The Article Discusses about Tax Treatment of Long Term Capital Gain arising from Transfer of Capial Assets under Income Tax Act, 1961. Articles  discusses Meaning of Capital Assets, What Constitutes a Capital and what is not a capital Asset, How to Apply Indexation Provisions, Period for Computation of Long Term Capital Asset, Tax on long-term capital gain @ 10% in certain special cases, Adjustment of LTCG against the basic exemption limit and Deductions under sections 80C to 80U and LTCG.

Introduction

Gain arising on transfer of capital asset is charged to tax under the head “Capital Gains”. Income from capital gains is classified as “Short Term Capital Gains” and “Long Term Capital Gains”. In this part you can gain knowledge about the provisions relating to tax on Long Term Capital Gains.

Meaning of Capital Gains

Profits or gains arising from transfer of a capital asset are called “Capital Gains” and are charged to tax under the head “Capital Gains”.

Meaning of Capital Asset

Capital asset is defined to include:

1. Any kind of property held by an assessee, whether or not connected with business or profession of the assesse.
2. Any securities held by a FII which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992.

However, the following items are excluded from the definition of “capital asset”:

1. any stock-in-trade (other than securities referred to in (b) above), consumable stores or raw materials held for the purposes of his business or profession ;
2. 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:

1. 1. jewellery;
   2. archaeological collections;
   3. drawings;
   4. paintings;
   5. sculptures; or
   6. any work of art. “Jewellery” includes—

1. 1. 1. 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;
      2. precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel;

iii.Agricultural Land in India, not being a land situated:

1. a. Within jurisdiction of municipality, notified area committee, town area committee, cantonment board and which has a population of not less than 10,000;
2. b. Within range of following distance measured aerially from the local limits of any municipality or cantonment board:

1. 1. not being more than 2 KMs, if population of such area is more than 10,000 but not exceeding 1 lakh;
   2. not being more than 6 KMs , if population of such area is more than 1 lakh but not exceeding 10 lakhs; or
   3. 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.
   4. 61/2 per cent Gold Bonds,1977 or 7 per cent Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government;
   5. Special Bearer Bonds, 1991;
   6. Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under the Gold Monetisation Scheme, 2016.

Following points should be kept in mind:

• The property being capital asset may or may not be connected with the business or profession of the taxpayer. E.g. Bus used to carry passenger by a person engaged in the business of passenger transport will be his capital asset.
• 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 will always be treated as capital asset, hence, such securities cannot be treated as stock-in-trade.

Illustration

Mr. Kumar purchased a residential house in January, 2017 for Rs. 84,00,000. He sold the house in April, 2020 for Rs. 90,00,000. In this case residential house is a capital asset of Mr. Kumar and, hence, the gain of Rs. 6,00,000 arising on account of sale of residential house will be charged to tax under the head “Capital Gains”.

Illustration

Mr. Kapoor is a property dealer. He purchased a flat for resale. The flat was purchased in January, 2019 for Rs. 84,00,000 and sold in April, 2020 for Rs. 90,00,000. In this case Mr. Kapoor is dealing in properties in his normal business. Hence, flat purchased by him would form part of stock-in-trade of the business. . In other words, for Mr. Kapoor flat is not a capital asset and, hence, gain of Rs. 6,00,000 arising on account of sale of flat will be charged to tax as business income and not as capital gain.

Meaning of long-term capital asset and short-term capital asset

For the purpose of taxation, capital assets are classified into two categories as given below:

Illustration

Mr. Kumar is a salaried employee. In the month of April, 2012 he purchased a piece of land and sold the same in December, 2020. In this case, land is a capital asset for Mr. Kumar. He purchased land in April, 2011 and sold in December, 2020 i.e. after holding it for a period of more than 24 months. Hence, land will be treated as long-term capital asset.

Illustration

Mr. Raj is a salaried employee. In the month of April, 2019, he purchased a piece of land and sold the same in December, 2020. In this case land is a capital asset for Mr. Raj. He purchased land in April, 2019 and sold it in December, 2020, i.e., after holding it for a period of less than 24 months. Hence, land will be treated as short-term capital asset.

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