Top 12 Capital Gains Tax Interview Questions You Must Prepare 19.May.2024

Stamp duty value me the value adopted or assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty.

As per section 50C, while computing capital gain arising on trfer of land or building or both, if the actual sale consideration of such land and/or building is less than the stamp duty value, then the stamp duty value will be taken as full value of consideration, i.e., as deemed selling price and capital gain will be computed accordingly.

Capital asset is defined to include:

a) Any kind of property held by an assesse, whether or not connected with business or profession of the assesse.

b) Any securities held by a FII which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992.

However, the following items are excluded from the definition of "capital asset":

Any stock-in-trade, consumable stores, or raw materials held by a person for the purpose of his business or profession. 

E.g., Motor car for a motor car dealer or gold for a jewellery merchant, are their stock-in-trade and, hence, they are not capital assets for them.

Personal effects of a person, that is to say, movable property including wearing apparels (*) and furniture held for personal use, by a person or for use by any member of his family dependent on him. 

(*) However, jewellery, archeological collections, drawings, paintings, sculptures, or any work of art are not treated as personal effects and, hence, are included in the definition of capital assets.

Agricultural Land in India, not being a land situated:

  • Within jurisdiction of municipality, notified area committee, town area committee, cantonment board and which has a population of not less than 10,000;
  • Within range of following distance measured aerially from the local limits of any municipality or cantonment board:
  • not being more than 2 KMs, if population of such area is more than 10,000 but not exceeding 1 lakh;
  • not being more than 6 KMs , if population of such area is more than 1 lakh but not exceeding 10 lakhs; or
  • not being more than 8 KMs , if population of such area is more than 10 lakhs.
  • Population is to be considered according to the figures of last preceding census of which relevant figures have been published before the first day of the year.
  • 6½% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government.
  • Special Bearer Bonds, 1991, issued by the Central Government Gold Deposit Bonds issued under Gold Deposit Scheme, 199@
  • Deposit certificates issued under the Gold Monetisation Scheme, 20@

Following points should be kept in mind :

  • The property being capital asset may or may not be connected with the business or profession of the taxpayer. E.g. Bus used to carry passenger by a person engaged in the business of passenger trport will be his  Capital asset.
  • Any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 will always be treated as capital asset, hence, such securities cannot be treated as stock-in-trade. 

For provisions in this regard check tutorials on “Tax on Short-Term Capital Gains and Tax on Long-Term Capital Gains”.

Generally, cost of acquisition of a capital asset is the cost incurred in acquiring the capital asset. It includes the purchase consideration plus any expenditure incurred exclusively for acquiring the capital asset. However, in respect of capital asset acquired before 1st April, 2001, the cost of acquisition will be higher of the actual cost of acquisition of the asset or fair market value of the asset as on 1st April, 20@This option is not available in the case of a depreciable asset.

Indexation is a process by which the cost of acquisition/improvement of a capital asset is adjusted against inflationary rise in the value of asset . The benefit of indexation is available only in case of long-term capital assets and is not available in case of short-term capital assets.

Capital gain arises if a person trfers a capital asset. section 47 excludes various tractions from the definition of 'trfer'. Thus, tractions covered under section 47 are not deemed as 'trfer' and, hence, these tractions will not give rise to any capital gain.  Trfer of capital asset by way of gift, will, etc., are few major tractions covered in section 4@Thus, if a person gifts his capital asset to any other person, then no capital gain will arise in the hands of the person making the gift (*).

If the person receiving the capital asset by way of gift, will, etc. subsequently trfers such asset, capital gain will arise in his hands. Special provisions are designed to compute capital gains in the hands of the person receiving the asset by way of gift, will, etc. In such a case, the cost of acquisition of the capital asset will be the cost of acquisition to the previous owner and the period of holding of the capital asset will be computed from the date of acquisition of the capital asset by the previous owner.

(*) As regards the taxability of gift in the hands of person receiving the gift, separate provisions are designed under section 56.

