Tax capital gain mcom project of 31 oages

VIVEK COLLEGE OF COMMERCE

VIVEK COLLEGE OF COMMERCE

CHAPTER: 1INTRODUCTION

1.1 MEANING:Acapital gainis aprofitthat results from a disposition of acapital asset, such asstock,bondorreal estate, where the amount realized on the disposition exceeds the purchase price. The gain is the difference between a higher selling price and a lower purchase price. Conversely, acapital lossarises if the proceeds from the sale of a capital asset are less than the purchase price.Capital gains may refer to "investment income" that arises in relation to real assets, such asproperty; financial assets, such asshares/stocks orbonds; andintangible assets. An increase in the value of a capital asset that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. A capital gain may be short term or long term and must be claimed on income taxes. A capital loss is incurred when there is a decrease in the capital asset value compared to an asset's purchase price.Profit that results when the price of a security held by a mutual fund rises above its purchase price and the security is sold. If the security continues to be held, the gain is unrealized. A capital loss would occur when the opposite takes place. Long-term capital gains are usually taxed at a lower rate than regular income. This is done to encourage entrepreneurship and investment in the economy. Tax conscious mutual fund investors should determine a mutual fund's unrealized accumulated capital gains, which are expressed as a percentage of its net assets, before investing in a fund with a significant unrealized capital gain component. This circumstance is referred to as a fund's capital gains exposure. When distributed by a fund, capital gains are a taxable obligation for the fund's investors.

1.2 DEFINITION:Capital gains are the profits that an investor realizes when he or she sells the capital asset for a price that is higher than the purchase price. Capital gains taxes are only triggered when an asset is realized, not while it is held by an investor. An investor can own shares that appreciate every year, but the investor does not incur a capital gains tax on the shares until they are sold.The amount by which an asset's selling price exceeds its initial purchase price. A realized capital gain is an investment that has been sold at a profit. An unrealized capital gain is an investment that hasn't been sold yet but would result in a profit if sold. Capital gain is often used to mean realized capital gain. For most investments sold at a profit, including mutual funds, bonds, options, collectibles, homes, and businesses, the IRS is owed money called capital gains tax. A capital gain is the difference between what you paid for an investment and what received when you sold that investment. Investments include mutual funds, bonds, stocks, options, precious metals, real estate, and collectibles. If we sold an investment for more than what you paid for it, then we have a gain. If we sold an investment for less than what we paid for it, then we have aloss. Our capital gains and losses are reported onIRS Form 1040 Schedule D, with the result carried to Form 1040.Capital gains are calculated as follows: Selling price Minus Selling fees & commissions Minus Buying fees & commissions Minus Purchase price Profit (or Loss if negative)

1.3 TYPES OF CAPITAL GAINS:Capital gains can be classified into long-term (LTCG) and short-term (STCG) depending on the period for which the capital asset has been held by the transferor before the date of such transfer. It is important to remember the category in which the capital gain falls because it will eventually impact the rate at which it is taxed and the tax benefits which can be enjoyed on re-investment of such gains/consideration.(1) Short Term Capital Gains:A capital gain realized by the sale or exchange of a capital asset that has been held for exactly one year or less. Short-term gains are taxed at the taxpayer's top marginal tax rate.A short-term gain can only be reduced by a short-term loss. A taxable capital loss is limited to $3,000 for single taxpayers and $1,500 for married taxpayers filing separately.Short-term gains and losses are netted against each other. For example, assume a taxpayer purchased and sold two different securities during the tax year: Security A and Security B. If he/she earned a gain on Security A of $5,000 and a loss on Security B of $3,000, then the net short-term gain is $2,000.(2) Long Term Capital Gains:Long term Capital gains, if the assets like shares and securities, are held by the assessee for a period exceeding 12 months or 36 months in the case of other assets. Units of UTI and specified mutual funds will now be eligible for treatment as long term capital assets if they are held for a period exceeding 12 months.Long term Capital gains are computed by deducting from the full value of consideration for the transfer of a capital asset the following:- Expenditure connected exclusively with the transfer;- The indexed cost of acquisition of the asset, and- The indexed cost of improvement, if any, of that asset. In the case of shares, expenditure in connection with the transfer includes the stock brokers commission but the salary of an employee is not deducted in computing capital gains though the employee may have helped in the transfer of the shares.Cost of acquisition, in such cases includes the price-paid, cost of share transfer stamps, cost of postage for sending the shares for transfer to the transfer-agents of the company, legal expenses etc.Indexed cost of acquisition means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee.A gain or loss from a qualifying investment owned for longer than 12 months and then sold. The amount of an asset sale that counts toward a capital gain or loss is the difference between the sale value and the purchase value. Long-term capital gains are assigned a lower tax rate than short-term capital gains in the United States.1.4 CAPITAL GAINS HOLDING PERIODS: Capital gains are taxed differently depending on whether your investment is considered long-term or short-term. How long you have held an investment is called theholding period.The holding period is determined from the day after you bought your investment until the date you sell your investment. The IRS states, "To determine how long you held the investment property, begin counting on the date after the day you acquired the property. The day you disposed of the property is part of your holding period." The short-term holding period isone year or less. Short-term capital gains are taxed at ordinary, which range from 10% to 39.6% for the year 2013.

