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Introduction to Capital Gain: 

Capital Gains are any kind of profit or gain that arises from the sale of a “capital asset”, which is considered as an income of a person and hence this income becomes taxable in the same year in which the transfer of capital asset took place. 

Capital Assets are the properties i.e. movable or immovable, tangible or intangible, that bring you profits in the long term such as homes, cars, investment properties, stocks, bonds, and even collectables or art etc. However, any stock or raw material, clothes, furniture, agricultural land in rural areas, special bearer bonds, or Gold deposit bonds are not considered to be capital assets. 

The tax that is paid on the income generated after selling capital assets is called taxation on capital gains. The tax is paid on the year in which the investment is made. 

 There are two types of capital assets i.e. long-term capital assets and short-term capital assets. It depends upon the time for which the assets have been held, which will determine the capital gains made and the tax upon it.

• Long Term Capital Assets: These are the assets held by the individual for more than 36 months. Assets such as jewellery and debt-oriented mutual funds are held mostly for more than the period of 36 months and hence are considered as Long term capital assets. 

However, if the assets such as the UTI Units, Equity-based mutual funds, securities listed on the stock exchange etc if held for a duration of more than 12 months are considered to be as Long Term Capital Assets.

• Short Term Capital Assets: These are the assets held by individuals for a duration of 36 months or less. However, in the case of immovable properties like house property, buildings, land etc. the duration has been reduced from 36 months to 24 months from the Financial Year 2017-18.

• Inherited Capital Assets: In all those cases where the assets are acquired through gift, succession, inheritance, will etc. the period for which the assets were held by the previous owner will determine the category under Short Term Capital Assets or Long Term Capital Assets. 

Important Glossary Terms while Calculating Capital Gains:

• Cost of Improvements(COI): It is the expense incurred by the seller on the capital assets thereby altering or making any additions to the assets.

• Cost of Acquisition(COA): It is the amount invested by the seller in acquiring the capital assets.

• Full value Consideration: It is that value or consideration received by the seller or to be received by the seller as a result of the transfer of the capital assets. Capital Gains are taxable in the year of transfer even though the considerations have been received or not.

Short Note: Any improvement made before April 1, 2001, is not taken into consideration. Further, in those cases where the capital assets become the property of the taxpayer other than that by the purchase, in that case, the cost of Improvements and the cost of Acquisition incurred by the previous owner would also be included. 

What are the Tax Rates? 

For the Long Term Capital Gain Tax (LTCG)

1. Condition: Sale of Equity Shares

Tax Rate: 10% over and above Rs 1 lakh

2. Condition: Except for the sale of equity shares

             Tax Rate:20%

For the Short Term Capital Gain Tax (STCG)

1.     Condition: When the transaction tax is based on securities

        Tax Rate: 15%

 2. Condition: When transaction tax is not based on securities

   Tax Rate: The short-term capital gain is added to your income tax return and the taxpayer is taxed according to income tax slab rates.

Steps to calculate Long Term Capital Gain Tax (LTCG)

Step 1: Consider the Full Value Consideration

Step 2: Make the following deductions:

• Expenditure incurred wholly and exclusively in connection with such transfer

• Indexed cost of acquisition

• Indexed cost of improvement

Step 3: From the resulting number further deduct exemptions provided under sections 54, 54EC, 54F, and 54B.

Steps to calculate Short Term Capital Gain Tax (STCG)

Step 1: Consider the Full Value Consideration

Step 2: Make the following deductions:

• Expenditure incurred wholly and exclusively in connection with such transfer

• Indexed cost of acquisition

• Indexed cost of improvement

Step 3: This Amount is Short Term Capital Gain

Exemption on Capital Gains:

1. Exemption on sale on house property on purchase on another house property: Section 54

2. Exemption on capital gains on sale of any asset other than a house property: Section 54F

3. Exemption on Sale of House Property on Reinvesting in specific bonds: Section 54EC

4. Exemption on Capital Gains From Transfer of Land Used for Agricultural Purpose: Section 54B

Relevant Case Laws on Taxation on Capital Gains

1.   CIT v. R. Nagaraja Rao (2013) 352 ITR 565; (Karnataka High Court)

Case Number: ITA 3048/2005; Date of Judgement/Order : 19/03/2012.

