUTATION OF INCOME UNDER THE HEAD “CAPITAL GAINS”

A) ON TRANSFER OF CAPITAL ASSETS OTHER THAN EQUITY SHARES;

Income is computed as under:

Full value of consideration on transfer of a capital asset less
(1) the cost of acquisition of the asset;
(2) the cost of improvement to the asset, if any,
(3) any expenditure incurred wholly and exclusively in transfer of the asset.

In case transfer of a long-term capital asset, the cost of acquisition of the asset and the cost of
improvement will be substituted by the indexed cost of acquisition and the indexed cost of
improvement for computing the long term capital gains.

INDEXED COST OF ACQUISITION is calculated as under :

Cost of the asset X Cost inflation index of the year in which the asset is transferred
Cost inflation index of the year of acquisition

INDEXED COST OF IMPROVEMENT is calculated as under:

Cost of improvement X Cost inflation index of the year in which the asset is transferred
Cost inflation index of the year in which the improvement is made

The indexation of cost of acquisition of an asset or cost of its improvement is intended to give a rough and ready relief to neutralize the impact of inflation and to counteract bunching of profits by linking the capital gains to the period of holding.

TAX RATE APPLICABLE:

Short term Capital Gains is included in the total income and taxed as per applicable rates. Long term Capital Gains is taxed at a flat rate of 20%.

B) ON TRANSFER OF CAPITAL ASSETS BEING EQUITY SHARES (OR) A UNIT OF AN EQUITY ORIENTED FUND

1. Short Term Capital Gains arising from the transfer of equity shares (or) unit of an equity oriented is taxed at 10% of such gains, if such transaction is chargeable to Securities Transaction Tax.

2. Long Term Capital Gains arising from the transfer of equity shares (or) unit of an equity oriented
fund is exempt u/s.10(38), if such transaction is chargeable to Security Transaction Tax.

EXEMPTIONS

1) LONG TERM CAPITAL GAINS ON SALE OF PROPERTY USED FOR RESIDENCE (SEC.54)

Where any Capital Gain arises on sale of Residential house which is chargeable to tax under ‘House Property’, such Capital Gains will not be included in the Gross Total Income under the following circumstances:

1. The asset which is sold is held by the Assessee for more than three years;
2. The assessee has purchased a Residential house within one year before the transfer (or) within two years after the date of transfer (or) constructed a house within a period of three years after the date of sale.
3. The assessee must be an Individual or HUF.
4. The cost of the house purchased equals or exceeds the amount of capital gain.

NOTE :

1. If the Capital Gain is not utilized for the above purposes before the due date for filing the return,
the same should be deposited in an account with any specified Bank.
2. Where the new asset is sold within three years, the cost of the new asset is to be reduced by the amount of Capital Gains exempted originally and the difference between the sale price of new asset
and reduced cost will be chargeable to tax as Short Term Capital Gains.
3. Where amount of capital gain is greater than cost of new asset, the difference will be chargeable as “Long Term Capital Gains”

2) LONG TERM CAPITAL GAIN ON TRANSFER OF CAPITAL ASSET IS EXEMPT U/S.54EC IF IT IS
INVESTED IN CERTAIN BONDS:

Capital Gain from transfer of Long term Capital Asset effected after 01/04/2000 is exempt u/s.54EC, if the capital gain is invested within a period of 6 months from the date of transfer in bonds, redeemable after three years issued by National Highways Authority of India & Rural Electrification Corporation Ltd.

1. The investment in long term specified asset has to be retained for a period of three years.
2. If the long term specified asset is transferred (or) availed a loan within three years, then the amount of capital gain originally exempt will be brought to tax as LTCG in the previous year in which the Long Term specified asset is transferred.

3) LONG TERM CAPITAL GAIN ON TRANSFER OF CERTAIN CAPITAL ASSET IS EXEMPT U/S.54F IN CASE OF INVESTMENT IN RESIDENTIAL HOUSE

The Long Term Capital Gain arising from the transfer of any capital asset other than residential house
will be exempt under the following circumstances:

1. The assessee is either Individual or HUF
2. Within period of one year before(or) two years after the date of transfer, the assessee purchases a residential house (or) constructs a residential house within a period of 3 yrs.
3. As on the date of transfer of original asset, the assessee does not own more than one residential house other than the new asset.
4. The cost of new house should not be less than the Net Sale Consideration.

NOTE:

1. If the assessee purchases within one year (or) constructs within 3 years after the date of original transfer any residential house, other than the new asset, the income from such residential house is chargeable to tax under, ‘House Property’.

CHAPTER VIA DEDUCTIONS:

Where the Gross Total Income of an assessee includes any Short Term Capital Gains or Long Term Capital Gains, the deduction under Chapter VI-A shall be allowed from the Gross Total Income as
reduced by such Capital Gains.

SET OFF AND CARRY FORWARD OF LOSES
Loss from transfer of a short term Capital Asset can be set off against gain from transfer of any other capital asset(Long Term or Short Term) in the same year. Loss from transfer of a Long term
Capital Asset can be set off against gain from transfer of any other long term Capital Asset in the
same year.

If there is a net loss under the head “Capital Gains” for an assessment year, the same cannot be
set off against any other head of income viz., Salaries, House Property, Business/Profession or Other Sources. It has to be separated into Short term Capital Loss(STCL) and Long Term Capital Loss (LTCL) and carried forward to next assessment year. In the next year, the STCL can be set off against any
gains from transfer of any capital asset (Long term or Short term) and LTCL can be set off against
gains from transfer of long term capital asset only. Any unabsorbed loss after such set off can
be further carried forward to next assessment year.

Capital loss computed in an assessment year can be carried forward for eight assessment years and
set off as above.

COST INFLATION INDEX (TABLE)

This brochure should not be construed as an exhaustive statement of law. In case of doubt, reference should always be made to the relevant provisions of Income Tax Act, Rules or Notifications.

For further information, please contact

The Public Relations Officer:

The Public Relations Officer
Income-tax Department, C.R.Building, Queen’s Road,
Bangalore-560 001. e-mail : itpro@bgl.vsnl.net.in

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