The long-term holding period ismore than one year. Long-term capital gains are taxed at long-term capital gains rates, which is usually less than ordinary tax rates. The long-term capitalis zero percent, 15%, or 20%, depending on your marginal tax bracket.In addition, high income taxpayers may have a 3.8% unearned income Medicare contribution tax applied to their capital gains and other net investment income. Thus the highest tax rate that could apply to capital gains income is 39.6+3.8= 43.4% on short term gains taxed at ordinary rates or 23.8% (20% + 3.8%) on long-term gains.Tax planning for investors focuses on deferring the sale of profitable investments until you qualify for the discounted long-term capital gains tax rate.

CHAPTER: 2 SHORT TERM CAPITAL GAINS

2.1 MEANING:

A short term capital gain is a capital gain which holds 36 months or less than that. Land is the example of short term capital gains. A capital gain realized by the sale or exchange of a capital asset that has been held for exactly one year or less. Short-term gains are taxed at the taxpayer's top marginal tax rate. A short-term gain can only be reduced by a short-term loss. A taxable capital loss is limited to $3,000 for single taxpayers and $1,500 for married taxpayers filing separately.

Short-term gains and losses are netted against each other. For example, assume a taxpayer purchased and sold two different securities during the tax year: Security A and Security B. If he/she earned a gain on Security A of $5,000 and a loss on Security B of $3,000, then the net short-term gain is $2,000.

Short-term gains are taxed at the taxpayer's top marginal tax rate. A short-term gain can only be reduced by a short-term loss. A taxable capital loss is limited to $3,000 for single taxpayers and $1,500 for married taxpayers filing separately.

Short term capital asset mans a capital asset held by an assessee for not more than 36 months immediately prior to its date of transfer. Gains from transfer of short term capital assets give rise to short term capital gains.

2.2 COMPUTATION OF SHORT TERM CAPITAL GAIN

Gains arising at the time of sale of Short Term Capital Asset shall be computed in the following manner:- Full Value of Consideration xxx

(Less) Expenditure incurred wholly and exclusively in connection with such Transfer/Sale xxx

(Less) Cost of Acquisition xxx

(Less) Cost of Improvement xxx

Gross Short Term Capital Gain xxx

(Less)Exemption(if any) available u/s 54B/54D/54G/54GA xxx

Net Short Term Capital Gainxxx

Tax as per the Income Tax Slab Rates shall be payable on the Short Term Capital Gain computed above

CHAPTER 3LONG TERM CAPITAL GAINS

3.1 MEANING:

An asset other than a short-term capital asset is regarded as a long term capital asset. Thus, shares/ securities/ units held for more than 12 months or any other asset held for more than 36 months are long term assets. Gains from transfer of long term capital assets giver rise to long term capital gains.

Long term Capital gains, if the assets like shares and securities, are held by the assessee for a period exceeding 12 months or 36 months in the case of other assets. Units of UTI and specified mutual funds will now be eligible for treatment as long term capital assets if they are held for a period exceeding 12 months.

