Understand Capital Gains Tax In India In 2020

Capital Gains Tax

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When is capital gains tax charged?

Any profits or gains arising from the ‘transfer’ of a ‘capital asset’ effected in the previous year (other than exemptions) shall be chargeable to Income-tax under capital gains tax head in the previous year in which the transfer took place.

First, we understand what is Capital Asset after which we are able to understand what is capital gains tax.

CAPITAL ASSET

Definition: According to section 2(14), a capital asset means –

  • (a)property of any kind held by an assessee, whether or not connected with his business or profession;

  • (b)any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the SEBI regulations.

However, it does not include:

(i) Stock-in trade:

Any stock-in-trade [other than securities referred to in (b) above, consumable stores or raw materials held for the purpose of the business or profession of the assessee;

The exclusion of stock-in-trade from the definition of capital asset is only in respect of sub-clause (a) above and not sub-clause (b). This implies that even if the nature of such security in the hands of the Foreign Portfolio Investor is stock in trade, the same would be treated as a capital asset and the profit on transfer would be taxable as capital gain.

Further, the Explanatory Memorandum to the Finance (No.2) Bill, 2014 clarifies that the income arising from transfer of such security by a Foreign Portfolio Investor (FPI) would be in the nature of capital gain, irrespective of the presence or otherwise in India, of the Fund manager managing the investments of the assessee.

(ii)Personal effects:

Personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him.

EXCLUSIONS:

(a)jewellery;

(b)archaeological collections;

(c)drawings;

(d)paintings;

(e)sculptures; or

(f) any work of art.

Definition of Jewellery –

Jewellery is a capital asset and the profits or gains arising from the transfer of jewellery held for personal use are chargeable to tax under the head “capital gains”. For this purpose, the expression ‘jewellery’ includes the following:

  • 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 stones and whether or not worked or sewn into any wearing apparel;

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

(iii)Rural agricultural land in India

i.e., agricultural land in India which is not situated in any specified area.

As per the definition that only rural agricultural lands in India are excluded from the purview of the term ‘capital asset’. Hence urban agricultural lands constitute capital assets. Accordingly, the agricultural land described in (a) and (b) below, being land situated within the specified urban limits, would fall within the definition of “capital asset”, and transfer of such land would attract capital gains tax –

  • (a)agricultural land situated in any area within the jurisdiction of a municipality or cantonment board having population of not less than ten thousand, or

  • (b)agricultural land situated in any area within such distance, measured aerially, in relation to the range of population as shown hereunder –

Shortest aerial distance from the local limits of a municipality or cantonment board referred to in item (a)Population according to the last preceding census of which the relevant figures have been published before the first day of the previous year.
(i)≤ 2 kms> 10,000
(ii)> 2 kms≤ 6 kms> 1,00,000
(iii)> 6 kms ≤ 8 kms> 10,00,000

(iv)Specified Gold Bonds:

6½% Gold Bonds, 1977, or 7% Gold Bonds, 1980, or National Defence Gold Bonds, 1980, issued by the Central Government;

(v)Special Bearer Bonds:

Special Bearer Bonds, 1991 issued by the Central Government;

(vi)Gold Deposit Bonds

Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under the Gold Monetisation Scheme, 2015 notified by the Central Government.

Also Read: Know the Sources of Section 80C where you can invest to reduce your Taxable Income.

Now, Let’s understand Short Term and Long Term Capital Asset

Capital Gains Tax

Short-term capital asset means a capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer. Long-term capital asset means a capital asset which is not a short-term capital asset. Thus, a capital asset held by an assessee for more than 36 months immediately preceding the date of its transfer is a long-term capital asset.

Exception:

A security (other than a unit) listed in a recognized stock exchange, or a unit of an equity oriented fund or a unit of the Unit Trust of India or a Zero Coupon Bond will, however, be considered as a long-term capital asset if the same is held for more than 12 months immediately preceding the date of its transfer.

Further, a share of a company (not being a share listed in a recognized stock exchange in India) or an immovable property, being land or building or both would be treated as a short-term capital asset if it was held by an assessee for not more than 24 months immediately preceding the date of its transfer.

Thus, the period of holding of unlisted shares or an immovable property, being land or building or both, for being treated as a long-term capital asset would be “more than 24 months” instead of “more than 36 months”.

When it is treated as capital asset transferred

Capital Gains Tax

Transfer in relation to a capital asset includes the following types of transactions:

(i) the sale, exchange or relinquishment of the asset; or

(ii)the extinguishment of any rights therein; or

(iii)the compulsory acquisition thereof under any law; or

(iv)the owner of a capital asset may convert the same into the stock-in-trade of a business carried on by him. Such conversion is treated as transfer; or

(v)the maturity or redemption of a zero coupon bond; or

(vi)possession of an immovable property in consideration of part-performance of a contract referred to in section 53A of the Transfer of Property Act, 1882.

