Mukesh Patel.in
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THE LONG & SHORT OF CAPITAL GAINS!

Understanding long term & short term capital gains is important since the same determines its tax treatment !

            The profit or gain arising on the transfer of a capital asset is known as ‘capital gains.’ It is important to ascertain the type of capital gain, as the computation of taxable gains is dependent on the same. Long term capital gains are entitled to concessional tax treatment in comparison to short term capital gains.

            There are two types of capital assets, which give rise to the two respective types of capital gains. Capital assets are classified in the following two categories on the basis of the period for which they have been held by the taxpayer prior to transfer.

            A ‘short term capital asset’ means a capital asset held by a taxpayer for a period of less than 36 months, immediately preceding the date of its transfer. However, in the case of shares of a company, quoted securities and units of the Unit Trust of India or an approved Mutual Fund, the period of 36 months is to be substituted by 12 months.

            A ‘long term capital asset’ means a capital asset which is not a short-term capital asset. In other words, it is an asset held by a taxpayer for a period of more than 36 months. Shares of a company, quoted securities and units of the Unit Trust of India or an approved Mutual Fund are also treated as long term capital assets, if held for more than 12 months. (more…)

REAPING GAINS FROM LOSSES!

Even in the gloom and doom of the capital market, you can make a boom by planning some tax saving strategies!

      As a logical corollary to Section 10(38) of the Income-tax Act exempting long term capital gains (LTCG) arising from transfer of securities upon implementation of STT, long term capital losses (LTCL) arising from such security transactions are required to be ignored.  Short term capital losses (STCL) are however, eligible for set-off against STCG and the net STCG amount is taxed at the flat rate of 15.45%.

SET OFF & CARRY FORWARD OF LOSSES

      Let us take a quick overview of the provisions relating to set off and carry forward of capital losses under the provisions of Sections 70, 71 and 74 of the Income-tax Act:

  • LTCL can be set off only against LTCG of the year and not against any other income.

  • STCL can be set off against STCG or even LTCG of the year, but not against any other income.

  • LTCL or STCL, which cannot be fully set off during the year, can be carried forward for set off against gain of any subsequent year in the aforesaid manner, for a maximum of upto 8 years.

      Taxpayers are aware of the fact that LTCL arising from any ‘off-market transaction’ is not eligible for exemption u/s. 10(38), since no STT is payable in respect of the same.  On the same analogy, if the LTCL arises to the taxpayer from any ‘off-market transaction’ (where no STT has been paid), such loss cannot be ignored and the same would be entitled to be set off against any other taxable LTCL of the year.

      Keeping in view the above provisions, let us consider some smart strategies that can be designed by a taxpayer for maximizing his tax savings: (more…)

HOUSING GAIN EXEMPTION!

Tribunals have held that capital gains from multiple houses and of multiple years can also enjoy complete tax holiday!

Section 54 and 54F of the Income-tax Act provide for an exemption in respect of long term capital gains (LTCG), where subject to fulfillment of prescribed conditions, a taxpayer makes investment either in the purchase or construction of a residential house.

   RELIEF FOR MULTIPLE HOUSES

In the case of ‘Rajesh Keshav Pillai vs. ITO’ (2011) 44 SOT 617 (Mum.), the taxpayer sold two separate flats and earned long-term capital gains. The taxpayer bought two different flats and claimed that the long-term capital gain was exempt under Section 54. The first appellate authority following the judgement of the Special Bench in ‘ITO vs. Sushila M. Jhaveri’ (2007) 107 ITD 327 (SB) held that the benefit of Section 54 was available in respect of only one flat and not two flats.

On appeal, the Tribunal held that though Section 54 refers to capital gains arising from ‘transfer of a residential house’, it does not provide that the exemption is available only in relation to one house. If the taxpayer has sold multiple houses, then the exemption under Section 54 is available in respect of all houses, if the other conditions are fulfilled. If more than one house is sold and more than one house is bought, a corresponding exemption under Section 54 is available. However, the exemption is not available on an aggregate basis, but has to be computed considering each sale and the corresponding purchase, adopting a combination beneficial to the taxpayer.         (more…)

EQUITY VERSUS TAXATION !

Though equity and taxation are often held as strangers,

Courts have ensured that they do not always remain so!

             Courts have been liberal in their judicial interpretations, while dealing with issues relating to exemption provisions, holding that “a beneficial section has to be construed liberally, having due regard to the object which it intends to serve.”

            In a recent matter that came up before the Punjab & Haryana High Court in the case of ‘CIT vs. Jagtar Singh Chawla’ [2013] 33 taxmann.com 38, the taxpayer had sold his property on 20.06.2006 for a consideration of Rs. 2.24 crores. The said amount was not invested in the capital gains account scheme by the due date of filing the return under Section 139(1) (i.e., 31.07.2007) and was instead used to purchase a new residential house on 31.3.2008. The taxpayer claimed exemption under Section 54F which was denied by the Assessing Officer & Commissioner (Appeals) on the ground that under Section 54F(4), the amount of the consideration which is not appropriated for purchase of the new asset before the date of furnishing the return of income had to be deposited in the “capital gains account scheme” before the due date for filing the return of income under Section 139(1). 

(more…)

PARK YOUR GAINS IN A HOUSE!

