ICAI Notes- Unit 4: Heads of Income | Taxation for CA Intermediate PDF Download

 Page 1


   
CAPITAL GAINS 
a
 3.357 
LEARNING OUTCOMES 
UNIT – 4 : CAPITAL GAINS 
 
 
 
After studying this unit, you would be able to – 
? comprehend the scope of income chargeable under this head; 
? comprehend and identify the assets classified as “capital assets” for the 
purposes of chargeability under this head; 
? comprehend the meaning of short-term capital asset and long-term capital asset; 
? compute the period of holding for determining whether an asset is a short -
term capital asset or long-term capital asset; 
? identify the transactions to be considered as transfer for the purpose of 
capital gains; 
? identify the transactions not regarded as transfer; 
? compute the capital gains from transfer of capital assets in the manner 
prescribed;  
? determine the cost of acquisition and indexed cost of acquisition, in case of 
long term capital asset for the purpose of computing the capital gains; 
? compute capital gains in case of depreciable assets; 
? compute capital gains in case of market linked debenture; 
? compute capital gains in case of slump sale; 
? compute the exemption available for investment of capital gains/net 
consideration on transfer of certain assets; 
? compute the capital gains chargeable to tax after deducting the 
exemptions available in respect of capital gains; 
? appreciate the concessional tax treatment available for short-term capital 
gains and for long term capital gains on transfer of listed equity 
shares/units of an equity oriented fund; 
? compute the tax liability applying the special rates of tax on long -term 
capital gains and short-term capital gains and the normal rates of tax.  
© The Institute of Chartered Accountants of India
Page 2


   
CAPITAL GAINS 
a
 3.357 
LEARNING OUTCOMES 
UNIT – 4 : CAPITAL GAINS 
 
 
 
After studying this unit, you would be able to – 
? comprehend the scope of income chargeable under this head; 
? comprehend and identify the assets classified as “capital assets” for the 
purposes of chargeability under this head; 
? comprehend the meaning of short-term capital asset and long-term capital asset; 
? compute the period of holding for determining whether an asset is a short -
term capital asset or long-term capital asset; 
? identify the transactions to be considered as transfer for the purpose of 
capital gains; 
? identify the transactions not regarded as transfer; 
? compute the capital gains from transfer of capital assets in the manner 
prescribed;  
? determine the cost of acquisition and indexed cost of acquisition, in case of 
long term capital asset for the purpose of computing the capital gains; 
? compute capital gains in case of depreciable assets; 
? compute capital gains in case of market linked debenture; 
? compute capital gains in case of slump sale; 
? compute the exemption available for investment of capital gains/net 
consideration on transfer of certain assets; 
? compute the capital gains chargeable to tax after deducting the 
exemptions available in respect of capital gains; 
? appreciate the concessional tax treatment available for short-term capital 
gains and for long term capital gains on transfer of listed equity 
shares/units of an equity oriented fund; 
? compute the tax liability applying the special rates of tax on long -term 
capital gains and short-term capital gains and the normal rates of tax.  
© The Institute of Chartered Accountants of India
a
 
INCOME TAX LAW 
3.358 
Proforma for computation of income under the head “Capital Gains” 
 Particulars Amt 
(`) 
Amt 
(`) 
In case of a Short-term capital asset 
(STCA) 
 
Full value of consideration received or accruing as a 
result of transfer 
xxx  
Less: Expenditure incurred wholly and exclusively in 
connection with such transfer (for e.g., brokerage on sale) 
xxx  
(Note: Deduction on account of STT paid will not be 
allowed) 
  
Net Sale Consideration  xxx 
Less: Cost of acquisition (COA) [Refer table at page 3.459] xxx  
Cost of improvement (COI) [Refer table at page 
3.462] 
xxx xxx 
Short-term capital gain (STCG)  xxx 
Less: Exemption under sections 54B/54D  xxx 
Short-term capital gain chargeable to tax  xxx 
In case of a Long-term capital asset (LTCA) 
 
 
 
 
 
 
 
 capital asset 
 
Full value of consideration received or accruing as a 
result of transfer 
xxx  
Less: Expenditure incurred wholly and exclusively in 
connection with such transfer (for e.g., brokerage on sale) 
xxx  
(Note: Deduction on account of STT paid will not be 
allowed) 
  
