(Keywords: Under Income-tax Act 1961 as amended from time to time, classification of Long Term Capital Gains (LTCG) and Short Term Capital Gains (STCG), Cost Inflation Index (CII), computation of LTCG, with illustrative examples are discussed)
Profits or gains arising from the transfer of a capital asset made in a previous year are taxable as Capital Gains under the head Capital Gains. Important ingredients of Capital Gains are existence of a capital asset, transfer of such asset and profits or gains that arise from such transfer,
Source:
(1) http://www.incometaxindia.gov.in/publications/4_compute_your_capital_gains/
chapter2.asp#Inflation
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Short Term Capital Gains (STCG) |
Long Term Capital Gains (LTCG) |
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Ordinarily transferring a capita asset held for 36 months or less gives rise for STCG. |
Transferring a capital asset held for more than 36 months gives rise to LTCG. |
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Computation of Capital Gains STCG: Full value of consideration (Cost of acquisition + Cost of improvement + cost of transfer). |
Computation of Capital Gains LTCG: Full value of consideration received or accruing (Indexed Cost of acquisition + Indexed Cost of improvement + cost of transfer). |
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Note: LTCG Seller has to pay the STCG and LTCG. Selling cost or cost of transfer to include brokerage paid, etc. Current LTCG tax for an individual or Hindu Undivided Family (HUF): 20 percent of capital gains. |
Where indexed Cost of acquisition: Cost of acquisition x CII (Cost Inflation Index) of the year of transfer / CII of year of acquisition. |
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Indexed Cost of improvement: Cost of improvement x CII of the year of transfer / CII of year of improvement. |
Where the capital asset is transferred is land or building or both, if the full value of consideration received or accruing is less than the value adopted or assessed by stamp valuation Authority, the value adopted by such Authority would be taken as the full value of consideration. The reasonable sale consideration or Stamp Authority valuation whichever is higher may be taken by the Stamp Authority. .
Capital gains tax valuation specified date is currently 1-04-1981. Any property acquired prior to the specified date, land value as on 1-4-1981 plus DRC (Depreciated Replacement Cost) of building, if any, as on the specified date would be the cost of acquisition. The cost of acquisition would be either cost or fair market value. The cost of acquisition needs to be appropriately indexed based on the prescribed CII for the Financial Year of purchase and sale, respectively as on 1-4-1981 or on the date of acquisition and improvement after 1-4-1981.
Under Section 50D, where the consideration received or accruing as a result of the transfer of a capital asset by an assessee is not ascertainable or can not be determined, then, for the purpose of computing income chargeable to tax as capital gains, the fair market value of the said asset on the date of transfer shall be deemed to be the full value of the consideration received as a result of transfer.
Full Value of consideration: This is the amount for which a capital asset is transferred. It may be in money or money's worth or a combination of both.
Where the transfer is by way of exchange of one asset for another, fair market value of the asset received is the full value of consideration. Where the consideration for the transfer is partly in cash and partly in kind, fair market value of the kind portion and cash consideration together constitute full value of consideration.
Cost of Acquisition: Cost of acquisition of an asset is the sum total of amount spent for acquiring the asset.
Where the asset was purchased, the cost of acquisition is the price paid. Where the asset was acquired by way of exchange for another asset, the cost of .acquisition is the fair market value of that other asset as on the date of exchange.
Any expenditure incurred in connection with such; purchase, exchange or other transaction e.g. brokerage paid, registration charges and legal expenses also forms part of cost of acquisition.
Sometimes advance is received against agreement to transfer a particular asset. Later on, if the advance is retained by the tax payer or forfeited for other party's failure to complete the transaction, such advance is to be deducted from the cost of acquisition. (1)
WAIVER: The exemption of capital gains can be claimed by investing in full (One year before sale or within two years after sale or under construction house within three years after the date of sale) or partly by investing in the house and / or bonds and partly paying the proportionate income tax to the extent of capital gains, which have not been invested as above. The assessee should not own more than one house (Other than the new house) on the date of sale; or purchase or construction of the residential house. (Section 54).
Cost Inflation Index is notified every year by the CBDT, Government of India, Delhi
Cost Inflation Index [Notification No.40/2013/F.No.142/7/2013-TPL] dated 6th June 2013.
