CAPITAL GAINS

In the last article we discussed about deduction of tax on capital gains on sale of property by NRI. Now we will discuss what the term Capital Gains means. This is the most effective tool of wealth creation, which we will discuss in details in our next articles. Today we will discuss about capital gains only, its types. Wealth creation through capital gains re-investments will be discussed in later articles. So lets start our journey of capital gains.

Capital gains in a layman’s language means ” a profit from sale of property or an investment”. Difference between the sale and purchase price of an assets is called capital gains(capital loss, if the difference is negative).

Section 45(1) of the Income Tax Act, 1961 deals with the provisions/definition of capital gains, which is reproduced below for better understanding: –

Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, be chargeable to income-tax under the head “Capital gains”, and shall be deemed to be the income of the previous year in which the transfer took place.

So for understanding the term capital gains first we have to understand what the word Capital Assets means and what the term transfer is being considered in Income Tax Act, 1961.

The term Capital Assets has been defined in Section 2(14) which covers almost everything and this can be verified from the words reproduced here-in-below: –

“capital asset” means—

(a)  property of any kind held by an assessee, whether or not connected with his business or profession;

(b)  any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 (15 of 1992),

BUT it excludes followings: –

1. any stock-in-trade other than the securities referred to in sub-clause (b), consumable stores or raw materials held for the purposes of his business or profession ;
2. 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, but excludes—
   1. jewellery;
   2. archaeological collections;
   3. drawings;
   4. paintings;
   5. sculptures; or
   6. any work of art.
3. Agricultural land situation outside the specified limit
4. Gold Bonds and Gold Deposit Bonds specified under various schemes.

If we go in details then we find out that personal effects are not considered capital assets under the Income Tax Act, 1961 and Rural Agricultural Land has also been excluded from the definition of Capital Assets.

In the definition of Capital Gains sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H have been referred. These are the sections which provides exemption to the assessee on investment of capital gains in various investment options defined in these above mentioned sections.

In simple language creation of wealth through Capital Gains is possible through these sections only and we will discuss these in details in our coming articles.

The term “Transfer” referred here-in-above has been defined in section 2(47) of the Income Tax Act, 1961 which means

“transfer”, in relation to a capital asset, includes,—

(i)  the sale, exchange or relinquishment of the asset ; or

(ii)  the extinguishment of any rights therein ; or

(iii) the compulsory acquisition thereof under any law ; or

(iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment ; or

iva) the maturity or redemption of a zero coupon bond; or

(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or

(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.

Explanation 1.—For the purposes of sub-clauses (v) and (vi), “immovable property” shall have the same meaning as in clause (d) of section 269UA.

Explanation 2.—For the removal of doubts, it is hereby clarified that “transfer” includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India;