(vii)transactions which have the effect of transferring or enabling the enjoyment of an immovable property.

Also Read: Understand Section 80D in only One Table.

Section 112:Long Term Capital Gains Tax

(1) Concessional rate of tax:

Where the total income of an assessee includes long-term capital gains, tax is payable by the assessee @20% on such long-term capital gains. The treatment of long-term capital gains in the hands of different types of assessees are as follows –

(i) Resident individual or Hindu undivided family:

Income-tax payable at normal rates on total income as reduced by long-term capital gains plus 20% on such long-term capital gains. However, where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax then such long-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such long-term capital gains will be calculated @20%.

(ii) Domestic Company:

Long-term capital gains tax will be charged @ 20%.

(iii) Non-corporate non-resident or foreign company:

  • Long-term capital gains tax arising from the transfer of a capital asset, being unlisted securities or shares of a company not being a company in which public are substantially interested, would be calculated at the rate of 10% on the capital gains in respect of such asset without giving effect to the indexation provision under second proviso to section 48 and currency fluctuation under first proviso to section 48.

  • In respect of other long-term capital gains tax, the applicable rate of tax would be 20%.

(iv) Residents (other than those included in (i) above):

Long-term capital gains tax will be charged @20%.

(2)Lower rate of capital gains tax for transfer of listed securities and zero coupon bonds:

Where the tax payable in respect of any income arising from the transfer of a listed security (other than a unit) or a zero coupon bond, being a long-term capital asset, exceeds 10% of the amount of capital gains before indexation, then such excess shall be ignored while computing the tax payable by the assessee.

Consequently, long term capital gains tax on transfer of units and unlisted securities are not eligible for concessional rate of tax@10% (without indexation benefit). Therefore, the long-term capital gains tax, in such cases, are taxable@20% (with indexation benefit).

However, in case of non-corporate non-residents and foreign companies, long term capital gains arising from transfer of a capital asset, being unlisted securities or shares in a company in which public are not substantially interested are eligible for a concessional rate of tax@10% (without indexation benefit).

(3)No deduction under Chapter VI-A against Long Term Capital Gains Tax:

The provisions of section 112 make it clear that the deductions under Chapter VIA cannot be availed in respect of the long-term capital gains tax included in the total income of the assessee.

Section 112A: Long Term Capital Gains Tax on Certain Assets

(1) Concessional rate of tax in respect of LTCG on transfer of certain assets:

In order to minimize economic distortions and curb erosion of tax base, section 112A provides that notwithstanding anything contained in section 112, a concessional rate of tax @10% will be leviable on the long-term capital gains exceeding Rs.1,00,000 on transfer of –

  • (a)an equity share in a company or

  • (b)a unit of an equity oriented fund or

  • (c)a unit of a business trust.

(2) Conditions:

The conditions for availing the benefit of this concessional rate are–

  • (a) In case of equity share in a company, STT has been paid on acquisition and transfer of such capital asset

  • (b)In case of unit of an equity oriented fund or unit of business trust, STT has been paid on transfer of such capital asset.

(3) Adjustment of Unexhausted Basic Exemption Limit:

In the case of resident individuals or HUF, if the basic exemption is not fully exhausted by any other income, then such long-term capital gain exceeding Rs.1 lakh will be reduced by the unexhausted basic exemption limit and only the balance would be taxed at 10%. However, the benefit of adjustment of unexhausted basic exemption limit is not available in the case of non-residents. It is also not available in case of resident AOPs and BOIs.

(4) No deduction under Chapter VI-A against Long Term Capital Gains Tax taxable under section 112A:

Deductions under Chapter VI-A cannot be availed in respect of such long-term capital gains tax on equity shares of a company or units of an equity oriented mutual fund or unit of a business trust included in the total income of the assessee.

(5)No benefit of rebate under section 87A against LTCG taxable under section 112A:

Rebate under section 87A is not available in respect of tax payable @10% on LTCG under section 112A.

CBDT’s FAQ on Section 112A:

Capital Gains Tax

Q 1. What is the meaning of long term capital gains tax under the new tax regime for long term capital gains?

Ans 1. Long term capital gains tax mean gains arising from the transfer of long-term capital asset. It provides for a new long-term capital gains tax regime for the following assets–

  • (i)Equity Shares in a company listed on a recognised stock exchange;

  • (ii)Unit of an equity oriented fund; and

  • (iii)Unit of a business trust.

