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Capital Asset - Taxation

Chargeability. Which income is chargeable under the head ‘capital gain’

Any profit or gain arising from the transfer of a Capital Asset is chargeable in the previous year in which transfer takes place. i.e. the date of accrual of capital gain is the date when the transfer takes place. In other words “Year of chargeability = Year of transfer ”

e.g. Suppose Mr. X ‘transfer’ (essential condition) a ‘capital asset’ (essential condition) on 11-6-2016, then gain arising shall be chargeable in the PY 2016-17 i.e. AY 2017-18 even if cash is not received.

Meaning of Capital Asset

Capital asset means property of any kind whether movable / immovable / tangible / intangible held by an assessee, whether connected with business or for personal purpose but excluding the following assets.

1. Any stock in trade, consumable stores or raw materials, held for the purpose of business or profession.

2. Movable assets held for his personal use. (Daily use)

However following shall not be treated as personal effects (a) jewelry; (b) archaeological collections; (c) drawings; (d) paintings; (e) sculptures; or (f) any work of art. (JAD P SA).

3. Rural agricultural land in India.

4. Gold Bonds. (Can be purchased only by depositing gold)

5. Special Bearer Bonds 1991. (Not in existence since redeemed)

Note 1: Meaning of Jewelry : “Jewelry” includes :

(a) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel, or

(b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel.

Note 2: Rural area is an area which is not an urban area. Urban Area means:

(A) Any area within the jurisdiction of Municipality / Cantonment board; or

(B) In any area within the distance, measured aerially (shortest aerial distance)

URBAN AREA		Population (as per latest census)	Distance (Straight distance as crows flies)
(i)	more than 10,000 and upto 1,00,000		2 k.m.	from the local limits of any
(ii)	more than 1,00,000 and upto 10,00,000		6 k.m.	municipality or cantonment
(iii)	exceeds 10,00,000		8 k.m.	board.

Note 3: Gold Bonds are:

(i)	Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999.
(ii)	6*A% Gold Bonds 1977 or 7% Gold Bonds 1980 or National Defence Gold Bonds 1980 issued by the Central Government. (Not in existence sinceredeemed)
(iii)	Certificates issued under Gold Monetisation Scheme, 2015 (w.e.f. AY 2016-17, FA 2016)

• Gold Bonds not treated as capital asset therefore capital gain do not arise.

• Also interest on Gold Bond / Certificate is exempt from tax under section 10(15).

• However Sovereign Gold Bond issued by the RBI under the Soverign Gold bond scheme 2015 is treated as capital asset. This bond is bought with money and not gold. It is as good as gold.

Note 4: It should be noted that transfer of an asset which is not a “Capital Asset” does not give rise to capital gain.

P1 : Answer the following questions :

1. Every asset is a capital asset except certain exclusions. (True or False)

2. What are those exclusions ?

3. In which previous year capital gain is charged to tax ?

4. Land situated in rural area is a capital asset. (True or False)

5. Name five intangible assets which are capital assets ?

6. Agricultural land situated in urban area is a capital asset. (True or False)

7. Agricultural land situated outside India in a rural area is treated as capital asset. (True or False)

8. Car held for personal purpose is treated as capital asset. (True or False)

9. Car held for business purpose is treated as capital asset. (True or False)

10. Car held by Maruti Udyog Ltd. is treated as capital asset. (True or False)

11. Gold held for personal use is treated as capital asset (True or False)

12. Shares held as investment is treated as capital asset (True or False)

13. Shares held as stock in trade is treated as capital asset (True or False)

14. M.F. Husain paintings purchased for personal use for Rs 1 Crore and sold for Rs 10,000 is treated as capital asset (True or False)

Solution

1. True.

2. Stock in trade, personal asset, agricultural land situated in India in rural area, gold bonds and special bearer bond.

3. In the PY in which transfer takes place.

4. True. Only agricultural land situated in rural area is not a capital asset.

5. Goodwill of a business, Right to subscribe for shares, trade mark, brand name, tenancy rights. (KPCTLF)

6. True

7. True

8. False

9. True, it is a depreciable asset

10. False, it is a stock in trade. Profit arising on sale of stock in trade shall give rise to business income.

11. True

12. True

13. False

14. True

Short Term CapitaL Asset (STCA)

1. Any capital asset held by an assessee for upto 36 months immediately prior to the date of transfer.

2. In the case of ‘financial asset’ an asset held for upto 12 months immediately prior to the date of transfer.

Meaning of financial asset : It includes —

a. Listed shares of Company : Equity shares or preference shares of public limited company listed in a recognised Stock Exchange of India.

b. Units of equity oriented mutual funds specified u/s 10(23D) whether quoted or not.

c. Government Securities.

d. Debentures or bonds listed in a recognised Stock Exchange of India.

e. Notified Zero coupon bonds. (Deep Discount Bonds). (Interest 0; Par Value Rs 10,000; Sales Value Rs 100; Lock in period 10 years)

3. In the case of ‘unlisted equity shares or preference shares’ an asset held for upto 24 months immediately prior to the date of transfer shall be treated as STCA.

Note 1: As seen in the previous chapter, the depreciable assets are always treated as short term capital asset irrespective of it’s holding period.

Note 2: For computing the period of holding of a capital asset, the date on which asset is transferred is to be excluded.

