Capital Gains

EXEMPTIONS FROM CAPITAL GAINS TAXATION

There are number of exemptionsprovided by the Act where gains on transfer of a capital asset, though otherwise taxable, are not liable to tax if certain conditions are satisfied.

Transfer of a Residential House ( Sec 54)

Long term capital gains arising on transfer of a residential house ( i.e. building or land appurtenant thereto ) is exempt if the amount of capital gains is utilised in acquiring another residential house, either by purchase or by construction. Exemption is also available if the investment is made partly in the land and partly in the land and partly in construction of residential house. The benefit is, however, available only to individuals and Hindu undivided families.

If the investment cost of new residential house exceeds the amount of capital gains, there is not tax. Where the cost of new house is less than the amount of capital gains, the gain in excess of the cost of new house is taxed as capital gains.

Where the acquisition of new asset is by purchase, the investment is new house must be made within one year before or 2 years after the date of transfer of original asset. Construction of new house must be completed within 3 years of the date of transfer of the original asset.

If the investment in the new asset has not been made by the due date for furnishing the return of income for the relevant assessment year, the un -utilised amount of capital gains must be deposited before the due date of filing of return in a separate bank account under the Capital Gains Account Scheme ,1988. If the amount deposited is not utilised wholly or partly for the purpose of purchase or construction of the new asset within 3 years the un utilised portion shall be taxable as capital gains in the previous year in which the period of three years expires.

Transfer of Agricultural lands (Sec 54B)

This exemption is available only to individuals. The conditions for exemption of capital gains are as under :

(i) Land transferred must have been used at least for two years immediately before the transfer by the tax payer or his parents for agricultural purposes.

(ii) Tax payer must acquire within two years of the date of transfer another piece of land for use for agricultural purposes.

(iii) Asset acquired must not again be transferred within 3 years of its purchase.

Where the cost of new agricultural land exceeds the amount of capital gains on transfer of original land, there is no capital gains tax. If the cost of new asset is less than the amount of capital gains, the gain in excess of the cost of new asset is alone liable to tax. If the new asset is not acquired by the due date for filing the return of income for the relevant assessment year, the un utilised amount of capital gain must be deposited in a bank account under the Capital Gains Account Scheme, 1988. Thereafter the new agricultural land must be acquired within the time period specified by making appropriate withdrawals from the scheme. If the whole or part of the amount is not utilised in acquiring the new asset then the un utilised portion of the deposited amount shall be taxable as capital gains of the previous year in which the period of two years expires.

Where the new asset is transferred within 3 years of its purchase, the exemption is withdrawn in the sense that the cost of new asset is treated as reduced by the amount of capital gains treated as exempt at the time of original transfer.

Compulsory acquisition of Land & Buildings of Industrial Undertakings ( Section 54 D)

This exemption is available to all categories of tax payers. The conditions for exemption of capital gains are as under;

(i) the asset transferred should be land or building or any right in land or building which formed part of an industrial undertaking belonging to the tax payer;

(ii) asset in question is transferred by way of compulsory acquisition under any law;

(iii) the asset in question was being used for the purpose of the industrial undertaking for at least for two years immediately before the date of compulsory acquisition .

The exemption is available if within 3 years of the date of compulsory acquisition, the taxpayer for the purposes of shifting or re-establishing the old industrial undertaking or setting up a new industrial undertaking :-

(a) purchases any other land, building or any other right in any other land or building, or

(b) constructs any other building for the purpose of the business of the assessee.

If the investment in new asset or assets exceeds the amount of capital gain, there is no tax. Where the cost of new asset is less than the amount of capital gain, the exemption is available only for the amount of investment in the new asset.

If the new asset is not acquired by the due date for filing the return of income for the relevant assessment year, the un utilised amount of capital gain must be deposited in a bank account under the Capital Gains Account Scheme 1988. Thereafter the new asset must be acquired within the time period specified by making appropriate withdrawals from the scheme. If the whole or part of the amount is not utilised in acquiring the new asset then the un utilised portion of the deposited amount shall be taxable as capital gains of the previous year in which the period of three years expires.

If the new asset is transferred within 3 years of its acquisition, the exemption is withdrawn in the sense that the cost of acquisition of the new asset is treated reduced by the amount of capital gain treated as exempt at the time of original transfer.

Transfer of industrial undertaking due to shifting from an urban area (Sec 54 G)

The exemption is available to all categories of tax payers. The conditions for claiming exemption are as under :

(i) the transfer is effected in the course of or in consequence of shifting the undertaking from an urban area to other than an urban area;

(ii) asset transferred is machinery, plant, building, land or any right in building or land used for the business of an industrial undertaking situate in an urban area;

(iii) the assessee has within one year before or 3 years after the date of transfer purchased new machinery or plant for the business of the Industrial Undertaking in the area to which the said undertaking is shifted and has acquired building or land or has constructed building for the purposes of his business in the said area and has shifted the original asset and transferred the establishment of such undertaking to such area and has incurred expenses on such other purpose as may be specified in a scheme framed by the Central Government for the purposes of this section.