The new tax regime applies to the above assets, if:

  • a. the assets mentioned in (i) & (ii) are held for a minimum period of twelve months from the date of acquisition; and the asset mentioned in (iii) is held for a minimum period of thirty six months; and

  • b. the Securities Transaction Tax (STT) is paid at the time of transfer. However, in the case of equity shares acquired after 1.10.2004, STT is required to be paid even at the time of acquisition (subject to notified exemptions).

Q 2. What is the point of chargeability of the tax?

Ans 2. The tax will be levied only upon transfer of the long-term capital asset on or after 1st April, 2018, as defined in clause (47) of section 2 of the Act.

Q 3. What is the method for calculation of long-term capital gains tax?

Ans 3. The long-term capital gains tax will be computed by deducting the cost of acquisition from the full value of consideration on transfer of the long-term capital asset.

Q 4. How do we determine the cost of acquisition for assets acquired on or before 31st January, 2018?

Ans 4. The cost of acquisition for the long-term capital asset acquired on or before 31st of January, 2018 will be the actual cost.

However, if the actual cost is less than the fair market value of such asset as on 31st of January, 2018, the fair market value will be deemed to be the cost of acquisition.

Further, if the full value of consideration on transfer is less than the fair market value, then such full value of consideration or the actual cost, whichever is higher, will be deemed to be the cost of acquisition.

Q 5. Please provide illustrations for computing long-term capital gains tax in different scenarios, in the light of answers to questions 4.

Ans 5. The computation of long-term capital gains tax in different scenarios is illustrated as under

Scenario 1:

An equity share is acquired on 1st of January, 2017 at Rs.100, its fair market value is Rs.200 on 31st of January, 2018 and it is sold on 1st of April, 2019 at Rs.250. As the actual cost of acquisition is less than the fair market value as on 31st of January, 2018, the fair market value of Rs.200 will be taken as the cost of acquisition and the long-term capital gains tax will be Rs.50 (Rs.250 – Rs.200).

Scenario 2:

An equity share is acquired on 1st of January, 2017 at Rs.100, its fair market value is Rs.200 on 31st of January, 2018 and it is sold on 1st of April, 2019 at Rs.150. In this case, the actual cost of acquisition is less than the fair market value as on 31st of January, 2018. However, the sale value is also less than the fair market value as on 31st of January, 2018. Accordingly, the sale value of Rs.150 will be taken as the cost of acquisition and the long-term capital gains tax will be NIL (Rs.150 – Rs.150).

Scenario 3:

An equity share is acquired on 1st of January, 2017 at Rs.100, its fair market value is Rs.50 on 31st of January, 2018 and it is sold on 1st of April, 2019 at Rs.150. In this case, the fair market value as on 31st of January, 2018 is less than the actual cost of acquisition, and therefore, the actual cost of Rs.100 will be taken as actual cost of acquisition and the long-term capital gains tax will be Rs.50 (Rs.150 – Rs.100).

Scenario 4:

An equity share is acquired on 1st of January, 2017 at Rs.100, its fair market value is Rs.200 on 31st of January, 2018 and it is sold on 1st of April, 2019 at Rs.50. In this case, the actual cost of acquisition is less than the fair market value as on 31st January, 2018. The sale value is less than the fair market value as on 31st of January, 2018 and also the actual cost of acquisition. Therefore, the actual cost of Rs.100 will be taken as the cost of acquisition in this case. Hence, the long-term capital loss will be Rs.50 (Rs.50 – Rs.100) in this case.

Q 6. Whether the cost of acquisition will be inflation indexed?

Ans 6.Third proviso to section 48, provides that the long-term capital gains tax will be computed without giving effect to the provisions of the second provisos of section 48. Accordingly, it is clarified that the benefit of inflation indexation of the cost of acquisition would not be available for computing long-term capital gains under the new tax regime.

Q 7. What will be the tax treatment of transfer made on or after 1st April 2018?

Ans 7. The long-term capital gains exceeding Rs.1 lakh arising from transfer of these assets made on after 1st April, 2018 will be taxed at 10 per cent. However, there will be no tax on gains accrued upto 31st January, 2018.

Q 8. What is the date from which the holding period will be counted?

Ans 8. The holding period will be counted from the date of acquisition.

Q 9. Whether tax will be deducted at source in case of gains by resident tax payer?

Ans 9. No. There will be no deduction of tax at source from the payment of long-term capital gains tax to a resident tax payer.

Q 10. What will be the cost of acquisition in the case of bonus shares acquired before 1st February 2018?

Ans 10.The cost of acquisition of bonus shares acquired before 31st January, 2018 will be determined as per section 55(2)(ac). Therefore, the fair market value of the bonus shares as on 31st January, 2018 will be taken as cost of acquisition (except in some typical situations explained in Ans 5), and hence, the gains accrued upto 31st January, 2018 will continue to be exempt.

