DEFINITION

When we buy any kind of property for a lower price and then subsequently sell it at a higher price, we make a gain. The gain on sale of a capital asset is called capital gain. This gain is not a regular income like salary, or house rent. It is a one-time gain; in other words the capital gain is not recurring, i.e., not occur again and again periodically. Whenever there is a loss on sale of any capital asset it will be termed as loss under the head capital gain.¹

TYPES OF CAPITAL GAIN

The profit on transfer of STCA is treated as Short Term Capital Gains (STCG) while that on LTCA is known as Long Term Capital Gains (LTCG).

While calculating tax the STCG is included in Total Income and taxed as per normal rates while LTCG is taxable at a flat rate @ 20%.

COMPUTATION OF CAPITAL GAINS

The capital gain can be computed by subtracting the cost of capital asset from its transfer price, i.e., the sale price.

EXEMPTION FROM CAPITAL GAINS

Exemption means a reduction from the taxable amount of capital gain on which tax will not be levied and paid. The exemptions are given under section 54, these exemptions are of various types but here we will discuss only one of the exemptions relating to the house property.

CAPITAL ASSETS :

Capital Asset means property of any kind, whether fixed or circulating, movable or immovable, tangible or intangible, held by the assesses, whether or not connected with his business or profession, but does not include Capital.

TRANSFER

The word transfer under income tax act is defined under section 2(47). As per section 2 (47) Transfer, in relation to a capital asset, includes sale, exchange or relinquishment of the asset or extinguishments of any right therein or the compulsory acquisition thereof under any law.

CONCEPT OF CAPITAL GAINS

The existing concept of capital gains is significantly changed in the Code. The word ‘asset’ is defined in section 314(24) to mean (a) a business asset or (b) an investment asset. ‘Business asset’ is defined in section 314(38) to mean ‘business trading asset’ or ‘business capital asset’. ‘Business trading asset’ is defined in section 314(42) to mean stock-in-trade, consumable stores or raw materials held for the purpose of the business. ‘Business capital asset’ is defined in section 314(39) to mean a tangible, intangible or any other capital asset, other than land, which is used for the purpose of business. ‘Investment asset’ is defined in section 314(141) to mean (a) any capital asset which is not a business capital asset, (b) any security held by a FII or (c) any undertaking or division of a business. Any surplus on transfer of a business capital asset is to be treated as business income. Hence, the provisions for computation of capital gains apply in respect of surplus (loss) on transfer of ‘investment asset’ only.

Provisions

The sections 196A, 196B, 196C and 196D talk of the income from capital gains.

Income in respect of units of non-residents.

196A. (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any income in respect of units of a Mutual Fund specified under clause (23D) of section 10² or of the Unit Trust of India shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of twenty per cent :

[Provided that no deduction shall be made under this section from any such income credited or paid on or after the 1st day of April, 2003.]

(2) Notwithstanding anything contained in sub-section (1), no deduction of tax shall be made from any income payable in respect of units of the Unit Trust of India to a non-resident Indian or a non-resident Hindu undivided family, where the units have been acquired from the Unit Trust of India out of the funds in a Non-resident (External) Account maintained with any bank in India or by remittance of funds in foreign currency, in accordance, in either case, with the provisions of [the Foreign Exchange Management Act, 1999 (42 of 1999)], and the rules made there under.

Explanation.—For the purposes of this section—

(a) "foreign currency" shall have the meaning assigned to it in [the Foreign Exchange Management Act, 1999 (42 of 1999)];

(b) "non-resident Indian" shall have the meaning assigned to it in clause (e) of section 115C;

(c) "Unit Trust of India" means the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963);

(d) where any income as aforesaid is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.]³

Income from units. Sec. 196B. [Where any income in respect of units referred to in section 115AB ⁴or by way of long-term capital gains arising from the transfer of such units is payable to an Offshore Fund], the person responsible for making the payment shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of ten per cent.]

Income from foreign currency bonds or shares of Indian company. 196C. Where any income by way of interest or dividends in respect of [bonds or Global Depository Receipts] referred to in section 115AC or by way of long-term capital gains arising from the transfer of such [bonds or Global Depository Receipts] is payable to a non-resident], the person responsible for making the payment shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of ten per cent.

[Provided that no such deduction shall be made in respect of any dividends referred to in section 115-O.]⁵

[Income of Foreign Institutional Investors from securities. 196D. (1) Where any income in respect of securities referred to in clause (a) of sub-section (1) of section 115AD, not being income by way of interest referred to in section 194LD⁶, is payable] to a Foreign Institutional Investor, the person responsible for making the payment shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of twenty per cent :

[Provided that no such deduction shall be made in respect of any dividends referred to in section 115-O.]

(2) No deduction of tax shall be made from any income, by way of capital gains arising from the transfer of securities referred to in section 115AD, payable to a Foreign Institutional Investor.

The existing distinction between long-term and short-term capital asset is now proposed to be modified. It an investment asset is held for more than one year after the end of the F.Y. in which it is acquired, it will be considered as a long-term capital asset.

The word ‘Asset’ is defined to mean (a) a business asset or (b) an investment asset. Again, a business asset is further classified as business trading asset and business capital asset. So far as business trading asset is concerned, it will be allowed as revenue expenditure in computing business income. As regards business capital asset, only depreciation will be allowed. Thus, only investment asset will form part of the computation of capital gains.

The provisions in relation to income from capital gains needs to be revised and amendments are very necessary for better and proper running. It is also to be noted that a law needs to change with the society or nit ends up being vague.

The provisions once revised will lead to perfect functioning.

REFERENCES:

1. P. N. Shah, Taxation of Capital Gains under Direct Taxes Code, Aug 2011

2. http://law.incometaxindia.gov.in/DIT/HtmlFileProcess.aspx?FooterPath=D:%5CWebSites%5CDITTaxmann%5CAct2010%5CDirectTaxLaws%5CITACT%5CHTMLFiles%5C2013&DFile=ftn44_section196a.htm&tar=middle

3. http://law.incometaxindia.gov.in/DIT/HtmlFileProcess.aspx?FooterPath=D:%5CWebSites%5CDITTaxmann%5CAct2010%5CDirectTaxLaws%5CITACT%5CHTMLFiles%5C2013&DFile=ftn45_section196a.htm&tar=middle

4. http://law.incometaxindia.gov.in/DIT/HtmlFileProcess.aspx?FooterPath=D:%5CWebSites%5CDITTaxmann%5CAct2010%5CDirectTaxLaws%5CITACT%5CHTMLFiles%5C2013&DFile=ftn54_section196c.htm&tar=middle

5. http://law.incometaxindia.gov.in/DIT/HtmlFileProcess.aspx?FooterPath=D:%5CWebSites%5CDITTaxmann%5CAct2010%5CDirectTaxLaws%5CITACT%5CHTMLFiles%5C2013&DFile=ftn52_section196c.htm&tar=middle

6. 6http://law.incometaxindia.gov.in/DIT/HtmlFileProcess.aspx?FooterPath=D:%5CWebSites%5CDITTaxmann%5CAct2010%5CDirectTaxLaws%5CITACT%5CHTMLFiles%5C2013&DFile=ftn44_section196a.htm&tar=middle

Received on 01.03.2014 Modified on 12.03.2014

Int. J. Rev. & Res. Social Sci. 2(1): Jan. – Mar. 2014; Page 10-11