What are capital assets?

In India, gains arising on transfer of capital assets are charged to tax under the head capital gains. The calculation of tax rate is based on the holding period of this asset by the owner: income from capital gains is classified as short-term capital gains and long-term capital gains. This begs the question, what are capital assets?

Which assets qualify as capital assets?

Under income tax laws in India, capital asset include:

1. Any kind of property held by a taxpayer, whether or not connected with their business or profession.
2. Any securities held by a foreign institutional investor (FII) which has invested in such securities in accordance with the regulations made under the Sebi Act, 1992.
3. Any ULIP to which exemption under Section 10(10D) does not apply on account of the applicability of the fourth and fifth proviso.

What does not qualify as capital assets?

The following items are excluded from the definition of capital asset under income tax law in India:

1. Any stock-in-trade other than securities referred, consumable stores or raw materials held for the purposes of business or profession

2. Movable property, including apparel and furniture, held for personal use by the taxpayer or any member of his family dependent on him.

The following movable property held for personal use by the taxpayer or any member of their family dependent on him is not included in the list of excluded items:

(a) Jewellery: Includes ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stones, and whether or not worked or sewn into any wearing apparel. It also includes precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel.

(b) Archaeological collections

(c) Drawings

(d) Paintings

(e) Sculptures

(f) Any work of art

3. Agricultural land in India, not being a land situated:

(a) Within jurisdiction of municipality, notified area committee, town area committee, cantonment board and which has a population of not less than 10,000

(b) Within range of following distance measured aerially from the local limits of any municipality or cantonment board:

(c) Not being more than 2 km if population of such area is more than 10,000 but not exceeding 1 lakh

(d) Not being more than 6 km if population of such area is more than 1 lakh but not exceeding 10 lakhs

(e) Not being more than 8 km if population of such area is more than 10 lakh.

Note: The population will be considered according to the figures of last preceding census of which relevant figures have been published before the first day of the year.

4. 61/2 per cent Gold Bonds,1977 or 7 per cent Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central government

5. Special Bearer Bonds, 1991

6. Gold deposit bonds issued under the Gold Deposit Scheme, 1999, or deposit certificates issued under the Gold Monetisation Scheme, 2015

Key points

• Whether a property is a capital asset or not will depend on its connection with a person’s business or profession of the taxpayer. For instance, a bus being used to carry passengers by a person engaged in the business of passenger transport will be his capital asset.
• Any securities held by a foreign institutional investor who has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992, will always be treated as capital asset, hence, such securities cannot be treated as stock-in-trade.