Q 11. What will be the cost of acquisition in the case of right share acquired before 1st February 2018?

Ans 11. The cost of acquisition of right share acquired before 31st January, 2018 will be determined as per section 55(2)(ac). Therefore, the fair market value of right share as on 31st January, 2018 will be taken as cost of acquisition (except in some typical situations explained in Ans 5), and hence, the gains accrued upto 31st January, 2018 will continue to be exempt.

Q 12. What will be the treatment of long-term capital loss arising from transfer made on or after 1st April, 2018?

Ans 12. Long-term capital loss arising from transfer made on or after 1st April, 2018 will be allowed to be set-off and carried forward in accordance with existing provisions of the Act. Therefore, it can be set-off against any other long-term capital gains tax and unabsorbed loss can be carried forward to subsequent eight years for set-off against long-term capital gains tax.

Note:

The Finance (No. 2) Act, 2019 has levied an enhanced surcharge of 25% and 37%, where the total income of individuals/HUF/AOPs/BOIs exceeds Rs. 2 crores and Rs. 5 crores, respectively. However, the enhanced surcharge has been withdrawn on tax payable at special rates under section 111A and 112A on short-term capital gains tax and long-term capital gains tax arising from the transfer of equity share in a company or unit of an equity-oriented fund/ business trust, which has been subject to securities transaction tax.

Also Read: Initiatives of the Committee for Members in Practice (CMP), ICAI

Section 111A: Short Term Capital Gains Tax In Respect Of Equity Shares/ Units Of An Equity Oriented Fund/ Units Of A Business Trust

(1)Concessional rate of tax in respect of Short Term Capital Gains Tax on transfer of certain assets:

This section provides for a concessional rate of tax (i.e. 15%) on the short-term capital gains tax on transfer of –

  • (i) an equity share in a company or

  • (ii) a unit of an equity oriented fund or

  • (iii) a unit of a business trust.

(2)Conditions:

The conditions for availing the benefit of this concessional rate are –

(i) the transaction of sale of such equity share or unit should be entered into on or after 1.10.2004, being the date on which Chapter VII of the Finance (No. 2) Act, 2004came into force; and (ii) such transaction should be chargeable to securities transaction tax under the said Chapter.

However, short-term capital gains tax arising from transactions 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 leviable in respect of such transaction.

(3)Adjustment of Unexhausted Basic Exemption Limit:

In the case of resident individuals or HUF, if the basic exemption is not fully exhausted by any other income, then the short-term capital gains tax will be reduced by the unexhausted basic exemption limit and only the balance would be taxed at 15%. However, the benefit of availing the basic exemption limit is not available in the case of non-residents.

(4)No deduction under Chapter VI-A against Short Term Capital Gains Tax taxable under section 111A:

Deductions under Chapter VI-A cannot be availed in respect of such short-term capital gains tax on equity shares of a company or units of an equity oriented mutual fund or unit of a business trust included in the total income of the assessee.

Exemption under section 10

The following are the exemption in respect of capital gains under section 10:

Section 10(33):Exemption of capital gains tax on transfer of a unit of Unit Scheme, 1964

This clause provides that any income arising from the transfer of specified units, shall be exempt from tax. Such transfer should take place on or after 1.4.2002.

Section 10(37):Exemption of capital gains tax on compulsory acquisition of agricultural land situated within specified urban limits

With a view to mitigate the hardship faced by the farmers whose agricultural land situated in specified urban limits has been compulsorily acquired, clause (37) provide to exempt the capital gains arising to an individual or a HUF from transfer of urban agricultural land by way of compulsory acquisition.

Such exemption is available where the compensation or the enhanced compensation or consideration, as the case may be, is received on or after 1.4.2004.

The exemption is available only when such land has been used for agricultural purposes during the preceding two years by such individual or a parent of his or by such HUF.

Exemption of Capital Gains Tax under section 54/ 54B/ 54D/ 54EC/ 54EE/ 54F/ 54G/ 54GA/54GB/ 54H

Section 54:Capital Gains Tax on sale of residential house

Eligible assessees – Individual & HUF

Conditions

  • There should be a transfer of residential house (buildings or lands appurtenant thereto)
  • It must be a long-term capital asset
  • Income from such house should be chargeable under the head “Income from house property”

Where the amount of capital gains tax exceeds Rs. 2 crore

Where the amount of capital gain exceeds Rs. 2 crore, one residential house in India should be purchased within 1 year before or 2 years after the date of transfer (or) constructed within a period of 3 years after the date of transfer.

