Taxation of capital gains (New)

Basic concepts in capital gains

Meaning of capital gains

  • If you own an asset and you sell that asset to any other person for certain consideration. The value of such consideration may be than or equal to the cost for which this particular asset was acquired by you. If the value is more, then you may get income as ‘capital gains. If the value of consideration is less than the cost, you will incur the loss in such transaction which is ‘capital loss’. If the asset is sold at the cost value, then capital gains shall be NIL or 0.
  • The conditions for charging income from capital gains are that there must be a capital asset and it must be transferred from its owner to a different person
  • This income from capital gains is not earned on a regular or daily basis like regular business or professional income or salary income. Such an income from capital gains is received only on certain occasions like transfer or sale of capital assets.
  • The income from capital gains is taxed in the year in which sale or transfer of the capital asset has taken place.

Capital Asset

Capital asset means a property of any kind held or owned by the person. Every property is eligible to be called as a capital asset, however, sale of every property or asset does not result into capital gains. There are certain assets, the sale of which does not result into capital gains:

  • Any stock in trade or consumables which are used in business and profession
  • Movable assets for personal use except jewellery
  • Agricultural land in India(see detailed article)
  • Gold bonds issued by Government of India
  • Special bearer bonds
  • Gold Deposit Bonds

Besides these, profits on sale of all other assets are liable to be taxed as capital gains.

Transfer of a capital asset

When the ownership of the asset is changed on account of its transfer from one owner to another it is called as ‘transfer of asset’ took place. This transfer may happen on account of:

  • Sale of such an asset
    • Owner sells the asset for a price. This is the most common form of transfer of a capital asset.
  • Exchange of an asset for another asset
    • Owner sells or transfers an asset in exchange for another asset
  • Relinquishment of the ownership of the asset by the owner
    • The owner gives up his ownership in the asset for someone else
  • Owner’s rights in the asset ownership get extinguished
    • The owner held the rights of ownership in the asset and such of his rights get extinguished
  • When the asset is acquired by the Government under law
    • For example, a Government takes over the land for building a highway
  • Enjoyment of a property by acquiring it through shares
    • When the property is owned by a co-operative society you get ownership of the property through shares of a co-operative society
  • Conversion of an asset into a stock in trade
    • For example, if a builder is having a plot of land as an asset and he divides that land into various plots and sells the individual plots as his stock in trade
  • Part performance of a contract by the respective parties
    • In case of sale of a property, document in the form a sale deed is entered into parties and also the possession of the property is given to the purchaser. However, in case a sale deed is not registered, and a possession of the property is given to the purchaser and he enjoys the property, then it is a case of part-performance of the contract. Also, if the sale deed is done but possession is not given then it’s a part performance of a contract. Such an instance qualifies as a transfer of a capital asset.
  • Maturity or redemption of a zero-coupon bond
    • When a person owns zero coupon bond and he redeemit, or the bond matures, then he will receive the proceeds of redemption or proceeds on maturity. Such redemption or maturity qualifies as transfer of a capital asset.

Cost of acquisition (CoA)

    • When a person owns any asset, he may have acquired it through purchase or gift or inheritance or will or division of family property or shared assets like partnership firms. Such an acquisition of an asset is done at a cost, this cost of purchase of asset or an acquisition of an asset is called as cost of acquisition (CoA).
    • When the asset is purchased it is done at a certain price and that price is CoA of that asset. If the asset is acquired through gift or inheritance or will, then the cost of the asset for which the person who had gifted or willed or gave in inheritance, shall be the cost of acquisition.
    • When the asset is acquired, all the expenses besides purchase price are to be added to arrive at the cost of acquisition.
    • For computation of capital gains on transfer of a capital asset, the CoA is deducted from full value of consideration.

Special Circumstances:

  • In case you have acquired the asset through special modes like gift, inheritance, will, partition etc., you don’t pay for acquiring of such an asset. However, the person who has transferred the property through any of these modes must have acquired it by paying the cost or amount for it. Such a cost to the previous owner of the asset is taken as the cost of acquisition.
  • The circumstances in which such cost of acquisition to the previous owner is taken as the CoA. The asset must be received by the current owner from the previous owner in following situations:
    • On partial or total partition of HUF.
    • Under a gift or a will.
    • Through succession, inheritance or devolution.
    • After distribution of assets on the liquidation of a company.
    • When the asset is transferred to a Trust.
    • Through a transfer by a holding company to its Indian subsidiary company.
    • Through transfer by a wholly owned subsidiary company to its Indian holding company otherwise than as stock-in-trade.
    • Through transfer in a scheme of amalgamation, by the amalgamating company to the amalgamated Indian company.
    • Through transfer in a scheme of amalgamation of a banking company with a banking institution.
    • Through transfer in a business reorganization of co-operative banks.
    • Through transfer of shares by the shareholders in a scheme of amalgamation of co-operative banks in business reorganization.
    • In the case of HUF where the separate property of a member has been converted into HUF property otherwise than for adequate consideration.
  • If the previous owner had also acquired the capital asset by any of the modes above, then the cost to that previous owner, who had acquired it by mode of acquisition other than the above, should be taken as cost of acquisition.
  • Where the cost for which the previous owner acquired the property cannot be ascertained, the cost of acquisition to the previous owner means the Fair Market Value on the date on which the capital asset became the property of the previous owner.

Cost of Acquisition specified in the Income tax Act

  • Besides the above two instances where the CoA is determined based on the amount for which a certain asset was acquired and the CoA to the previous owner, the Income tax Act also specified the cost of acquisition in respect of some specific capital assets.
  • These are as under:
    Sr. No. Name or class of asset and modes of acquisition Cost of Acquisition
    1 Goodwill or other such commercial rights If the goodwill or any other such rights are outrightly purchased, then the CoA shall be such actual value for which these rights or goodwill is purchased.

    In case these rights or goodwill is generated into the business, then CoA shall be NIL

    2 Bonus Shares Nil
    3 Specified security to an employee Fair market value as determined
    4 ESOPs Fair Market value as determined
    5 In cases where the asset is acquired through various modes of acquisition like acquisition of shares through conversion of shares and conversion of partnership concern or proprietary concern into a company Cost of acquisition to the previous owner
    6 Where the cost for which the previous owner acquired the property cannot be ascertained The cost of acquisition for which the previous owner acquired the said capital asset
    7 Advance money If the advance money received by the owner of the capital asset is retained by the owner, then such advance money will be deducted from the cost of acquisition for the purposes of computation of capital gains and hence the amount of capital gains will increase.

    If such an amount of advance money or advance receipt is taxable under the head of Income from other sources, then the same amount shall not be deducted from the cost of acquisition.

Cost of improvement

  • When you own and possess a capital asset like a land or a built-up property, you tend to carry out certain improvements on it. For that you incur costs on material, labor etc. These costs go on to become the cost of improvement.
  • For computation of capital gains on transfer of the capital asset, such costs of improvement need to be deducted from full value of consideration.

