Capital Gain and Capital Asset

Capital Gain is profit arising on transfer of capital asset.  This gain is charged to tax under the head “Capital Gains”.  Capital gain arises when certain assets like land properties, equity shares, units of mutual fund etc are sold for a gain or profit.  The treatment of capital gains is slightly different from other sources of income. 

What is a capital asset? 

Capital asset by definition covers certain assets like property (plot or a built up commercial / residential unit) or shares/mutual fund units/bonds etc.  As per Income Tax Act definition capital asset include

(a) Any kind of property held by an assessee, whether or not connected with business or
profession of the assesse.

However, the following items are excluded from the definition of “capital asset”:
(i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession ;

(ii) personal effects, that is, movable property (including wearing apparel and
furniture) held for personal use by the taxpayer or any member of his family
dependent on him, but excludes—
(a) jewellery;
(b) archaeological collections;
(c) drawings;
(d) paintings;
(e) sculptures; or
(f) any work of art.
“Jewellery" includes—
a. ornaments made of gold, silver, platinum or any other precious metal or any alloy
containing one or more of such precious metals, whether or not containing any
precious or semi-precious stones, and whether or not worked or sewn into any
wearing apparel;
b. precious or semi-precious stones, whether or not set in any furniture, utensil or
other article or worked or sewn into any wearing apparel;

Capital gain, capital asset, Short Term Capital Gains Tax, Long Term Capital Gains Tax, Agricultural land

(iii) Agricultural Land in India, subject to certain conditions.

Is agricultural land a capital asset? 

Agricultural land in India is exempted from capital asset  if   What are the conditions for an agriculture land not to be 

Agricultural Land in India not being a land situated:
a. Within jurisdiction of municipality, notified area committee, town area committee,
cantonment board and which has a population of not less than 10,000

b. Within range of following distance measured aerially from the local limits of any municipality or cantonment board: 
i. not being more than 2 KMs, if population of such area is more than 10,000 but not exceeding 1 lakh; 
ii. not being more than 6 KMs , if population of such area is more than 1 lakh but not exceeding 10 lakhs; or 
iii. not being more than 8 KMs , if population of such area is more than 10 lakhs. 

Population is to be considered according to the figures of last preceding census of which relevant figures have been published before the first day of the year.  

How is Capital Gain treated for the purpose of taxation? 

The treatment of capital gain for taxation purpose is slightly different compared to  other sources of income.  For the this purpose, it examines whether the capital gain (profit on sale) is short term or long term.

How is short term and long term capital assets classified? 

Short term capital asset is a capital asset held by an assessee for less than 36 months immediately prior to its date of transfer. However,  in select cases, an asset held for more than 12 months is treated as long term asset. The following assets held for more than 12 months are treated as long term capital assets.

1) Equity or preference shares in a company (listed in recognised stock exchange in India) 
2) Securities (like debentures, bonds, Government securities, derivatives etc.) listed in recognised stock exchange in India 
3) Unit of UTI (whether  quoted or not)
4)Units of equity oriented fund (whether  quoted or not) 
5) Zero coupon bonds (whether quoted or not)
Equity oriented mutual fund means a mutual fund specified under section 10(23D) and 65% of its investible funds out of total proceeds are invested in equity shares of a domestic company.
In the case of unlisted shares of a company, it has to be held for a minimum period of 24 months to be considered as long term asset. 

Tax on gains arising from short term asset is called Short Term Capital Gains Tax (STCG) and that on long term asset is called Long Term Capital Gains Tax (LTCG). 

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