This article is written by Chandana, from Tamil Nadu Dr. Ambedkar Law University (SOEL). This article deals with the capital gain tax and selling property.

Introduction

Capital taxes are calculated when one wants to file income tax returns. The taxability of capital gain depends on its nature. The type of capital gain, in turn, depends upon the period for which capital asset is held. The essentials which are to be fulfilled while calculating the capital gains, need to be a capital asset and the asset must have been transferred by the assessee, and transfer is to take place in the previous year.

Capital gain tax under the Income Tax Act, 1995

Meaning of capital gain tax

Capital gain tax in layman terms can be understood as any tax levied on the profit or gained in selling the capital assets.

Capital Gain as under the Income Tax Act, 1995

The charging section of Capital gain is provided under Section 45(1) of the Income Tax Act, 1995. Section 45(1) of Income Tax Act, 1995 affirms that any profit or gains arising from the transfer of capital assets in the previous year shall be chargeable to income tax under the head of capital gain and the income shall be deemed to be the income of the previous year in which the transfer took place. The previous year is defined under Section 3(1) of the Income Tax Act, 1995. The previous year begins on April 1 and ends on March 31.

Essential conditions of Section 45(1) of the Income Tax Act, 1995

1. There must be a capital asset

Capital assets are defined under Section 2(14) of the Income Tax Act, 1961. The following below mentioned categories fall under the head of capital assets: 

• Property of any kind which is held by the assessee.
• Securities held by the foreign institutional investor, the investment of securities is as per the Regulations of SEBI Act, 1992.

But a capital asset does not include the following below categories:

• Stock-in trade, consumables stores, raw materials.
• Gold bonds, which are either defence, special bearer, deposit bonds.
• Personal property is used by the assessee or any member of the family who is dependent upon him for personal uses.
• Agriculture land which is situated in the rural area.

Capital assets are further divided into: 

• Short term assets.
• Long term assets.

2. The capital asset must have been transferred by the assessee

A transfer includes transferring or creating of any interest in the assets, disposing or parting with the assets. Section 2(47) of the Income Tax Act, 1995 specifies the elements which constitute a transfer of the capital asset. They are:

• Sale, exchange or, relinquishment of a capital asset.
• Extinguishing the right to use a capital asset.
• Compulsory acquisition of a capital asset.
• Converting the capital asset into stock-in-trade.
• Retaining the possession of the immovable property in the part performance.
• Maturity or redemption of a zero-coupon bond.

Section 47 of the Income Tax Act, 1995 specifies the elements which do not constitute a transfer of the capital asset. Below are the few elements which are given under Section 47 of the Income Tax Act, 1995:

• Transfer of a capital asset either under a gift or irrevocable trust but does not include ESOPs.
• Transfer of assets from holding company to a wholly subsidiary company.
• Transfer of share which is held by the shareholder in the amalgamating company.
• Transfer of capital assets under a reverse mortgage.  

An exception to the above rule is provided under the following sub-clauses of Section 45 of the Income Tax Act, 1995.

• Section 45(1A) of the Income Tax Act, 1995 states if the assessee receives money from the insurance company on accounts that the assets were destroyed during the:

1. Natural calamities;
2. Riots or civil disturbances;
3. Accidental fire or explosion;
4. By any enemy action.

Then the income which has been received will be taxable in the previous year under the head of capital gain.

• Section 45(2) of the Income Tax Act, 1995 states when the owner of the assets converts it into stock-in-trade and such transfers, it is put under the head profit/ gains from business/ profession.
• Section 45(5) of the Income Tax Act, 1995 states that any capital gains arising from transfer by way of compulsory acquisition under any law shall be taxable in the year in which the compensation is first received by the assessee. 

3. The transfer must have been effected in the previous year

The transfer should have been effected in the previous year and it should be under the head of capital gain.

4. There must be a gain or profit on transfer of capital asset

At the time of the transfer, the assessee should have gained some profit or gain while transfer of such capital asset.

5. Such capital should be the one which is not exempted under:

• Section 54 of the Income Tax Act, 1995: Profit on sale of the property used for the residence.
• Section 54B of the Income Tax Act, 1995: Transfer of land used for agricultural purposes.
• Section 54D of the Income Tax Act, 1995: Compulsory acquisition of land and buildings.
• Section 54EC of the Income Tax Act, 1995: No tax on long-term capital gains if the investment is made in specified books.
• Section 54EE of the Income Tax Act, 1995: Tax incentives for start-ups.
• Section 54F of the Income Tax Act, 1995: Capital gain on the transfer of certain capital assets not to be charged in case of investment in a residential house.
• Section 54GA of the Income Tax Act, 1995: Capital gain on transfer of assets of shifting of industrial undertaking from an urban area to a special economic zone.
• Section 54GB of the Income Tax Act, 1995: Capital gain on transfer of residential house property.
• Section 54H of the Income Tax Act, 1995: Extension of time for acquiring new assets or depositing or investing an amount of capital gain.
• Section 112A inserted by the Finance Act, 2018: Tax on long-term capital gains in case of specified securities.