Cost Inflation Index (CII) or indexation benefit:

  • The asset which is sold is generally acquired before it is put on sale. When it is acquired one year (listed shares) or two years (other shares and immovable property) before sale of asset, the cost of the asset must be indexed to its value as on the date of sale.
  • This is done because for computing the capital gains sale price on a date cannot be compared with the cost of the asset much longer before that. So, the cost has to be brought at parity with the sale price on that date.
  • This is done by multiplying the cost of acquisition by an index known as Cost Inflation Index. This procedure is called as ‘Indexation.’
  • The cost inflation index (CII), is published by the Central Government for every year.
  • The CII of the base year is held as 100. This base year is Financial Year-2001-02. The CII for each year afterwards is as follows:
    Sr. No. Financial Year Cost Inflation Index
    1 2001-02 100
    2 2002-03 105
    3 2003-04 109
    4 2004-05 113
    5 2005-06 117
    6 2006-07 122
    7 2007-08 129
    8 2008-09 137
    9 2009-10 148
    10 2010-11 167
    11 2011-12 184
    12 2012-13 200
    13 2013-14 220
    14 2014-15 240
    15 2015-16 254
    16 2016-17 264
    17 2017-18 272
    18 2018-19 280
  • The cost of the capital asset which is arrived at after indexation is called as Indexed Cost of Acquisition (ICOA) and the cost of improvement which is arrived at after indexation is called as Indexed Cost of Improvement (ICOI).
  • Formula for computing indexed cost of acquisition and indexed cost of improvement

    (CII for F Y in which asset is sold) X (Cost of acquisition)
    CII for the year in which asset was acquired

  • Example of indexation:
    • Suppose a plot of land was acquired on 23.09.2005 at a cost of Rs.4,76,550/- and it is sold at a price of Rs.21,55,435/- on 30.12.2018. What is the cost of acquisition and cost of indexation and amount of capital gains?
      • Financial Year of acquisition of the asset (plot of land): The date of acquisition is 23.09.2005 hence the financial year is 2005-06. This asset is sold on 30.12.2018 and hence the financial year of the sale of asset is 2018-19.
      • The CII for F Y 2005-06 is 117 and that for F Y 2018-19 is 280.
      • The Indexed Cost of Acquisition is computed as below:
        (CII for F Y in which asset is sold) X (Cost of acquisition) : 280 X 476550 = 11,40,462/-
        CII for the year in which asset was acquired                             117

        Hence, the Indexed cost of acquisition is Rs. 11,40,462/-. The long- term capital gains shall be computed by deducting Rs. 11,40,462/- from the sales consideration of Rs. 21,55,435/- and this the amount of long-term capital gains is at Rs. 10,14,973/-

  • Indexed cost of acquisition and indexed cost of improvement shall not be applicable in case of sale of shares or debentures (capital asset) by an NR assessee of an Indian company
  • The indexation shall also not be applicable in case of sale of bonds or debentures except capital indexed bonds issued by the Government of India and Sovereign Gold Bond issued by the RBI

Holding period of a capital asset:

  • When you acquire a capital asset, you tend to own and possess it for some time before you sell or transfer its ownership to another person. The time period for which you have held this capital asset in your possession is called as the ‘Holding Period’.
  • When you sell the asset and capital gains income arises thereby, it will be either short term capital gains/loss or long-term capital gain/loss
  • Whether it will be long term or short-term capital gain/loss will be determined by the nature of a capital asset and the holding period.

Types of capital gains:

There are two types of capital gains. Long Term Capital Gains (LTCG)/Long Term Capita Loss (LTCL) or Short-Term Capital Gains (STCG) Or Short-Term Capital Loss (STCL). This is dependent upon the period of holding and the nature of asset. Accordingly, the LTCG and STCG for different classes of assets is as below:

Nature of Asset Period of Holding
Short Term Long Term
Shares (Listed) Upto 12 months More than 12 months
Shares (Not Listed) Upto 24 months More than 24 months
Equity MF Upto 12 months More than 12 months
Debt MF Upto 36 months More than 36 months
Real Estate Upto 24 months More than 24 months
Gold Upto 36 months More than 36 months
Listed bonds Upto 12 months More than 12 months
Land & building Upto 24 months More than 24 months
Urban Agriculture Land Upto 24 months More than 24 months
Residential House Property Upto 24 months More than 24 months
Zero Coupon Bonds Upto 12 months More than 12 months

Full value of consideration

When you sell an asset for a consideration, the amount of such consideration is called as ‘Full Value of Consideration’. In most of the instance the amount received as a sale consideration is ‘full value of consideration’ however, in some instances such ‘full value of consideration’ is decided as per the relevant section/provision of the Income tax Act. These instances are detailed below:

Sr. No. Nature of asset or circumstances of its transfer Full value of consideration Example
1. Land or building or immovable property Higher of the two:

a.        Actual amount of consideration or value

b.       Value or amount as per the Government valuation/ ready reckoner

However, if the ready reckoner value is greater than actual consideration, then the same can be disputed and the matter must be referred to Valuation Officer

If you have sold the flat for Rs. 10,000,000/- and the value as per ready reckoner is Rs.15,000,000/-, then the full value of consideration is Rs.15,000,000/-. However, this can be disputed
2. The capital asset is acquired by the Central Government through compulsory acquisition The amount of compensation received from the central government

If the compensation received is increased subsequently, then the increased amount of compensation

If the amount of compensation is reduced by the Court or the Government, then the reduced amount of compensation.

If the enhanced compensation is received by the successor of the person who has sold the property, then the said enhanced compensation shall be the income of such a receiver.

If the plot of your land is acquired by the Central Government for building of a highway, the compensation paid by the Central Government shall be the full value of consideration and if its reduced or enhanced, the compensation so enhanced or reduced shall be the full value of consideration.
3. If the asset like land or property or any other asset is converted from fixed asset to trading stock There will not be exchange of money in this transaction. Therefore, the fair market value of the fixed asset as on the date such conversion shall be the ‘full value of consideration’. Some of persons like builders or real estate developers have the land or property as their fixed assets and sometimes, they convert this fixed asset into the plots for trading. In such a case, this conversion is akin to transfer and liable to capital gains. Since there is no exchange of money, the fair market value is treated as the full value of consideration.
4. When a person becomes a partner in a firm or a member of Body of Individuals (BOI) or Association of Persons (AOP) or LLP and introduces his asset as his share in such partnership firm or BOI or AOP The asset which is contributed as a capital asset is recorded in the books of the firm as a capital contribution. This amount of capital contribution is the ‘full value of consideration’ When you become a partner in a firm or LLP and transfer your property as your capital contribution, the amount which is recorded in the accounts of that firm as your capital contribution will be the full value of consideration.
5. When a firm, LLP or BOI is dissolved and its assets are distributed amongst partners of the firm and members of BOI The fair market value of the asset on the date of the transfer When the firm which was owning a piece of land is dissolved and the said land is distributed amongst various partners, the market value of the land in the hands of each of the partners shall be the full value of consideration.
6. When a company is liquidated, and the assets of the company are distributed amongst its shareholders The amount of money or the fair market value of the assets distributed to its shareholders The assets owned by the company are distributed amongst its shareholders when the company is liquidated or closed.
7. Receipt of insurance claim on account of damage to the insured asset on because of flood, typhoon, war, riots or civil disobedience etc. The amount of money or the fair market value of the asset received as an insurance claim from the insurer company In case of flood, if the house is damaged and you receive another house in lieu of insurance claim, then the fair market value of the house received from insurer is the full value of consideration
8. The transfer of ESOP shares or ESOP debentures or ESOP warrants under a gift or will Fair Market Value on the date of such transfer If you have received the ESOP and then you transfer said ESOP under a gift or will to another person, then the fair market value of these ESOP is the full value of consideration.
9. The asset is transferred but the consideration for transfer cannot be determined The fair market value of the said asset on the date of transfer. When the person transfers a sculpture or a painting to another person then the fair market value of that sculpture or painting is the full value of consideration.
10 Transfer of shares of a private limited company for a consideration value below the fair market value The fair market value of the said asset as determined according to the prescribed procedure on the date of transfer If you own the shares of a Private Limited company and sell or transfer those shares to a third party, then the full value of consideration will be the one determined according to the procedure prescribed

What is Net Consideration?