Net Sale Consideration  xxx 
Less: Indexed cost of acquisition (ICOA) xxx  
Cost of 
acquisition 
× 
CII for the year in which the asset is 
transferred  
CII for the year in which the asset was 
first held by the assessee or P.Y. 2001 -02, 
whichever is later 
 
  
Note: Benefit of indexation will, however, not be available 
in respect of LTCG taxable u/s 112A and LTCG from transfer 
of bonds or debentures (other than capital indexed bonds 
issued by the Government and sovereign gold bonds issued 
by RBI) 
  
© The Institute of Chartered Accountants of India
Page 3


   
CAPITAL GAINS 
a
 3.357 
LEARNING OUTCOMES 
UNIT – 4 : CAPITAL GAINS 
 
 
 
After studying this unit, you would be able to – 
? comprehend the scope of income chargeable under this head; 
? comprehend and identify the assets classified as “capital assets” for the 
purposes of chargeability under this head; 
? comprehend the meaning of short-term capital asset and long-term capital asset; 
? compute the period of holding for determining whether an asset is a short -
term capital asset or long-term capital asset; 
? identify the transactions to be considered as transfer for the purpose of 
capital gains; 
? identify the transactions not regarded as transfer; 
? compute the capital gains from transfer of capital assets in the manner 
prescribed;  
? determine the cost of acquisition and indexed cost of acquisition, in case of 
long term capital asset for the purpose of computing the capital gains; 
? compute capital gains in case of depreciable assets; 
? compute capital gains in case of market linked debenture; 
? compute capital gains in case of slump sale; 
? compute the exemption available for investment of capital gains/net 
consideration on transfer of certain assets; 
? compute the capital gains chargeable to tax after deducting the 
exemptions available in respect of capital gains; 
? appreciate the concessional tax treatment available for short-term capital 
gains and for long term capital gains on transfer of listed equity 
shares/units of an equity oriented fund; 
? compute the tax liability applying the special rates of tax on long -term 
capital gains and short-term capital gains and the normal rates of tax.  
© The Institute of Chartered Accountants of India
a
 
INCOME TAX LAW 
3.358 
Proforma for computation of income under the head “Capital Gains” 
 Particulars Amt 
(`) 
Amt 
(`) 
In case of a Short-term capital asset 
(STCA) 
 
Full value of consideration received or accruing as a 
result of transfer 
xxx  
Less: Expenditure incurred wholly and exclusively in 
connection with such transfer (for e.g., brokerage on sale) 
xxx  
(Note: Deduction on account of STT paid will not be 
allowed) 
  
Net Sale Consideration  xxx 
Less: Cost of acquisition (COA) [Refer table at page 3.459] xxx  
Cost of improvement (COI) [Refer table at page 
3.462] 
xxx xxx 
Short-term capital gain (STCG)  xxx 
Less: Exemption under sections 54B/54D  xxx 
Short-term capital gain chargeable to tax  xxx 
In case of a Long-term capital asset (LTCA) 
 
 
 
 
 
 
 
 capital asset 
 
Full value of consideration received or accruing as a 
result of transfer 
xxx  
Less: Expenditure incurred wholly and exclusively in 
connection with such transfer (for e.g., brokerage on sale) 
xxx  
(Note: Deduction on account of STT paid will not be 
allowed) 
  
Net Sale Consideration  xxx 
Less: Indexed cost of acquisition (ICOA) xxx  
Cost of 
acquisition 
× 
CII for the year in which the asset is 
transferred  
CII for the year in which the asset was 
first held by the assessee or P.Y. 2001 -02, 
whichever is later 
 
  
Note: Benefit of indexation will, however, not be available 
in respect of LTCG taxable u/s 112A and LTCG from transfer 
of bonds or debentures (other than capital indexed bonds 
issued by the Government and sovereign gold bonds issued 
by RBI) 
  
© The Institute of Chartered Accountants of India
   
CAPITAL GAINS 
a
 3.359 
Less: Indexed cost of improvement (ICOI) xxx xxx 
Cost of 
improvement 
× 
CII for the year in which the asset is 
transferred 
CII for the year in which the 
improvement took place 
 
