CS Executive · Tax Laws and Practice

Capital Gains: formula sheet

Full chapter guide

Key formulas

Capital gains test: Capital gain arises only if: (1) the asset is a capital asset AND (2) there is a transfer AND (3) the transfer is not an exempt one; If any one of the three fails, you do not compute capital gains.
Meaning of capital asset: Capital asset = property of any kind held by the assessee (business-linked or not) − excluded items; Excluded items include stock-in-trade, consumables, raw materials, personal effects, rural agricultural land and specified gold and bearer bonds.
Personal effects exclusion: Movable property for personal use of assessee or dependants is excluded, except jewellery, archaeological collections, drawings, paintings, sculptures and works of art; Immovable property is never a personal effect. Jewellery is always a capital asset.
Rural agricultural land test: Agricultural land is urban (and so a capital asset) if it lies within the limits of a municipality of the minimum population set by the Act, or within the aerial distance from its boundary that the Act sets for the population band of that municipality; The permitted distance rises with the population band. Learn the exact population bands and distances from the section defining capital asset. Land outside them is rural agricultural land, and is not a capital asset.
Inclusive meaning of transfer: Transfer = sale + exchange + relinquishment + extinguishment of rights + compulsory acquisition + deemed transfers; Deemed transfers include conversion into stock-in-trade and part performance of a contract on immovable property.
Conversion into stock-in-trade: Gain is taxed in the year the stock-in-trade is sold or transferred; full value = fair market value on the date of conversion; The business profit on the later sale is taxed separately as business income.
Relief on shifting of industrial undertaking (sections 87 and 88): If cost of new asset ≥ capital gain: no gain is charged under section 67. If cost of new asset < capital gain: the difference is charged under section 67; New asset means cost or expenses on any of these, within one year before or three years after the transfer: purchase of machinery or plant, acquisition of land or building or construction of building, shifting the original asset and transferring the establishment, or expenses under a notified scheme. Section 87 is for shifting to an area other than an urban area. Section 88 is for shifting to a Special Economic Zone. Unused gain must be deposited as the section requires.
Period of holding: Period of holding = Date of transfer − Date of acquisition (counted in months); Count full months. For gifted or inherited assets, the previous owner's holding period is added, as explained below.
Short-term capital asset: Held for ≤ cut-off period → short-term; 'Not more than' includes the exact cut-off. An asset held for exactly 24 months (or 12 months) is short-term.
Long-term capital asset: Held for > cut-off period → long-term; A long-term capital asset is one that is not a short-term capital asset.
Cut-off: 12 months: Listed securities (other than units), units of equity oriented fund, units of business trust, zero coupon bonds → 12 months; Securities must be listed on a recognised stock exchange in India for this rule.
Cut-off: 24 months: All other capital assets (land, building, unlisted shares, jewellery and so on) → 24 months; Treat 24 months as the default and 12 months as the exception.
Gift, will or inheritance: Holding period = Previous owner's period + Your own period; The cost is also taken as the previous owner's cost, so the two rules go together.
Bonus and rights shares: Period runs from the date of allotment of the bonus or rights shares; Do not count the period of the original shares. Renounced rights entitlements are a separate case.
Section 198 rate: Tax = 12.5% × (LTCG − ₹1,25,000), where STT conditions are met; Applies to long-term gains on listed equity shares, units of equity oriented funds and units of business trusts. For resident individuals and HUFs, sub-section (3) adjusts for any unused basic exemption limit.
Slump sale: deemed cost: Cost of acquisition = Cost of improvement = Net worth of the undertaking; Section 77(3)(a). Net worth = aggregate value of total assets less liabilities as per books. Revaluation changes are ignored.
Slump sale: deemed consideration: Full value of consideration = Fair market value of the capital assets on the date of transfer (as prescribed); Section 77(3)(b). Gain is long-term if held more than 36 months, otherwise short-term (Section 77(1) and (2)).
