Chapter X
Computation of capital gains
10.1 Income from transactions in all investment assets will be computed under the head "Capital gains".
10.2 Investment asset has been defined to mean any capital asset other than business capital asset.
10.3 Capital gain is the term used for the amount by which the sale price of a capital asset, net of any expense incurred in connection with the sale of the asset, exceeds the acquisition price of the capital asset. Capital gain is a return on investment or a form of compensation for foregoing current consumption opportunities. Since capital gain increases the ability to pay of the person receiving such gain, it should form part of taxable income.
10.4 Special treatment of capital gains under an income-tax regime is merited for two reasons. Firstly, taxing gains each year, as they accrue, would strain the finances of an individual who has yet to receive these gains in hand. Secondly, the capital gain realized when a capital asset is sold is usually the accumulated appreciation in the value of the asset over a number of years. The "bunching" of such appreciation in the year in which the asset is sold pushes the seller into a higher marginal tax bracket if the value of the asset is sufficiently high. If no special treatment is accorded to capital gains, a progressive income-tax would discriminate against those whose income from capital assets is in the form of capital gains as compared to those whose income is derived from interest or dividends.
10.5 The gains (losses) arising from the transfer of investment assets will be treated as capital gains (losses). These gains (losses) will be included in the total income of the financial year in which the investment asset is transferred irrespective of the year in which the consideration is actually received. However, in case of compulsory acquisition of an asset, capital gains will be taxed in the year in which the compensation is actually received.
10.6 The present distinction between short-term investment asset and long-term investment asset on the basis of the length of holding of the asset will be eliminated.
10.7 The capital gains arising from the transfer of personal effects and agricultural land beyond specified urban limits will be exempt from income-tax.
10.8 In general, the capital gains will be equal to the full consideration from the transfer of the investment asset minus the cost of acquisition, cost of improvement thereof and transfer-related incidental expenses. However, in the case of a capital asset which is transferred any time after one year from the end of the financial year in which it is acquired, the cost of acquisition and cost of improvement will be adjusted on the basis of cost inflation index to reduce the inflationary gains.
10.9 The capital gains from all investment assets will be aggregated to arrive at the total amount of current income from capital gains. This will, then, be aggregated with unabsorbed capital loss at the end of the immediate preceding financial year (unabsorbed preceding year capital loss) to arrive at the total amount of income under the head "Capital gains". If the result of the aggregation is a loss, the total amount of capital gains will be treated as "nil" and the loss will be treated as unabsorbed current capital loss at the end of the financial year.
10.11 The Securities Transaction Tax will be abolished. Therefore, all capital gains (loss) arising from the transfer of equity shares in a company or units of an equity oriented fund will form part of the computation process described in para 10.8 above.
10.12 For the purposes of capital gains, certain transactions are not treated as transfer, in order to allow deferral of tax liability. For example, the transfer of a capital asset under a gift or will is not treated as a transfer for the purpose of capital gains.
10.13 The cost of acquisition is generally with reference to the value of the asset on the base date or, if the asset is acquired after such date, the cost at which the asset is acquired. The base date will now be shifted from 1.4.1981 to 1.4.2000. As a result, all capital gains between 1.4.1981 and 31.3.2000 will not be liable to tax.
10.14 Courts have ruled that where the cost of acquisition of a capital asset is indeterminable, the machinery provisions for computing capital gains fail. Therefore, the gain from such asset cannot be subject to income-tax. A general provision has, therefore, been made to the effect that the cost of acquisition of an investment asset shall be deemed to be nil if it cannot be determined or ascertained for any reason, and capital gains will be computed accordingly. A similar provision has been provided in respect of cost of improvement.
10.15 The benefit of "rollover" will be available only to the following :—
(a) From agricultural land to one or more pieces of agricultural land.
(b) From any investment asset transferred any time after one year from the end of the financial year in which the asset is acquired by the assessee, to a residential house, if the assessee does not own any residential house, other than the new asset, on the date of transfer of the original asset.
(c) From any investment asset transferred any time after one year from the end of the financial year in which the asset is acquired by the assessee to deposit in an account maintained under the Capital Gains Savings Scheme.
10.16 All withdrawals, under whatever circumstances, from the account maintained under the Capital Gains Savings Scheme will be included in the income under the head "income from residuary sources" and accordingly subject to tax.
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