Where the amount of capital gains tax does not exceed Rs. 2 crore

Where the amount of capital gains does not exceed Rs. 2 crore, the assessee i.e., individual or HUF, may at his option, purchase two residential houses in India within 1 year before or 2 years after the date of transfer (or) construct two residential houses in India within a period of 3 years after the date of transfer.

Where during any assessment year, the assessee has exercised the option to purchase or construct two residential houses in India, he shall not be subsequently entitled to exercise the option for the same or any other assessment year.

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  • If such investment is not made before the date of filing of return of income, then the capital gain has to be deposited under the CGAS. Amount utilized by the assessee for purchase or construction of new asset and the amount so deposited shall be deemed to be the cost of new asset.

Quantum of Exemption

  • If cost of new residential house or houses, as the case may be is more than or equal to Long term capital gains tax, entire long term capital gains is exempt.
  • If cost of new residential house or houses, as the case may be is less than Long term capital gains, long term capital gains tax to the extent of cost of new residential house is exempt.

Consequences of transfer of new asset before 3 years

  • If the new asset is transferred before 3 years from the date of its acquisition or construction, then, cost of the asset will be reduced by capital gains exempted earlier for computing capital gains.

Section 54B:Capital Gains Tax on transfer of agricultural land

Eligible assessee – Individual & HUF

Conditions

  • There should be a transfer of urban agricultural land.
  • Such land must have been used for agricultural purposes by the assessee, being an individual or his parent, or a HUF in the 2 years immediately preceding the date of transfer.
  • He should purchase another agricultural land (urban or rural) within 2 years from the date of transfer.
  • If such investment is not made before the date of filing of return of income, then the capital gain has to be deposited under the CGAS. Amount utilized by the assessee for purchase of new asset and the amount so deposited shall be deemed to be the cost of new asset.

Quantum of exemption

  • If cost of new agricultural land is more than or equal to capital gains, entire capital gains tax is exempt.
  • If cost of new agricultural land is less than capital gains, capital gains tax to the extent of cost of new agricultural land is exempt.

Consequences of transfer of new agricultural land before 3 years

  • If the new agricultural land is transferred before 3 years from the date of its acquisition, then cost of the land will be reduced by capital gains exempted earlier for computing capital gains of new agricultural land.
  • However, if the new agricultural land is a rural agricultural land, there would be no capital gains on transfer of such land.

Section 54D: Capital Gains Tax on transfer by way of compulsory acquisition of land and building of an industrial undertaking

Eligible assessee – Any assessee

Conditions  

  • There must be compulsory acquisition of land and building or any right in land or building forming part of an industrial undertaking.
  • The land and building should have been used by the assessee for purposes of the business of the industrial undertaking in the 2 years immediately preceding the date of transfer.
  • The assessee must purchase any other land or building or construct any building (for shifting or re-establishing the existing undertaking or setting up a new industrial undertaking) within 3 years from the date of transfer.
  • If such investment is not made before the date of filing of return of income, then the capital gain has to be deposited under the CGAS. Amount utilized by the assessee for purchase of new asset and the amount so deposited shall be deemed to be the cost of new asset

Quantum of exemption

  • If cost of new asset is more than or equal to Capital gains, entire capital gains tax is exempt.
  • If cost of new asset is less than Capital gains, capital gains tax to the extent of cost of new asset is exempt.

Note:

The exemption in respect of capital gains from transfer of capital asset would be available even in respect of short-term capital asset, being land or building or any right in any land or building, provided such capital asset is used by assessee for the industrial undertaking belonging to him, even if he was not the owner for the said period of 2 years.

Consequences of transfer of new asset before 3 years

  • If the new asset is transferred before 3 years from the date of its acquisition, then cost of the asset will be reduced by capital gains exempted earlier for computing capital gains.

Section 54EC: Capital Gains Tax not chargeable on investment in certain bonds

Eligible assessee – Any assessee

Conditions  

  • There should be transfer of a long-term capital asset being land or building or both.
  • Such asset can also be a depreciable asset held for more than 36 months. [CIT v. Dempo Company Ltd (2016) 387 ITR 354 (SC)]
  • The capital gains arising from such transfer should be invested in a long-term specified asset within 6 months from the date of transfer.
  • Long-term specified asset means specified bonds, redeemable after 5 years, issued on or after 1.4.2018 by the National Highways Authority of India (NHAI) or the Rural Electrification Corporation Limited (RECL) or any other bond notified by the Central Government in this behalf.
  • The assessee should not transfer or convert or avail loan or advance on the security of such bonds for a period of 5 years from the date of acquisition of such bonds.

