Capital Asset

Introduction

A capital asset includes every property held by the assessee, being movable or immovable. However, some personal assets and rural agriculture land are not considered as capital asset. A capital asset is bifurcated into short-term capital asset or long-term capital asset on the basis of its period of holding.

1. Meaning of Capital Asset

The term 'capital asset' has defined in Section 2(22) of the Income-tax Act. It 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 FII

(c) Any securities held by a Category I or Category II AIF which has invested in such securities in accordance with the SEBI or IFSC Regulations;

(d) Any unit linked insurance policy to which exemption under Schedule II [Table S. No. 2] does not apply.

1.1. Inclusions in capital asset

All kinds of property, whether movable, immovable, tangible or intangible including rights of management or control of an Indian company is a capital asset. Example, Property includes business undertaking, partner's share in a firm, a route permit, a leasehold right, right to get conveyance executed

1.2. Exclusions from capital assets

The following assets are excluded from the definition of 'Capital Assets'.

1.2-1. Stock-in-trade

Any stock-in-trade, consumable stores or raw material held for the purpose of business or profession have been excluded from the purview of capital asset. Any surplus arising from sale of stock-in-trade or raw material or consumables is chargeable to tax as business income under the head 'Profits and Gains from Business or Profession'. However, stock-in-trade does not include securities held by a FII.

1.2-2. Personal effects

Movable property held for personal use of the assessee, or any member of his family dependent on him, is not treated as capital asset. Example, wearing apparel, furniture, car, scooter, TV, refrigerator, musical instruments, gun, revolver, generator, etc., are personal effects.

An article is considered as personal effects if it is intended for personal or household use by the assessee and not merely because these articles are capable of being put to personal or household use. All personal effects need not be used daily. So long as they are meant for personal use, they are considered as personal effects

However, following assets, even if they are meant for personal use, shall not be considered as personal effects and any gain arising from their sale shall be charged to tax:

(a) Jewellery including:

• Ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more such precious metals 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;

(b) Archaeological collections;

(c) Drawings;

(d) Paintings;

(e) Sculptures; and

(f) Any work of art.

1.2-3. Agricultural land in India

An agricultural land situated in any rural area in India is not treated as capital asset.

1.2-4. Bonds

Following Bonds have been excluded from the purview of capital asset:

(a) 6.5% Gold Bonds, 1977;

(b) 7% Gold Bonds, 1980;

(c) National Defense Gold Bonds, 1980;

(d) Special Bearer Bonds, 1991;

(e) Gold Deposit Bonds issued under Gold Deposit Scheme, 1999; and

(f) Deposit certificates issued under the Gold Monetisation Scheme, 2015

2. Types of Capital Asset

For computing capital gain, capital assets are categorized into short-term capital assets and long-term capital assets. This distinction is crucial because short-term capital gains are taxed at a higher rate than long-term capital gains. The distinction between a long-term and short-term capital asset is based on the period for which it is held by the owner before transfer. Usually, the period of holding of a capital asset is reckoned from the date of its purchase. However, in certain special cases, the period of holding is determined in accordance with the specific provisions.

2.1. Short-term capital asset

A capital asset is considered 'short-term' if it is held for 24 months or less before the date of transfer.

Exception: 12-month holding period

The holding period is reduced from 24 months to 12 months for the following capital assets:

(a) Listed securities

(b) Units of UTI (listed or unlisted);

(c) Units of equity-oriented fund (listed or unlisted);

(d) Zero Coupon Bonds (Listed or Unlisted).

2.2. Long-term Capital Asset

A capital asset is classified as 'long-term' if it does not fall under the definition of a short-term capital asset. Therefore, listed securities, units of UTI, units of equity-oriented funds, and zero-coupon bonds are considered long-term if held for more than 12 months. Other capital assets are treated as long-term if held for more than 24 months.

2.3. No holding period criteria for certain capital assets

Capital gain arising from the transfer of the following capital assets is deemed to be capital gain arising from the transfer of a short-term capital asset, irrespective of the holding period:.

(a) Depreciable asset [Section 74]

(b) Market Linked Debentures (MLDs) or Specified Mutual Funds (SMFs) or Unlisted Bonds or Unlisted Debentures [Section 76].

2.4. Overview

The holding period for classification of an asset into short-term and long-term has been enumerated in the below table.

References

The concept of Foreign Institutional Investor (FII) has been substituted by Foreign Portfolio Investor (FPI) by SEBI (Foreign Portfolio Investors) Regulations, 2014 which has also been substituted by the SEBI (Foreign Portfolio Investors) Regulations, 2019.

CIT v. Tata Services Ltd. [1980] 122 ITR 594 (Bom.)

CIT v. H.H. Maharani Usha Devi [1998] 98 Taxman 309 (SC)

"Security" shall have the meaning assigned to it in clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956

This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.