  
Long-term capital gains (LTCG)  xxx 
Less: Exemption under sections 54/54B/54D/54EC/54F 
[Refer Table at pages 3.463-3.465] 
 xxx 
Long-term capital gains chargeable to tax  xxx 
Rate of tax on Short-term Capital Gains (STCG) 
Section Rate of tax 
111A 
• STCG arising on transfer of listed equity shares, units of equity-
oriented fund and unit of business trust
1
 - 15%, if STT has been 
paid on such sale. 
• STCG arising from transaction undertaken in foreign currency 
on a recognized stock exchange located in an International 
Financial Services Centre (IFSC) would be taxable at a 
concessional rate of 15%, even though STT is not paid in respect 
of such transaction. 
Note - STCG arising on transfer of other Short-term Capital Assets would be 
chargeable at normal rates of tax. 
Rates of tax on Long-term Capital Gains (LTCG) 
Section Rate of tax 
112A • Tax @10% on LTCG exceeding ` 1,00,000 on the transfer of 
following long-term capital assets - 
- listed equity shares, if STT has been paid on acquisition and 
transfer of such shares 
- units of equity oriented fund and unit of business trust
1
, if STT 
has been paid on transfer of such units 
• If such transaction is undertaken on a recognized stock 
exchange located in an IFSC, LTCG would be taxable at a 
concessional rate of 10% where the consideration for transfer is 
1
The provisions relating to business trust would be dealt at Final level. 
© The Institute of Chartered Accountants of India
Page 4


   
CAPITAL GAINS 
a
 3.357 
LEARNING OUTCOMES 
UNIT – 4 : CAPITAL GAINS 
 
 
 
After studying this unit, you would be able to – 
? comprehend the scope of income chargeable under this head; 
? comprehend and identify the assets classified as “capital assets” for the 
purposes of chargeability under this head; 
? comprehend the meaning of short-term capital asset and long-term capital asset; 
? compute the period of holding for determining whether an asset is a short -
term capital asset or long-term capital asset; 
? identify the transactions to be considered as transfer for the purpose of 
capital gains; 
? identify the transactions not regarded as transfer; 
? compute the capital gains from transfer of capital assets in the manner 
prescribed;  
? determine the cost of acquisition and indexed cost of acquisition, in case of 
long term capital asset for the purpose of computing the capital gains; 
? compute capital gains in case of depreciable assets; 
? compute capital gains in case of market linked debenture; 
? compute capital gains in case of slump sale; 
? compute the exemption available for investment of capital gains/net 
consideration on transfer of certain assets; 
? compute the capital gains chargeable to tax after deducting the 
exemptions available in respect of capital gains; 
? appreciate the concessional tax treatment available for short-term capital 
gains and for long term capital gains on transfer of listed equity 
shares/units of an equity oriented fund; 
? compute the tax liability applying the special rates of tax on long -term 
capital gains and short-term capital gains and the normal rates of tax.  
© The Institute of Chartered Accountants of India
a
 
INCOME TAX LAW 
3.358 
Proforma for computation of income under the head “Capital Gains” 
 Particulars Amt 
(`) 
Amt 
(`) 
In case of a Short-term capital asset 
(STCA) 
 
Full value of consideration received or accruing as a 
result of transfer 
xxx  
Less: Expenditure incurred wholly and exclusively in 
connection with such transfer (for e.g., brokerage on sale) 
xxx  
(Note: Deduction on account of STT paid will not be 
allowed) 
  
Net Sale Consideration  xxx 
Less: Cost of acquisition (COA) [Refer table at page 3.459] xxx  
Cost of improvement (COI) [Refer table at page 
3.462] 
xxx xxx 
Short-term capital gain (STCG)  xxx 
Less: Exemption under sections 54B/54D  xxx 
Short-term capital gain chargeable to tax  xxx 
In case of a Long-term capital asset (LTCA) 
 
 
 
 
 
 
 
 capital asset 
 
Full value of consideration received or accruing as a 
result of transfer 
xxx  
Less: Expenditure incurred wholly and exclusively in 
connection with such transfer (for e.g., brokerage on sale) 
xxx  
(Note: Deduction on account of STT paid will not be 
allowed) 
  
