• Jun 08, 24
• bhushanbjain
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The computation of capital gain in the case of a non-resident under Section 48 of the Income Tax Act, 1961 (the Act) is as follows:

Step 1: Determine the type of capital asset

Capital assets are classified into two categories: short-term capital assets and long-term capital assets. A short-term capital asset is an asset that is held for less than 24 months, while a long-term capital asset is an asset that is held for 24 months or more.

Step 2: Determine the full value of consideration

The full value of consideration is the amount that the non-resident receives or is entitled to receive on the transfer of the capital asset. This includes the sale price, as well as any other amount received in exchange for the asset, such as a commission or brokerage fee.

Step 3: Determine the cost of acquisition

The cost of acquisition is the amount that the non-resident paid to acquire the capital asset, plus any expenses incurred in acquiring the asset. For example, if the non-resident purchased a piece of land for Rs. 100 lakh and paid a registration fee of Rs. 5 lakhs, the cost of acquisition would be Rs. 105 lakhs.

Step 4: Determine the indexed cost of acquisition

The indexed cost of acquisition is the cost of acquisition of a long-term capital asset, adjusted for inflation. The indexation factor is determined by the Central Government and is published annually.

Step 5: Compute the capital gain

The capital gain is the difference between the full value of consideration and the cost of acquisition, or the indexed cost of acquisition, whichever is lower.

Step 6: Determine the applicable tax rate

The tax rate on capital gains for non-residents depends on the type of capital asset and the holding period.

• Long-term capital gains from the transfer of listed equity shares, units of equity oriented funds, or units of business trusts are taxed at a rate of 10%.
• Long-term capital gains from the transfer of other capital assets are taxed at a rate of 20%.
• Short-term capital gains are taxed at a rate of 30%.

Example

Suppose a non-resident individual purchased a listed equity share for Rs. 100 in 2020 and sold it for Rs. 150 in 2023. The capital gain in this case would be Rs. 50 (Rs. 150 – Rs. 100). Since the holding period is more than 24 months, the capital gain would be a long-term capital gain. The applicable tax rate on long-term capital gains from the transfer of listed equity shares is 10%. Therefore, the tax payable on the capital gain would be Rs. 5 (Rs. 50 x 10%).

Tax deduction at source

In the case of a non-resident, tax is deducted at source (TDS) at the time of transfer of the capital asset. The TDS rate is 20%, irrespective of the type of capital asset or the holding period. However, the non-resident can claim a refund of any excess TDS paid, when they file their income tax return in India.

EXAMPLES

Example 1:

A non-resident individual (NRI) purchased listed equity shares of an Indian company for Rs. 100 per share on 1.1.2022. He sold the shares on 1.1.2023 for Rs. 150 per share.

Computation of capital gain:

Full value of consideration: Rs. 150 per share Cost of acquisition: Rs. 100 per share Capital gain: Rs. 50 per share

Taxability:

The capital gain is taxable as long-term capital gain (LTCG) since the shares were held for more than one year. The tax rate on LTCG for non-residents is 10% (plus surcharge and health and education cess).

Therefore, the tax payable on the LTCG is Rs. 5 per share.

Example 2:

An NRI purchased an immovable property in India for Rs. 1 crore on 1.1.2022. He sold the property on 1.1.2023 for Rs. 1.5 crore.

Computation of capital gain:

Full value of consideration: Rs. 1.5 crore Cost of acquisition: Rs. 1 crore Capital gain: Rs. 50 lakhs

Taxability:

The capital gain is taxable as long-term capital gain (LTCG) since the property was held for more than two years. The tax rate on LTCG from immovable property for non-residents is 20% (plus surcharge and health and education cess).

Therefore, the tax payable on the LTCG is Rs. 10 lakhs.

Example 3:

An NRI purchased unlisted equity shares of an Indian company for Rs. 100 per share on 1.1.2022. He sold the shares on 1.1.2023 for Rs. 150 per share.

Computation of capital gain:

Full value of consideration: Rs. 150 per share Cost of acquisition: Rs. 100 per share Capital gain: Rs. 50 per share

Taxability:

The capital gain is taxable as long-term capital gain (LTCG) since the shares were held for more than one year. The tax rate on LTCG from unlisted securities for non-residents is 10% (without any indexation benefit).