Long term Capital gains are computed by deducting from the full value of consideration for the transfer of a capital asset the following: Expenditure connected exclusively with the transfer; The indexed cost of acquisition of the asset, and The indexed cost of improvement, if any, of that asset. In the case of shares, expenditure in connection with the transfer includes the stock brokers commission but the salary of an employee is not deducted in computing capital gains though the employee may have helped in the transfer of the shares.

Cost of acquisition, in such cases includes the price-paid, cost of share transfer stamps, cost of postage for sending the shares for transfer to the transfer-agents of the company, legal expenses etc.Indexed cost of acquisition means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee.

3.2 EXEMPTIONS ON LONG-TERM CAPITAL GAINS;

Under Section 54 Any Long Term Capital Gain, arising to an Individual orHUF, from theSale of a Residential Property(whether Self-Occupied or onRent) shall be exempt to the extent suchcapital gains is investedin the1. Purchase of another Residential Propertywithin 1 year before or 2 years after the due date of transfer of the Property sold and/or2. Construction of Residential house Property within a period of3 yearsfrom the date of acquisitionProvided that the newResidential House Property purchased or constructed is not transferred within a period of 3 yearsfrom the date of acquisition. If thenewproperty is soldwithin a period of 3 yearsfrom the date of its acquisition, then, for the purpose of computing the capital gains on this transfer, the cost of acquisition of this house property shall be reduced by the amount of capital gain exempt undersection 54earlier. The capital gain arising from this transfer will always be a short term capital gain.

Capital Gains shall be exempt to the extent it is invested in the purchase and/or construction of another house i.e.1. If the entire amount is equal to or less than the cost of the new house, then the entire capital gain shall be exempt2. If the amount of Capital Gain is greater than the cost of the new house, then the cost of the new house shall be allowed as an exemption

3.3 COMPUTATION OF LONG TERM CAPITAL GAIN:Gains at the time of sale of Long Term Capital Asset shall be computed in the following manner:- Full Value of Consideration xxx

(Less) Expenditure incurred wholly and exclusively in connection with such Transfer/Sale xxx

(Less) Indexed Cost of Acquisition xxx

(Less) Indexed Cost of Improvement xxx

Gross LTCG xxx

(Less)Exemption(if any) available u/s 54/54B/54D/54EC/54ED/54F/54G xxx

Net LTCGxxx

CHAPTER 4COST OF ACQUISITION

4.1 MEANING:

Cost of acquisition of an asset is the value for which the asset was acquired by the assessee. Expenses of capital nature for completing or acquiring the title to the property are part of the cost of acquisition.Following are treated as cost of acquisition: Interest on moneys borrowed to purchase asset is part of actual cost of asset. Litigation expenses incurred for compelling the company to register the shares in the name of the assessee would be of capital nature, forming a part of the cost of acquisition of the shares.Following are not treated as cost of acquisition: Ground rent cannot be said to be expenditure incurred by the assessee for the acquisition of the capital asset. Estate duty paid in respect of inherited property can neither be treated as a part of the cost of acquisition of property nor as cost of improvement.

Cost of Acquisition is theprice which the assessee has paid, or the amount which the assessee has incurred, for acquiring the Property /Asset. The Expenses incurred at the time of completing the title are a part of the cost of acquisition.

In cases where the Capital Asset became the property of the assessee in any of the manners mentioned below, the cost of acquisition shall be deemed to be thecost for which the previous owner of the property acquired it:-1. On the Distribution of Assets/ Total Partition ofHUF2. Under a Gift or Will3. By Succession, Inheritance or Devolution4. On Distribution of Assets on Liquidation of a Company

Where the cost for which the previous owner of the capital asset acquired the property cannot be ascertained, the cost of acquisition to the previous owner shall be the fair market value of the asset on the date on which the asset became the property of the previous owner. Themoney borrowed for acquiring the capital asset will also form a part of the cost of Asset.