Aggregate value of total assets: Depreciable assets: WDV of block; self-generated goodwill: nil; assets with full deduction allowed or allowable under section 46: nil; other assets: book value; Section 77(5)(b). Goodwill bought from a previous owner is not nil; it falls under other assets at book value.
Block of assets: gain when block continues: STCG = Sale consideration − (Transfer expenses + Opening WDV of block + Cost of assets acquired in the year), if positive; Section 74(2). Gain is deemed short-term.
Block of assets: when block ceases to exist: Cost of block = Opening WDV + Actual cost of assets acquired in the year; STCG = Consideration − that cost (and transfer expenses); Section 74(3). The income is short-term capital gain.
Compulsory acquisition (industrial undertaking land or building): Gain exceeds cost of new asset: excess taxed. Gain ≤ cost of new asset: nil gain taxed; Section 84. Land or building must have been used for the undertaking's business in the two years before transfer. New asset must be bought or built within three years. If sold within three years, cost of new asset is nil (excess case) or reduced by the gain (other case).
NRI foreign exchange asset: proportionate exemption: Exempt gain = Capital gain × (Cost of new asset ÷ Net consideration); Section 215(1)(ii). Applies if cost of new asset is less than net consideration. Investment within six months. If cost ≥ net consideration, whole gain is exempt. Applies to long-term gains.
Net consideration (section 86): Net consideration = full value of consideration − expenditure incurred wholly and exclusively on the transfer; This is the amount compared with the cost of the new asset.
Section 86 exemption where net consideration > cost of new asset: Exempt gain = Capital gain × Cost of new asset ÷ Net consideration; Only this proportion is not charged under section 67. The balance is taxable. Cost of new asset is capped at ₹10 crore.
Section 86 exemption where net consideration ≤ cost of new asset: Exempt gain = whole capital gain; No capital gains are charged under section 67.
Section 86 time limits: Purchase: 1 year before to 2 years after transfer. Construction: within 3 years after transfer; One residential house in India. Unused amount to be deposited before the due date of filing the return under section 263.
Section 86 limits of ₹10 crore: Cost of new asset above ₹10 crore is ignored; net consideration above ₹10 crore is ignored for the deposit rule (sub-section (2)); Learn both limits separately. They apply to different sub-sections.
Section 86 claw-back on unutilised deposit: Taxable = X − Y, where X = gain not charged earlier; Y = gain that would not have been charged if cost of new asset were the amount actually utilised; Charged as income of the tax year in which three years from the date of transfer expire.
Section 86 claw-back on sale of new asset: If new asset is transferred within 3 years of purchase or construction, the gain not charged earlier is charged as long-term capital gains of the year of that transfer; Also applies where you buy or build another income-yielding house under sub-section (6).
Section 83 (agricultural land): If gain > cost of new asset: excess charged; cost of new asset = nil for transfer within 3 years. If gain ≤ cost: no gain charged; cost reduced by the gain; New land bought within 2 years. Unused amount deposited; taxed in the year two years from transfer expire.
Section 88 (shifting to SEZ): If cost and expenses on new asset < gain: difference charged. If ≥ gain: nil charged; Period: 1 year before to 3 years after transfer. Cost of new asset for transfer within 3 years is nil, or reduced by the gain charged.
Exempt gain when investment is less than the gain: Gain charged under section 67 = Long-term capital gain − Investment in bonds; Applies where the gain exceeds the investment. The part invested is not charged.
Full exemption: If investment ≥ capital gain, whole gain is not charged; Investment above the gain gives no extra benefit. The maximum counted investment is ₹50 lakh.
Time limit for investment: Invest within 6 months after the date of transfer; Counted from the date of transfer of the land or building, not from the end of the tax year.
Investment ceiling: Investment ≤ ₹50,00,000 in a tax year, or in the year of transfer and the next tax year together; The cap covers gains from one or more original assets.
Lock-in and withdrawal: Transfer or conversion into money within 5 years of acquisition: exempt gain is deemed long-term capital gain of that tax year; A loan or advance on the security of the bond is treated as conversion into money on the date of the loan.
Eligible bond: Bond redeemable after 5 years, issued on or after 1 April 2018, by NHAI or REC, or any other notified bond; Check the issuer, the issue date and the redemption term.