  • When you sell/transfer any capital asset other than a residential house and invest those sale proceeds in a residential house, then you are eligible for exemption from paying tax on the capital gains income.
  • This is done under section 54F of the Income Tax Act.
  • This exemption is computed as per the formula related to ‘net consideration.’
  • Therefore, the concept of ‘Net Consideration’ is applicable only in cases of deduction u/s 54F
  • Net consideration is computed by reducing the expenses related directly with transfer of a capital asset like stamp duty, registration charges, transfer duty etc. from full value of consideration.

Computation of Capital Gains Income
There will be capital gains income when all the following things happen:

  • The asset sold by you must be a capital asset
  • Such an asset must be transferred to another person
  • Such an asset must have a definite cost of acquisition or such cost may be determinable under Income Tax Act
  • You must have received something in exchange of such transfer of asset or such receipt of consideration may be determinable under Income tax Act
When will there be NO capital gains?

Capital assets exempt from capital gains tax

There won’t be any capital gains in following cases:

  • When the sold asset is not a capital asset
    Some of the assets sold by you may not come under the definition of ‘capital asset’. Such assets are:

    • Any stock in trade
      • The stock in trade which is used by the person in his regular business as a stock is not a capital asset.
      • For example, if a person is a land developer and sells the plots of land as a part of his business, then the plots sold by him are not capital assets but business stock and therefore, the income earned by him from sale of such stock is charged as business income and not capital gains income.
    • Movable assets for personal use
      • The assets like clothes, furniture which is used to give personal effects are not a capital asset. However, this does not include jewellery.
      • Since these assets are necessary for personal use, their sale does not cause capital gains income
    • Agricultural land in India
      • The agricultural land in India is specifically excluded from the definition of ‘capital asset’. Therefore, if you sell agricultural land, there will be no tax at all.
      • However, it is not up-to everyone to say which land is the agricultural land. It is defined in the Income tax Act as the following:
        • The piece or parcel of land situated beyond municipal limits of a Municipal Corporation or Municipal Council or Cantonment Board
        • The land should be situated
          • Beyond 2 kilometers of municipal boundary of a city having population of 10000 to 100,000.
          • Beyond 6 kilometers of municipal boundary of a city having population more than 100,000 but less than 1000000.
          • Beyond 8 kilometers municipal limits of a city having population of more than 1000000.
          • It is not important whether the land is cultivated for agriculture or not. If the land is situated beyond the distances or boundaries as above, then the land is to be considered as agricultural land and not taxed for capital gains.
    • Gold Bonds issued by Government of India
    • Special Bearer bonds
    • Gold Deposit Bonds
  • When the transfer of asset is NOT a valid transfer?
    In all cases when the asset is transferred from one owner to another owner, NOT all the transfers result in capital gains. There are some transactions/transactions which are immune from capital gains income. Such instances of transfer are given in section 47 of the Income tax Act. These are as under:
Sr. No. Particulars Exceptions, if any.
01 Distribution of capital assets to members of HUF on partial or full partition of HUF
02 Transfer of a capital asset under a gift or a will or an irrevocable trust This does not apply to ESOPs
03 Transfer of capital assets by a company to its 100% wholly owned Indian subsidiary company Within a period of 8 years after transfer, the shareholding should not change and the capital asset should not get converted into stock in trade
04 Transfer of capital assets by a subsidiary company to its 100% Indian holding company
05 Transfer of capital assets by an amalgamating company to an amalgamated company
06 Transfer of shares by amalgamating foreign company to an amalgamated foreign company 25% shareholding must be continued, and transactions should not attract tax in a foreign company
07 Transfer of a capital asset by a banking company to a banking Institution
08 Transfer of shares (deriving value from Indian company) by amalgamating foreign company to an amalgamated foreign company 25% shareholding must be continued, and transactions should not attract tax in a foreign company
09 Transfer of a capital asset by a demerged company to a resulting Indian company
10 Amalgamation and merger related transfer of capital assets from amalgamating company to amalgamated company and a transfer of shares by a shareholder from amalgamating company to amalgamated company
11 Transfer of Global Depository Receipts including those denominated in rupees from one NR to another NR Applicable from A Y 2018-19
12 Any transfer of a capital asset through a conversion of bonds/debentures into shares or from preference shares to equity shares Preference shares to equity shares is applicable from A Y 2018-19
13 Transfer of a capital asset through succession of a company from a partnership firm

Transfer of a capital asset by an unlisted or a private company to an LLP

From A Y 2018-19, the total value of assets should not exceed Rs. FIVE crores
14 Transfer of a capital asset in case of succession of proprietary concern to a private company
15 Transfer of units of mutual funds from a consolidating scheme to a consolidated scheme of mutual funds

How to compute capital gains income?

When you sell a capital asset following things are part of the transaction

Transaction Legal Connotation
The amount of consideration for which the asset is sold Full Value of Consideration
The expenses that you incur for transfer of asset Transfer expenses like Stamp duty, registration charges etc.
The cost for which the asset was originally acquired Cost of Acquisition (CoA)
The expenses incurred by you in improving the said capital asset Cost of improvement

These things happen in all the transactions of sale of capital asset. These are put into a formula to arrive at capital gains income

Income from capital gains =
Full Value of Consideration
Less: Transfer expenses like Stamp duty, registration charges etc.
Cost of Acquisition (CoA)

Cost of improvement

Thus, capital gains income is computed after reducing the transfer expenses, cost of acquisition and cost of improvement from the full value of consideration.

 

In case of certain assets whenever a long-term capital gains is computed, then the indexation comes into play and the cost of acquisition is computed as Indexed Cost of Acquisition and Cost of Improvement is computed as Indexed Cost of Improvement.