4.2 DEEMED COST OF ACQUISITIONS: In some cases, the assessee might not have acquired the property himself but moght have become owner of the property under certain circumstances.1. Special rules apply when a capital asset becomes the property of the assessee- On distribution of assets on the total or partial partition of a Hindu Undivided family; Under gift or will; By succession, inheritance or devolution; On distribution of assets on the dissolutions of a firm, body of individuals or other associations of persons where such dissolution had taken place before 1-4-1987; On distribution of assets on the liquidation of a company; Under a transfer to a revocable or an irrevocable trust; Being a wholly-owned Indian Subsidiary company under a transfer from its holding company; Being an Indian holding company under a transfer from this wholly-owned subsidiary company; In a scheme of amalgamation, by the amalgamated company from the amalgamating company which comes under section 47(vi)/(via); Being a Hindu undivided family where one of its members has converted his self-acquired property into joint family property after 31-21-1969;2. In the above cases, cost to the previous owner would be taken as cost of acquisition of the assessee.3. Where the previous owner has also acquired the property in the above manner, the previous owner of the property means the last previous owner who acquired the property by means other than those discussed above. For example, if X acquires a house property in 1990 from his father under a will, the cost of property to the father will be taken as the cost of acquisition of X at the time of sale of property by X. If however, the father of X has acquired the property from a partnership firm on its dissolution in 1985, cost to the partnership firm will be taken as the cost of acquisition of X at the time of its sale by X.4. Cost of any improvement of the asset incurred by the previous owner, or the assessee, will be added to such cost.5. In case the cost to the previous owner cannot be ascertained, the fair market value of the asset as on the date it became the property of the previous owner is taken to be the cost of acquisition to the previous owner.6. On the sales of shares received on conversion of debentures of a company into shares of that company, the cost of acquisition of such shares is to be taken as that part of the cost of debentures which has been appropriated towards the shares.7. Where the capital gain arises from the transfer of specified security on sweat equity shares, u/s 17(2) (vi) the cost of acquisition of such security on shares shall be the fair market value which has been taken into account for the purpose of that clause.8. The cost of acquisition of the original shares held by the shareholder in the demerged company are deemed to have been reduced by the amount as so arrived under section.49 (2C)9. Where the capital gain arises from the transfer of property, subjected to tax u/s 56(2) (vii) or 56(2)(viia), the cost of acquisition of such property or shares shall be the fair market value under that clause.

CHAPTER 5COST OF IMPROVEMENT

5.1 MEANING:

All Capital Expenditures incurred in makingany additions or alterations to the Capital Assetby the Assessee after it became his property or alterations to the capital asset by the assessee after it became his property shall be deductible as the Cost of Improvement. If the Asset was transferred to the assessee under the cases specified immediately above, the capital expenditure incurred by the previous owner shall also be treated as cost of improvement.

However, the Cost of Improvement does not include any capital asset which is deductible in computing the chargeable under head- Income from House Property, Profits or Gains of Business or Profession, or Income from Other Sources. Only the Capital Expenses are considered as a cost of Improvement and routine expenses on Repairs and Maintenance do not form part of cost of improvement.

For the purpose of Computation of Long Term Capital Gain, Indexation using the Cost Inflation Index shall be done to the Cost of Acquisition & Cost of Improvement and the resultant figure shall be the Indexed Cost of Acquisition & Indexed Cost of Improvement for the purpose of computation of LTCGIndexed Cost = Actual Cost *Cost Inflation Index of the Year of Sale Cost Inflation Index of the Year of PurchaseThe Assessee also has the option of not opting for Indexation and the Long Term Capital Gain Tax Rate in this case shall be10%

5.2 DEFINITION:Cost of improvement is defined as follows:1. Cost of improvement in relation to goodwill of a business or a right to manufacture, produce or process any article or thing is taken to be nil.2. Cost of improvement in relation to any other capital asset means all expenses of capital nature incurred in making any addition/alteration to the capital asset by the assessee. 5.3 EXCLUDES:Cost of improvement does not, however, include the following:1. Any expenditure which is deductible in computing the income chargeable under any other heads; and2.expenditue incurred prior to April 1,1981( where the capital asset became the property of the assessee or the previous owner before Apirl1,1981 irrespective of whether the assessee opts for treating the fair market value as on 1-4-1981 as his cost of acquisition. 5.4 EXAMPLES:1. Cost of improvement includes any expenditure incurred to protect, cure or complete the title to the capital asset. In other words, any expenditure incurred to increase the value of the capital asset is treated as cost of improvement. In the case of investment in shares, expenses incurred in getting title to the shares secured, perfected or completed indicate the cost of improvement of the asset.2. Expenditure incurred in legal proceedings in a civil court for enhancement of compensation in the case of compulsorily acquisition is taken as cost of improvement.