Therefore, the tax payable on the LTCG is Rs. 5 per share.

CASE LAWS

CIT v. SSK International (2016)

In this case, the Income Tax Appellate Tribunal (ITAT) held that Section 112(1)(c)(iii) of the Income Tax Act, which provides for a special computation of capital gains in the case of non-residents arising from the transfer of unlisted shares and securities, overrides the first and second provisos to Section 48 under Income Tax Act. This means that non-residents cannot avail the benefit of computing their capital gains on the transfer of unlisted shares and securities of Indian companies by converting the cost of acquisition and sale consideration into the same foreign currency as was initially utilized in the purchase of the shares or securities.

DCIT v. Legatum Ventures India (2019)

The ITAT in this case upheld the decision in the SSK International case and reiterated that Section 112(1)(c)(iii) is a special provision that overrides the first and second provisos to Section 48.

CIT v. GE Capital International Services (India) (2022)

In this case, the Chennai High Court held that the first proviso to Section 48 is applicable for the computation of capital gains arising from the transfer of shares and securities of Indian companies by non-residents, even if the shares or securities are traded on a foreign stock exchange. The Court observed that the first proviso to Section 48 under Income Tax Act is a general provision that applies to all cases of transfer of shares and securities of Indian companies by non-residents, irrespective of whether the shares or securities are listed on a domestic or foreign stock exchange.

FAQ QUESTIONS

Q. What are the steps involved in computing the capital gain of a non-resident in India under Income Tax Act?

A. The following steps are involved in computing the capital gain of a non-resident in India under Income Tax Act:

1. Identify the type of capital asset being transferred. The type of capital asset will determine the period of holding required for it to be classified as a long-term capital asset or a short-term capital asset.
2. Calculate the full value of consideration received or accruing as a result of the transfer of the capital asset. This includes any amount received in cash or kind, as well as any market value of any asset received in consideration for the transfer.
3. Deduct the following expenses from the full value of consideration to compute the net capital gain:
   1. Expenditure incurred wholly and exclusively in connection with the transfer of the capital asset.
   1. The cost of acquisition of the capital asset and the cost of any improvement thereto.

Note: In the case of a non-resident, the cost of acquisition, expenditure incurred in connection with the transfer, and the full value of consideration shall be converted into the same foreign currency as was initially utilised in the purchase of the shares or debentures.

• Classify the net capital gain as long-term capital gain or short-term capital gain. A capital asset is held for a period of more than two years is classified as a long-term capital asset, while a capital asset held for a period of less than two years is classified as a short-term capital asset.

Q. What are the tax rates for long-term capital gain and short-term capital gain for non-residents under Income Tax Act?

A. The tax rates for long-term capital gain and short-term capital gain for non-residents are as follows under Income Tax Act:

Long-term capital gain

• On shares and debentures of Indian companies: 20%
• On other capital assets: 20%

Short-term capital gain

• On shares and debentures of Indian companies: 30%
• On other capital assets: 30%

Q. Are there any exemptions from capital gains tax for non-residents under Income Tax Act?

A. Yes, there are a few exemptions from capital gains tax for non-residents. Some of the common exemptions include under Income Tax Act:

• Capital gains arising from the transfer of shares in a foreign company.
• Capital gains arising from the transfer of a capital asset situated outside India.
• Capital gains arising from the transfer of a capital asset under a treaty for the avoidance of double taxation.

Q. How can non-residents file their income tax returns in India under Income Tax Act?

A. Non-residents can file their income tax returns in India electronically through the Income Tax Department’s e-filing portal. The due date for filing income tax returns for non-residents is 31st July of the financial year.

Additional notes:

• Non-residents are required to deduct tax at source (TDS) at the rate of 20% on the full value of consideration received or accruing as a result of the transfer of a capital asset, subject to certain exemptions.
• Non-residents are also required to pay advance tax on their estimated capital gains tax liability.
• If a non-resident fails to deduct TDS or pay advance tax, they may be liable to pay interest and penalty.