Gain arising on trfer of long-term capital asset is termed as long-term capital gain and gain arising on trfer of short-term capital asset is termed as short-term capital gain. However, there are a few exceptions to this rule, like gain on depreciable asset is always taxed as short-term capital gain.

The taxability of capital gain depends on the nature of gain, i.e. whether short-term or long-term. Hence to determine the taxability, capital gains are classified into short-term capital gain and long-term capital gain. In other words, the tax rates for long-term capital gain and short-term capital gain are different. Similarly, computation provisions are different for long-term capital gains and short-term capital gains.

Section 10 provides list of incomes which are exempt from tax Amongst these the major exemptions relating to capital gains are listed below:

Section 10(33) : Long-term or short-term capital gain arising on trfer of units of Unit Scheme, 1964 (US 64) (trferred on or after 1-4-2002).

Section 10(37) : An individual or Hindu Undivided Family (HUF) can claim exemption in respect of capital gain arising on trfer of agricultural land situated in an urban  area by way of compulsory acquisition. This exemption is available if the land was used by the taxpayer (or by his parents in the case of an individual) for agricultural purpose for a period of 2 years immediately preceding the date of its trfer .

Section 10(37A) : An individual or Hindu Undivided Family (HUF) can claim exemption in respect of capital gain arising on trfer of land or building or both under Land Pooling Scheme under the Andhra Pradesh Capital City Land Pooling Scheme (Formulation and Implementation) Rules, 20@This exemption is available if individual or HUF was owner of such land as on 02-06-20@[Inserted by the Finance Act 2017 w.e.f. 01-04-2015].

Section 10(38) : Long-term capital gain arising on trfer of equity shares or units of equity oriented mutual fund (*) or a unit of a business trust other than a unit allotted by the trust in exchange of shares of a special purpose vehicle as referred to in section 47(xvii), will be exempt from tax,

if the following conditions are satisfied:

  • The asset trferred should be equity shares of a company or units of an equity oriented mutual fund or a unit of a business trust other than a unit allotted by the trust in exchange of shares of a special purpose vehicle as referred to in section 4@
  • The traction should be liable to securities traction tax (STT) at the time of trfer.
  • Such asset should be a long-term capital asset.
  • Trfer should take place on or after October 1, 20@

Note: Any long-term capital gain arising from a traction undertaken in recognized stock exchange located in an International Financial Service Center shall be exempt from tax. Such exemption is available if such traction is undertaken in foreign current and even if no STT is paid on such traction.

Long term capital gain exemption on trfer of equity share acquired or on after 01-10-2004 shall be available only if the acquisition of share is chargeable to STT. However, the exemption shall continue in genuine cases where the STT could not have been paid like acquisition of share in IPO, FPO, bonus or right issue by a listed company, acquisition by non-resident in accordance with FDI policy, etc. [Inserted by Finance Act 2017]

(*) Equity oriented mutual fund me a mutual fund specified under section 10(23D) and 65% of its investible funds, out of total proceeds of such fund are invested in equity shares of domestic companies.

Yes, as per section 54EC you can claim tax relief by investing the long-term capital gains in the bonds issued by the National Highway Authority of India or by the Rural Electrification Corporation Limited. The investment should be made within a period of 6 months from the date of trfer of capital asset and bonds should not be redeemed before 3 years. This benefit cannot be availed in respect of short-term capital gain. Maximum amount which qualifies for investment will be Rs. 50,00,0@Thus, deduction under section 54EC cannot be claimed for more than Rs. 50,00,000. 

House sold by you is a long-term capital asset. Any gain arising on trfer of capital asset is charged to tax under the head “Capital Gains”. Income-tax Law has prescribed the method of computing capital gain arising on account of sale of capital assets. Thus, to check the taxability in your case, you have to compute capital gain by following the rules laid down in this regard, and if the result is gain, then the same will be liable to tax.

The fair market value of the asset as on 1st June, 2016 [which has been taken into account for the purpose of said declaration Scheme, 2016] shall be deemed as cost of acquisition of the asset. [This provision is applicable w.e.f. 1-4-2017]