Frequently Asked Questions (FAQs) on Capital Gains – Definitions | Rules | Exemptions

Transfer of a capital asset includes Sale, Exchange, or Relinquishment of the asset or compulsory acquisition by Law. Following rules are applicable in this regard for purpose of capital gain:

1. Immovable Property when documents are registered – Transfer is effective when conveyance deed is registered. OR under section 53A, when a contract is signed and advance is given, later on registered.
2. Movable Property – When property is delivered.

Long Term Capital Gain

Long term capital gain arises when period of holding an capital asset is more than 12/24/36 months as per following categories:

Category A
In case of following assets the period of holding must be more than 12 months (applicable with effect from July 10, 2014):

• Equity/Preference Shares in a Company which are listed in a recognized stock exchange in India.
• Debentures, Bonds, Government Securities, Derivatives (Listed in recognized stock exchange in India).
• Units of Unit Trust of India (Listed or Not).
• Zero Coupon Bonds (Listed or Not).

Category B
In following cases the period of holding must be more than 24 months:

• Equity/Preference Shares in a Company which are unlisted. (Applicable with effect from 01-04-2016).
• Immovable property i.e. Land or Building or Both (applicable with effect from 01-04-2017).

Category C
In case of all other assets period of holding must be more than 36 months.

Short Term Capital Gain

Short term capital gain arises when the period of holding of an assets is 12/24/36 months or less, as per detailed description given above in long term capital gain.

Cost of acquisition of an asset is the value which was paid by the assessee. It includes expenses/commission paid on purchase and interest on money borrowed to purchase the asset.

Cost of improvement is capital expenditure incurred by the assessee in making additions and improvement, which enhance capital value of asset.

If a capital asset is converted into stock-in-trade the following rules are applicable regarding valuation of the asset on date of conversion and its subsequent sale:

1. It is assumed that capital asset has been transferred on the date of its conversion.
2. Accordingly fair market value of the asset on the date of conversion is taken as full value of the asset converted.
3. . However, capital gain (if any) is taxable only when asset is actually sold out after conversion into stock in trade.
4. Any profit or loss after conversion will be business income or loss, as the case may be.

If a person receives insurance claim or compensation from government in case of damage or destruction of capital asset, it is treated as full value of consideration for purpose of computation of capital gain (if any) and it is taxable. However this rule is applicable only when damage or destruction was caused by following:

1. Flood, Typhoon, Hurricane, Cyclone, Earthquake etc.
2. Riot or Civil Disturbance.
3. Accidental fire or explosion.
4. Action by enemy or in combating an enemy.

Under section 54F Capital Gain arising on transfer of any long-term asset (except residential house property) is eligible for exemption, provided net sale proceeds were invested in acquisition of another one house within one year prior or two years hence from the date of transfer. If new one house is constructed, the period is next three years from the date of transfer. Exemption under section 54F is available, provided on the date of transfer the taxpayer owns one residential house only. Amount of exemption is as follows:

Amount of Exemption = Capital Gain × Cost of new house/Net Sales Consideration of asset sold

Under section 54G, Capital Gain arising on transfer of assets due to shifting of an industrial undertaking from urban area to rural area is exempt. The exemption is amount of Capital gain or investment in new assets acquired, whichever is less.

Under section 54GA, Capital Gain arising on transfer of assets due to shifting of industrial undertaking from urban area to special economic zone is exempt. The exemption is amount of Capital gain or investment in new assets acquired, whichever is lower.