Courts have liberally interpreted exemption provisions via investment of capital gains in a residential house!

 Under Section 54 of the Income-tax Act, an exemption is available to a taxpayer who is an individual or a Hindu Undivided Family, in respect of the transfer of a residential house (whether self-occupied or let out) held for more than 36 months, where the capital gains arising from the transfer are invested either for the purchase of another residential house (whether old or new) within a period of one year before or two years after the date of transfer or the construction of another residential house within a period of three years after the date of transfer.

If the whole of capital gains are invested in the cost of the house so purchased or constructed, the entire capital gains will be exempt from tax. If, however, the amount of capital gains is greater than the cost of the house so purchased or constructed, the difference between the two will be chargeable to tax. Exemption under Section 54 can be availed even if the taxpayer owns more than one house on the date of transfer.

It is important to note that as per the provisions of Section 54, if the new house property is transferred within a period of three years of its purchase or construction, the amount of capital gains arising therefrom, together with the amount of capital gains exempted earlier will be chargeable to tax in the year of transfer as Short Term Capital Gains. (more…)

GAINS TAX CONCESSIONS FOR AGRICULTURAL LAND

Capital gains arising on sale of a rural agricultural land & on compulsory acquisition of an urban land are fully tax exempt!

      Section 2(14) of the Income-tax Act, which defines ‘capital asset,’ excludes from within its purview an agricultural land situated in India at a place having a population of less than 10,000 as per the last preceding census or at an area not comprised within any municipal limits or within a notified distance from such municipal limits. The Government notification in this regard has specified distances ranging between 2 to 8 kms for various towns situated in different states keeping in view the extent of urban development in the respective areas.

      If the agricultural land sold by a taxpayer does not qualify as a ‘capital asset’ on the basis of the above test, then it does not give rise to any taxable capital gains. Any agricultural land situated in any ‘urban area’ on the basis of the above guidelines being required to be treated as a ‘capital asset,’ any gains arising from the transfer of the same would be liable to tax as capital gains. (more…)

SMART BOND FOR EXEMPTION!

Enjoy exemption from long term capital gains by planning investment in specified bonds!

               Section 54EC of the Income-tax Act provides for exemption of taxable long term capital gains (LTCG) arising from the transfer of an asset, to the extent the amount of such gains are invested in notified bonds within a period of six months from the date of transfer.  Notified for this purpose are the three year bonds issued by National Highways Authority of India (NHAI) and Rural Electrification Corporation (REC).

               Until FY 2006-07, there was no monetary ceiling prescribed in regard to investment in such capital gains bonds and hence a taxpayer could virtually invest his entire taxable gain, even running into crores of rupees, in these bonds and avail the benefit of 100% exemption under Section 54EC.

               However, the Finance Act, 2007 amended Section 54EC so as to provide that this exemption would be available subject to the condition that the investment in the notified capital gains bonds made on or after 1st day of April, 2007 does not exceed Rs.50,00,000 during any financial year. (more…)

INDEX YOUR GAIN AND REDUCE YOUR TAX PAIN!

Availing the Benefit of Indexation, you can Inherit Today,

Sell Tomorrow & Still Keep Away your Tax Sorrow!

 

If your grandfather had acquired a plot of land for Rs.10,00,000 in late 1981, which you received by way of inheritance on his death in 2010 and you were planning to sell the same in early 2011 for a consideration of Rs.71,00,000, what would be the income-tax you would be required to pay on your capital gains?

 Difficult to believe, but ‘zero tax’ is the correct answer. (more…)

NO TAX ON SALE OF SILVER UTENSILS?

As Silver Prices have Doubled from Rs.22,500 to Rs.45,000 in past 21 months, it may be worth reaping this Tax Free Bonanza!

SALE OF ‘PERSONAL EFFECTS’ NOT TAXABLE

As per Section 2(14) of the Income-tax Act, ‘personal effects,’ excluding jewellery, are not treated as capital assets and hence any gain arising on their transfer cannot be made liable to capital gains tax.

‘Personal effects’ would include movable property such as wearing apparel, furniture, household articles, utensils, vehicles, etc. held for personal use. Jewellery which has been excluded from ‘personal effects’ would include ornaments made of gold, silver, platinum or any other precious metal, precious or semi-precious stones and any articles set in any such stones.

A motor car or any other conveyance held for the personal use of a taxpayer is also a personal effect and any profit or gain arising from the same cannot be charged to tax as capital gains. In this regard, one can rely on the decision of the Bombay High Court in the case of ‘CIT vs. Sitadevi N. Poddar’ 148 ITR 506(Bom.). (more…)

SHARE INVESTMENT NOT BUSINESS!

Mumbai High Court Stresses On Need For

Uniformity & Consistency In Approach!

“Activity of a taxpayer accepted as investment in shares in earlier years cannot be treated as business in subsequent years, if facts are the same.” This landmark ruling of the Mumbai High Court delivered on 6th January, 2010 will make several investors heave a sigh of relief, in the backdrop of the recent onslaught of the Income-tax Department in treating capital gains from securities liable to tax as business income from trading in shares. While long term capital gains from securities are exempt and short term gains attract a concessional tax, business income gets taxed at normal rates. (more…)

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