Deductions from the capital gains income

Common deductions

The capital gains income arises on sale of a capital asset and it may represent the life’s investment or asset for some persons. Therefore, considering it’s due importance in the market and economy, there are various options available to save the tax on the capital gains. Such options are more in case of LTCG than in case of STCG. These options are as below:

  • The rate of tax on the LTCG income is 20%
  • If invested in the assets specified in the Income tax Act, entire capital gains income is exempt from tax
  • If not invested within given time limits, you can keep your money in bank account as per capital gains account scheme (CGAS) and claim the deductions

Most common deductions
The summary of eligibility conditions for most common deductions is as follows:

Section Sold Asset Invest Sale proceeds in Time-Limit for investment Can Firm or company claim? Capital gains account scheme?
54 Residential House Residential House Purchase of a residential house before ONE year of sale and TWO years after sale of asset OR

Construction of a house AFTER three of sale of asset

NO YES
54B Urban Agricultural land Agricultural Land Within TWO years of sale of asset NO YES
54F Any asset other than a residential house Residential House Purchase of a residential house before ONE year of sale and TWO years after sale of asset OR

Construction of a house AFTER three of sale of asset

NO YES
54EC Immovable property NHAI or REC Bonds Within SIX months of sale of asset YES NO
54EE Any capital Asset Specified fund for start-ups Within SIX months of sale of asset YES NO

Deductions on capital gains on sale of residential house (section 54 deduction)

If you sell a residential house property, the profit earned by you on such sale is taxable as capital gains income. Based on the period for which you have held this house property, this income shall be treated as Long-Term Capital Gains (LTCG) or Short-Term Capital Gains (STCG). If it is a long-term capital gains income, then you can claim the deductions against capital gains income under section 54 of the Income tax Act.
Conditions to be met

  • It can be claimed ONLY by individuals and HUFs and NOT by partnership firms, companies, LLPs, Trusts or societies etc.
  • It can be claimed on sale of ONLY residential house property and NOT on any other property
  • The residential property sold must be a LONG-TERM capital asset and NOT short-term capital asset
  • The new house must be purchased before one year or after two years of sale of original house property
  • If new house is constructed (and not outrightly purchased), then it must be constructed within three years of sale of original house property
  • The new residential house must be acquired or constructed or purchased ONLY in India

ALL these conditions must be met and are non-optional. If you fail in any of these conditions, your claim of deductions will be scrutinized by the Income tax Department and if found that conditions are not fulfilled, the claim may be withdrawn resulting in additional tax burden and penalty.

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What is the amount of deduction?

The amount of deduction eligible under section 54 shall be lesser of the:

  • The amount of capital gain on the sale of property, or
  • The amount of investment in the new residential house

This means:

  • The amount of capital gain on the sale of property, or
  • The amount of investment in the new residential house

This means:

  • If the amount of capital gains is lesser than the investment in the new residential house, then the entire amount of capital gain is exempt from tax
  • If the amount of capital gain is more than the investment in the new residential house then the amount equal to the investment amount in the new residential house is exempt from tax

What if the new residential house is sold shortly after it was purchased/constructed?

The residential house which is bought or constructed through the sale proceeds of the sold house, then the treatment of capital gains on sale of new residential house depends upon the period for which it was held after acquisition and whether the capital gains on the original house were lesser or more than the cost of the new house.

  • If the new residential house is sold within THREE years of the date of sale of the original house, then it will impact the capital gain computation of the new house. However, if it is sold after THREE years then there is no impact.

Impact of sale of new house within THREE years:
A.
If the amount of capital gains on the sale of original house is more than the cost of new house, then the entire sale proceeds from the sale of new house will be considered as the capital gains income and there will be no deduction on account of cost of acquisition

Illustrated:
Vineet sold his residential flat (Property X) on 01.03.2018 for a consideration of 10,000,000/- and the long- term capital gain was computed at Rs.70,00,000/-. This capital gain was invested in a construction of bungalow (Property Y) of Rs.60,00,000/-. The bungalow was complete on 30/09/2018. He sold the said bungalow on 30/10/2019 for Rs.12,000,000/-.
What is the computation capital gains in all these transactions?
There are two transactions of sale of property in two financial years

Property X (Flat) Property Y (Bungalow)
Financial year 2017-18 2019-20
Sold for 10,000,000 12,000,000/-
Capital gain 70,00,000 ?? (see note below)
Deduction claimed 60,00,000 0 (see note below)
Taxable capital gain 10,00,000 ?? (see note below)

Vineet has sold the property X and has computed the LTCG income of Rs.70,00,000/-. He claimed deduction of Rs.60,00,000/- on this and taxable capital gain was Rs.10,00,000/-. Thus, his deduction was lesser than the capital gains amount.

In such a situation, the computation of capital gains in respect of property Y is as follows. The property Y is sold within 3 years of the sale of property X. As per section 54, the entire sale consideration of Rs.12,000,000/- shall be treated as capital gains and there won’t be any deduction on account of cost of acquisition. And since the asset is sold within TWO years of construction/acquisition, it shall be the STCG and no further deduction on this STCG income can be claimed.

B. If the amount of capital gains on the sale of original house is equal to or less than the cost of new house, and if the new house is sold within a period of THREE years of the date of sale of original house, then the capital gain in case of new asset will be computed by considering the cost of acquisition after reduction of capital gains of original asset therefrom.

Illustrated:
Vineet sold his residential flat (Property X) on 01.03.2018 for a consideration of 10,000,000/- and the long- term capital gain was computed at Rs.70,00,000/-. This capital gain was invested in a construction of bungalow (Property Y) of Rs.80,00,000/-. The bungalow was complete on 30/09/2018. He sold the said bungalow on 30/10/2019 for Rs.12,000,000/-.

What is the computation capital gains in all these transactions?

There are two transactions of sale of property in two financial years

Property X (Flat) Property Y (Bungalow)
Financial year 2017-18 2019-20
Sold for 10,000,000 12,000,000/-
Capital gain 70,00,000 ?? (see note below)
Deduction claimed 80,00,000 (will be restricted to 70,00,000) 0 (see note below)
Taxable capital gain 0 ?? (see note below)

Vineet has sold the property X and has computed the LTCG income of Rs.70,00,000/-. Since the cost of new asset was more than the capital gains, the entire amount of capital gains is exempt from tax. And taxable capital gains shall be NIL.

The property Y is sold within 3 years of the sale of property X. In such a situation, the computation of capital gains in respect of property Y is as follows.

The sale consideration for property Y is Rs.12,000,000/-. The cost of acquisition is Rs.80,00,000/- since it is constructed for this amount. This cost of acquisition shall be reduced by the amount of capital gains of the original property X. Thus:

Particulars Property Y (Bungalow)
Financial year 2019-20
Sold for 12,000,000/-
Cost of acquisition 80,00,000/-
Less: 70,00,000/-
Less: Adjusted cost of acquisition 10,00,000/-
Capital gain 11,000,000/-
Deduction claimed NIL
Taxable capital gain 11,000,000/-

Capital Gains Account Scheme (CGAS)
Purchasing or a construction of new house is a big decision for an individual and he may not finalize it within the time allowed under the said section or even if he had made the decision, he would not have made entire payments for the new house before filing the ITR for the relevant assessment year.

What is the scheme?

  • The CGAS scheme is designed to give benefit to the taxpayers for deferred utilization of the sale proceeds from the sale of a capital asset while they are claiming the deductions/exemptions form capital gains in respect of sale of capital asset.
  • If you have not utilized the entire amount of capital gains or net consideration from sale of the capital asset, then the unutilized portion of such capital gains or the net consideration may suffer tax liability.
  • However, if the unutilized portion of the amount is deposited in an account opened and maintained through CGAS, then the taxpayer will be eligible for the said deduction
  • Such scheme is applicable only in case of deductions under sections 54, 54F, 54B, 54D, 54G and 54GB. It is NOT applicable in case of deductions under section 54EC and 54EE since, in these two cases the new asset must be acquired by the taxpayer within 06 months of the sale of the original asset.
  • This scheme is called as the Capital Gains Account Scheme-1988

Example:
Shri Sunil has sold a residential flat for Rs. 70,00,000/- and his capital gains income was Rs. 50,00,000/- on this transaction. He wanted to buy a new house for Rs. 60 lacs and invest the capital gains amount in the said new house and claim exemption from tax on capital gains income. He had decided the property to buy for Rs.60,00,000/-. However, since the amount was to be paid to the builder in installments, he could not pay entire amount of Rs.50 lacs or 60 lacs to the builder before 31st July or before filing his ITR. He paid only Rs. 20 lacs.