CHAPTER 6CAPITAL GAINS ACCOUNT SCHEME

6.1 INTRODUCTION:

Although as per Section 54, the assessee is given 2 years to purchase the house property or 3 years for the construction of the house property, but the capital gains on the transfer of the original house property is taxable in the year in which it was sold. TheIncome Tax Returnof that year is required to be submitted in the relevant assessment year on or before the specified due date for filing the Income Tax Return. Hence, the assessee will have to take a decision for the purchase/construction of the house property till the date of furnishing of the income tax return otherwise; the capital gain would become taxable. To avoid the above situation, theIncome Tax Actspecifies an alternative in the form of deposit under the Capital Gains Account Scheme.

TheAmount of Capital Gain which is not utilized by the Assesseefor the purchase or construction of the new house before the date of furnishing of the Income Tax Return should be deposited by him under the Capital Gains Account Scheme, before thedue date of furnishing the return. The proof of such a deposit shall be attached with the Income Tax Return. In this case, the amount already utilized by the assessee for the purchase/construction of the new house shall be eligible for exemption

In case, the assessee deposits the amount in the Capital Gains Account Scheme but does not utilize the amount deposited for the purchase or construction of a residential house within the specified period, the amount not so utilized shall be charged as Capital Gains of the year in which the period of 3 years from the date of sale of the Original Asset and it will belong term capital gain of thatfinancial year.As per theIncome Tax Act, the taxpayer is allowed some time (2/3 years) to invest the capital gains in specified instruments. However, in many cases the due date for filing income tax returns for the year in which the capital gains arises is before the expiry of the specified period.

To avoid such issues, the income tax act prescribes that the taxpayer should deposit the amount of capital gains in the capital gains account scheme on or before the due date of filing of income tax returns which can be easily withdrawn at the time of investment in the specified instrument.

6.2 FEATURES & TAX BENEFITS1. Only Individuals andHUFare allowed to open capital gains account.

2. The amount deposited in the Capital gains account cannot be offered as a Security for any Loan/ Guarantee.

3. The Interest on such account is not tax-free and TDS is also liable to be deducted from such account as per the provisions of the income tax act. 4. The profit that arises on thesale of any propertyis referred to as Capital Gains and is chargeable to tax.

5. Government also provides for various schemes for saving tax on such capital gains under Section 54, 54B, 54D, 54F etc.

6. However, as per the provisions of these sections, the amount is required to be reinvested in specified investment types before the specified period.

7. However, if the due date of filing income tax returns falls before the expiry of the specified period, the amount of capital gains is required to be invested temporarily in theCapital Gains Account Schemewhich can be easily withdrawn at the time of investment in the specified instrument.6.3 OPENING OF CAPITAL GAINS ACCOUNTThe Capital Gains Account Scheme was introduced in the year 1988, and as per the Capital Gains Account Scheme the amount of capital gains to be claimed as an exemption should be either be re-invested or deposited in the Capital Gains Account before the due date of filing of returns.The Govt has notified 28 banks which can open the Capital Gains Account on behalf of the Govt. All branches of these 28 banks except Rural Branches are authorised to open the capital gains account.6.4 CATEGORIES OF CAPITAL GAIN ACCOUNT SCHEME:1. Capital Gains Account Type A Savings Account:

This is like a normal savings account and the interest payable on this account is the same as the interest paid on normal savings account by that bank. In case of Type A Account, the deposit office shall issue a pass book to the depositor wherein all amounts of deposits, withdrawals, together with the interest due, shall be entered over the signature of the authorised officer of the Bank.

2. Capital Gains Account -Type B Term Deposit Account:

This is like a fixed deposit wherein the amount is deposited for a fixed period of time. The interest rate on this account is equivalent to the interest paid on fixed deposits by the bank. As Type B accounts are same as Fixed Deposits Account, any withdrawal from this type of account attracts a penalty for pre-maturity withdrawal. In case of Type B Account, the deposit office shall issue a deposit receipt wherein the principal amount of deposit, date of deposit, date of maturity of deposit shall be entered over the signature of the authorised officer of the Bank.