Note:

  • In case of conversion of capital asset into stock in trade and subsequent sale of stock in trade – Period of 6 months to be reckoned from the date of sale of stock in trade for the purpose of section 54EC exemption [CBDT Circular No.791 dated 2-6- 2000].
  • Section 46(2):-Receipt of money on liquidation of company is chargeable to tax in the hands of shareholders. However, there is no transfer of capital asset in such a case – Therefore, exemption under section 54EC is not available – CIT v. Ruby Trading Co. (P) Ltd. 259 ITR 54 (Raj.)

Quantum of exemption

  • Capital gains or amount invested in specified bonds, whichever is lower.
  • Ceiling limit for investment in long-term specified asset
  • The maximum investment which can be made in notified bonds or bonds of NHAI and RECL, out of capital gains arising from transfer of one or more assets, during the previous year in which the original asset is transferred and in the subsequent financial year cannot exceed Rs. 50 lakhs.

Violation of condition

  • In case of transfer or conversion of such bonds or availing loan or advance on security of such bonds before the expiry of 5 years, the capital gain exempted earlier shall be taxed as long-term capital gain in the year of violation of condition.

Section 54EE: Exemption of long-term capital gains tax on investment in notified units of specified fund

Objective:

For incentivising the start-up ecosystem in India, the ‘start-up India Action Plan’ envisages establishment of a Fund of Funds which intends to raise Rs. 2,500 crores annually for four years to finance the start-ups.

Eligible assessee – Any assessee

Exemption of LTCG invested in units of specified fund:

  • There should be transfer of a long-term capital asset.
  • The capital gains arising from such transfer should be invested in a long-term specified asset within 6 months from the date of transfer.
  • Long-term specified asset means a unit or units issued before 1st April, 2019 of such fund, as may be notified by the Central Government in this behalf.
  • The assessee should not transfer or avail loan or advance on the security of such units for a period of 3 years from the date of acquisition of such units.

Quantum of Exemption:

  • If amount invested in notified units of specified fund is more than or equal to capital gains, entire capital gains tax is exempt.
  • If amount invested in notified units of specified fund is less than capital gains, capital gains tax to the extent of cost of amount invested in notified units is exempt.

Ceiling limit for investment in units of the specified fund

The maximum investment in units of the specified fund in any financial year is Rs. 50 lakh. Further, the investment made by an assessee in the units of specified fund out of capital gains arising from the transfer of one or more capital assets, cannot exceed Rs. 50 lakh, whether the investment is made in the same financial year or subsequent financial year or partly in the same financial year and partly in the subsequent financial year.

Conditions for availing exemption:

  • Investment of LTCG in units of specified fund.
  • Units should notbe transferred for a period of 3 years.
  • Maximum investment is Rs.50 lakhs.
  • Investment within 6 months from the date of transfer

Consequence of transfer of units before 3 years:

Where units are transferred or loan or advance is taken on security of such units within a period of 3 years from its acquisition, the capital gains, to the extent exempt earlier, would be chargeable as long term capital gains in the year of transfer.

Violation of condition

Further, if the assessee takes any loan or advance on the security of such units, he shall be deemed to have transferred such units on the date on which such loan or advance is taken.

Section 54F: Capital gains tax in cases of investment in residential house

Eligible assessees: Individuals/ HUF

Conditions  

  • There must be transfer of a long-term capital asset, not being a residential house.
  • Transfer of plot of land is also eligible for exemption
  • The assessee should purchase one residential house situated in India within a period of 1 year before or 2 years after the date of transfer; or construct one residential house in India within 3 years from the date of transfer.
  • If such investment is not made before the date of filing of return of income, then the net sale consideration has to be deposited under the CGAS. Amount utilized by the assessee for purchase or construction of new asset and the amount so deposited shall deemed to be the cost of new asset.
  • The assessee should not own more than one residential house on the date of transfer.
  • The assessee should not purchase any other residential house within a period of 2 year or construct any other residential house within a period of 3 years from the date of transfer of the original asset.

Quantum of exemption

  • If cost of new residential house is more than or equal to Net sale consideration of original asset, entire capital gains tax is exempt.
  • If cost of new residential house is less than Net sale consideration of original asset, only proportionate capital gains tax is exempt i.e. LTCG* (Amount invested in new residential house/ Net sale consideration)

Consequences if the new house is transferred within 3 years from the date of its purchase

  • If the new asset is transferred before 3 years from the date of its acquisition, then the Capital gains would arise on transfer of the new house and capital gain exempted earlier under section 54F would be taxable as long-term capital gains.

Consequences where assessee purchases any other residential house within 2 years or constructs within 3 years from the date of transfer of original asset

The capital gain exempted earlier under section 54F would be deemed to be long-term capital gains and chargeable to tax in the previous year in which such residential house is purchased or constructed.