Since he paid or utilized only Rs.20 lacs, the remaining amount of Rs.40 lacs shall be brought to tax. In order to avoid this, the amount of Rs.40 lacs must be deposited in CGAS.

Who can avail this scheme?

Any tax payer who:

  • Is claiming deduction under section 54,54B, 54F, 54D, 54G and 54GB.
  • Has not utilized the entire proceeds of capital gains amount in acquiring the new asset till due date of filing ITR

Types of Accounts and mode of opening the accounts

  • Under this scheme there are two types of accounts i.e. Deposit Account – A and Deposit Account-B.
  • Deposit Account-A: The deposits made under this account are ‘savings account’ type deposits and the withdrawals from this account are easy.
  • Deposit Account-B: The deposits made under this account are of the ‘term deposit’ type and may be cumulative or non-cumulative. The withdrawals under this account may be made after the expiry of a specific maturity period.
  • The person who desires to open any of these two accounts is required to approach the bank or the branch and apply in Form A. The said branch shall accept the Form A along with the cheque/DD/or cash and issue the receipt.
  • Subject to the realization of the cheque, the date of submitting these details is said to be the date of opening the account in CGAS. The interest on such deposits however shall be calculated from the date of realization of cheque or DD or cash.
  • The account holder shall be given a passbook by the bank branch recording all the transactions of deposits and withdrawals.
  • The separate accounts are needed to be opened in case of different deductions. For example, if the assessee has claimed deduction under section 54B and 54F, then there have to be separate capital gains accounts in respect of these two deductions.

Transfer and mutual conversion of accounts

  • The accounts can be transferred from one branch to another branch of the same bank
  • The amount in account A can be transferred to account B at any time after the depositor applies in Form B to the branch
  • If he doesn’t have a type A account, then he may make such a request to the branch
  • The rates of interest change from the date of such application
  • If the amount in Type B account is transferred to type A account before the maturity period, then such transfers may be treated as premature withdrawals

Interest on the capital gains accounts

  • The rates of interest on deposits in both the accounts are specified by the Reserve Bank of India from time to time
  • The interest in Type A accounts is calculated and credited at each half yearly interval and that in Type B accounts is credited at quarterly intervals
  • The interest received on these capital gains accounts is taxable as income from other sources

Withdrawal from the capital gains accounts

  • The funds can be withdrawn ONLY from the capital gains account type A and the amounts in capital gains accounts type B have to be transferred to the capital gains account type A before they are withdrawn
  • The branch holding the account has to be requested in Form C for such withdrawal. The withdrawal will be processed and entered in the passbook by the deposit branch office
  • In case of first withdrawal, you don’t need to intimate the purported utilization for such withdrawal. However, after that you have to intimate the details of utilization of the amounts withdrawn earlier. Such intimation is to be made in Form D
  • In case the amount of withdrawal from Account type A is more than Rs.25,000/- then the deposit branch will make the direct payment through crossed Demand Draft to the person to which the depositor intends to make payment from withdrawal amounts
  • In case of withdrawal from the Type B accounts before the maturity date of such accounts, such a withdrawal is termed as a premature withdrawal and the earning in interest will be affected accordingly
  • In case the depositor does not give all the details of utilization of the withdrawal amounts in the prescribed Form D, then the deposit branch can refuse the withdrawal.

Utilization of the withdrawals

  • The depositor is required to utilize the withdrawn amount ONLY for the purposes for which such deposit was made and NOT for any other purpose
  • Such utilization must be completed within 60 days from the date of withdrawal and if any amount remains unutilized, then such an amount must be immediately deposited back in type-A account
  • If not utilized and not deposited back, then the said unutilized amount has to be offered to tax as income from capital gains
You can not take or obtain the loan by placing the CGAS amount as security. You will lose the tax exemption.

Closure of the Account

  • The account can be closed by applying to the deposit office or the branch having the account
  • Such an application has to be made in Form G and must be accompanied with the approval or the permission of the Assessing Officer
  • If the nominee of the depositor is making the application for closure, then the application must be in Form H

Different Application Forms in Capital Gains Account Scheme

Sr. No. Form No. Use
01 Form A Opening of Account type, A and B
02 Form B Transfer of the amount from B to A account
03 Form C Withdrawal of the amount from Capital Gains Account
04 Form D Details of utilization of the withdrawn amount
05 Form E Nomination of nominee by the Depositor
06 Form F Change of alteration of the nominees by the depositor
07 Form G Application for closure of the account by the Depositor
08 Form H Application for closure of the Account by the nominee of the depositor

Deduction on purchase of a residential house (section 54F deduction)
If you sell any capital asset, the profit earned by you on such sale is taxable as capital gains income. Based on the period for which you have held this property, this income shall be treated as Long-Term Capital Gains (LTCG) or Short-Term Capital Gains (STCG). If it is a long-term capital gains income, then you can claim the deductions against capital gains income under section 54F of the Income tax Act.
Conditions to be met

  • It can be claimed ONLY by individuals and HUFs and NOT by partnership firms, companies, LLPs, Trusts or societies etc.
  • It can be claimed on sale of any capital asset other than a residential house property
  • The asset or property sold must be a LONG-TERM capital asset and NOT short-term capital asset
  • The new house must be purchased before one year or after two years of sale of original asset
  • If new house is constructed (and not outrightly purchased), then it must be constructed within three years of sale of original asset
  • The new residential house must be acquired or constructed or purchased ONLY in India
  • On the date of purchase of a new residential house property you should not own or possess any other residential house than the one you have newly purchased
  • You should not purchase any residential house other than the new house within a period of ONE YEAR from the date of transfer of original asset
  • You should not construct any new residential house other than the new house within a period of THREE YEARS from the date of transfer of original asset

Important condition:
If you purchase a residential house, other than the one purchased or constructed for claiming deduction, within TWO years or construct a residential house within THREE years, of the date of sale of original asset, then the amount of capital gains income which was exempted, shall be taxed in the year in which such new house is acquired.

ALL these conditions must be met and are non-optional. If you fail in any of these conditions, your claim of deductions will be scrutinized by the Income tax Department and if found that conditions are not fulfilled, the claim may be withdrawn resulting in additional tax burden and penalty.

What is the amount of deduction?
The amount of deduction is related to the amount of net consideration on sale of asset. Net consideration means the full value of consideration less transfer expenses like stamp duty, registration charges etc.