If the expenses for the aforesaid new asset and activities exceed the amount of capital gain, there is no tax. If the expenses incurred are less than the amount of capital gain, only the un utlised amount is taxed as capital gain.

In order to avail this exemption the un utilised amount of capital gain as on the date on which return of income for the relevant assessment year is due must be deposited in a bank account under the Capital Gains Accounts Scheme, 1988. Thereafter the new asset must be acquired and expenses related to the assets must be expended within the time period specified in the section by making appropriate withdrawals from the Bank account. If the amount deposited in the said scheme is not utilised wholly or partly for all or any of the purposes mentioned above within the period of three years then the amount not so utilised shall be charged as capital gains of the previous year in which the period of three years from the date of transfer of the original asset expires.

For the purposes of this section Urban Area means any such area within the limits of a municipal corporation or municipality as the Central Government may notify.

Exemption for acquiring a residential house ( Section 54F)

This exemption is available only to individuals and Hindu Undivided Families in whose case there is a capital gain arising from the transfer of any long term capital asset other than a residential house . The following conditions have to be satisfied for claiming the exemption :

(i) the tax payer should purchase a residential house within 1 year before or two years after the date of transfer of the asset in question, or should construct such a residential house within 3 years of that date ( herein after called the new asset); and

(ii) the tax payer must not own any other residential house on the date of transfer of the asset in question other than the new asset and also should not purchase within one year after the date of the transfer any residential house other than the new asset and also should not construct within a period of three years from the date of transfer any residential house other than the new asset. If conditions stated above are violated, the exemption granted is withdrawn in the sense that the capital gains exempted is treated as long term capital gains of the year in which such other residential house is purchased or constructed.

The exemption is available to the assessee if the investment in new residential house is equal to or more than the net consideration in respect of the original asset.However, if the investment in new asset falls short of the net consideration, the amount of capital gain not chargeable to tax is equal to :

Cost of new asset X Long term capital gains

Net consideration received

For the purposes of this section the 'net consideration' means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly or exclusively in connection with such transfer.

The exemption may not be allowed if the net consideration which is not utilised till the date for filing of the return of income of the relevant year is not deposited in a bank account under the Capital Gains Account Scheme,1988 before the due date of filing of return of income. If the sums deposited are not utilised wholly or partly for the purpose of new residential house within the time period specified , then the difference between the capital gains exempted earlier and the capital gains utilised shall be treated as capital gains of the previous year in which the period of three years expires. Similarly the exemption is also withdrawn if the residential house acquired is transferred within 3 years from the date of its purchase or construction. In such cases the capital gain exempted is treated as long term capital gain of the year in which residential house is transferred.

Exemption in respect of investment in specified securities (Sec 54 EA)

This exemption is available to all the assessees in respect of the long term capital assets transferred on or after 1st October, 1996.

The exemption from tax on capital gains is available in cases where the whole or part of the net consideration is invested in specified bonds or debentures or shares of a Public Company or units of a mutual fund whose income is exempt under clause 10(23D) of the Income Tax Act within six months of the date of transfer of the capital asset. The shares , debentures ( Specified securities ) etc., which will qualify for exemption are those which are notified by the Central Board of Direct Taxes.

Where the amount invested in the specified securities is more than the net consideration in respect of the original asset , the whole of the capital gains is exempt. Where the amount invested in the specified securities is less than the net consideration in respect of the original asset the exemption is calculated as under :

Capital gains X Amount invested in the specified securities

Net Consideration

If the specified securities are transferred or converted ( otherwise than by transfer ) into money within three years from the date of their acquisition , the capital gains exempted earlier shall be deemed to be capital gains of the previous year in which the securities are so transferred or converted. Taking of any loan on the security of such specified securities amounts to conversion of the securities into money on the date on which such loan/advance is taken.

'Net Consideration' for this section is defined as the full value of the consideration received or accruing as reduced by the expenditure incurred wholly and exclusively in connection with such transfer.

Exemption for investment in specified assets ( Sec 54 EB)

The Income Tax Act also provides exemption from the capital gains tax where the capital gains are invested in certain specified assets as notified by the Central Board of Direct Taxes. The exemption is available only in respect of long term capital gains where the following conditions are fulfilled :-

• the whole or any part of the capital gains is invested in specified assets.
• the specified assets are not transferred or converted ( otherwise than by transfer ) into money for a period of seven years from the date of their acquisition.
• where the amount invested in the specified assets is equal to or more than the capital gains , no capital gains is leviable.
• where the amount invested in the specified assets is less capital gains , the exemption is restricted proportionately to the amount invested with respect to the whole of the capital gains.

If the specified assets are transferred or converted into money before a period of seven years the capital gains exempted earlier shall be treated as long term capital gains of the previous year in which the specified asset is transferred or converted. It has also been provided that rebate under section 88 is not allowable in respect of the investments in specified assets.