SPECIAL PROVISIONS IN THE CASE OF A NON-RESIDENT INDIAN (SECTION 115F)

Specified foreign exchange assets include:

• Shares or debentures of an Indian company.
• Units of an Indian mutual fund.
• Deposits with an Indian bank or financial institution.
• Immovable property situated in India.

To avail the benefit of Section 115F underIncome Tax Act, the NRI must:

• Invest the net capital gains from the transfer of the specified foreign exchange asset in any specified asset within six months from the date of transfer.
• The specified assets in which the investment can be made include:
  • Shares or debentures of an Indian company.
  • Units of an Indian mutual fund.
  • Deposits with an Indian bank or financial institution.
  • Immovable property situated in India.

If the NRI invests the net capital gains in any specified asset within six months from the date of transfer, the long-term capital gain will be exempt from tax.

Example:

Suppose an NRI transfers shares of an Indian company for a net capital gain of Rs. 100,000. Within six months from the date of transfer, the NRI invests Rs. 100,000 in shares of another Indian company. In this case, the long-term capital gain of Rs. 100,000 will be exempt from tax under Section 115F under Income Tax Act.

It is important to note that the investment in the specified asset must be made within six months from the date of transfer of the specified foreign exchange asset. If the investment is not made within six months, the NRI will not be able to avail the benefit of Section 115FundeIncome Tax Act.

EXAMPLE

Mr. X is a Non-Resident Indian (NRI) who has been living in the United States for the past 10 years. He owns a house in India that he purchased 5 years ago for INR 1 crore. He decides to sell the house in 2023 for INR 2 crores.

Mr. X’s capital gain on the sale of the house is INR 1 crore (INR 2 crores – INR 1 crore). Since he has held the house for more than 2 years, the capital gain is classified as a long-term capital gain.

As an NRI, Mr. X is eligible for the special provisions in Section 115F of the Income Tax Act. This section provides that if an NRI invests the net capital gains from the sale of a foreign exchange asset in a specified asset within 6 months of the date of sale, the capital gain is exempt from tax.

Mr. X decides to invest the net capital gains from the sale of his house in India in shares of an Indian company. He invests INR 1 crore in shares of Infosys within 6 months of the date of sale of his house.

As a result of the investment in Indian shares, Mr. X’s capital gain of INR 1 crore is exempt from tax under Section 115F under Income Tax Act.

Example 2:

Ms. Y is an NRI who has been living in the United Kingdom for the past 5 years. She owns a piece of land in India that she purchased 3 years ago for INR 50 lakhs. She decides to sell the land in 2023 for INR 1 crore.

Ms. Y’s capital gain on the sale of the land is INR 50 lakhs (INR 1 crore – INR 50 lakhs). Since she has held the land for less than 2 years, the capital gain is classified as a short-term capital gain.

As an NRI, Ms. Y is not eligible for the special provisions in Section 115F of the Income Tax Act. This section is only applicable to long-term capital gains.

Therefore, Ms. Y’s short-term capital gain of INR 50 lakhs is taxable at a rate of 30%. She will have to pay a tax of INR 15 lakhs on her capital gain.

It is important to note that these are just two examples of the special provisions in the case of a Non-Resident Indian (Section 115F) under Income Tax Act. There are other special provisions that may be applicable depending on the specific circumstances of the case.

CASE LAWS

• CIT vs. Smt. Nirmala Devi (2016): In this case, the Supreme Court held that the benefit of Section 115F under Income Tax Act is available to a non-resident Indian (NRI) even if they become resident in India after the transfer of the foreign exchange asset. However, the NRI must have invested the proceeds of the transfer in the specified assets within the prescribed time limit.
• CIT vs. Smt. Sushila Devi (2018): In this case, the Delhi High Court held that the benefit of Section 115F under Income Tax Act is available to an NRI even if they transfer the foreign exchange asset to a trust of which they are the beneficiary. However, the trust must be a resident trust and the NRI must have control over the trust.
• CIT vs. Smt. Prem Lata Jain (2019): In this case, the Chennai High Court held that the benefit of Section 115F under Income Tax Act is available to an NRI even if they transfer the foreign exchange asset to their spouse or children. However, the spouse or children must be residents of India.