Capital Gains Account Type A is advised when the amount of capital gains is to be used for construction of a house as the amount would be required to be withdrawn in various stages.Capital Gains Account Type B Term Deposit Account is advised when the amount of capital gains is to be utilize for purchase of a house.Capital Gains Account Type B is also of 2 types 1. Cumulative:Under the cumulative option the interest is re-invested and the total amount is paid at the time of the completion of the term period or at the time of withdrawal (whichever is earlier).2. Non-Cumulative:Under the non-cumulative option, the interest is paid at regular intervals and is not reinvested.6.5 INTEREST ON CAPITAL GAINS ACCOUNT SCHEME:1. The Interest at such rates as may be specified by theReserve Bank of India (RBI)from time to time shall be allowed for each calendar month on the lowest balance between the close of the 10th day and the end of the month and shall be credit to the account at the end of each half year.

2. In case of cumulative deposit in Account B, the amount of interest accrued will be deemed to have been reinvested and in case of non-cumulative deposit in Account B, the amount of interest due will become due and payable at quarterly intervals.

3. In case of conversion of the account or premature withdrawal from the account or closure of the account, the interest payable shall be the interest rate applicable for the period for which the amount was deposited less 1% as penalty for premature withdrawal.

6.6 TRANSFER AND CONVERSION OF CAPITAL GAINS ACCOUNT:1. A depositor, if he so desires, may apply for transfer of his capital gains account, from one deposit office to another deposit office of the same bank.

2. A depositor, if he so desires, may also apply in Form B for transfer of a part of or all the funds from Type A Account to Type B Account and vice-versa.

3. A depositor may also convert the whole of his Type A account into Type B Account and vice-versa.

4. If a request has been received for transfer of amount from Type B to Type A and vice versa before the expiry of the specified period for which the deposit was made, such request shall be treated as premature withdrawal of amount.

CHAPTER 7CAPITAL GAINS TAX RATES

7.1 TAX RATE ON SHORT-TERM CAPITAL GAINS:1. Tax Rate on Short-Term Capital Gains:Capital gain income from assets held one year or less is taxed at the ordinary income tax rates in effect for the year, ranging from10% to 39.6% for the year 2014.2. Tax Rate on Collectible Assets:Long-term investments in collectibles are taxed at a flat 28%. Short-term investments in collectibles are taxed as short-term capital gains at your ordinary income tax rates. Collectibles include the following items: stamps, coins, precious metals, precious gems, rare rugs, antiques, alcoholic beverages, and fine art.However, certain precious metal coins and bullion are considered regular investment assets and are not considered collectibles for tax purposes underInternal Revenue Code Section 408(m)(3). 3. Tax Rate on Recaptured Depreciation of Real PropertyReal property that has been depreciated is subject to a specialdepreciation recapturetax. A special 25% tax rate applies to the amount of gain that is related to depreciation deductions that were claimed or could have been claimed on a property. The remainder of the gain will be taxed at ordinary rates or long-term gain rates, depending on how long the property was held. 4. Business AssetsFixed assets used in your business are taxed as ordinary gains. Business assets include all furniture, equipment, and machinery used in a business venture. Examples include computers, desks, chairs, and photocopiers. Ordinary gains are reported on IRSForm 4797. 5. Small Business StockCapital gains and losses on small business stock may qualify for preferential tax treatment. Gains may be partially excluded under Section 1202, if the company had total assets of $50 million or less when the stock was issued. Losses may be treated as ordinary losses up to $50,000 per year under Section 1244, if the company had total paid-in capital of $1 million or less.Small business investors can request that companies certify their stock as qualifying under Section 1202, Section 1244, or both, at the time they make an investment in the company.Gains on small business stock are taxed at 28% after any exclusion. Ordinary losses on Section 1244 stocks can reduce other ordinary income, such as wages.