  1. If the cost of the new asset (residential house) is more than or equal to the amount of net consideration, then the entire amount of capital gains income shall be tax-exempt.
    • This means, if the plot of land is sold for Rs.10,000,000/- and transfer expenses are Rs.10,00,000/- then the ‘net consideration’ is Rs.90,00,000/-. If the indexed cost of acquisition is Rs.30,00,000/-, the capital gains income is Rs.60,00,000/-. The cost of the new residential house is Rs.95,00,000/- which is more than ‘net consideration’.
    • In such a scenario, the entire amount of capital gains income shall be exempt.
  2. If the cost of the new asset (residential house) is more than the ‘net consideration’, then the ratio of cost of the new asset to the net consideration is to be worked out and the same ratio is applied to the amount of capital gains and the resultant amount shall be exempt from tax.
    • This means, in above example, if the cost of the new asset (residential house) is Rs.85,00,000/- which is less than the net consideration, then the exempt amount of capital gains is worked out as under:

    Ratio of cost of new asset to net consideration: 8500000/9500000=0.89
    Exempt amount of capital gains : 6000000 x 0.89 = 53,68,421/-

    The formula shall be: Deduction u/s 54F: (Cost of new asset/net consideration) x amount of capital gains

    Hence, the amount of capital gains income exempt from tax is Rs.53,68,421/- and not the entire amount of capital gains.

    Impact of sale of new house within THREE years:

    If the new residential house (asset) is sold within THREE years of the date of sale of the original asset, then the capital gains income which was claimed as exempt will be taxed in the year in which the new asset is sold. The amount of capital gains shall be the same as that computed at the time of sale of original asset.

Capital Gains Account Scheme is applicable for deduction under section 54F

Deductions in case of sale of urban agricultural land and purchase of agricultural land (Section 54B)

The deduction under this section can be claimed after sale of a land which was used for agricultural purposes and on sale of which, the sales consideration is invested in purchase of agricultural land. The eligibility conditions for this deduction are as under:

  • This deduction is available ONLY for individual and HUF categories of persons
  • This deduction can ONLY be claimed on sale land which was used for agricultural purposes
  • Such an agricultural use must be done by the taxpayer or his parent or in case of HUF, by the HUF itself
  • Such an agricultural use must be for a period of more than TWO years preceding the date of sale of the original asset i.e. agricultural land.
  • The deduction under this section can be claimed ONLY on purchase of an agricultural land
  • Such purchase must be within a period of TWO years immediately after the date of transfer of the original asset i.e. urban agricultural land.

What is the amount of deduction?

  • If the amount of capital gains is lesser than the investment in the new agricultural land, then the entire amount of capital gain is exempt from tax
  • If the amount of capital gain is more than the investment in the new agricultural land then the amount equal to the investment amount in the new agricultural land is exempt from tax

Impact of sale of new agricultural land within THREE years:

  1. If the amount of capital gains on the sale of original agricultural land is more than the cost of new agricultural land, then the entire sale proceeds from the sale of new agricultural land will be considered as the capital gains income and there will be no deduction on account of cost of acquisition
    Illustrated:

    Vineet sold his agricultural land (Property X) on 01.03.2018 for a consideration of 10,000,000/- and the long- term capital gain was computed at Rs.70,00,000/-. This capital gain was invested in a new agricultural land (Property Y) of Rs.60,00,000/-. The purchase was complete on 30/09/2018. He sold the said new agricultural land on 30/10/2019 for Rs.12,000,000/-.

    What is the computation capital gains in all these transactions?

    There are two transactions of sale of land in two financial years

    Property X (original agricultural land) Property Y (new agricultural land)
    Financial year 2017-18 2019-20
    Sold for 10,000,000 12,000,000/-
    Capital gain 70,00,000 ?? (see note below)
    Deduction claimed 60,00,000 0 (see note below)
    Taxable capital gain 10,00,000 ?? (see note below)

    Vineet has sold the property X and has computed the LTCG income of Rs.70,00,000/-. He claimed deduction of Rs.60,00,000/- on this and taxable capital gain was Rs.10,00,000/-. Thus, his deduction was lesser than the capital gains amount.
    In such a situation, the computation of capital gains in respect of property Y is as follows.
    The property Y is sold within 3 years of the sale of property X. As per section 54B, the entire sale consideration of Rs.12,000,000/- shall be treated as capital gains and there won’t be any deduction on account of cost of acquisition. And since the asset is sold within TWO years of construction/acquisition, it shall be the STCG and no further deduction on this STCG income can be claimed.

  2. If the amount of capital gains on the sale of original land is equal to or less than the cost of new agricultural land, and if the new agricultural land is sold within a period of THREE years of the date of sale of original land, then the capital gain in case of new agricultural land will be computed by considering the cost of acquisition after reduction of capital gains of original asset therefrom.
    Illustrated:
    Vineet sold his agricultural land (Property X) on 01.03.2018 for a consideration of 10,000,000/- and the long- term capital gain was computed at Rs.70,00,000/-. This capital gain was invested in purchase of new agricultural land (Property Y) of Rs.80,00,000/-. The purchase of new asset was complete on 30/09/2018. He sold the said new asset on 30/10/2019 for Rs.12,000,000/-.
    What is the computation capital gains in all these transactions?There are two transactions of sale of property in two financial years

    Property X (Original Agricultural Land) Property Y (new agricultural land)
    Financial year 2017-18 2019-20
    Sold for 10,000,000 12,000,000/-
    Capital gain 70,00,000 ?? (see note below)
    Deduction claimed 80,00,000 (will be restricted to 70,00,000) 0 (see note below)
    Taxable capital gain 0 ?? (see note below)

    Vineet has sold the property X and has computed the LTCG income of Rs.70,00,000/-. Since the cost of new asset was more than the capital gains, the entire amount of capital gains is exempt from tax. And taxable capital gains shall be NIL.

    The property Y is sold within 3 years of the sale of property X. In such a situation, the computation of capital gains in respect of property Y is as follows.

    The sale consideration for property Y is Rs.12,000,000/-. The cost of acquisition is Rs.80,00,000/- since it is constructed for this amount. This cost of acquisition shall be reduced by the amount of capital gains of the original property X. Thus:

    Particulars Property Y (Bungalow)
    Financial year 2019-20
    Sold for 12,000,000/-
    Cost of acquisition 80,00,000/-
    Less: 70,00,000/-
    Less: Adjusted cost of acquisition 10,00,000/-
    Capital gain 11,000,000/-
    Deduction claimed NIL
    Taxable capital gain 11,000,000/-
The Capital Gains Account Scheme is applicable in case of deductions under section 54B

Deduction against investment in REC/NHAI bonds (Section 54EC)
If you have sold any immovable property like plot of land or building or both, then you can get exemption on the capital gains if you invest the amount in the bonds issued by Rural Electrification Corporation (REC) or National Highways Authorities of India (NHAI). The salient features of this benefit are as under:

  • This deduction is computed and allowed as per section 54EC of the Income tax Act
  • It is available on sale of ONLY the immovable property like land, building or both and not on any other asset
  • The total amount of investment permissible for the taxpayer is of Rs.50 lakhs
  • Such an investment in REC and NHAI bonds must be made within 06 months from the date of sale of original asset
  • You can not use the money invested in these bonds as a security for obtaining loans, otherwise you may lose the deduction
  • You cannot liquidate these investments before 5 years from the date of acquisition of such bonds, otherwise the capital gains shall be charged to tax in the year of liquidation

Amount of deduction

  • The total amount of investment in the REC/NHAI bonds will be eligible for deduction from the capital gains income.
  • The total amount of the investment permitted for the taxpayer in the year of sale of asset and the subsequent year is Rs.50,00,000/-.