Net Sale Consideration  xxx 
Less: Indexed cost of acquisition (ICOA) xxx  
Cost of 
acquisition 
× 
CII for the year in which the asset is 
transferred  
CII for the year in which the asset was 
first held by the assessee or P.Y. 2001 -02, 
whichever is later 
 
  
Note: Benefit of indexation will, however, not be available 
in respect of LTCG taxable u/s 112A and LTCG from transfer 
of bonds or debentures (other than capital indexed bonds 
issued by the Government and sovereign gold bonds issued 
by RBI) 
  
© The Institute of Chartered Accountants of India
   
CAPITAL GAINS 
a
 3.359 
Less: Indexed cost of improvement (ICOI) xxx xxx 
Cost of 
improvement 
× 
CII for the year in which the asset is 
transferred 
CII for the year in which the 
improvement took place 
 
  
Long-term capital gains (LTCG)  xxx 
Less: Exemption under sections 54/54B/54D/54EC/54F 
[Refer Table at pages 3.463-3.465] 
 xxx 
Long-term capital gains chargeable to tax  xxx 
Rate of tax on Short-term Capital Gains (STCG) 
Section Rate of tax 
111A 
• STCG arising on transfer of listed equity shares, units of equity-
oriented fund and unit of business trust
1
 - 15%, if STT has been 
paid on such sale. 
• STCG arising from transaction undertaken in foreign currency 
on a recognized stock exchange located in an International 
Financial Services Centre (IFSC) would be taxable at a 
concessional rate of 15%, even though STT is not paid in respect 
of such transaction. 
Note - STCG arising on transfer of other Short-term Capital Assets would be 
chargeable at normal rates of tax. 
Rates of tax on Long-term Capital Gains (LTCG) 
Section Rate of tax 
112A • Tax @10% on LTCG exceeding ` 1,00,000 on the transfer of 
following long-term capital assets - 
- listed equity shares, if STT has been paid on acquisition and 
transfer of such shares 
- units of equity oriented fund and unit of business trust
1
, if STT 
has been paid on transfer of such units 
• If such transaction is undertaken on a recognized stock 
exchange located in an IFSC, LTCG would be taxable at a 
concessional rate of 10% where the consideration for transfer is 
1
The provisions relating to business trust would be dealt at Final level. 
© The Institute of Chartered Accountants of India
a
 
INCOME TAX LAW 
3.360 
received or receivable in foreign currency, even though STT is not 
paid in respect of such transaction. 
• Benefit of indexation and currency fluctuation would not be 
available. 
112 
 
 
Long-term capital asset 
(LTCA) 
Rate of tax  
Unlisted securities, or 
shares of a closely held 
company 
Non-corporate non-resident/ foreign 
company - 10%, without the benefit of 
indexation and currency fluctuation 
Other Assessees - 20%, with indexation 
benefit 
Listed securities (other 
than a unit) or a zero-
coupon bond 
- 10%, without the benefit of indexation 
or 
- 20%, availing the benefit of indexation 
whichever is more beneficial to the 
assessee 
Other Assets - 20% 
Notes:  
• In case of a resident individual or a Hindu Undivided Family (HUF), the 
LTCG taxable u/s 112 or 112A or STCG taxable u/s 111A shall be reduced by 
the unexhausted basic exemption limit and the balance shall be subject to tax. 
• No deduction under Chapter VI-A can be claimed in respect of such LTCG 
chargeable to tax u/s 112 or u/s 112A or STCG chargeable to tax u/s 111A. 
• Rebate u/s 87A is not available in respect of tax payable@10% on LTCG  
u/s 112A. 
• In case the assessee pays tax under default tax regime, enhanced surcharge of 
25% would not be levied on dividend income, STCG taxable u/s 111A and LTCG 
taxable u/s 112 and u/s 112A. 
• In case the assessee exercises the option of shifting out of the default tax 
regime under section 115BAC, enhanced surcharge of 25% or 37% would not 
be levied on dividend income, STCG taxable u/s 111A and LTCG taxable u/s 112 
and u/s 112A. 
  
