Understanding the Basis of Charge: Capital Gains in Income Tax

Capital Gain Provisions as per Income Tax

Basis of Charge

Any profits or gains arising due to the sale of a capital asset in the previous year shall be chargeable to income tax under ‘Capital Gains’ and shall be the income of the previous year in which the transfer took place unless such capital gain is exempt under section 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA or
54GB.

The following are the essential conditions for taxing capital gains:-

1. There must be a capital asset which is held by the assessee.
2. The capital asset must have been transferred by the assessee during the previous year.
3. There must be profits or gains as a result of such transfer, which will be known as capital gain;
4. Such capital gain should not be exempt under sections 54, 54B, 54D, 54EC,
   54EE, 54F, 54G,54GA or 54GB.

If the above conditions are satisfied, the capital gain shall arise and be taxed in the previous year in which the asset is transferred, subject to certain exceptions mentioned in para.

A. There must be a capital Assets. A capital gain arises only when a capital asset is transferred. If the assets transferred are not capital assets, they will not be covered under the head ‘Capital Gain’.

B. What is a capital asset: “Capital asset” means-

1. Property of any kind held by an assessee, whether or not connected with his business or professional.
2. Any securities held by a Foreign Institutional Investor who has invested in such securities following the regulations made under the Securities and Exchange Board of India Act,1992.
3. Any unit-linked insurance policy to which exemption under section 10(10D) does not apply on account of the applicability of the 1st 4 and 5 provisions thereof. (Inserted 1992 by the Finance Act, 2021 W.e.f A.Y. 2021-2022) but does not include-
   (i) Any stock-in-trade [other than the securities referred to in sub-clause (b) above]. consumable stores or raw materials held for his business or profession.
   (ii) Personal effects, that is to say, movable property (including wearing apparel and furniture). held for personal use by the assessee or any member of his family dependent on him However, the following assets shall not be treated as personal effects though these assets are moveable and may be held for personal use:
   (a) jewellery
   (b) archaeological collections
   (c) drawings
   (d) paintings
   (e) sculptures or any work of art.
4. Clarification: The house property, in which the assessee lives, is intimately used by him for personal purposes, but it will not be a personal effect as it is an immovable property.
   1. Personal effects are no doubt ‘assets’ but they are not called capital assets for capital gain purposes. Similarly, stock in trade, etc., are assets but these are not capital assets for capital gain purposes.
   2. Agricultural land in India, which is not an urban agricultural land. In other words, it must be a rural agricultural land.
   3. 6.5% Gold Bonds, 1977, 7% Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government.
   4. Special Bearer Bonds, 1991, issued by the Central Government.
   5. Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under the Gold Monetisation Scheme, 2015 and 2019 notified by the Central Government.

The items covered under clauses (4) and (5) are only of academic significance, as these instruments do not exist now.

Taxcellent helps you in calculating capital gain and its taxability along with the appropriate income tax return filing.