Note 3: The gain arising on transfer of a STCA is called Short Term Capital Gain (STCG). Similarly the loss arising on transfer of a STCA is called Short Term Capital Loss (STCL).

Note 4: Income from units of mutual fund is exempt from tax under section 10(35).

Note 5: Zero coupon bond means a bond issued by any infrastructure capital company or fund or any public company in respect of which no payment or benefit is received before maturity or redemption fund. The Central Govt. notifies in the Official Gazette.

Long Term Capital Asset (LTCA)

1. Any capital asset other than STCA is regarded as a LTCA i.e. an asset held for more than 36 months / 12 months as the case may be.

2. The gain arising on transfer of a LTCA is called Long Term Capital Gain (LTCG). Similarly the loss arising on transfer of a LTCA is called Long Term Capital Loss (LTCL).

P1: Find whether following assets are STCA or LTCA :

Type of capital assets		Date of acquisition	Date of transfer
1.	House Property	1-10-20	2-10-20
2.	Machinery on which depreciation is claimed.	1-1-20	1-1-20
3.	Equity shares held in Reliance Industries Ltd.	5-4-20	31-3-20
4.	Debentures listed in Bombay Stock Exchange.	6-11-20	4-12-20
5.	Unlisted debentures.	1-1-20	2-1-20
6.	Debentures listed in NewYork Stock exchange (FCCB)	1-1-20	2-1-20
7.	Shares held in co-operative society	11-5-20	5-1-20
8.	Shares held in Microsoft Inc	10-6-20	9-6-2017
9.	Shares held in Pepsi India (P) Ltd	10-8-20	9-8-20
10.	Units of equity oriented fund	9-6-2015	8-6-20
11.	Units of debt oriented fund	7-7-2014	7-7-2017
12.	Shares in Aurus (P) Ltd	10-7-20	9-8-20
13	Sovereign Gold Bond	1-4-20	31-3-20

Ans: 1. LTCA; 2. STCA; 3. LTCA; 4. LTCA; 5. LTCA; 6. STCA; 7. STCA. 8. LTCA; 9. STCA; 10. STCA; 11. STCA (FCCB : Foreign currency convertible bonds) 12. LTCA; 13. STCA

1. What is the holding period of shares to constitute LTCA ?

2. Name the assets which remain under the possession of assessee for more than 3 years, still the gain arising from their transfer is treated as short term capital gain ?

3. Discuss the holding period of assets ?

4. What is the objective of differentiating short term capital gain and long term capital gain?

Solutions

1. It is either 1 year or 2 years

2. Depreciable asset.

Holding period of		STCA	LTCA
(a)	Depreciable assets	always STCA	always STCA
(b)	Selected Financial assets	^w 1year or less	more than 1 year
(c)	Unlisted equity or preference shares	2 year or less	more than 2 year
(d)	Other capital assets	3 years or less	more than 3 years

(a) Rates of tax	Individual / HUF etc.	Firm / Company	Foreign Company
Short term capital gain	slab rate	30%	40%
STCG (STT paid)	15%	15%	15%
Long term capital gain	20%	20%	20%
Long term capital gain (STT paid)	nil	nil	nil

(b) Also loss arising from sale of long term capital asset can set off only against long term capital gain. However loss arising from short term capital asset can be set off from both the long term and short term capital gain.

The document Capital Asset - Taxation | Income Tax for assessment (Inter Level) is a part of the Taxation Course Income Tax for assessment (Inter Level).

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FAQs on Capital Asset - Taxation - Income Tax for assessment (Inter Level)

1. What is a capital asset for taxation purposes?

Ans. A capital asset for taxation purposes refers to any property or investment held by an individual or business, such as real estate, stocks, bonds, or vehicles, that has the potential to generate income or appreciate in value.

2. How are capital assets taxed?

Ans. Capital assets are subject to taxation when they are sold or disposed of. The tax treatment depends on the holding period of the asset. If the asset is held for less than a year, it is considered a short-term capital gain or loss and is taxed at the individual's ordinary income tax rate. If the asset is held for more than a year, it is considered a long-term capital gain or loss and is subject to a lower tax rate.

3. Are there any exemptions or deductions available for capital assets?

Ans. Yes, there are certain exemptions and deductions available for capital assets. For example, if an individual sells their primary residence, they may be eligible for a capital gains exclusion of up to a certain amount. Additionally, certain investments may qualify for special tax treatments, such as qualified dividends or tax-free municipal bonds.

4. How is the cost basis of a capital asset determined?

Ans. The cost basis of a capital asset is generally the original purchase price plus any additional costs incurred, such as brokerage fees or closing costs. However, it can be adjusted for various factors, such as improvements made to the asset or depreciation taken. The cost basis is important for calculating capital gains or losses when the asset is sold.

5. Are there any special tax considerations for capital assets inherited or received as a gift?

Ans. Yes, there are special tax considerations for capital assets inherited or received as a gift. When an individual inherits a capital asset, the cost basis is typically "stepped up" to the fair market value at the date of the owner's death. This means that any potential capital gains or losses are calculated based on the value at the time of inheritance, rather than the original purchase price. For gifts, the cost basis depends on whether the fair market value at the time of the gift is higher or lower than the original purchase price.

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Nov 16, 2024 Last updated

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