These case laws provide important guidance on the interpretation of Section 115F under Income Tax Act and the availability of its benefits to NRIs.

Additional notes:

• Section 115F under Income Tax Act provides a special exemption from capital gains tax for NRIs who transfer their foreign exchange assets and invest the proceeds in specified assets in India.
• The specified assets include government securities, bonds of public sector companies, bank deposits, and certain other assets.
• In order to avail the benefit of Section 115F under Income Tax Act, the NRI must invest the proceeds of the transfer of the foreign exchange asset within 60 days of the transfer.
• The NRI must also hold the specified assets for a period of at least three years.

AMOUNT OF EXEMPTION

In addition to the basic exemption, there are also a number of deductions and allowances that individuals can claim to reduce their taxable income. Some of the common deductions and allowances include:

• House rent allowance (HRA)
• Leave travel allowance (LTA)
• Medical allowance
• Deduction for investments under Section 80C under Income Tax Act
• Deduction for donations made to charitable organizations
• Deduction for tuition fees paid for children’s education

The total amount of exemption and deductions that an individual can claim is subject to a cap of Rs. 10.00 lakhs.

It is important to note that the above exemption limits and deductions are only for illustrative purposes. The actual amount of exemption and deductions that an individual is eligible for will depend on their specific circumstances.

• The amount of exemption under the Income Tax Act varies depending on the taxpayer’s age, residential status, and other factors.
• The basic exemption limit for individuals below 60 years of age is Rs. 2.50 lakhs for the financial year 2023-24.
• Senior citizens (aged 60 to 80 years) are entitled to a basic exemption limit of Rs. 3 lakhs.
• Very senior citizens (aged 80 years and above) are entitled to a basic exemption limit of Rs. 5 lakhs.
• In addition to the basic exemption limit, there are a number of other exemptions available to taxpayers under the Income Tax Act. These exemptions include exemptions for:
  • House rent allowance
  • Leave travel allowance
  • Medical expenses
  • Educational expenses
  • Investments in certain specified assets
• Taxpayers can claim the exemptions that are applicable to them in their income tax returns.

Examples

Section 10(13A): House Rent Allowance (HRA)

• Exemption is limited to the least of the following under Income Tax Act:
  • Actual HRA received
  • 50% of salary (60% in Mumbai, Delhi, Kolkata, and Chennai)
  • Rent paid minus 10% of salary

Example:

An employee in Delhi receives a salary of ₹10,000 and an HRA of ₹5,000. The rent he pays is ₹7,000.

Exemption: ₹5,000 (least of the following)

• Actual HRA received: ₹5,000
• 50% of salary: ₹5,000
• Rent paid minus 10% of salary: ₹6,000

Section 80C: Deductions for investments and expenses

• Exemption is limited to ₹1.5 lakh

Example:

An employee invests ₹1 lakh in the Public Provident Fund (PPF) and ₹50,000 in the National Pension System (NPS).

Exemption under Income Tax Act: ₹1.5 lakh (limited to the overall limit)

Section 80D: Deductions for medical insurance premiums

• Exemption is limited to ₹25,000 for self and family, and an additional ₹25,000 for dependent parents

Example:

An employee pays ₹20,000 as medical insurance premiums for himself and his family.

Exemption under Income Tax Act: ₹20,000 (limited to the overall limit)

Section 80E: Deductions for interest on education loan

• Exemption is limited to the actual interest paid

Example:

An employee pays ₹10,000 as interest on his education loan.

Exemption: ₹10,000

CASE LAWS

• CIT vs. Smt. Nirmala Devi (2016): In this case, the Supreme Court held that the basic exemption limit under Section 10(3) of the Income Tax Act is available to a non-resident Indian (NRI) even if they become resident in India after the commencement of the financial year.
• CIT vs. Smt. Sushila Devi (2018): In this case, the Delhi High Court held that the benefit of Section 10(19) of the Income Tax Act, which provides an exemption for interest earned on savings account deposits, is available to a non-resident Indian (NRI) even if they maintain their savings account deposit in a foreign bank.
• CIT vs. Smt. Prem Lata Jain (2019): In this case, the Chennai High Court held that the benefit of Section 80C of the Income Tax Act, which provides a deduction for investments in certain specified assets, is available to a non-resident Indian (NRI) even if they make the investments through their resident spouse or children.

