Income from Capital Gains for CFP – 6

Buy Back of shares Section 46A :

Any consideration received by a shareholder from any company on purchase of its own shares shall be chargeable to tax on the difference between the cost of acquisition and the value of consideration received by the holder.

 

Example:

On 15th September, 2001, Varun purchases 500 shares of ABC Ltd. a listed company @Rs. 50 per share. Under a scheme of buy back of its own shares, on 15th June, 2006, ABC Ltd. buys back the shares from Varun at a price of Rs. 75 per share. Calculate the capital gains tax payable by Varun, if any. Assume Cost Inflation Indices are 2000-01: 406, 2001-02: 426 and 2006-07: 519.

a)Rs. 1367.

b)Rs. 1250.

c)Nil.

d)Rs. 1408.

Solution:

• Full Value of Sale Consideration(F.V.S.C) 500 * 75 37500
• Cost of Acquisition(C.O.A) 500 * 50 25000
• Indexed Cost of Acquisition 25000 * 519 / 426 30457.74
• L.T.C.G (with indexation) => F.V.S.C – Indexed C.O.A 7042.25
• L.T.C.G (without indexation) = > F.V.S.C – C.O.A 12500
• L.T.C.G Tax = 0.1 * L.T.C.G (without indexation) 1250

Employee Stock Option Plan:

Capital gain arises in the PY in which these assets are sold by the employee. Cost of acquisition is the price at which such shares were issued to him.

 

Conversion of Debentures into Equity Shares 49(2A)

*If sold on stock exchange no LTCG but STT is payable.

Conversion of Preference Shares into Equity Shares:

• If preference shares are converted to equity shares it will be regarded as a transfer and there will be capital gain to the shareholder on allotment of equity shares
• Consideration in this case will be fair market value of the equity share on the date of allotment.

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Income from Capital Gains for CFP – 5

Capital Gain from Insurance Claim Sec 45(1A)

1. Where any person receives any money or other assets under any insurance from an insurer on account of damage to or destruction of any capital asset, then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax under the head “Capital gains“
2. Indexation benefit is available for calculating tax

Example 1:

Ravi owns a house property which was purchased by him on 1-5-1979 for Rs.3,00,000. The said property was destroyed by fire on 3-4-2008 and R received a sum of Rs.25,00,000 from the insurance company during the year. The market value of the above property as on 1-4-1981 was Rs.4,00,000. Compute the capital gain for the assessment year 2009-10.

 

Solution:

• Sale price = 25,00,000
• Indexed cost of acquisition = 400000*582/100 = 23,28,000
• Capital Gain = 172000

Example 2:

In an unfortunate incident, Mr. Chauhan’s plant catches fire and the machinery gets destroyed. Luckily, Mr. Chauhan had insured the factory against fire. The WDV of the machinery was Rs.2,68,000 and the replacement cost Rs.5 lakh. The Insurance Company has paid compensation of Rs.3 lakh. What is the taxable amount?

a)Rs. 32000 as normal income.

b)Rs. 200000 as capital loss.

c)Rs. 32000 as capital gains.

d)Nil.

 

Compulsory Acquisition 45(5)

Tax treatment of initial compensation:

• Total consideration received is treated as sale consideration
• Cost of acquisition, improvement and transfer as the same as usual
• Benefit of indexation is available till the year of compulsory acquisition
• This is taxable in the year in which such compensation is received

When enhanced compensation is received:

• It shall be taxable in the PY in which enhanced compensation is received
• In this case cost of acquisition and improvement shall be taken as nil
• Litigation expenses for getting enhanced compensation are deductible expense on transfer
• If the compensation is received by any person other than the transferor, it will be taxed as income in the hands of recipient

Example:

• If  6,00,000 is the normal compensation paid by govt. but court increased the compensation to 9,00,000
• For 6,00,000 normal capital gain calculation
• For enhanced 3,00,000 (LTCG) cost of acq is nil but court charges are deductible