S.O. 1464(E) - In exercise of the powers conferred by clause (v) of the Explanation to section 48 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby makes the following amendment in the notification of the Government of India in the Ministry of Finance (Department of Revenue), Central Board of Direct Taxes published in the Gazette of India, Extraordinary, vide number S.O. 709(E), dated the 20th August, 1998, namely:-
2. In the said notification, in the Table, after serial number 32 and the entries relating thereto, the following serial number and entries shall be inserted, namely:
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Sl No |
Financial Year |
Cost Inflation Index |
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33 |
2013-14 |
939 |
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SL. No. |
Financial Year |
Cost Index |
Sl. No. |
Financial Year |
Cost Index |
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1 |
1981-82 |
100 |
18 |
1998-99 |
351 |
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2 |
1982-83 |
109 |
19 |
1999-2000 |
389 |
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3 |
1983-84 |
116 |
20 |
2000-01 |
406 |
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4 |
1984-85 |
125 |
21 |
2001-02 |
426 |
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5 |
1985-86 |
133 |
22 |
2002-03 |
447 |
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6 |
1986-87 |
140 |
23 |
2003-04 |
463 |
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7 |
1987-88 |
150 |
24 |
2004-05 |
480 |
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8 |
1988-89 |
161 |
25 |
2005-06 |
497 |
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9 |
1989-90 |
172 |
26 |
2006-07 |
519 |
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10 |
1990-91 |
182 |
27 |
2007-08 |
551 |
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11 |
1991-92 |
199 |
28 |
2008-09 |
582 |
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12 |
1992-93 |
223 |
29 |
2009-10 |
632 |
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13 |
1993-94 |
244 |
30 |
2010-11 |
711 |
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14 |
1994-95 |
259 |
31 |
2011-12 |
785 |
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15 |
1995-96 |
281 |
32 |
2012-13 |
852 |
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16 |
1996-97 |
305 |
33 |
2013-14 |
939 |
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17 |
1997-98 |
331 |
34 |
Example I: (Specified Date 1 04 1981)
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Land extent: 1,200 sqft |
Residential Building BUA: 1,200 sqft |
Improvement: addition + refurbishment |
Year sold |
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Year bought: 1975 in Chennai, Mylapore |
Year constructed: 1975, BUA: 1,200 sqft |
Year: 1990 - 91 |
2006 - 07 |
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Land Value: Rs. 72,000/= (say A) |
DRC: Rs. 1,08,000 Say (B) |
Rs. 1,20,000/= (600 sqft added) |
Rs. 1,00,00,000 |
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Value on 1/4/1981 |
Value on 1/4/1981 A+B: Rs. 1,80,000/= |
1990 - 91 |
2006 - 07 |
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CII: 100 |
100 |
182 |
519 |
Computation of Capital gain:
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Selling Price (Say S) |
INR |
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1,00,00,000 |
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Selling expenses (Say C) |
2,50,000 |
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Indexed Acquisition Cost: 1,80,000 * 519/ 100 (Say D) |
9,34,200 |
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Indexed cost of improvement: 1,20,000 * 519/182 (say E) With Document Proof |
3,42,198 |
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Capital Gains: S (C+D+E) Say CG |
84,73,602 |
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S. 54 (Exemption) Re-investment towards new residential property one year prior to date of transfer. Say RI) |
98,00,000 |
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Capital gains |
0 |
Example 2: (Specified Date 1 04 1981)
An apartment building in Thiruvanmiyur, Chennai, 860 sqft BUA, UDS of Land: 516 sqft, cost of acquisition is Rs 17,00,000/= during 1989 -1990 (As per Deed of Apartment). During the same year, an amount of Rupee 2,50,000/= was spent towards interior decoration. The property was sold during FY 2009-10 for a consideration of Rupee 90,00,000/=. Cost of sale is Rupee 2,25,000/= CII during 1989-90: 172 and 2009-10 is: 632
Computation of Capital gain:
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Selling Price (Say S) |
INR |
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90,00,000 |
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Selling expenses (Say C) |
2,25,000 |
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Indexed Acquisition Cost: 17,00,000 * 632/ 172 (Say D) |
62,46,512 |
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Indexed cost of improvement: 2,50,000 * 632/172 (say E) With Document Proof |
9,18,605 |
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Capital gains: S (C+D+E) Say CG |
16,09883 |
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S. 54 (EC) exemption Investment of capital gains in certain fund (Say RF) |
50,00,000 |
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Capital gains: An individual or a HUF (Formula for deductible: Amount invested / Net Consideration * LTCG) |
7,15,504 |
Example 3: (Specified Date: 1/4/1981)
An apartment building admeasuring 700 sqft was purchased in Chennai during 1970 at Rupee 30,000/=. During redevelopment process Builder offered 50% extra, which would make the new flat 1,050 sqft. Mr. X opted for 860 sqft and surrendered 190 sqft for a consideration of Rupee 13,30,000/=, which the builder has agreed to pay in six installments during the next three financial years from FY 2010-11 and Mr. X has handed over the initial residential flat to the builder. CII during 1981-82: 100 and 2010-11 is: 711. Mr X can claim exemption if his flat is handed over within 3 year from 2010-11 and market value of flat is Rupee 65,00,000/= (Based on surrendered flat composite rate as on 2010-11)
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Sales consideration = Rs. 13,30,000 (Surrendered Value of 190 sqft) + Cost of construction of Flat of 860 sqft. (Say S) |
INR |
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23,62,000 |
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Selling expenses (Say C) |
0 |
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Indexed Acquisition Cost: 30000 * 711/ 100 (Say D) |
2,13,300 |
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Indexed cost of improvement: (say E) |
0 |
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Capital gains: S (C+D+E) Say CG |
