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All about Capital Gains Tax in India

This article focuses on the basic fundamentals of capital gains for income tax purposes in India.

Capital Gains mean profit or gain that arises from the transfer of capital asset which is chargeable to income tax in the year in which such transfer takes place.  Capital Gains can be short term or long term.  Read more about applicable rates on capital gains.

Capital Asset means:

  • Property of any kind held by an assessee (taxpayer), whether or not connected with business profession like land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, etc.
  • Any security held by foreign institutional investors.

But does not include-

  • Any stock in trade, consumable stores or raw materials held for the purpose of business or profession
  • Personal goods such as clothes and furniture held for personal use.  The following goods used for personal use are considered as capital asset:
    • Jewelry;
    • Archaeological collections;
    • Drawings;
    • Paintings;
    • Sculptures; or
    • Any work of art.
    • Agricultural land in rural India
    • 6.5 % gold bonds (1977) or 7% gold bonds (1980) or national defence gold bonds (1980) issued by the central government
    • Special bearer bonds (1991) issued by the central government
    • Gold deposit bond issued under the gold deposit scheme (1999) or deposit certificates issued under the Gold Monetisation Scheme, 2015

What is Rural Agricultural Land for tax purposes?

It means

  • Any area which is outside the jurisdiction of a municipality or cantonment board, having a population of 10,000 or more is considered a rural area.
  • In any area measured aerially from the local limits of municipality or cantonment board referred above falling within 2kms/ 6kms/ 8kms as given below:
DistancePopulation
2 kms from local limit of municipality or cantonment boardIf the population of the municipality/cantonment board is more than 10,000 but not more than 1 lakh
6 kms from local limit of municipality or cantonment boardIf the population of the municipality/cantonment board is more than 1 lakh but not more than 10 lakh
8 kms from local limit of municipality or cantonment boardIf the population of the municipality/cantonment board is more than 10 lakh

What is a transfer?

As already mentioned above, a capital asset must be transferred for capital gains to arise. 

Transfer“, in relation to a capital asset, includes,—

  • the sale, exchange or relinquishment of the asset ; or
  • the extinguishment of any rights therein ; or
  • the compulsory acquisition thereof under any law ; or
  • conversion of capital asset into stock in trade; or
  • the maturity or redemption of a zero coupon bond; or
  • any transaction involving the allowing of the possession of any immovable property to be taken in part performance of an agreement to sell; or
  • any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other AOP or by way of any agreement) which has the effect of transferring, any immovable property.

Usually, gains is taxable in the year in which the transfer takes place.  There are certain exception of the rule:

  • On receipt of Insurance claim: Insurance claim received against damage or destruction of capital assets is taxable in the year in which claim is received from the insurance company. Section 45(1A)
  • Conversion of Capital Asset into Stock in Trade: Whenever, a capital asset is converted into stock in trade then, the taxability arises in the year in which stock in trade is sold irrespective of the fact that transfer took place in the year of conversion. Section 45(2)
  • Compulsory Acquisition: In case of compulsory acquisition of an asset by the government, compensation received will be taxable in the year of first receipt of amount. Section 45(5)
  • Joint Development Agreement: In case of Joint Development Agreement, taxability arises in the year in which certificate of completion of whole or part of the project is issued. Section 45(5A)

To learn about how to compute capital gains tax, click here.

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