© The Institute of Chartered Accountants of India
Page 5


   
CAPITAL GAINS 
a
 3.357 
LEARNING OUTCOMES 
UNIT – 4 : CAPITAL GAINS 
 
 
 
After studying this unit, you would be able to – 
? comprehend the scope of income chargeable under this head; 
? comprehend and identify the assets classified as “capital assets” for the 
purposes of chargeability under this head; 
? comprehend the meaning of short-term capital asset and long-term capital asset; 
? compute the period of holding for determining whether an asset is a short -
term capital asset or long-term capital asset; 
? identify the transactions to be considered as transfer for the purpose of 
capital gains; 
? identify the transactions not regarded as transfer; 
? compute the capital gains from transfer of capital assets in the manner 
prescribed;  
? determine the cost of acquisition and indexed cost of acquisition, in case of 
long term capital asset for the purpose of computing the capital gains; 
? compute capital gains in case of depreciable assets; 
? compute capital gains in case of market linked debenture; 
? compute capital gains in case of slump sale; 
? compute the exemption available for investment of capital gains/net 
consideration on transfer of certain assets; 
? compute the capital gains chargeable to tax after deducting the 
exemptions available in respect of capital gains; 
? appreciate the concessional tax treatment available for short-term capital 
gains and for long term capital gains on transfer of listed equity 
shares/units of an equity oriented fund; 
? compute the tax liability applying the special rates of tax on long -term 
capital gains and short-term capital gains and the normal rates of tax.  
© The Institute of Chartered Accountants of India
a
 
INCOME TAX LAW 
3.358 
Proforma for computation of income under the head “Capital Gains” 
 Particulars Amt 
(`) 
Amt 
(`) 
In case of a Short-term capital asset 
(STCA) 
 
Full value of consideration received or accruing as a 
result of transfer 
xxx  
Less: Expenditure incurred wholly and exclusively in 
connection with such transfer (for e.g., brokerage on sale) 
xxx  
(Note: Deduction on account of STT paid will not be 
allowed) 
  
Net Sale Consideration  xxx 
Less: Cost of acquisition (COA) [Refer table at page 3.459] xxx  
Cost of improvement (COI) [Refer table at page 
3.462] 
xxx xxx 
Short-term capital gain (STCG)  xxx 
Less: Exemption under sections 54B/54D  xxx 
Short-term capital gain chargeable to tax  xxx 
In case of a Long-term capital asset (LTCA) 
 
 
 
 
 
 
 
 capital asset 
 
Full value of consideration received or accruing as a 
result of transfer 
xxx  
Less: Expenditure incurred wholly and exclusively in 
connection with such transfer (for e.g., brokerage on sale) 
xxx  
(Note: Deduction on account of STT paid will not be 
allowed) 
  
Net Sale Consideration  xxx 
Less: Indexed cost of acquisition (ICOA) xxx  
Cost of 
acquisition 
× 
CII for the year in which the asset is 
transferred  
CII for the year in which the asset was 
first held by the assessee or P.Y. 2001 -02, 
whichever is later 
 
  
Note: Benefit of indexation will, however, not be available 
in respect of LTCG taxable u/s 112A and LTCG from transfer 
of bonds or debentures (other than capital indexed bonds 
issued by the Government and sovereign gold bonds issued 
by RBI) 
  
© The Institute of Chartered Accountants of India
   
CAPITAL GAINS 
a
 3.359 
Less: Indexed cost of improvement (ICOI) xxx xxx 
Cost of 
improvement 
× 
CII for the year in which the asset is 
transferred 
CII for the year in which the 
improvement took place 
 
  
Long-term capital gains (LTCG)  xxx 
Less: Exemption under sections 54/54B/54D/54EC/54F 
[Refer Table at pages 3.463-3.465] 
 xxx 
Long-term capital gains chargeable to tax  xxx 
Rate of tax on Short-term Capital Gains (STCG) 
Section Rate of tax 
111A 
• STCG arising on transfer of listed equity shares, units of equity-
oriented fund and unit of business trust
1
 - 15%, if STT has been 
paid on such sale. 
• STCG arising from transaction undertaken in foreign currency 
on a recognized stock exchange located in an International 
Financial Services Centre (IFSC) would be taxable at a 
concessional rate of 15%, even though STT is not paid in respect 
of such transaction. 
Note - STCG arising on transfer of other Short-term Capital Assets would be 
chargeable at normal rates of tax. 
Rates of tax on Long-term Capital Gains (LTCG) 
Section Rate of tax 
112A • Tax @10% on LTCG exceeding ` 1,00,000 on the transfer of 
following long-term capital assets - 
- listed equity shares, if STT has been paid on acquisition and 
transfer of such shares 
- units of equity oriented fund and unit of business trust
1
, if STT 
has been paid on transfer of such units 
• If such transaction is undertaken on a recognized stock 
exchange located in an IFSC, LTCG would be taxable at a 
concessional rate of 10% where the consideration for transfer is 
1
The provisions relating to business trust would be dealt at Final level. 
© The Institute of Chartered Accountants of India
a
 