21,48,700 |
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S. 54 exemption Re-Investment towards new residential property within 2 years after the date of transfer or within 3 years in an under construction property(Say RC) |
65,00,000 |
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Capital gains (In the authors opinion) |
0 |
Cost of Acquisition with reference to certain mode of Acquisition:
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Sl. No |
Where the capital asset became the property of the assesse. |
Cost of Acquisition of asset |
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a) |
Under a Gift or Will. |
1). It shall be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the asset incurred or borne by the previous owner or the assessee, as the case may be, till the date of acquisition of the asset by the assesse. 2). If the previous owner had also acquired the capital asset by any of the modes above, then the cost to that previous owner who had acquired it by mode of acquisition other than the above should be taken as cost of acquisition. |
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b) |
On any distribution of assets on the total or partial partition of a Hindu Undivided Family |
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b) |
By succession, inheritance or devolution. |
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c) |
On any distribution of assets on the dissolution of a firm, body of individuals or other association of persons where such dissolution had taken place any time before 1 04 1987. |
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d) |
On any distribution of assets on the liquidation of a company. |
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e) |
Under a transfer of a revocable or an irrevocable trust |
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f) |
By transfer from its holding company or subsidiary company. |
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g) |
By transfer in a scheme of amalgamation |
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h) |
By an individual house of a |
Capital gains Tax Deductible for Agricultural land & Industrial undertakings, etc.:
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Agricultural land |
Compulsory Acquisition of land and building of an Industrial undertakings |
Shifting from Urban Area to rural or Special Economic Zones |
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Section 54B Capital gains on transfer of land used for agricultural purpose not to be charged in certain cases: If invested in agricultural land within two years after the date of sale. Prior to sale, the sold land must be put to agricultural use for at least two years by the assesse or his father. The net selling price can be claimed for exemption. |
Section 54D Capital gains on compulsory acquisition of land and buildings not to be charged in certain cases: If invested within three years after the date of compulsory acquisition in establishing the old industry or set up a new industry. Deduction to include the cost of land or building or any rights in that as the case may be. The investment can be claimed for exemption subject to satisfy some conditions. |
Section 54G Capital gains on shifting industrial undertakings from urban area to rural area not to be charged in certain cases: If invested within one year before and three years after the date of shifting in establishing the industry complete. Such amount can be claimed for exemption subject to satisfy some conditions. |
The assessee can opt for cost of acquisition or fair market value as on 1 04 -1981, where the capital asset became the property of the assesse before 1st April 1981 and where the capital asset became the property of the previous owner before the 1st April, 1981 means the cost of the capital to the previous owner or the market value of the asset on the 1st day of April, 1981 at the option of the assessee. S. 55 (2) (b) (i) (ii) & (iii Liquidation)
Property acquire after 1st April, 1981, only cost of acquisition should be taken. The cost of acquisition needs to be appropriately indexed based on the prescribed CII for the Financial Year of purchase and sale, respectively on the date of acquisition and improvement after 1-4-1981.
Example 4: The acquisition cost as on 1st April, 1981 is (Land CU 70 and Depreciated Replacement Cost of Residential Building is CU 100). Improvement is done on 1985-86 to the tune of CU 120. It was sold on 2002-03 for a consideration of CU 5,000/= Determine the capital gains as per cost of acquisition and valuation by fair market value (FMV). CII as on 1981-82: 100; 1985-86: 133 & 2002 - 03: 447 (Specified Date: 01 04 1981)
The property is in a prime location, near to Bus and Metro Station and famous temple. The plot has return frontage. The land value is increased 35% for return frontage, location & situation, size, and shape, comparing with the data land which doesnt have. Land value CU: 70 x 1.35 = CU 95 psf
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Valuation by Cost of Acquisition |
Valuation by FMV |
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Selling Price Say S: CU 5,000 |
Selling Price Say S: CU 5,000 |
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Indexed acquisition cost Say C: (70+100) x 447/100 = CU 760 |
Indexed acquisition cost Say C: (95+100) x 447/100= CU 872 |
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Indexed cost of improvement Say D: 120 x 447/133: CU 403 |
Indexed cost of improvement Say D: 120 x 447/133: CU 403 |
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Selling expenses Say E: CU 113 |
Selling expenses Say E: CU 113 |
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Capital Gains: S (C+D+E): CU 3,724 |
Capital Gains: S (C+D+E): CU 3,612 |
A Registered valuer is supposed to know as to which method or mode should be adopted for the purpose of valuing a particular land or a building having regard to a large number of factors involved therein. The tax on capital gains does not envisage that the valuation given must be true and exact market value. We have earlier noticed that one of the modes of computating the market value may be based on a judgment or award in respect of acquisition of similar land, subject of course to such increase or decrease thereupon as may be applicable having regard to the accepted principles laid down therefor and may be found applicable. (Judgment of Honble Supreme Court of India in Dilip N. Shroff v Joint Commissioner of Income tax and others, October, 2007, as reported in Indian Valuer Journal, October, 2007 PP 1214).
The authors other articles can be viewed in
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A. M, IBRAHIM
Architect
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