Keep in mind: The maximum amount of deduction available to the taxpayer is Rs.50,00,000/-
What is REC and NHAI bonds?

Who can invest? Apart from resident individuals, Hindu Undivided Families, non-resident Indians, firms, LLPs and companies can also invest.
Investment amount You can invest a minimum of Rs, 10,000 and a maximum of Rs, 50 lakhs. The face value is Rs. 10,000 per bond, so you can buy up to 500 bonds.
Interest rates? Currently, an interest rate (coupon rate) of 6%, payable annually, is being offered on this bond.
What is the tenure of this bond? The NHAI /REC bond can be fully redeemed at maturity, after FIVE years. You cannot transfer these bonds in another person’s name. Also, it’s a non-negotiable financial instrument. These bonds can not be offered as security for obtaining loans.
What is the risk in this investment? The bond comes with minimum risk and does not need daily monitoring. Moreover, you do not need to pay a commission to get the bond. The bond also comes with AAA/stable rating by CRISIL Ltd and AAA (Ind)/(Affirmed) by Fitch.
Taxability of interest earned on these bonds There is no tax deductible at source on the interest paid by these bonds. But the interest earned on these bonds is taxable. You will need to pay tax on the interest income as advance tax.
Please keep in mind This bond can be held in the name of a single holder as well as jointly. Keep in mind that even if you make separate applications, individually or jointly, the aggregate investment should not exceed Rs50 lakh, or both of you may lose the benefit under section 54EC. You will be able to avail a nomination facility on these bonds.
The Capital Gains Account Scheme is NOT applicable to deduction under section 54EC

The deduction against investment in Fund of Funds (Start-up Fund)
If you have sold any capital asset, then you can get exemption on the capital gains if you invest the amount in the long term specified asset. This long term specified asset is the fund of funds set up by the Government of India for boosting up the start-up ecosystem in the country. The salient features of this benefit are as under:

  • This deduction is computed and allowed as per section 54EE of the Income tax Act
  • It is available on sale of any asset
  • The total amount of investment permissible for the taxpayer is of Rs.50 lakhs
  • Such an investment in specified fund must be made within 06 months from the date of sale of original asset
  • You cannot use the money invested in this fund as a security for obtaining loans, otherwise you may lose the deduction
  • You cannot liquidate these investments before 3 years from the date of acquisition of such bonds, otherwise the capital gains shall be charged to tax in the year of liquidation

Amount of deduction

  • The total amount of investment in the specified fund will be eligible for deduction from the capital gains income.
  • The total amount of investment permitted for the taxpayer in the year of sale of asset and the subsequent year is Rs.50,00,000/-.

Keep in mind:

  • The maximum amount of deduction available to the taxpayer is Rs.50,00,000/-
  • This deduction is available from Assessment Year 2017-18
The Capital Gains Account Scheme is NOT applicable to deduction under section 54EC

Capital gains on immovable property
The sale of immovable property and shares forms the bulk of transactions in giving rise to capital gains income. The computation of capital gains in each of the case may be different in different situations like full value of consideration, cost of acquisition and modes of acquisition, modes of transfer of the asset, the claim of deductions on the income from capital gains. All the aspects of transaction of sale of such asset and consequential capital gains are dealt with herein.
Summary of capital gains income on property:

Asset Immovable Property
Residential house/flat Commercial property Plot of land Urban Agricultural land
Full Value of consideration
  • Section 50C

applicability

Yes Yes Yes Yes
  • Compulsory acquisition
Fair Market Value
  • Conversion from fixed asset to trading stock
Fair Market Value
  • Introduction in the firm/LLP/Company as capital
Fair Market Value
  • Distribution on liquidation of company
Fair Market Value
  • Distribution from partnership firm/LLP
Fair Market Value
  • Division of HUF
Fair Market Value
Cost of Acquisition
  • Asset is acquired through purchase
Purchase price
  • Asset is acquired through will, gift, inheritance, partition etc.
Cost of acquisition to the previous owner
  • Advance money retained in respect of transaction preceding present sale transaction
To be reduced from the cost of acquisition if the advance is not offered as income from other sources in earlier year.
Indexation applicable in LTCG YES YES YES YES
Deductions applicable 54, 54EC, 54EE 54F, 54EC, 54EE 54F, 54EC, 54EE 54F, 54B, 54EC, 54EE

The computation of capital gains in case of immovable properties like house/flat or a commercial shop/officer or a piece of land involves four aspects:

  • Whether it is a capital asset?
  • Whether such a capital asset is transferred?
  • What is the sale consideration or the amount for which it is transferred?
  • What is the cost of acquisition of such a property?
  • Whether any deduction is claimed on the capital gains?

Whether it is a capital asset?
This issue will not come in case of a house or a shop or the urban agricultural land but will come up only in case the plot of a land situated on the urban boundary is sold. The ‘agricultural land’ is defined in the Income tax Act as follows:

  • The piece or parcel of land situated beyond municipal limits of a Municipal Corporation or Municipal Council or Cantonment Board
  • The land should be situated
    • Beyond 2 kilometers of municipal boundary of a city having population of 10000 to 100,000
    • Beyond 6 kilometers of municipal boundary of a city having population more than 100,000 but less than 1000000
    • Beyond 8 kilometers municipal limits of a city having population of more than 1000000
  • Cultivating the piece of land for agricultural operations does not decide whether it is a capital asset
  • Whether you have declared the agricultural income from the said land or not is also not necessary to decide the nature of land
If the property sold by you is an agricultural land, then there can not be capital gain on such sale. Rest of the property transactions are liable for taxable capital gains income.

Transfer of property

  • The transfer of property as is understood in the common parlance as sale of the property or transfer of ownership. The general taxpayer thinks that unless he has received the money against transfer of his own property, there should not arise any capital gains income.
  • But this is not the case and transfer of property without any consideration may also give rise to income from capital gains.

There are some transfers of property which may not result in income from capital gains. Such transfers are as follows:

Sr. No. Particulars
01 Distribution of capital assets to members of HUF on partial or full partition of HUF
02 Transfer of a property under a gift or a will or an irrevocable trust
03 Transfer of a property by a company to its 100% wholly owned Indian subsidiary company
04 Transfer of a property by a subsidiary company to its 100% Indian holding company
05 Transfer of property by an amalgamating company to an amalgamated company
06 Transfer of a property by a banking company to a banking Institution
07 Transfer of a property by a demerged company to a resulting Indian company
08 Transfer of a property in case of succession of proprietary concern to a private company

Besides the above, if the property is transferred by any other mode, then there shall be income from capital gains.

Full Value of Consideration:
This is the amount of consideration or price that is received against the sale of the property by the seller. In most of the instances, it is the amount for which the property is sold by the seller. The amount for which the property is sold is called as the ‘full value of consideration’.

However, in some of the instances this may not be the full value of consideration and the same must be determined as per the rules and law contained in Income tax Act. These are discussed below:

When the sale consideration is less than the Government Valuation.