INCOME TAX LAW 
3.360 
received or receivable in foreign currency, even though STT is not 
paid in respect of such transaction. 
• Benefit of indexation and currency fluctuation would not be 
available. 
112 
 
 
Long-term capital asset 
(LTCA) 
Rate of tax  
Unlisted securities, or 
shares of a closely held 
company 
Non-corporate non-resident/ foreign 
company - 10%, without the benefit of 
indexation and currency fluctuation 
Other Assessees - 20%, with indexation 
benefit 
Listed securities (other 
than a unit) or a zero-
coupon bond 
- 10%, without the benefit of indexation 
or 
- 20%, availing the benefit of indexation 
whichever is more beneficial to the 
assessee 
Other Assets - 20% 
Notes:  
• In case of a resident individual or a Hindu Undivided Family (HUF), the 
LTCG taxable u/s 112 or 112A or STCG taxable u/s 111A shall be reduced by 
the unexhausted basic exemption limit and the balance shall be subject to tax. 
• No deduction under Chapter VI-A can be claimed in respect of such LTCG 
chargeable to tax u/s 112 or u/s 112A or STCG chargeable to tax u/s 111A. 
• Rebate u/s 87A is not available in respect of tax payable@10% on LTCG  
u/s 112A. 
• In case the assessee pays tax under default tax regime, enhanced surcharge of 
25% would not be levied on dividend income, STCG taxable u/s 111A and LTCG 
taxable u/s 112 and u/s 112A. 
• In case the assessee exercises the option of shifting out of the default tax 
regime under section 115BAC, enhanced surcharge of 25% or 37% would not 
be levied on dividend income, STCG taxable u/s 111A and LTCG taxable u/s 112 
and u/s 112A. 
  
© The Institute of Chartered Accountants of India
   
CAPITAL GAINS 
a
 3.361 
Period of holding [Section 2(42A)] 
Note – Capital gains arising from transfer of market linked debentures and units of 
a specified mutual fund would always be capital gains arising from transfer of short 
term capital assets irrespective of the period of holding of such assets. This is 
provided in section 50AA. 
4.1 INTRODUCTION 
Section 45 provides that any profits or gains arising from the transfer of a capital 
asset effected in the previous year will be chargeable to income -tax under the 
head ‘Capital Gains’. Such capital gains will be deemed to be the income of the 
previous year in which the transfer took place. In this charging section, two terms 
are important. One is “capital asset” and the other is “transfer”. 
Hence, in this unit on capital gains, we begin our discussion with the definition of 
“capital asset” and “transfer”. Thereafter, we will proceed to discuss the various 
circumstances under which capital gains tax is levied. There are certain 
transactions which are not to be regarded as transfer for the purposes of capital 
gains. These transactions have also been discussed in thi s chapter. For computing 
long-term capital gains, application of cost inflation index is necessary. Again, 
there is a separate method of computation of capital gains in respect of 
depreciable assets. Also, there are exemptions in cases where capital gains are 
invested in specified assets. All these aspects are being discussed in this unit. 
STCA, if held for 
= 12 months
LTCA, if held for 
> 12 months
•Security (other than unit) listed in a recognized stock
exchange (other than market linked debentures and
units of specified mutual fund)
•Unit of equity oriented fund/unit of UTI
•Zero Coupon bond
STCA, if held for 
= 24 months
LTCA, if held for 
> 24 months
•Unlisted shares
•Land or building or both
STCA, if held for 
= 36 months
LTCA, if held for 
> 36 months
•Unlisted securities other than shares
•Other capital assets
© The Institute of Chartered Accountants of India