Computation of Capital Gains

Introduction

Any profit or gain arising from transfer of a capital asset is taxable under the head capital gains. For computation of capital gains, the following factors are considered:

The calculation of capital gain depends on factors like the holding period, sale value, cost of acquisition and improvement, transfer expenses, adjustments for reconstitution of a firm/AOP/BOI, and exemptions under Sections 82 to 88.

1. About

(a) Period of holding;

(b) Full value of consideration;

(c) Cost of acquisition;

(d) Cost of improvement;

(e) Expenditure incurred in connection with transfer;

(f) Adjustment for the capital gains taxed under Section 67(10);

(g) Capital gain exemptions allowed under Section 82 to 88.

2. How to calculate capital gains?

The capital gains shall be computed in the following manner:

3. Meaning of key terms

3.1. Period of holding

Main article: Period of holding of a capital asset

For the purpose of computation of capital gain, a capital asset is bifurcated into short-term capital asset and long-term capital asset. This distinction is important as incidence of tax is higher on short-term capital gains as compared to the 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.

3.2. Full value of consideration

Main article: Full value of consideration for computation of capital gains

The Income-tax Act has not defined the term 'full value of consideration'. Therefore, it has to be understood in commercial sense according to the prevalent usage. It is the amount of consideration received or receivable by the owner of asset in lieu of transfer of such assets. Such consideration may be received in cash or in kind. If it is received in kind, then fair market value of such assets is taken as full value of consideration. However, in some cases, the full value of consideration shall be calculated in contrast to the general principle.

3.3. Expenditure incurred in connection with transfer

Any expenditure incurred wholly and exclusively in connection with transfer of a capital asset is allowed as a deduction while computing capital gain. Thus, the brokerage or commission, stamp duty, registration fee, travelling expenses and legal expenses, etc., incurred in connection with transfer are allowed to be deducted in computing capital gain. However, no deduction is allowed in respect of any sum paid on account of Securities Transaction Tax while calculating the capital gains from sale of securities.

3.4. Cost of acquisition

Main article: Cost of acquisition for computation of capital gains

The cost of acquisition of the capital asset is deducted while computing capital gain. It is reasonable to include in the actual cost of a capital asset all the expenses which were incurred by the assessee in acquiring it as distinct from the expenditure, which was incurred by him for retaining or maintaining the capital asset. Where an assessee has acquired a capital asset by way of purchase, its purchase price is taken to be the cost of acquisition. Where an assessee has acquired a capital asset by way of construction, the aggregate of cost of land and the construction cost is taken to be the cost of acquisition.

3.5. Cost of Improvement

Main article: Cost of improvement for computation of capital gains

'Cost of Improvement' includes all expenditure of a capital nature incurred on or after 01-04-2001 in making any addition or alterations to the capital asset either by the assessee or the previous owner. Therefore, all capital expenditure incurred on or after 01-04-2001 shall be deducted while calculating the capital gains.

3.6. Indexed cost of acquisition or improvement

3.6-1. In general

The benefit of indexation is not allowed while computing capital gain. .

3.6-2. In case of land or building acquired by resident individual/HUF before 23-07-2024

Main article: Grandfathering of long-term capital gains from land or building acquired before 23-07-2024

Grandfathering provision allows resident individuals and resident HUFs to apply indexation on land or building acquired before 23-07-2024 and pay tax at the higher rate of 20% if the tax calculated at 12.5% without indexation benefit results in a higher amount.

3.7. Adjustment for the capital gain taxable under Section 67(10)

Main article: Computation of deduction under Section 72(5)

Where the amount is chargeable to tax as income of partnership firm under Section 67(10), the firm shall attribute such amount to the capital asset remaining with it, including capital assets forming part of block of asset. Such attribution is allowed, at the time of computation of capital gains from the transfer of such capital asset remaining with the partnership firm, by way of deduction under Section 72(5). The deduction under Section 72(5) is allowed if the following conditions are satisfied:

(a) There should be a reconstitution of the partnership firm;

(b) Capital asset or money or both should be given to the partner on such reconstitution;

(c) Capital gain is computed and taxed in the hands of the firm under Section 67(10); and

(d) The book value (or historical value or WDV) of at least one of the capital assets remaining with the firm after such reconstitution should be less than its fair market value. It may also include the self-generated asset.

The amount chargeable to tax under Section 67(10) shall relate to revaluation of any capital asset or valuation of self-generated asset or self-generated goodwill of firm if the revaluation is based on a valuation report obtained from a registered valuer defined under Rule 56.

References

Resident individuals/HUFs can opt to avail the benefit of indexation with higher capital gain tax rate for land or buildings acquired before 23-07-2024.

Resident individuals/HUFs can opt to avail the benefit of indexation with higher capital gain tax rate for land or buildings acquired before 23-07-2024.

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