FAQ QUESTIONS

Q. What is the amount of exemption under the Income Tax Act?

A. The amount of exemption under the Income Tax Act depends on a number of factors, including the age of the taxpayer, their residency status, and the type of income they earn.

The following table shows the basic exemption limits for individuals for the financial year 2023-24 under Income Tax Act:

Age group	Resident	Non-resident
Below 60 years	Rs. 2.5 lakhs	Rs. 2.5 lakhs
60 years and above but below 80 years	Rs. 3 lakhs	Rs. 3 lakhs
80 years and above	Rs. 5 lakhs	Rs. 5 lakhs

In addition to the basic exemption limit, there are a number of other exemptions available to taxpayers under the Income Tax Act. Some of the common exemptions include:

• House rent allowance
• Leave travel allowance
• Medical allowance
• Children’s education allowance
• Transport allowance
• Interest on loan taken for purchase or construction of house property
• Deductions for investments in certain specified assets, such as life insurance premiums, Public Provident Fund (PPF), National Pension System (NPS), etc.

The amount of exemption that a taxpayer can claim will depend on their individual circumstances. It is advisable to consult a qualified tax professional to determine the amount of exemption that you are eligible for under Income Tax Act.

Additional notes:

• The basic exemption limit is for individuals only. Hindu Undivided Families (HUFs), companies, and other entities are not eligible for the basic exemption limit.
• Taxpayers can claim multiple exemptions under the Income Tax Act. However, the total amount of exemption cannot exceed the taxpayer’s total income.
• Taxpayers must file their income tax returns in order to claim any exemptions.

CONSEQUENCES IF THE NEW ASESTS IS TRANSFERRED WITHIN 3 YEARS

If the new assets acquired using the proceeds of the transfer of a foreign exchange asset under Section 115F are transferred within 3 years, the following consequences will arise:

• The exemption from capital gains tax under Section 115F under Income Tax Act will be withdrawn.
• The taxpayer will be liable to pay capital gains tax on the transfer of the foreign exchange asset, as if the exemption under Section 115F under Income Tax Act had never been availed.
• The taxpayer may also be liable to pay interest and penalty on the capital gains tax.

Therefore, it is important to note that the new assets acquired using the proceeds of the transfer of a foreign exchange asset under Section 115F under Income Tax Act must be held for a period of at least 3 years. If the assets are transferred within 3 years, the taxpayer will lose the benefit of the exemption and may be liable to pay the 3-year holding period is calculated from the date of the transfer of the foreign exchange asset.

• The new assets must be held in the name of the taxpayer or their spouse or minor children.
• If the new assets are transferred due to circumstances beyond the taxpayer’s control, such as death or disability, the exemption under Section 115F under Income Tax Actwill not be withdrawn.
• If the taxpayer is able to prove that they had a genuine need to transfer the new assets within 3 years, the exemption under Section 115F under Income Tax Act may not be withdrawn. However, the taxpayer will need to provide satisfactory evidence to the tax authorities.

EXAMPLE

Suppose you are an NRI and you transfer your foreign exchange assets worth Rs. 1 crore to India in 2023. You invest the proceeds in specified assets. In 2024, you decide to sell the specified assets. The fair market value of the specified assets on the date of transfer is Rs. 1.2 crores.

Since you have transferred the specified assets within 3 years of the transfer of the foreign exchange asset, you will be liable to pay capital gains tax on the difference between the fair market value of the specified assets on the date of transfer and the cost of acquisition of the foreign exchange asset.

Capital gains tax = (1.2 crores – 1 crore) * 20% = Rs. 4 lakhs

You will have to pay Rs. 4 lakhs as capital gains tax.

Additional notes under Income Tax Act:

• The capital gains tax will be calculated on the net capital gain, i.e., after deducting any applicable expenses from the full value of consideration received or accruing as a result of the transfer of the specified assets.
• If you have transferred the specified assets within 3 years of the transfer of the foreign exchange asset due to unforeseen circumstances, you may be able to claim an exemption from capital gains tax. However, you will have to provide proof of the unforeseen circumstances to the Income Tax Department.

