Foundation — What a capital asset is, what it is not, and how long you must hold it

Think of it like this

Key terms in this chapter

23 July 2024

The date from which the Finance Act 2024 amendments to capital gains apply. Transfers on or after this date use the new holding periods, the new rates and the withdrawal of indexation; earlier transfers follow the erstwhile provisions.

Bonus shares

Shares issued free to existing shareholders. The period of holding runs from the date of allotment of the bonus shares, and the cost of acquisition is NIL if they were issued on or after 1 April 2001.

Capital asset (Section 2(14))

Property of any kind held by an assessee, whether or not connected with his business or profession, plus securities held by an FII or a Category I or II AIF, and any ULIP to which the section 10(10D) exemption does not apply.

Capital Gains Account Scheme (CAGS)

A deposit account in which unutilised capital gains may be parked before the return filing date, preserving the exemption while the new asset is bought or built. It applies to sections 54, 54B, 54D, 54F, 54G, 54GA and 54GB, but not to 54EC, 54EE or 115F.

Cost Inflation Index (CII)

An index notified by the CBDT every year to nullify the effect of inflation when computing capital gains. The base year is 2001-02.

Cost of acquisition

The value for which the asset was acquired by the assessee, including all expenses incurred in acquiring it, subject to many special rules for bonus shares, rights, inherited assets and conversions.

Cost of improvement

Capital expenditure incurred on or after 1 April 2001 in making additions or alterations to a capital asset, by the assessee or the previous owner. It is NIL for goodwill and certain rights, and is not allowed for MLDs and SMFs.

Depreciable asset

An asset on which depreciation has been claimed. It is always treated as a short-term capital asset irrespective of the period of holding.

Electronic Gold Receipt (EGR)

An electronic receipt issued on the deposit of underlying physical gold under SEBI regulations, covered by the definition of securities. Conversion of gold into EGR and back is not a transfer, and both the holding period and the cost carry over.

Exchange

Under section 118 of the Transfer of Property Act 1882, where two persons mutually transfer the ownership of one thing for another, neither thing nor both things being money only. Both sides are transfers for capital gains.

Expenditure in connection with transfer

Expenditure incurred wholly and exclusively in connection with the transfer — brokerage, commission, stamp duty, registration fee, travelling and legal expenses. STT and CTT are never deductible.

Extinguishment of rights

The ending of a person's rights in a capital asset, which is a transfer. The destruction or irretrievable loss of the asset itself is not an extinguishment of rights and gives rise to no capital loss.

FIFO method

First-in-first-out. For securities held in demat form, the securities that first entered the account are deemed to be the first sold out, fixing both the period of holding and the cost of acquisition.

Fixed Maturity Plan rollover

Extension of the duration of a closed-ended FMP, clarified by the CBDT not to amount to a transfer as the scheme remains the same. The workbook notes this is no longer relevant because section 50AA makes such gains always short term.

Full value of consideration

Not defined in the Act; the amount received or receivable by the owner for the transfer, in cash or in kind. Where received in kind, the fair market value is taken.

Indexed cost of acquisition

Cost of acquisition multiplied by the CII of the year of transfer and divided by the CII of the year the asset was first held or the CII of 2001-02, whichever is later.

Long-term capital asset

An asset held for more than the prescribed period. The tax incidence is lower on long-term capital gains than on short-term gains.

Market Linked Debenture (MLD)

A debenture whose return is linked to a market index. Gains on transfer, redemption or maturity are always short-term capital gains, and no cost of improvement is allowed.

Parallel calculation (immovable property)

Where land or building acquired before 23 July 2024 is transferred after that date, the tax is computed both at 12.5 per cent without indexation and at 20 per cent with indexation, and the lower tax applies. Indexation cannot create an allowable loss.

Personal effects

Movable property held for personal use of the assessee or a dependent family member — wearing apparel, furniture, car, scooter, TV, refrigerator and the like. Not capital assets, so gains on their sale are not taxed.

Relinquishment

Not defined in the Act. It occurs when the owner withdraws himself from the property and abandons his rights to it — for example a retiring partner giving up his rights in firm property.

Renouncement of right

Selling a rights entitlement instead of subscribing. It is a transfer of a capital asset, the cost of acquisition is NIL, and the holding period runs only from the date of the company's offer, so it is always short term.