7.2 TAX RATE ON LONG-TERM CAPITAL GAINS AND QUALIFIED DIVIDEND INCOME:1. Tax rate on long-term capital gains:Long term Capital gains, if the assets like shares and securities, are held by the assessee for a period exceeding 12 months or 36 months in the case of other assets. Units of UTI and specified mutual funds will now be eligible for treatment as long term capital assets if they are held for a period exceeding 12 months.

Capital gain income from assets held longer than one year are generally taxed at special long-term capital gains tax rates. The rate that applies depends on which ordinary income tax bracket you fall under. 0%applies to long-term gains and dividend income if a person is in the 10% and 15% tax brackets, 15%applies to long-term gains and dividend income if a person is in the 25%, 28%, 33%, or 35% tax brackets, and 20%applies to long-term gains and dividend income if a person is in the 39.6% tax bracket.2. Tax Rates on Dividend IncomeDividends are classified either as ordinary dividends or as qualified dividends. Ordinary dividends are taxed at ordinary tax rates for whatever tax bracket you are in. Qualified dividends are taxed at the long-term capital gains tax rates of zero percent, 15% or 20% rates. To be eligible as a qualified dividend, the dividends must be from a domestic corporation or a qualifying foreign corporation and you must hold the stock "for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date"

7.3 CAPITAL GAINS TAX RATESIf your tax bracket is:Then short-term gains are taxed at:And long-term gains are taxed at:

10%10%0%

15%15%0%

25%25%15%

28%28%15%

33%33%15%

35%35%15%

39.6%39.6%20%

Except for the following types of assets:

CollectiblesOrdinary tax rates28%

Depreciation recaptureOrdinary tax rates25%

Qualified small business stockOrdinary tax rates28% after exclusion

CHAPTER 8 PROBLEMS AND SOLUTIONS

ILLUSTRATION 1:Mr. Kamlesh purchased a house property for Rs. 100000 on 27 August, 1978.He made the following additions/alterations to the house property.Cost of construction of 1st floor in Financial Year 1983-84Rs.300000Cost of construction of 2st floor in Financial Year 1990-91Rs.400000Fair market value of the property on 01-04-1981 was Rs. 500000. He sold the property on 20th October, 2013 for Rs.9500000. He paid the brokerage of Rs.55000 for the sale transaction. The Cost Inflation Index for Financial year 1981-82 is 100,for Financial year 1983-84 is 116, for Financial year 1990-91 is 182, for Financial year 2013-14 is 939.Compute the Capital gain of Mr. Kamlesh chargeable to tax for the Assessment Year 2014-15.SOLUTION:NAME OF ASSESSEE: Mr. KamleshSTATUS: INDIVIDUALPREVIOUS YEAR: 2013-14ASSESSMENT YEAR: 2014-15PARTICULARS AMT.Full value of consideration 9500000Less: Indexed cost of Acquisition of FMV 500000 on 1-4-1981 500000 x 939/ 1004695000 Less: Indexed Cost of Improvement 300000 x 939/ 116 for F.Y. 1983-842428448 400000 x 939/ 182 for F.Y. 1990-912063736Less: Expenses of Transfer (Brokerage)55000 9242185Long Term Capital Gains257815

ILLUSTRATION 2:Mr. Rakesh purchased a house property on 14th April, 1979 for Rs. 50000.Later on, he gifted the house property to his friend Mr. A on 15th June, 1986. Following renovations were carried out by Mr. Rakesh and Mr. A to the house property:ParticularsAmt.By Mr.Rakesh during F.Y. 1979-8010000 By Mr. Rakesh during F.Y. 1983-8450000By Mr. A during F.Y. 1993-94190000The fair market value of the property as on 1-4-1981 is Rs.70000.The house was sold by Mr. A to Mr. Sanjay on 2nd January, 2014 for a consideration of Rs. 2500000.Compute the capital gains of Mr. A for the assessment year 2014-15. Cost inflation indices are as under:Financial Year Coat Inflation Index1981-821001983-841161986-871401993-942442013-14939SOLUTION:NAME: MR.RAKESHSTATUS: INDIVIDUALPREVIOUS YEAR: 2013-14ASSESSMENT YEAR: 2014-15Computation of Total Income Amt.Full value of consideration2500000Less: Indexed cost of Acquisition (70000 x 939/100)657300 Less: Indexed Cost of Improvement 50000 / 116 x 939404741.38 190000 / 244 x 939731188.52Long Term Capital Gains706770.10