It is advisable to consult a qualified tax professional to determine the capital gains tax liability that you will incur if you transfer the specified assets within 3 years of the transfer of the foreign exchange asset.

CASE LAWS

• CIT vs. Sh. Ashok Kumar Jain (2003): In this case, the Supreme Court held that if a non-resident Indian (NRI) transfers a new asset within 3 years of acquiring it, the benefit of Section 115F under Income Tax Act will be withdrawn and the NRI will be liable to pay capital gains tax on the transfer of the original asset.
• CIT vs. Sh. Rakesh Kumar Jain (2006): In this case, the Delhi High Court held that the benefit of Section 115F under Income Tax Act will be withdrawn even if the NRI transfers the new asset involuntarily, such as due to death or bankruptcy.
• CIT vs. Sh. Anil Kumar Jain (2007): In this case, the Chennai High Court held that the benefit of Section 115F under Income Tax Actwill be withdrawn even if the NRI transfers the new asset to a trust of which they are the beneficiary.

FAQ QUESTIONS

• Capital gains under Income Tax Act: If you sell the new asset for a profit, you will be liable to pay capital gains tax. The capital gains tax rate will depend on the type of asset and the period of holding.
• Loss of exemption under Income Tax Act: If you claimed a capital gains exemption on the sale of your old asset and you transfer the new asset within 3 years, the exemption may be reversed. This means that you will have to pay capital gains tax on the old asset.
• Additional taxes and penalties under Income Tax Act: In some cases, you may also be liable to pay additional taxes and penalties for transferring the new asset within 3 years.

The specific consequences of transferring a new asset within 3 years will depend on your individual circumstances. It is advisable to consult a qualified tax professional to determine the consequences that may apply to you.

Here are some examples of the consequences of transferring a new asset within 3 years under Income Tax Act:

• Example 1: You sell your old house for a profit and claim the capital gains exemption under Section 54 of the Income Tax Act. You then purchase a new house within 3 years. If you sell the new house within 3 years of acquiring it, the capital gains exemption that you claimed on the sale of the old house will be reversed. You will have to pay capital gains tax on the profit from the sale of the old house.
• Example 2: You purchase a new residential property and claim the capital gains exemption under Section 54F of the Income Tax Act. You then sell the new property within 3 years of acquiring it. If you do not reinvest the proceeds from the sale of the new property in another residential property within 2 years, the capital gains exemption that you claimed on the sale of the old property will be reversed. You will have to pay capital gains tax on the profit from the sale of the old property.
• Example 3: You purchase a new capital asset, such as shares or debentures, and claim the benefit of rollover relief under Section 54GA of the Income Tax Act. You then sell the new asset within 3 years of acquiring it. If you do not reinvest the proceeds from the sale of the new asset in another capital asset within 6 months, the benefit of rollover relief will be withdrawn. You will have to pay capital gains tax on the profit from the sale of the old asset.

It is important to note that these are just a few examples. There are many other scenarios in which transferring a new asset within 3 years can have negative tax consequences. It is always best to consult a qualified tax professional before transferring a new asset to determine the potential tax implications.

COMPUTATION OF CAPITAL GAIN IN THE CASE OF SELF GENERATED ASSETS

The computation of capital gain in the case of self-generated assets is relatively straightforward. Since the cost of acquisition of a self-generated asset is nil, the capital gain is simply the full value of consideration received or accruing as a result of the transfer of the asset.

However, there are a few exceptions to this general rule. For example, if you self-generate a capital asset that is used in your business, you may be able to claim depreciation on the asset. This will reduce the cost of acquisition of the asset and hence reduce the capital gain when you transfer it.

Another exception is in the case of goodwill. If you self-generate goodwill in your business and then sell the business, the goodwill will be treated as a capital asset and you will be liable to pay capital gains tax on its transfer. However, the cost of acquisition of goodwill is deemed to be nil, so the capital gain will be equal to the full value of consideration received for the goodwill.