Section 54G: Exemption of capital gains tax for shifting of industrial undertaking from urban areas

Eligible assessees: Any assessee

Conditions

  • There should be a shifting of the industrial undertaking from an urban area to any other area other than an urban area.
  • There should be a transfer of machinery, plant, building or land or any right in building or land used for the business of an industrial undertaking situated in an urban area.
  • Such transfer should be in the course of, or in consequence of, shifting the industrial undertaking from an urban area to any other area other than an urban area.
  • The capital gain (short-term or long-term) should be utilized for any of the following purposes within 1 year before or 3 years after the date of transfer –
  1. purchase of new plant and machinery for the purposes of business of the industrial undertaking in the area to which the said undertaking is shifted;
  2. acquisition of building or land or construction of building for the purposes of his business in the said area;
  3. expenses on shifting of the industrial undertaking from the urban area to the other area;
  4. such other expenditure as the Central Government may specify in a scheme framed by the Central Government.
  • If such investment is not made before the date of filing of return of income, then the capital gain has to be deposited under the CGAS. Amount utilized by the assessee for purchase of new asset and expenses of shifting and the amount so deposited shall be deemed to be the cost of new asset.

Quantum of exemption

  • If cost of new assets plus expenses incurred for the specified purpose is more than or equal to Capital gains, entire capital gains tax(short-term or long-term) is exempt.
  • If cost of new assets plus expenses incurred for the specified purpose is less than Capital gains, capital gains tax(short-term or long-term) to the extent of such cost and expenses is exempt.

Consequences if the new asset is transferred within a period of 3 years

If the new asset is transferred within a period of 3 years of its purchase or construction, then the capital gain, which was exempt earlier under section 54G would be deducted from the cost of acquisition of the new asset for the purpose of computation of capital gains in respect of the transfer of the new asset.

Section 54GA: Exemption of capital gains tax on transfer of certain capital assets in case of shifting of an industrial undertaking from an urban area to any SEZ

Eligible assesses – Any assessee

Conditions

  • There must be transfer of capital assets
  • Such transfer must be effected in the course of, or in consequence of the shifting of an industrial undertaking from an urban area to any SEZ, whether developed in an urban area or not.
  • The capital asset should be either machinery or plant or building or land or any rights in building or land used for the purposes of the business of an industrial undertaking situated in an urban area.
  • The assessee should, within a period of 1 year before or 3 years after the date of transfer,
  1. purchase machinery or plant for the purposes of business of the industrial undertaking in the SEZ;
  2. acquire building or land or construct building for the purposes of his business in the SEZ;
  3. expenses on shifting of the industrial undertaking from the urban area to the SEZ; and
  4. incur expenses for such other purposes as may be specified in a scheme framed by the Central Government.
  • If such investment is not made before the date of filing of return of income, then the capital gain has to be deposited under the CGAS.Amount utilized by the assessee for purchase of new asset and expenses of shifting and the amount so deposited shall be deemed to be the cost of new asset.

Quantum of exemption

  • If cost of new assets plus expenses incurred for shifting is more than or equal to Capital gains, entire capital gains tax(short-term or long-term) is exempt.
  • If cost of new assets plus expenses incurred for shifting is less than Capital gains, capital gains tax(short-term or long-term) to the extent of such cost and expenses is exempt.

Consequences if the new asset is transferred within a period of 3 years

  • If the new asset is transferred within a period of 3 years of its purchase or construction, then the capital gain, which was exempt earlier under section 54GA would be deducted from the cost of acquisition of the new asset for the purpose of computation of capital gains in respect of the transfer of the new asset.

Section 54GB: Exemption of long-term capital gains tax on transfer of residential property if the net sale consideration is used for subscription in equity shares of an eligible start–up company to be used for purchase of new plant and machinery

  • Section 54GB exempts long-term capital gains on sale of a residential property (house or plot of land) owned by an individual or a HUF in case of re-investment of net sale consideration in the equity shares of an eligible company being an eligible start-up, which is utilized by the company for the purchase of new plant and machinery.
  • In order to qualify as an “eligible company” under section 54GB the company should be:
  1. incorporated in the financial year in which the capital gain arises or in the following year on or before the due date of filing return of income by the individual or HUF;
  2. engaged in an eligible business;
  3. a company in which the individual or HUF holds more than 25% of the share capital or 25% of the voting rights, after the subscription in shares by the individual or HUF; and
  4. a company which is an eligible start-up.

Meaning of eligible start-up:

  • Company engaged in eligible business incorporated during the period 1.4.2016 -31.3.2021.
  • Total turnover ≤ Rs.25 crores in the P.Y. for which deduction under section 80-IAC is claimed.
  • Holds a certificate of eligible business from the notified Inter Ministerial Board of Certification.

Meaning of eligible business:

A business carried out by an eligible start up engaged in innovation, development or improvement of products or processes or services or a scalable business model with a high potential of employment generation or wealth creation.