ILLUSTRATION 3Mr. Thomas inherited a house in Jaipur under will of his father in May,2003. The house was purchased by his father in January, 1981 for Rs. 250000. He invested an amount of Rs. 700000 in construction of one more floor in this house in June, 2005. The house was sold by him in November, 2013 for Rs.4725000. Brokerage Rs.37500 was paid by Mr. Thomas to Mr.Sunil. The market value of house as on 1-4-1981 was Rs.270000.You are required to compute the amount of capital gain chargeable to tax for A.Y. 2014-15 with the help of given information and by taking CII for F.Y. 2013-14 as 939, F.Y. 2003-04 as 463 and for F.Y. 2005-06 as 497.

SOLUTION:NAME: MR.THOMAS STATUS:INDIVIDUAL R & ORPREVIOUS YEAR: 2013-14ASSESSMENT YEAR:2014-15Computation of Total Income Amt.Sale consideration4725000Less: Expenses incurred on transfer being brokerage37500Less: Indexed cost of Acquisition (270000 x 939/100)2535300 Less: Indexed Cost of Improvement (700000 x 939/497) 1322535.213895335.21Long Term Capital Gains829664.79Note: The house was inherited by Mr. Thomas under the will of his father and therefore the cost incurred by the previous owner shall be taken as the cost. Value as on 1-4-1981 accordingly shall be adopted as th cost of acquisition of the house property.

ILLUSTRATION 4:Mrs. Sarita purchased a house property for Rs.200000 in the year 1969-70. Following expenses were incurred for the house property.1. Cost of Construction in the year 1977-78 Rs.150000.2. Cost of Construction of 1st floor in 1984-85 Rs.350000.3. Alteration to house property in 1993-94 Rs.3000004. Fair Market Value of the property on 1st April 1981 is Rs.500000. The house property is sold to Mr. Alok in the previous year 2011-12 for Rs.9500000.5. Expenses insured on transfer during the previous year is Rs.5000.Compute the capital gain for A.Y 2012-13. (Cost Inflation Index: 1981-82:100, 1984-85:125, 1993-94:244, 2011-12:785.SOLUTION:NAME: MRS.SARITA STATUS: INDIVIDUALPREVIOUS YEAR: 2011-12ASSESSMENT YEAR: 2012-13Computation of Total Income Amt.Full Value of Consideration9500000Less: Transfer Expenses5000Less: Indexed cost of Acquisition (500000 x 785/100)3925000 Less: Indexed Cost of Improvement (350000 x 785/125) 2198000 (300000 x 785/ 244)9651647088164Long Term Capital Gains2406836Note:1. Any capital asset acquired before 1-4-1981, Index Cost of Acquisition for such capital asset will be either the purchase price or Fair Market Value as on 1-4-1981 whichever is higher.2. Any improvement, alteration, reconstruction, etc done before 1-4-1981 has to be ignored.

ILLUSTRATION 5:Miss Anjali purchased a capital asset on 1-1-1977 at a price of Rs.475000 & spent Rs.15000 on registration (FMV as on 1-4-1981 is RS.485000). She made the following improvement as given below:Date Amt. 1-12-1980100001-6-19941500001-2-2004200000Capital asset is transferred on 31-3-2012 at a consideration of Rs. 8500000. Transfer expenses incurred at the rate of 0.5%. Calculate the capital gain in the hands of anjali.SOLUTION:NAME: MISS ANJALISTATUS: INDIVIDUALPREVIOUS YEAR: 2011-12ASSESSMENT YEAR: 2012-13Computation of Total Income Amt.Full value of consideration8500000Less: Transfer Expenses (8500000 x 0.5%)42500Less: Indexed cost of Acquisition (490000 x 785/100)3846500 Less: Indexed Cost of Improvement 150000/ 259 x 785454633 200000/ 463 x 7853390934640226Long Term Capital Gains3817274

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Direct and Indirect TaxesDr. Varsha M.Ainapure

CAPITAL GAINSPAGE 30