Any gains or profits that you earn from the sale or transfer of any capital assets is referred to as capital gains. According to Section 45 of the Income Tax Act, assessees are liable to pay capital gains tax on such profits. The IT Department will deem these profits as income in the year in which the sale or transfer of capital assets took place.
This article is a complete guide to Section 45 of the Income Tax Act – how capital gains from transfer or sale of capital assets are taxed, types of transfer, how to calculate the holding period and various sub-sections of Section 45. Read on!
Section 2(14) of the Income Tax Act defines capital assets for the purpose of taxation. Here are some capital assets:
However, capital assets exclude the following:
Capital assets not held for more than 36 months by the owner comes under short term capital assets. However, some assets may also qualify as short term if their holding period is 12 months. These include:
All unlisted shares held by individuals and immovable property will come under short term capital assets if their holding period is not over 24 months.
Long term capital assets are those having a holding period of more than 12, 24, or 36 months immediately preceding the transfer date. The holding period varies for different asset classes.
According to Section 45 of the Income Tax Act India short term capital gains will be taxed as below:
Section 45 under Income Tax Act provides for the taxation of long term capital assets. Accordingly, taxation occurs as per the following:
Here are ways of calculating the holding period of various capital assets:
The holding period of such assets will include the time for which the individual was a member of that stock exchange immediately before corporatisation.
On doing an analysis of section 45 of the Income Tax Act, one comes across the following types of transfer of capital assets:
Whenever an assessee receives a payment or some asset from any insurance firm, then gains or profits from such receipts also come under the head of capital gains. Tax authorities will deem them as income in the year in which it was received.
Gain from such conversion will attract taxation as it will be treated as income in the preceding year in which such transfer or sale of assets took place.
When an individual had a beneficial interest in securities during the previous year, then profits from the transfer of such beneficial interest by the Depository shall be taxable as income of the owner in the year in which the transfer took place.
Whenever an entity transfers capital assets to AOP or a firm, in that case, gains arising from such transfers are chargeable to income tax of the preceding year in which such transfers happened.
All transfers of assets in case of liquidation of the entity also come under the purview of capital gains taxation. Gains from such transfers are taxable to the income of the company in the previous year in which such transfers took place.
IT Department levies capital gains tax In case of compensation for compulsory acquisition by state or Central Governments. Profits from these are taxable to the income of the beneficiary in the year of receiving the compensation.
Gains from transfers of capital assets attract capital gains tax under Section 45 of the Income Tax Act. Individuals must look for deductions allowed in Section 54 and its subsections to reduce their tax liability.
Ans: The formula for the computation of short term capital gains tax is given below:
STCG = Full value consideration – (cost of transfer + cost of improvement + cost of acquisition)
Ans: The formula for computing LTCG is:
Long term capital gains tax = Full consideration value received – (cost of transfer + indexed cost of improvement + indexed acquisition cost)
Ans: Section 54 of the Income Tax Act allows certain Long Term Capital Gains exemptions. Gains arising from the sale of residential property are available as exemptions given the fulfilment of certain conditions.
Ans: Profits arising from industrial buildings and property acquired by Government under specific laws are also eligible for exemptions. However, taxpayers must have used the property for at least 2 years immediately before such acquisition. Moreover, taxpayers must reinvest the proceeds to acquire another immovable property.
Ans: This section is applicable for individuals selling or transferring a part of a capital asset from a large block of assets on which they availed depreciation. In such a case, any gain from this sale or transfer comes under head capital gains. Individuals can compute capital gains when either a part of the asset is sold or the entire block is transferred.
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