Understanding the concept of Capital Gains

Selling property is a decision that has to be taken with extreme gumption similar to that of buying property. It should be understood that profits accruing from property selling, though attractive, are liable to be taxed. In this context, the prudence of a seller with regards to understanding capital gains and measures to save taxes becomes significant. Otherwise, he may end up shelling a considerable amount as taxes on the sale of his property.

Definition of Capital Assets

According to the Income Tax Act, Capital Assets are defined as any property that is held by an assesse that may or may not be related to a business or profession. This may include any type of movable or immovable property such as real estate, jewellery, equity shares, bonds, paintings, art works etc.

Property excluded from Capital assets

However, the Act excludes some property from the purview of capital assets. Hence, profits accruing out of such property is not taxable as capital gains. These include:

·  Assets possessed as stock-in-trade for business purposes. Accordingly, if a builder sells an apartment, the income thus gained is not taxable as capital gains but as business income. This is because the asset is held by him as stock and not as an investment.

·  Personal movable property like vehicles, jewellery, art works, paintings, sculptors, archaeological collections etc.

·  Agricultural land in India beyond the municipality limits.

Income generated from capital gains accrues due to transfer of a capital asset held for investment purposes or as capital asset as such.

“Transfer” of assets

According to Section 2 (47) of the Income Tax Act, the definition of “transfer” includes the sale of the asset, its exchange, forgoing the asset or relinquishing the right in the asset. Hence, capital gains will accrue in all cases where the asset held has been parted with irrespective of the manner in which it was done. It will also accrue when the capital asset has been converted into stock-in-trade.

Such a scenario arises when a person ploughs in the capital gained from investments into a business activity. For instance, a person who invests in many shares, decides to sell the profit earned from such investments so as to start a regular business. Thereby, any activity that involves the disposal of an asset comes under the purview of a ‘transfer’ and hence the accrual of capital gains. It also covers exchange of assets whereby a person get a new property in exchange for an old one.

Asset acquisition cost

The cost of acquiring an asset would involve the price paid to the seller to acquire the asset. It would also include all expenses involved in taking possession of the property and transferring it to the buyer’s name. This involves expenses like brokerage, loan processing fee, stamp duty etc. Besides, any other expenses that are directly involved in the purchase of the property would also be included in the cost of the property. However, cost of renovation or restoration would come under cost of improvement that will be included as a cost for calculating capital gains.