  • All the properties like land and buildings are registered in the records of the State Government on which they collect land revenue or property tax. This revenue or tax is collected on the basis of value of the property. This value is the value determined by the State Government (Stamp Duty Valuation).
  • When such properties are transferred or sold their ownership is transferred and such change is ownership is registered in the records of State Government. When there is a transfer of property from one owner to another, the State Government charges stamp duty on this transaction.
  • This stamp duty is charged as a percentage of the sales consideration or sales value. However, for the purposes of collection of stamp duty, the State Government values the property at a certain amount. This valuation is called as ‘ready reckoner rate’ commonly and is the Stamp duty valuation of the said property.
  • When you sell the property and the sale consideration of the property may be equal to or lesser than or greater than the stamp duty valuation amount of the said property. In such situations, the full value of consideration is as below:

What happens if I don’t agree with the ready reckoner valuation?

  • The provisions of section 50C of the Income Tax Act will apply to your case as discussed below.
  • In such case there are two options with you, one, you can get the valuation of the property done from the registered valuer and adopt the same as full value of consideration. Two, you can adopt the amount received by you as the full value of consideration and compute the income from capital gains.
  • If the property transaction is of a value of more than Rs.3,000,000/-, there is a chance that your case might be picked up for scrutiny assessment. In the scrutiny assessment, you have to prove as to how the value adopted by you is correct and the valuation as per the ready reckoner is not correct.
  • The Assessing Officer will refer your case to the Government Valuation Officer, who in turn will compute the valuation of the property. The value determined by the Valuation Officer shall be the full value of consideration and the Assessing officer shall assessee the capital gains income taking this value as full value of consideration.
  • If the report of the Valuation Officer doesn’t reach in time before completion of assessment, the Assessing Officer shall adopt the value as per ready reckoner and compute the income from capital gains.

Full value of consideration in cases when the property is transferred NOT in sale but through will, inheritance or other transfers:

SR. No. Nature of asset or circumstances of its transfer Full value of consideration
1. The capital asset is acquired by the Central Government through compulsory acquisition The amount of compensation received from the central government

If the compensation received is increased subsequently, then the increased amount of compensation

If the amount of compensation is reduced by the Court or the Government, then the reduced amount of compensation.

If the enhanced compensation is received by the successor of the person who has sold the property, then the said enhanced compensation shall be the income of such a receiver.

3. If the asset like land or property or any other asset is converted from fixed asset to trading stock There will not be exchange of money in this transaction. Therefore, the fair market value of the fixed asset as on the date such conversion shall be the ‘full value of consideration’.
4. When a person becomes a partner in a firm or a member of Body of Individuals (BOI) or Association of Persons (AOP) or LLP and introduces his property as his share in such partnership firm or BOI or AOP The property which is contributed as a capital asset is recorded in the books of the firm as a capital contribution. This amount of capital contribution is the ‘full value of consideration’
5. When a firm, LLP or BOI is dissolved and its assets are distributed amongst partners of the firm and members of BOI The fair market value of the property on the date of the transfer
6. When a company is liquidated, and the property of the company are distributed amongst its shareholders The amount of money or the fair market value of the property distributed to its shareholders
9. The property is transferred but the consideration for transfer cannot be determined The fair market value of the said asset on the date of transfer.

Cost of Acquisition of the property

  • When a person owns any property, he may have acquired it through purchase or gift or inheritance or will or division of family property or shared assets like partnership firms. Such an acquisition of an asset is done at a cost, this cost of purchase of asset or an acquisition of an asset is called as cost of acquisition (CoA).
  • When the asset is purchased it is done at a certain price and that price is CoA of that asset. If the asset is acquired through gift or inheritance or will, then the cost of the asset for which the person who had gifted or willed or gave in inheritance, shall be the cost of acquisition.
  • When the asset is acquired, all the expenses besides purchase price are to be added to arrive at the cost of acquisition.
  • For computation of capital gains on transfer of a capital asset, the CoA is deducted from full value of consideration.
  • Special Circumstances:
  • In case you have acquired the asset through special modes like gift, inheritance, will, partition etc., you don’t pay for acquiring of such an asset. However, the person who has transferred the property through any of these modes must have acquired it by paying the cost or amount for it. Such a cost to the previous owner of the asset is taken as the cost of acquisition.
  • The circumstances in which such cost of acquisition to the previous owner is taken as the CoA. The asset must be received by the current owner from the previous owner in following situations:
  • If the previous owner had also acquired the capital asset by any of the modes above, then the cost to that previous owner, who had acquired it by mode of acquisition other than the above, should be taken as cost of acquisition.
  • Where the cost for which the previous owner acquired the property cannot be ascertained, the cost of acquisition to the previous owner means the Fair Market Value on the date on which the capital asset became the property of the previous owner.

Cost of improvement

  • When you own and possess a capital asset like a land or a built-up property, you tend to carry out certain improvements on it. For that you incur costs on material, labor etc. These costs go on to become the cost of improvement
  • For computation of capital gains on transfer of the capital asset, such costs of improvement need to be deducted from full value of consideration

Indexed Cost of Acquisition and Indexed Cost of Improvement

  • The property which is sold is generally acquired before it is put on sale. When it is acquired two years before it’s sale, the cost of the property must be indexed to its value as on the date of sale.
  • This is done by multiplying the cost of acquisition by an index known as Cost Inflation Index. This procedure is called as ‘Indexation.’
  • The cost inflation index (CII), is published by the Central Government for every year.
  • Similarly, indexation is applied to the cost of improvement also.
Read more about indexation and indexed cost of acquisition and indexed cost of improvement

Whether it is a long term or short term capital gains?
If the property was held by you in your possession as the owner after you have acquired it for a period of TWO years or more then the capital gains income shall be Long Term Capital Gains and if NOT more than TWO years, then the said income shall be Short Term Capital Gains Income.

Deductions/Exemptions from capital gains income on the property
Section Sold Asset Invest Sale proceeds in Time-Limit for investment Can Firm or company claim? Capital gains account scheme?
54 Residential House Residential House Purchase of a residential house before ONE year of sale and TWO years after sale of asset OR

Construction of a house AFTER three of sale of asset

NO YES
54B Urban Agricultural land Agricultural Land Within TWO years of sale of asset NO YES
54F Any property other than a residential house Residential House Purchase of a residential house before ONE year of sale and TWO years after sale of asset OR

Construction of a house AFTER three of sale of asset

NO YES
54EC Immovable property NHAI or REC Bonds Within SIX months of sale of asset YES NO
54EE Any capital Asset Specified fund for start-ups Within SIX months of sale of asset YES NO
Read more about the deductions under section 54/ 54B / 54EC / 54EE / 54F
Read More about the Capital Gains Account Scheme
Formula for computation of capital gains income:
Income from capital gains
Long Term Capital Gains = Short Term Capital Gains =
Full Value of Consideration Full Value of Consideration
Less: Transfer expenses like Stamp duty, registration charges etc. Transfer expenses like Stamp duty, registration charges etc.
Indexed Cost of Acquisition (CoA) Cost of Acquisition (CoA)
Indexed Cost of improvement Cost of improvement
Eligible Deductions Eligible Deductions

What happens if the advance money is received against the property?

  • If the advance money received by the owner of the property is retained by the owner, then such advance money will be deducted from the cost of acquisition for the purposes of computation of capital gains and hence the amount of capital gains will increase.
  • If such an amount of advance money or advance receipt is taxable under the head of Income from other sources, then the same amount shall not be deducted from the cost of acquisition.