Quick revision

Capital gains are charged only when a capital asset is transferred; section 67 is the charging provision referred to in the exemption sections.
Section 85: only long-term gains on land or building, invested within six months of transfer in specified bonds.
Section 85 investment cap is fifty lakh rupees, either in any tax year or across the year of transfer and the next tax year.
Section 85: if the bond is transferred or converted into money within five years, the exempted gain becomes long-term capital gain of that year.
Section 85(4): a loan or advance against the bond is treated as converting it into money on that date.
Section 86: individual or HUF, long-term asset that is not a residential house; buy one house within one year before or two years after transfer, or construct within three years.
Section 86 limit: cost of new house and net consideration above ten crore rupees are not taken into account as set out in sub-sections (8) and (9).
Section 86(7): if the new house is transferred within three years of purchase or construction, the exempted gain is charged.
Section 215: non-resident Indian, long-term gain on a foreign exchange asset, reinvestment of net consideration within six months, three-year lock-in.
Section 77: slump sale gain is long-term, but short-term if the undertaking is held for thirty-six months or less.
Section 77: an accountant's report on net worth must be furnished; revaluation of assets is ignored when computing net worth.
Section 74: the excess of consideration over expenses, opening WDV and additions in the year is short-term capital gain; if the block ceases to exist, the whole result is short-term.

Common mistakes

Treating all personal belongings as excluded from capital assets. Fix: Always add: jewellery, archaeological collections, drawings, paintings, sculptures and works of art are capital assets even if for personal use. A personal house is also a capital asset.
Saying all agricultural land is exempt from capital gains. Fix: Only rural agricultural land is excluded. Land that falls within the population and distance limits is a capital asset and its transfer gives capital gains.
Treating an asset held for exactly 24 months (or 12 months) as long-term. Fix: Remember the wording 'not more than' gives short-term. Long-term needs the period to be more than the cut-off, so the transfer must fall after the anniversary date.
Using 12 months for every asset, or 24 months for every asset. Fix: Ask first whether the asset is a listed security, an equity oriented fund unit or a business trust unit. If yes, use 12 months. Otherwise use 24 months.
Using the actual sale price of individual assets in a slump sale, or adding revaluation to net worth. Fix: Use net worth as cost, ignore revaluation, and use fair market value as the full value of consideration as the section deems.
Treating self-generated goodwill at book value in net worth. Fix: Self-generated goodwill is nil. Only goodwill bought from a previous owner goes at book value.
Dividing by the sale price instead of net consideration in the section 86 proportion. Fix: Compute net consideration first: full value minus expenses wholly and exclusively on transfer. Use that in the denominator.
Claiming section 86 when the original asset is a residential house or the assessee is a company. Fix: State at the start that section 86 needs an individual or HUF and a long-term asset that is not a residential house.
Applying section 85 to gains from shares, gold or other assets. Fix: Always state first that the original asset must be land or building, or both, with a long-term gain.
Investing the full sale price and expecting exemption on all of it. Fix: Under section 85 the investment is made from the capital gain. Exemption cannot exceed the gain.

Exam tips

Write the two-gate structure (asset, then transfer) in the first two lines. Examiners reward a clear approach.
Learn the list of exclusions and the jewellery exception word for word. This is the most tested part of the definition of capital asset.
In case studies on agricultural land, state population, distance and the limit, and then conclude.
For conversion into stock-in-trade, always state when the gain is taxed and which value is used.
Keep the capital gains charge under section 67 and the shifting relief in sections 87 and 88 in mind, and cite them only where the facts need them.
Write the cut-off period and the reason (listed or not) as your first line. It earns marks even if a later date calculation slips.
Always write both dates and the exact period. Examiners reward visible working. Do not just say 'more than 24 months'.
Scan every question for gift, inheritance, bonus shares, rights shares or a transfer on amalgamation. These words are signals that the start date changes.