Rule 115A

The rule for converting foreign currency amounts in computing capital gains on shares or debentures of an Indian company acquired by a non-resident in foreign currency. Inputs use the average of SBI TT buying and selling rates; the resulting gain is re-converted at the TT buying rate on the date of transfer.

Rural agricultural land

Agricultural land situated in a rural area in India, which is not a capital asset. Agricultural land in an urban area, within prescribed limits from municipalities, or in a foreign country remains a capital asset.

Section 111A

The provision taxing short-term capital gains at 20 per cent on the transfer of equity shares, units of equity oriented mutual funds, equity oriented high premium ULIPs or business trust units where the transaction is chargeable to STT.

Section 112A grandfathering

For listed equity, equity oriented fund units or business trust units acquired on or before 31 January 2018 and sold after 1 April 2018, the cost is the higher of actual cost and the lower of the 31 January 2018 fair market value and the sale consideration.

Section 115F

Exemption for a non-resident Indian who reinvests the proceeds of foreign-currency-purchased Indian shares, debentures, deposits or Government securities into similar assets within six months, computed proportionately.

Section 50AA

The provision under which gains on an unlisted bond or unlisted debenture transferred, redeemed or maturing after 23 July 2024 are taxable as short-term capital gains irrespective of the period of holding.

Section 54

Exemption for an individual or HUF who reinvests the capital gain from a long-term residential house in one residential house in India — two houses if the gain does not exceed Rs 2 crore — within one year before or two years after transfer, or three years for construction, capped at Rs 10 crore.

Section 54B

Exemption for an individual or HUF who reinvests the capital gain from agricultural land used for agriculture for two years into new agricultural land within two years of transfer.

Section 54D

Exemption for any assessee whose industrial land or building is compulsorily acquired, on reinvestment of the capital gain in land or building to shift or set up a new industrial undertaking within three years.

Section 54EC

Exemption for any assessee who invests the capital gain from land or building in bonds of NHAI or REC within six months of transfer, limited to Rs 50,00,000. The Capital Gains Account Scheme does not apply.

Section 54F

Exemption for an individual or HUF who reinvests the NET CONSIDERATION from a long-term asset other than a residential house into one residential house in India. The exemption is proportionate — eligible investment times capital gain divided by net sale consideration — with the eligible investment capped at Rs 10 crore.

Section 54GB

Exemption for an individual or HUF who reinvests the net consideration from a long-term residential property into equity shares of an eligible company or eligible start-up, which must itself buy new assets within one year of the subscription.

Section 54H

Where a transfer under sections 54, 54B, 54D, 54EC or 54F occurs by compulsory acquisition and the consideration is received later, the reinvestment timelines run from the date of receipt of the consideration.

Securities lending

Lending securities through an approved intermediary under the SEBI scheme, the borrower returning equivalent securities of the same type or class. The CBDT has clarified this is not a transfer even if the same distinctive numbers do not come back.

Short-term capital asset

An asset held for not more than the prescribed period before transfer — generally 24 months, or 12 months for listed securities and certain units, with some assets always short term regardless of holding.

Sovereign Gold Bond redemption

Redemption of an SGB issued by the RBI, by an individual, is not regarded as a transfer. A sale on the secondary market, or a redemption by a non-individual, does not get this treatment.

Specified Mutual Fund (SMF)

A scheme investing 65 per cent or more in debt or money market instruments directly or indirectly, whose gains are always short term; and, for units bought on or after 1 April 2023 and sold before 1 April 2025, schemes investing 35 per cent or less directly in listed domestic equity.

Stock-in-trade

Goods, consumable stores or raw material held for the purpose of business or profession. Excluded from the definition of capital asset, because profits on their sale are business income.

Telegraphic Transfer buying rate

The rate at which a bank buys foreign currency for immediate transfer. Used to convert the computed capital gain into rupees, and for other foreign capital gains as it stood on the last day of the month preceding the month of transfer.

The seven carve-outs

Jewellery, precious or semi-precious stones, archaeological collections, drawings, paintings, sculptures and any work of art. These remain capital assets even if meant for personal use, and gains on their sale are taxable.

Transfer (Section 2(47))

The passing of property or rights in property from one person to another. It includes sale, exchange, relinquishment, extinguishment of rights, and the maturity or redemption of zero coupon bonds.

Vault Manager

Any person who stores and safe-keeps gold deposited by a depositor for the purpose of trading in Electronic Gold Receipts and providing incidental services.