Section 45 to 55A of the Income-tax act, 1961 deal with the capital gains. Section 45 of the Act, provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save otherwise provided in section 54, 54B, 54D, 54EA, 54EB, 54F 54G and 54H [with effect from 1-4-1991] be chargeable to income-tax under the head "Capital Gains" and shall be deemed to be the income of the previous year in which the transfer took place.

Doubts may arise as to whether 'Capital Gains' being capital receipt cab be brought to tax as income. It may be noted that the ordinary accounting canons of distinctions between a capital receipt and a revenue receipt are not always followed under the Income-tax Act. Section 2(24) of the Income-tax Act specifically provides that "income" includes 'any capital gains chargeable under section 45'.

The requisites of a charge to income tax, of capital gains under section 45 are :-

1. There must be a capital asset
2. The capital asset must have been transferred
3. The transfer must have been effected in the previous year
4. There must be a gain arising on such transfer of a capital asset.

Gains on sale of capital assets held for more than three years (one year for listed securities or mutual fund units) are treated as long-term capital gains and are taxed at concessional rates compared short-term capital gains.

While calculating taxable long-term capital gains, the cost of acquisition and the cost of improvement are linked to a cost inflation index. As a result, the indexed cost of acquisition is deducted from the sale consideration received, to arrive at the capital gain.

Long-term capital gains are taxed at a flat rate of 20 per cent for individuals and foreign companies, and 30 per cent for domestic companies. Long-term capital gains on the transfer of shares/bonds issued in a foreign currency under a scheme notified by the Indian Government are taxed at 10 per cent.

For non-residents, the capital gains arising from the transfer of shares and debentures are calculated in the original currency of acquisition. Therefore, no tax is payable merely because of the devaluation of the Indian Rupee vis-a-vis other currencies. However, no tax is payable on the transfer of shares in an Indian company by one non-resident to another if the transfer is in pursuance of a scheme of amalgamation and certain conditions are satisfied.

Income of Offshore Funds and non-residents from units purchased in foreign currency and capital gains on their transfer are taxed at 10 per cent. In the case of Foreign Institutional Investors, income from investment in securities (vis dividends, interest) is taxed at 20 per cent, while capital gains on transfer of these securities are taxed at 10 per cent (long-term) and 30 per cent (short-term).

The concessional treatment allowed to long-term capital gains is not applicable to short-term capital gains. Short term capital gains are computed as the sale price or consideration less cost of acquisition and related expenses. The taxable short term gain is aggregated with taxable income from other income classes, and is taxed at the overall tax rate applicable to the assessee.

Any capital losses made in a particular year can be set off only against capital gains made in the same year. If set-off is not possible, these capital losses can be carried forward for a period of eight years, and set off against the capital gains of subsequent years.

The rates which are applicable: