As per the provisions of the Income Tax Act 1961, any profit or gain that is arises on the transfer of a ‘capital asset’ is known as capital gain i.e. this is the amount of profit that arises on the sale of any capital assets and it will be considered as income and will be taxable under the head of “Capital Gain” of Income Tax Act 1961. Such an amount of capital gain will be taxable in the year in which has transfer taken place.
For the example- Mr. Ram, he has purchased a building 10 months before at the cost of 15 lakhs now he wants to sale it at Rs. 20 lakhs then the difference will be considered as capital gain and it will be taxable in the year in which transfer has taken place under the head Capital Gain.
Definition of Capital Assets
To understand the concept of capital gain, it is important to know the meaning and the definition of capital assets because capital gain arises only on the transfer of capital assets. The definition of Capital Asset is as follow-
As per section 2 (14) and 2 (47) of the Income Tax Act 1961-
Capital Asset” means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include—
(i) Any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession;
(ii) Personal effect, 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, but excludes—
(b) Archaeological collections;
(e) Sculptures; or
(f) Any work of art.
As per this definition Plant, Machinery, Land, Building, Patents, Jewellery, trademarks, House Property, vehicles, leasehold rights, etc. are examples of capital assets but the definition of the capital asset does not include-
Agricultural land in rural India
Any stock, consumables, or raw material, held for the purpose of business or profession
Special bearer bonds
Type of Capital Assets
There are 2 types of capital assets-
1- Long term capital asset (LTCA)
2- Short term capital asset (STCA)
(a) Long term capital asset (LTCA)
Long term capital asset is an asset that is held by the person for the period which ismore than 36 months, is a long-term capital asset i.e. if there is any asset held by the assessee for the period more than 36 months then such asset will be considered as LTCA.
There are some assets that are considered as long-term capital assets if held by the assessee for 12 months or more. These assets are:
1- Equity shares and the preference shares of a listed company.
2- Securities, which are listed in the recognized stock exchange.
3- Units of UTI (quoted or unquoted).
4- Quoted or unquoted equity oriented mutual funds.
5- Quoted or unquoted zero coupon bonds.
In the case of Immovable property if it is held by the assessee for the period of 24 months then it will be considered as LTCA.
(b)Short term capital asset (STCA)
Short term capital asset is an asset that is held by the assessee for the period which isless than 12 months, is a short-term capital asset i.e. if there is any asset held by the assessee for the period less than 12 months then such asset will be considered as STCA.
Type of Capital Gain
There are 2 types of capital gain.
1- Long term capital gain (LTCG)
2- Short term capital gain (STCG)
Long term capital gain (LTCG)–
The capital gain which arises on the transfer of long term capital assets will be considered as long term capital gain (LTCG).
Short term capital gain (STCG)–
The capital gain which is arise on the transfer of short term capital assets will be considered as short term capital gain (STCG).
The Tax rate on capital gain-
Long term capital gain- 20% except for the capital gain which arises on the transfer of equity shares & equity oriented funds. The capital gain which is arising on the transfer of equity shares & equity oriented funds will be 10% if the amount of capital gain is more than 1 lakh.
Short term capital gain- The short term capital gain will be taxable according to the tax slab but if there is any short term capital gain ariseson the security on which STT is paid then such short term capital gain will be taxable @ 15%.
How to Compute Capital Gain
The amount of capital gain will calculate as follow-
Sale Consideration xxxx
Less: Cost of Acquisition /Indexed cost of Acquisition xxxx
Less: Expenses on the transfer of asset xxxx
Capital Gain (STCG/ LTCG) xxxx