Profits or gains arising from the transfer of a capital asset made in a previous year is taxable as capital gains under the head “Capital Gains”. The important ingredients for capital gains are, therefore, existence of a capital asset, transfer of such capital asset and profits or gains that arise from such transfer.
All transfer of capital assets attracts capital gains. Capital assets are those properties that have an enduring value and they are not consumable.
To neutralize the erosion of value of money over the years the cost index for the year of sale is factored in while calculating the cost of investment so that the impact of inflation is neutralized and only the actual gain to the seller is brought to tax.
Long term Capital gains are computed by deducting from the full value of consideration for the transfer of a capital asset the following :
- Expenditure connected exclusively with the transfer;
- The indexed cost of acquisition of the asset, and
- The indexed cost of improvement, if any, of that asset. In the case of shares, expenditure in connection with the transfer includes the stock broker’s commission but the salary of an employee is not deducted in computing capital gains though the employee may have helped in the transfer of the shares.
Cost of acquisition, in such cases includes the price-paid, cost of share transfer stamps, cost of postage for sending the shares for transfer to the transfer-agents of the company, legal expenses etc.
As per section 54 of income tax act, in case the asset transferred is a long term capital asset being a residential house, and if out of the capital gains, a new residential house is constructed within 3 years, or purchased 1 year before or 2 years after the date of transfer, then exemption on the LTCG is available on the amount of investment in the new asset to the extent of the capital gains. It may be noted that the amount of capital gains not appropriated towards purchase or construction may be deposited in the Capital Gains Account Scheme of a public sector bank before the due date of filing of Income Tax Return. This amount should subsequently be used for purchase or construction of a new house within 3 years.
Section 54F: When the asset transferred is a long term capital asset other than a residential house, and if out of the consideration, investment in purchase or construction of a residential house is made within the specified time as in sec. 54, then exemption from the capital gains will be available as:
(i) If cost of new asset is greater than the net consideration received, the entire capital gain is exempt.
(ii) Otherwise, exemption = Capital Gains x Cost of new asset/Net consideration.
It may be noted that this exemption is not available, if on the date of transfer, the assessee owns any house other than the new asset. It may be noted that the Finance Act 2000 has provided that with effect from assessment year 2001-2002, the above exemption shall not be available if assessee owns more than one residential house, other than new asset, on the date of transfer. Investment in the Capital Gains Account Scheme may be made as in Sec.54.