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Capital gains on transfer of property and Tax implication

Any gain or loss arising on transfer of property is subject to the tax provisions under the head 'capital gains'. Under the provisions of Section 2 (14) of the Income Tax Act 1961, 'capital asset' means property of any kind held by an assessee. It does not include certain items like stock-in-trade, consumables or raw materials for business, and personal effects and certain agricultural categories of land. Any real estate, including a flat, building, site, farm house, and commercial property is subject to capital gains on sale or transfer.
It is not only sale of property which triggers off capital gains. Even certain specified forms of transfers are deemed as sale, and any gain is subject to capital gains tax.

Transfer of property means a person conveying property, in the present or future, to one or more other persons, or to himself. Any income arising on transfer of a capital asset is subject to capital gains tax. Transfer is deemed to have taken place on the date on which possession of the property has been given. In case payment is received but the transfer has not been effected, it is not treated as a sale transaction.

Under the income tax laws, capital assets may be either long-term capital assets or short-term capital assets. In case a property is held for more than 36 months, the capital gain arising from it is treated as long-term capital gains. In case the property is transferred or sold after holding it for less than 36 months, the income would be treated as short-term capital gains (and vice versa for the capital loss). This is different from the provisions applicable to securities - equity shares or mutual fund units, where the qualifying period for long term capital gains is anything over 12 months.

The period for which the capital asset was held determines its taxability - whether it is a long-term capital asset or a short-term capital asset and accordingly whether the assessee has incurred a long term or short-term capital gain.

The amount of capital gains is arrived at by applying the concept of cost inflation index (CII). The index is published by the IT Department. The present worth of a property is arrived at by applying the CII to the cost of the property and to any improvements made. This is deducted from the sale amount received by the transferor, to arrive at the capital gains. The long-term capital gains are charged to tax at the rate of 20 percent.

Capital loss, whether short-term or long-term, can be carried forward and set off for the next eight years. After eight years, it get lapsed and cannot be carried forward.

An assessee may plan tax and save it under Section 54EC in respect of long-term capital gains by investing in a residential property or in capital gains bonds. It needs to be ensured that the conditions prescribed under the section are strictly complied with, or else the amount claimed for exemption becomes subject to tax.

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