Types of capital gain tax

There are two types of capital gain tax:

1. Short term capital assets
2. Long term capital assets

1.  Short term capital assets

Short term capital assets are defined under Section 2(42A) asserts that the capital assets are held by the assessee for not more than thirty-six months immediately before the date of the transfer. The following are the exceptions to short-term capital assets and instead of considering not more than thirty-six months for this purpose if the assets are held less than twelve months, such assets are considered to be short-term capital assets. 

• Security listed in the recognised stock exchange.
• Unity of an equity-oriented fund.
• Zero-coupon bond.

The period of thirty months is not static. Depending on the assets which the assessee holds it is changed. The points are mentioned in Section 2(42A) of the Income Tax Act, 1995.

2. Long term capital assets

Long term capital assets are defined under Section 2(29A) of Income Tax Act, 1995 which simply defines all the capital assets which are not a short term capital asset are called long term capital assets. It means the assessee should hold the asset for more than thirty-six months. But if any immovable property is transferred on or after April 1, 2017, it is to be categorised as long term capital assets if the asset is held by the assessee for more than twenty-four months before the date of the transfer.

Mode of computation of capital gain tax

According to Section 48 of the Income Tax Act, 1995, the income which is chargeable under the head of capital gain shall be deducted only from the full value consideration which is received by the assessee as a result of the transfer of capital assets in the following accounts:

1. The expenditure which is incurred by the transferee wholly in connection with such transfer.
2. The cost of acquisition of the capital asset.
3. The cost of the improvement.

If the assessee is a non-resident of India and any capital gains arise by transfer of such capital assets then the money received by the assessee shall be in the same foreign currency which was used initially by the assessee for the purchase of such capital assets. 

Computation of short term capital gain

Computation of long term capital gain

Exemption of capital gains

Few exemptions as mentioned under the Income Tax Act, 1995

1. Profit on sale of property used for residence

According to Section 54 of Income Tax Act, 1995, where any capital gain arises from the transfer of long term residential house by an assessee, individual, Hindu undivided family, the income arising from there is charged under the head “income from house property.” The assessee will fall under the exemption only if:

1. The assessee purchases one residential house within one year; or
2. The assessee purchases within two years after the date of the transfer; or
3. The assessee constructs the house within three years from the date of transfer.

The Finance Act, 2019 has been amended and extended the benefit of exemption when the investment is made by way of purchase or construction of two residential house properties in India. The exemption can be claimed by the assessee only if:

1. The long term capital gain does not exceed INR 2 crores.
2. The benefit is available to the assessee only once in a lifetime of the assessee for a particular assessment year. 

2. Transfer of land used for agricultural purposes

According to Section 54B of the Income Tax Act, 1995, where capital gains arise by way of transfer of the land and before the transfer the land was used by the assessee for agricultural purposes and within two years from the date of transfer, the assessee has purchased some other agricultural land. If the cost of new agricultural land is higher than the amount of capital gain the entire long-term capital gain will be exempt. If the cost of new agricultural land is lesser than the amount of capital the long-term capital gain is exempted only to the cost of new agriculture land.

3. Compulsory acquisition of land and buildings

According to Section 54D of Income Tax Act, 1995, an assessee may gain exemption from capital gain arising from the transfer by way of compulsory acquisition of any land or building which is forming a part of an industrial undertaking and which is used by an assessee for business purposes before two years of transfer and an assessee must have purchased some other land or building within three years from the date of transfer.

4. No tax on long-term capital gains if the investment made in specified bonds

According to Section 54EC of Income Tax Act, 1995, when an assessee has long term capital assets either building or land, and where an assessee transfer such asset an assessee should invest the amount in a long term specified assets within six months from the date of such transfer in order to gain capital exemptions.

5. Capital gain on transfer of certain capital assets not to be charged in case of investment in residential house

According to Section 54F of Income Tax Act, 1995,  where, in the case of an assessee being an individual, the capital gain arises from the transfer of any long-term capital asset, not being a residential house and the assessee has, within a period of one year before or after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house, the capital gain shall be dealt as per Section 54F of the Act.

Conclusion

Section 45 to 55A of the Income Tax Act deals with capital gains. Understanding about capital gains can be helpful for both an assessee and businessman as they can claim necessary exemptions as per the Act.

References

• http://legislative.gov.in/sites/default/files/A1961-43.pdf
• http://egazette.nic.in/WriteReadData/2019/209695.pdf

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