Conditions

  • The amount of net consideration should be used by the individual or HUF before the due date of furnishing of return of income under section 139(1), for subscription in equity shares of the eligible company.
  • The amount of subscription as share capital is to be utilized by the eligible company for the purchase of new plant and machinery within a period of one year from the date of subscription in the equity shares.
  • If the amount of net consideration subscribed as equity shares in the eligible company is not utilized by the company for the purchase of plant and machinery before the due date of filing of return by the individual or HUF, the unutilized amount shall be deposited in an account with any specified bank or institution before such due date of filing return of income. The return of income furnished by the assessee, should be accompanied by the proof of such deposit.
  • The said amount is to be utilized in accordance with any scheme which may be notified by the Central Government in the Official Gazette.

The amount of net consideration utilized by the company for purchase of new plant and machinery and the amount deposited as mentioned in 4th bullet point above, will be deemed to be the cost of new plant and machinery for the purpose of computation of capital gains in the hands of individual or HUF.

New plant and machinery does not include –

  • any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person;
  • any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest house;
  • any office appliances including computer and computer software;
  • any vehicle; or
  • any machinery or plant, the whole of the actual cost of which is allowed as a deduction, whether by way of depreciation or otherwise, in computing the income chargeable under the head “Profits and gains of business or profession” of any previous year.

In case of an eligible start-up, being a technology driven start-up so certified by the notified Inter-Ministerial Board of Certification (IMBC), the company can also utilize the amount invested in shares to purchase computers or computer software. This is because computers or computer software form the core asset base of such technology driven start-ups.

Quantum of exemption under section 54GB

  • If cost of new plant and machinery is more than or equal to Net consideration of residential house, entire capital gains tax is exempt.
  • If cost of new plant and machinery is less than Net consideration of residential house, only proportionate capital gains tax is exempt i.e. LTCG*(Amount invested in new plant and machinery/Net consideration)
  • The exemption under this section would not be available in respect of transfer of residential property made after 31st March, 2021.
  • If the amount deposited by the company in specified banks/ institutions, is not utilized wholly or partly for the purchase of new plant and machinery within the period specified, then, the amount of capital gains not charged to tax under section 45 on account of such deposit by the company shall be charged to tax under section 45 as income of the assessee for the previous year in which the period of 1 year from the date of subscription in the equity shares by the assessee expires.
  • If the equity shares of the company acquired by the individual or HUF or the new plant and machinery acquired by the company are sold or transferred within a period of five years from the date of acquisition(within a period of three years from the date of acquisition, in case the new asset is computer or computer software acquired by a technology driven start-up), the amount of capital gains earlier exempt under section 54GB shall be deemed to be the income of the individual or HUF chargeable under the head “Capital Gains” of the previous year in which such equity shares or such new plant and machinery are sold or otherwise transferred.This would be in addition to the capital gains arising on transfer of shares by the individual or HUF or capital gains arising on transfer of new plant and machinery by the company, as the case may be. These are safeguards to restrict the transfer of the shares of the company and of the plant and machinery for a period of 5 years (3 years in case of computer or computer software) to prevent diversion of these funds.

Capital Gains Account Scheme (CGAS)

Under sections 54, 54B, 54D, 54F, 54G and 54GA, capital gains is exempt to the extent of investment of such gains/ net consideration (in the case of section 54F) in specified assets within the specified time. If such investment is not made before the date of filing of return of income, then the capital gain or net consideration (in case of exemption under section 54F) has to be deposited under the CGAS.

Time limit

Such deposit in CGAS should be made before filing the return of income or on or before the due date of filing the return of income, whichever is earlier. Proof of such deposit should be attached with the return. The deposit can be withdrawn for utilization for the specified purposes in accordance with the scheme.

Consequences if the amount deposited in CGAS is not utilized within the stipulated time of 2 years / 3 years

If the amount deposited is not utilized for the specified purpose within the stipulated period, then the unutilized amount shall be charged as capital gain of the previous year in which the specified period expires. In the case of section 54F, proportionate amount will be taxable.

CBDT Circular No.743 dated 6.5.96 clarifies that in the event of death of an individual before the stipulated period, the unutilized amount is not chargeable to tax in the hands of the legal heirs of the deceased individual. Such unutilized amount is not income but is a part of the estate devolving upon them.

Section 54H: Extension of time for acquiring new asset or depositing or investing amount of Capital Gains Tax

In case of compulsory acquisition of the original asset, where the compensation is not received on the date of transfer, the period available for acquiring a new asset or making investment in CGAS under sections 54, 54B, 54D, 54EC and 54F would be considered from the date of receipt of such compensation and not from the date of the transfer.

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