1. Preconditions for charge u/s. 45

Income under the head “Capital Gains” can be charged only if the following three conditions are satisfied

1. There must be a “capital asset” [for definition of “capital asset” refer S. 2(14)] :—
   capital asset” means––
   1. property of any kind held by an assessee, whether or not connected with his business or profession;
   2. 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, but does not include––
      1. Any stock-in-trade [other than the securities referred to in sub-clause (b)
      2. Personal effects of the assessee;
      3. Agricultural land in a rural area;
      4. 6½% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Bonds, 1980 issued by the Central Government;
      5. Special Bearer Bonds, 1991 issued by the Central Government;
      6. Gold Deposit Bonds issued under Gold Deposit Scheme 1999.

      Explanation 1 – "property" includes any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever.
      Explanation 2 – (a) the expression “Foreign Institutional Investor” shall have the meaning assigned to it in clause (a) of the Explanation to section 115AD;
      (b) the expression “securities” shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956

2. There must be a “transfer” of such capital asset [for meaning of “transfer”, refer Ss. 2(47), 47 & 46(1)]; and
3. There must arise either profits or gains or loss out of such transfer.

2. Year of Chargeability

Capital Gains are generally charged to tax in the year in which “transfer” takes place (For exception to this general rule, refer column (4) of Table 3)

3. Mode of Computation

3.1 Income under the head Capital gains is to be computed as follows:

3.2 Capital gains u/s. 48 are computed as follows:

* Section 51 amended by Finance (No. 2) Bill, 2014 w.e.f. 1-4-2015 whereby where any sum of money, received as an advance or otherwise in the course of negotiations for transfer of a capital asset, has been included in the total income of the assessee for any previous year in accordance with the provisions of clause (ix) of sub-section (2) of section 56, then, such sum shall not be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition.

Exceptions to S. 48:

1. In case of a non-resident, Capital Gains on transfer of shares in or debentures of an Indian company are to be computed firstly by converting cost of acquisition, full value of consideration and expenses incurred in connection with transfer into originally utilised foreign currency and reconverting the capital gains so computed into Indian rupees.
   Rule 115A prescribes the rates of conversion and reconversion for the purpose of calculation of capital gains in the above case. The rates of conversion and reconversion are as follows:

2. The benefit of indexation of cost will not be available for computation of Capital Gains on transfer of Bonds/Deb.
3. While calculating long-term capital gains (other than those covered under (a) and (b) above) cost of acquisition and cost of improvement are required to be indexed at prescribed indices (refer Table 2)

3.3 Capital gains u/s. 50 are computed as follows:

If the resultant figure is negative, the same is chargeable as deemed short-term capital gains u/s. 50.

If the resultant figure is positive and the entire block ceases to exist as such (for the reason that all the assets in that block are transferred during the year) the resultant figure indicates deemed short-term capital loss (refer CBDT Circular No. 469 dated 23-9-1986 — reported in 162 ITR (Stat) 21, 30).

If the resultant figure is positive and the block continues to exist (For the reason that at least one asset in the block continues to be owned by the assessee) then there will be no gains or losses and the assessee will be entitled to claim depreciation on the resultant figure.

3.4 Capital Gains u/s. 50B

Profit arising on slump sale of one or more undertakings would be chargeable to tax as Long-Term Capital Gain in the year of transfer if such undertakings have been owned and held by the assessee for at least 36 months before the date of transfer or as Short-Term Capital Gain if held for a shorter period.

The networth (as defined) of the undertakings would be regarded as the cost of acquisition and improvement. No indexation would be allowed in respect of such cost.

3.5 Indexation

In case the capital asset is a long-term capital asset, the cost of acquisition is to be increased by cost inflation index. The prescribed cost inflation index is given in column (2) of Table 2 below. Column (4) gives the multiplying factor in case of capital asset sold in financial year 2014-15.

For example, if cost of acquisition of an asset acquired in F.Y. 1994-95 is ₹ 50,000, its indexed cost of acquisition in F.Y. 2014-15 would be ₹ 1,97,683 (i.e., 50,000 x 3.953668)

4. Exempt Capital Gains

Refer sections 10(33), 10(37), 10(38), sections 54 to 54GB and section 115F

Long-term gain from sale of listed units of Business trust will be exempt u/s 10(38). Finance Bill 2015 has deleted, the erstwhile provision which didn't allow exemption in respect of any income arising from transfer of units of a business trust which were acquired in consideration of a transfer referred to in clause (xvii) of section 47.

5. Rate of Tax on Capital Gains

Refer “Rates of Tax” on page 9.69

TABLE 1

Proviso section 2(42A) states that capital gain arising on unlisted shares of a company and units of a Mutual Fund specified under clause (23D) of section 10 transferred during the period beginning on the 1st day of April, 2014 and ending on the 10th day of July, 2014 will be considered as short-term if the said shares/units were held for not more than twelve months.