Capital gain in special cases under income tax

There are a number of special cases where the computation of capital gains under income tax may differ from the general rules. Some of these cases are as follows:

• Transfer of long-term capital assets: In case of transfer of long-term capital assets (LTCGs), the assesses is entitled to claim the benefit of indexation. Indexation is a process of adjusting the cost of acquisition of the asset for inflation. This is done by multiplying the cost of acquisition by the Cost Inflation Index (CII) of the year of transfer and dividing it by the CII of the year of acquisition. The difference between the indexed cost of acquisition and the sale proceeds is the taxable capital gain.
• Transfer of short-term capital assets: In case of transfer of short-term capital assets (STCGs), the assesses is not entitled to the benefit of indexation. Instead, the taxable capital gain is simply the difference between the sale proceeds and the cost of acquisition.
• Transfer of depreciable assets: In case of transfer of depreciable assets, the taxable capital gain is computed after taking into account the depreciation claimed on the asset. The depreciation claimed is deducted from the sale proceeds to arrive at the adjusted sale proceeds. The taxable capital gain is then computed as the difference between the adjusted sale proceeds and the indexed cost of acquisition.
• Transfer of assets on compulsory acquisition: In case of transfer of assets on compulsory acquisition, the assesses is entitled to claim exemption from capital gains tax under Section 10(37) of the Income Tax Act, 1961. This exemption is available only if the asset is acquired by the government or a local authority.
• Transfer of agricultural land: In case of transfer of agricultural land, the assesses is entitled to claim exemption from capital gains tax under Section 54B of the Income Tax Act, 1961. This exemption is available only if the assesses invests the capital gains in the purchase of agricultural land or one residential house property within two years from the date of transfer.

EXAMPLE

Example of capital gain in a special case in India:

Transaction: An individual sells a residential property in Delhi, which he had purchased 5 years ago for Rs.1 crore sale proceeds of the property are Rs.1.5 crores.

Computation of capital gain:

• Cost of acquisition = Rs.1 crore
• Sale proceeds = Rs.1.5 crores
• Capital gain = Rs.1.5 crores – Rs.1 crore = Rs.50 lakhs

Since the property was held for more than24 months, the capital gain will be treated as long-term capital gain.

Capital gains tax rates in Delhi:

• Long-term capital gains up to Rs.1 lakh = Exempt
• Long-term capital gain in excess of Rs.1 lakh = 20%

Computation of capital gains tax in Delhi:

• Long-term capital gain = Rs.50 lakhs
• Capital gains tax = Rs.50 lakhs * 20% = Rs.10 lakhs

Note: The above computation is for illustrative purposes only. The actual capital gains tax payable may vary depending on the individual’s other income and deductions.

Special cases:

There are a number of special cases where capital gains tax may be reduced or waived altogether. For example:

• If the individual invests the capital gains in a new residential property within 1 year of the sale of the old property, then the capital gains tax will be deferred.
• If the individual is above the age of 60 years and sells his only residential property, then the capital gains tax will be exempt.
• If the individual is a resident of a notified municipality and sells his only residential property, then the capital gains tax will be exempt on the first Rs.1 crore of the capital gain.

FAQ QUESTIONS

Example of capital gain in a special case in India:

Transaction: An individual sells a residential property in Delhi, which he had purchased 5 years ago for Rs.1 crore. The sale proceeds of the property are Rs.1.5 crores.

Computation of capital gain:

• Cost of acquisition = Rs.1 crore
• Sale proceeds = Rs.1.5 crores
• Capital gain = Rs.1.5 crores – Rs.1 crore = Rs.50 lakhs

Since the property was held for more than 24 months, the capital gain will be treated as long-term capital gain.

Capital gains tax rates in Delhi:

• Long-term capital gains up to Rs.1 lakh = Exempt
• Long-term capital gain in excess of Rs.1 lakh = 20%

Computation of capital gains tax in Delhi:

• Long-term capital gain = Rs.50 lakhs
• Capital gains tax = Rs.50 lakhs * 20% = Rs.10 lakhs

Note: The above computation is for illustrative purposes only. The actual capital gains tax payable may vary depending on the individual’s other income and deductions.

Special cases:

There are a number of special cases where capital gains tax may be reduced or waived altogether. For example:

• If the individual invests the capital gains in a new residential property within 1 year of the sale of the old property, then the capital gains tax will be deferred.
• If the individual is above the age of 60 years and sells his only residential property, then the capital gains tax will be exempt.
• If the individual is a resident of a notified municipality and sells his only residential property, then the capital gains tax will be exempt on the first Rs.1 crore of the capital gain.

CASE LAWS

• G Venkat swami Naidu and Co vs CIT (35 ITR 594): This case held that even an isolated and single transaction may be of an adventure in nature of trade if some of the essential features of trade are present in such a transaction. This means that even if an asset is held for a short period of time, it may still be considered a capital asset if the taxpayer’s intention was to trade in it and make a profit.
• ACIT vs Kishan Lal (1991 188 ITR 752): This case held that where an asset is acquired for the purpose of business and subsequently used for personal purposes, the gain arising on its sale will be taxable as capital gain.
• CIT vs Smt. Anjali Devi (2000 244 ITR 521): This case held that where an asset is acquired by a taxpayer in the name of a relative or friend, the gain arising on its sale will be taxable as the income of the taxpayer.

How to compute capital gains in certain special cases

The following are some of the special cases of capital gains and how to compute them:

• Deemed transfer of capital assets: In certain cases, the Income Tax Act deems a transfer of a capital asset to have taken place even if there is no actual transfer. For example, if a taxpayer converts a capital asset into stock-in-trade, it will be deemed to have been transferred at its fair market value on that date. The capital gain will be computed as the difference between the fair market value and the cost price of the asset.
• Capital gains arising from compulsory acquisition of capital assets: If a capital asset is compulsorily acquired by the government or a public authority, the gain arising on such acquisition will be taxable as capital gain. The capital gain will be computed as the difference between the compensation received and the cost price of the asset.
• Capital gains arising from the death of the taxpayer: If a taxpayer dies holding a capital asset, the asset will be deemed to have been transferred to the legal heirs at its fair market value on the date of death. The capital gain will be computed as the difference between the fair market value and the cost price of the asset.