In the present case, R. Nagaraja Rao, entered into an family agreement. Every party of the said family agreement, held personal properties, family properties and shares of different business. Arbitration proceedings initiated, regarding a dispute relating to the family agreement. As per the settlement, decided in arbitration, the members of family transferred to each others assets, including shares. Assessing officer saw the decision of arbitration under family agreement, as a transfer, such a transfer is liable to attract tax liability under capital gains. As per the assessing officer, assesssee was liable to pay tax from the capital gains from the said transfer. CIT(A), approved the order of assessing officer. On appeal by assessee, ITAT, ruled in favour of assessee, as the family agreement, and the subsequent transfer by decision on arbitrator, is a partition, and the same can not be treated as transfer for capital gains. Revenue department, filed an appeal before the Karnataka High Court.  Karnattka High Court approved the decision of ITAT. As, where there is no transfer, no capital gain arises, therefore no liability to pay capital gains tax.

2.   CIT v. Ashwani Chopra & Arvind Chopra (2013) 352 ITR 620 ; (Punjab & Haryana High Court)

Decided on 10/01/2013.

The court in this case answered the following question:

“Whether the amount of compensation paid to the assessee to settle inequalities in partition, thus, a provision of owelty, represents immovable property and is not an income exigible to tax?”

The answer to this question was in affirmative, the court relied upon reasoning given in the judgement of the case given above. In view of the principles of law, in the case of CIT v. R. Nagaraja Rao (2013) 352 ITR 565, the court found that the payment of Rs. 24 crores to group A is to equalize the inequalities in partition of the assets of M/s. Hind Samachar Ltd. The amount so paid is immovable property. If such amount is to be treated as income liable to tax, the inequalities would set in as the share of the recipient will diminish to the extent of tax. Since the amount paid during the course of partition is to settle the inequalities in partition, therefore, deemed to be immovable property. Such amount is not an income liable to tax. Thus, the amount of owelty, i.e., compensation deposited by group B is to equalize the partition represents immovable property and will not attract capital gains.

3.   Commissioner Of Income Tax v. Sh. Shimbhu Mehra (2105) 94 CCH 0051 ; (Allahabad High Court)

Decided on :12/10/2015.

In the present case, the land in questiion is located at Khasra No. 634 in the village of Artoni, on the Mathura Road in Agra, and is co-owned by all the appellants. For the loan obtained by the company M/s Mehra Off Set Press, in which the assessees were partners, the land was mortgaged with the State Bank of India, Agra. The Bank filed a civil lawsuit for the amount owed as well as pendente lite interest after the outstanding debts were not paid. The Debt Recovery Tribunal then took over the lawsuit. The assessees negotiated and entered into an arrangement with the following purchaser to sell the land at Rs. 34,71,750 per hectare on July 4, 2001, while the proceedings were still ongoing. In continuation of the aforementioned arrangement, the assessees got a portion of the consideration, clearing the State Bank of India's liabilities, and on 21.11.2001, the Bank freed the mortgaged property and lifted the encumbrances. In April 2003, the sale deed was finally put into effect. All assesse filed and got their income tax returns processed under section 143(1), showing all income from other sources including long term capital gains. A notice under Section 148 of the Act required the assessees to give justification for why the assessment should not be reviewed and why capital gains should not be assessed in accordance with Section 50C of the Act. The Assessing Officer reopened the case, reassessed the income, and calculated the long-term capital gains in accordance with Section 50C of the Act using the local authority's valuation assessment as a starting point. The following question was answered by the court in this case:

Whether on the facts and in the circumstances of the case, the Hon'ble ITAT is legally justified in confirming the findings of the learned CIT (A) holding that the agreement to sell the land under consideration was made on 04.07.2001, prior to insertion of section 50C of Income Tax Act,1961 ignoring the fact that the sale deed was executed in April, 2003, the sale consideration agreed upon was paid in April, 2003 and the possession of the land was handed over to the transferee after execution of Sale Deed?

The court said that, it is apparently clear that the moment an agreement to sell is executed between the parties and part consideration is received, the transfer for the purpose of Section 50C of the Act takes places and computation under Section 48 of the Act will start accordingly, for the purpose of calculating the capital gains under Section 45 of the Act. It is apparently clear that the transfer of the property took place in the year 2001 when the provision of Section 50C of the Act was not in existence. Consequently, the Assessing Officer was not justified in making the reassessment and computing the capital gains by invoking the provision of Section 50C of the Act, which was clearly not applicable in the assessees' case.

References:

1. https://www.incometaxindia.gov.in/tutorials/14-%20stcg.pdf

2. https://cleartax.in/s/capital-gains-income

3. https://www.bankbazaar.com/tax/capital-gains-tax.html

4. https://www.investopedia.com/terms/c/capital_gains_tax.asp

5. https://groww.in/p/capital-gains-tax