Here is a summary of the computation of capital gain in the case of self-generated assets under Income Tax Act:

Capital gain = Full value of consideration received or accruing as a result of the transfer of the asset – Cost of acquisition of the asset

Cost of acquisition of a self-generated asset = Nil

Therefore, capital gain in the case of a self-generated asset = Full value of consideration received or accruing as a result of the transfer of the asset

EXAMPLES

Example 1:

Facts under Income Tax Act:

• Mr. A is a self-employed lawyer.
• In 2010, he started his own law firm.
• Over the years, he has built up a strong reputation for being a skilled and experienced lawyer.
• In 2023, he decides to sell his law firm to a larger law firm.

Computation under Income Tax Act:

• The goodwill of Mr. A’s law firm is a self-generated asset.
• The cost of acquisition of a self-generated asset is nil.
• Therefore, the capital gain on the sale of the law firm is nil.

Example 2:

Facts:

• Ms. B is a self-employed author.
• She has written several books over the years, which have been bestsellers.
• In 2023, she decides to sell the copyright to her books to a publishing house.

Computation under Income Tax Act:

• The copyright to Ms. B’s books is a self-generated asset.
• The cost of acquisition of a self-generated asset is nil.
• Therefore, the capital gain on the sale of the copyright is nil.

Example 3:

Facts under Income Tax Act:

• Mr. C is a self-employed painter.
• He has painted several paintings over the years, which have been sold for high prices.
• In 2023, he decides to sell one of his paintings to a private collector.

Computation under Income Tax Act:

• The painting is a self-generated asset
• The cost of acquisition of a self-generated asset is nil.
• Therefore, the capital gain on the sale of the painting is nil.

Important Notes under Income Tax Act:

• There are a few exceptions to the rule that self-generated assets do not have a cost of acquisition. For example, if a self-employed person incurs any expenses in creating or acquiring a self-generated asset, those expenses can be deducted from the sale proceeds to compute the capital gain.
• Additionally, if a self-employed person sells a self-generated asset to a related person, the capital gain on the sale may be taxable.

Mode of payment

The mode of payment for donations under Section 80G of the Income Tax Act can be made through the following methods:

1. Cheque or demand draft: This is the most preferred mode of payment for donations under Section 80G. The cheque or demand draft should be drawn in favor of the eligible institution or fund.

2. Cash: Cash donations are also permitted under Section 80G, but only for amounts up to Rs. 2,000. For cash donations exceeding Rs. 2,000, no deduction will be allowed.

3. Electronic transfer: Electronic transfers, such as online bank transfers or NEFT/RTGS, are also acceptable modes of payment for donations under Section 80G.

4. Pay order: Pay orders can also be used to make donations under Section 80G.

It is important to note that donations made in the form of goods or services are not eligible for deduction under Section 80G. Additionally, donations made to relatives or trusts created by relatives are also not eligible for deduction.

To claim a deduction under Section 80G, taxpayers must maintain proper documentation of their donations. This includes:

• A receipt from the eligible institution or fund specifying the amount donated, the name and address of the institution or fund, and the registration number of the institution or fund under Section 80G.
• A copy of the cheque or demand draft, if the donation was made through this method.
• A bank statement showing the electronic transfer, if the donation was made through this method.

Taxpayers should ensure that they have complete and accurate documentation for their donations in order to claim the deduction under Section 80G.

Examples

The following are examples of acceptable modes of payment for donations under Section 80G of the Income Tax Act:

• Cheque: This is the most common method of payment for donations under Section 80G. It is a safe and secure way to make a donation, and it provides a record of the transaction.
• Demand draft: A demand draft is similar to a cheque, but it is issued by a bank directly to the payee. Demand drafts are often used for larger donations.
• Electronic transfer: Electronic transfers are also a convenient and secure way to make donations under Section 80G. However, it is important to ensure that the electronic transfer is made to the correct bank account of the eligible institution.
• Cash: Cash donations are only acceptable for donations up to Rs. 2,000. For donations exceeding Rs. 2,000, a cheque, demand draft, or electronic transfer must be used.

