Meaning of capital asset (as set, 1961 Act, AY 2016-17)

The expression is defined in section 2(14). A capital gain arises only on the transfer of a capital asset (section 45), so the definition fixes the reach of the head Capital gains.

What is included

1. Property of any kind held by the assessee, whether or not it is connected with his business or profession (section 2(14)(a)). The words of any kind in section 2(14)(a) are wide: land, buildings, shares and jewellery are all property. The Explanation at the end of section 2(14) adds that property includes, and has always included, any rights in or in relation to an Indian company, such as rights of management or control.
2. Securities held by a Foreign Institutional Investor that has invested in them under the SEBI regulations (section 2(14)(b)). These are capital assets even if the investor treats them as stock-in-trade.

What is excluded

The definition then leaves out six kinds of property:

1. Stock-in-trade, consumable stores and raw materials held for the business or profession (other than the securities in item 2 above) (section 2(14)(i)). Their sale gives business income, not a capital gain.
2. Personal effects: movable property, including clothing and furniture, held for the personal use of the assessee or a dependent family member (section 2(14)(ii)). The exclusion does not cover jewellery, archaeological collections, drawings, paintings, sculptures or any work of art; these remain capital assets even when kept for personal use. Jewellery here includes ornaments of gold, silver, platinum or other precious metal (or an alloy of one), with or without stones, and precious or semi-precious stones, whether or not set or sewn into something (Explanation 1 to that sub-clause).
3. Agricultural land in India that is not in an urban area (section 2(14)(iii)); see below.
4. The 6½% Gold Bonds, 1977, the 7% Gold Bonds, 1980 and the National Defence Gold Bonds, 1980 issued by the Central Government (section 2(14)(iv)).
5. Special Bearer Bonds, 1991 issued by the Central Government (section 2(14)(v)).
6. Gold Deposit Bonds under the Gold Deposit Scheme, 1999, and deposit certificates under the Gold Monetisation Scheme, 2015, notified by the Central Government (section 2(14)(vi)). The second part was inserted by Act 28 of 2016 with effect from 1 April 2016, so it applies from assessment year 2016-17, the year of this paper.

Rural agricultural land

Agricultural land in India is a capital asset only if it lies:

• within a municipality or cantonment board with a population of 10,000 or more; or
• within the following aerial distances from the local limits of such a municipality or cantonment board:
  • up to 2 km, if its population is more than 10,000 and up to 1 lakh;
  • up to 6 km, if it is more than 1 lakh and up to 10 lakh;
  • up to 8 km, if it is more than 10 lakh.

Population means that of the last census whose figures were published before the first day of the previous year (Explanation to section 2(14)(iii)(b)). Agricultural land outside these areas is not a capital asset, so its sale is not taxed as a capital gain.

Examples (our own)