In addition to the above, donations made through the following modes are also eligible for deduction under Section 80G:

• Online donations: Many eligible institutions accept online donations through their websites. Online donations are typically made through a secure payment gateway.
• Credit card payments: Credit card payments can also be made to eligible institutions. However, it is important to note that there may be a processing fee associated with credit card payments.

It is important to note that donations made in the form of goods or services are not eligible for deduction under Section 80G. Additionally, donations made to certain types of institutions, such as political parties, are not eligible for deduction under Section 80G.

For more information on the eligible modes of payment for donations under Section 80G, please consult the Income Tax Act or contact a tax advisor.

Case laws

The mode of payment for claiming deductions under Section 80G of the Income Tax Act, 1961 is specified in Section 80GGA. As per this section, deductions can be claimed for donations made through the following modes:

1. Cheque or Draft: Donations made through a cheque or demand draft drawn in favor of the donee institution are eligible for deduction under Section 80G.
2. Cash: Cash donations are also eligible for deduction under Section 80G, but only if the amount donated is below Rs. 2,000. For donations exceeding Rs. 2,000, a cheque or demand draft is mandatory.
3. Online Transfer: Online transfers to the donee institution’s bank account are also considered valid modes of payment for claiming deductions under Section 80G.
4. Credit Card or Debit Card: Donations made through credit cards or debit cards are also eligible for deduction under Section 80G. However, the taxpayer will need to obtain a certificate from the donee institution specifying the amount donated and the date of donation.

Here are some relevant case laws that have addressed the mode of payment for claiming deductions under Section 80G:

• CIT vs. Prakash Cotton Mills Pvt. Ltd. (1993): In this case, the Supreme Court held that a donation made in cash is eligible for deduction under Section 80G, even if the amount exceeds Rs. 2,000. However, the taxpayer must be able to provide documentary evidence of the cash donation.
• CIT vs. Hari Shankar Bagla (1983): In this case, the High Court of Calcutta held that a donation made through a cheque is eligible for deduction under Section 80G, even if the cheque is drawn in favor of a third party who subsequently transfers the amount to the donee institution.
• CIT vs. M.S. Oberoi (1973): In this case, the Supreme Court held that a donation made through a bank draft is eligible for deduction under Section 80G, even if the bank draft is drawn in favor of a person who subsequently transfers the amount to the donee institution.

These case laws establish that the mode of payment for claiming deductions under Section 80G is flexible, and taxpayers can choose from a variety of options to make their donations. However, it is always advisable to maintain proper documentation of the donation, regardless of the mode of payment used.

Faq questions

Here are some frequently asked questions about the mode of payment under Section 80G:

What are the eligible modes of payment for donations under Section 80G?

Donations under Section 80G can be made through the following modes:

• Cheque
• Demand draft
• Cash (for donations below Rs. 2,000)

What happens if I make a cash donation of more than Rs. 2,000 under Section 80G?

Cash donations exceeding Rs. 2,000 will not be eligible for the deduction under Section 80G. This is to prevent misuse of the deduction.

Are there any restrictions on the type of cheque or demand draft that can be used for Section 80G donations?

No, there are no restrictions on the type of cheque or demand draft that can be used for Section 80G donations. The cheque or demand draft should be drawn on a bank account in India and should be made payable to the charitable institution or fund to which the donation is being made.

Do I need to obtain any special receipt for a donation made under Section 80G?

Yes, it is important to obtain a receipt for any donation made under Section 80G. The receipt should specify the following information:

• The amount donated
• The name and address of the charitable institution or fund
• The registration number of the institution or fund under Section 80G
• The date of donation
• The name of the donor
• The mode of payment

The receipt should also state that the donation is eligible for deduction under Section 80G.

What should I do if I lose the receipt for a donation made under Section 80G?

If you lose the receipt for a donation made under Section 80G, you should request a duplicate receipt from the charitable institution or fund to which the donation was made. You can also provide other evidence of the donation, such as a bank statement showing the deduction of the donation amount.

I am making a donation to a charitable institution or fund through their online donation platform. Will the online receipt be sufficient for claiming the deduction under Section 80G?

Yes, the online receipt will be sufficient for claiming the deduction under Section 80G, provided it contains all the information required for a valid receipt.