CAPITAL GAINS TAX
One of the most sought-after investments is a residential property, mainly because you get to own a house. Some investors, however, might do so to make money when they sell the property later on. It is significant to remember that, for income tax purposes, real estate is considered a capital asset. As such, any profit or loss realized from the sale of real estate may be liable to taxation under the “Capital Gains” heading. Similar to this, selling various kinds of capital assets can result in capital profits or losses.
Here, we’ll go into great detail on the “Capital gains”.
WHAT IS CAPITAL GAINS TAX?
“Capital gains income” is any profit or gain derived from the sale of a “capital asset.” These capital gains are subject to taxation in the year that the capital asset is transferred. We refer to this as capital gains tax. Short-term capital gains (STCG) and long-term capital gains (LTCG) are the two categories of capital gains.
A.WHAT ARE CAPITAL ASSETS?
Among the various types of capital assets include land, buildings, houses, cars, machinery, jewels, patents, trademarks, and leasehold rights. This covers owning interests in or ties to an Indian business. It encompasses all other legal rights as well as the rights of administration and control.
The following items do not fit under the capital asset category:
- Any inventory, supplies, or raw materials stored for a trade or professional purpose
- Personal items kept for one’s own use, such as clothing and furniture
- India’s rural(*) agricultural land
- Central government-issued 6½% gold bonds (1977), 7% gold bonds (1980), or National Defence gold bonds (1980).
- 1991’s special bearer bonds
- Deposit certificates issued under the Gold Monetization Scheme, 2015, and Gold Monetization Scheme, 2019, as notified by the Central Government, or gold deposit bonds issued under the Gold Deposit Scheme, 1999.
* The definition of a rural area (as of AY 2014–15) – A rural area is any place with 10,000 or more people that is not under the control of a municipality or cantonment authority. Furthermore, it must not fall under the parameters listed below.
| Distance (to be measured aerially) | Population (as per the last census). |
|---|---|
| 2 kms from local limit of municipality or cantonment board | If the population of the municipality/cantonment board is more than 10,000 but not more than 1 lakh |
| 6 km from local limit of municipality or cantonment board | If the population of the municipality/cantonment board is more than 1 lakh but not more than 10 lakh |
| 8 km from the local limit of the municipality or cantonment board | If the population of the municipality/cantonment board is more than 10 lakh |
B. WHAT ARE THE TYPES OF CAPITAL ASSETS?
- Short-term capital assets (STCA) are assets held for a duration of 36 months or less. However, there are exceptions to this timeframe. For unlisted shares and immovable properties such as land, building, and house property, the holding period for being considered short-term is 24 months, starting from the fiscal year 2017-18. For example, if a house property is sold after being held for 24 months, any resulting income is categorized as long-term capital gain, provided the sale occurs after March 31, 2017. This reduced timeframe of 24 months doesn’t apply to movable properties like jewelry or debt-oriented mutual funds.
Additionally, certain assets fall under the short-term capital asset category if held for 12 months or less, starting from transfers made after July 10, 2014, regardless of the purchase date. These assets include equity or preference shares in a company listed on a recognized Indian stock exchange, securities listed on such exchanges (such as debentures, bonds, and government securities), units of UTI (whether quoted or not), units of equity-oriented mutual funds, and zero coupon bonds (whether quoted or not).
- Long-term capital assets (LTCA), on the other hand, are assets held for more than 36 months. However, similar to short-term assets, exceptions exist. Land, building, and house property qualify as long-term capital assets if held for 24 months or more, starting from the fiscal year 2017-18.
Furthermore, certain assets are classified as long-term capital assets if held for more than 12 months. These include equity or preference shares in a company listed on a recognized Indian stock exchange, securities listed on such exchanges (such as debentures, bonds, and government securities), units of UTI (whether quoted or not), units of equity-oriented mutual funds, and zero coupon bonds (whether quoted or not).
C. RATES OF TAXATION: Long-Term and Short-Term Capital Gains Tax Category
| Tax Type | Condition | Applicable Tax |
|---|---|---|
| Long-term capital gains tax (LTCG) | Sale of: - Listed Equity shares (If STT has been paid on purchase and sale of such shares) - units of equity oriented mutual fund (If STT has been paid on sale of such units) | 10% over and above Rs 1 lakh |
| Others | 20% | |
| Short-term capital gains tax (STCG) | When Securities Transaction Tax (STT) is not applicable | Normal slab rates |
| When STT is applicable | 15%. |
D. TAX ON EQUITY AND DEBT MUTUAL FUNDS
The treatment of gains from the sale of equity funds and debt funds varies. An equity fund is an investment vehicle that makes a sizable portion of its portfolio—more than 65%—in stocks.
| Funds | On or before 1 April 2023 | Effective 1 April 2023 | ||
|---|---|---|---|---|
| Short-Term Gains | Long-Term Gains | Short-Term Gains | Long-Term Gains | |
| Debt Funds | At tax slab rates of the individual | 10% without indexation or 20% with indexation whichever is lower | At tax slab rates of the individual | At tax slab rates of the individual |
| Equity Funds | 15% | 10% over and above Rs 1 lakh without indexation | 15% | 10% over and above Rs 1 lakh without indexation |
CALCULATING CAPITAL GAINS
Capital gains are calculated differently for assets held for a longer period and for those held over a shorter period.
Key Terms to Know
Full value consideration: The amount received or due to be received by the seller for transferring their capital asset. Capital gains are taxable in the year of transfer, regardless of whether consideration has been received.
Cost of acquisition: The price at which the capital asset was originally bought by the seller.
Cost of improvement: Expenses of a capital nature incurred by the seller in enhancing the value of the capital asset.
Important Notes:
- If the capital asset is acquired by means other than an outright purchase, the previous owner’s acquisition and improvement costs may also be considered.
- Improvements made before April 1, 2001, are not taken into account.
Calculating Short-Term Capital Gains
- Begin with the full value consideration.
- Deduct expenses related to the transfer, cost of acquisition, and cost of improvement.
- Further deduct any exemptions under relevant sections (e.g., 54B/54D).
- The resulting amount represents the short-term capital gain subject to tax.
Short-term capital gain = Full value consideration
Less: Expenses incurred exclusively for such transfer( for e.g. brokerage on sale)
Less: Cost of acquisition
Less: Cost of improvement
Calculating Long-Term Capital Gains
- Start with the full value consideration.
- Deduct expenses associated with the transfer, indexed cost of acquisition, and indexed cost of improvement.
- Additionally, deduct any applicable exemptions under sections like 54, 54D, 54EC, 54F, and 54B.
- Exceptions may apply, such as the exemption for long-term capital gains on equity shares/units of equity-oriented funds up to Rs. 1 lakh per annum, with a 10% tax on gains exceeding this threshold without indexation benefit.
Long-term capital gain= Full value consideration
Less : Expenses incurred exclusively for such transfer
Less: Indexed cost of acquisition
Less: Indexed cost of improvement
Less: Expenses that can be deducted from full value for consideration
These calculations provide clarity on the taxable gains from the sale of assets, helping taxpayers manage their tax liabilities effectively.
DEDUCTIBLE EXPENSES
A. Sale of House Property: Certain expenses can be deducted from the total sale price of a house property, including:
- Brokerage or commission paid to secure a purchaser.
- Cost of stamp papers.
- Travel expenses related to the transfer, even if incurred after the transfer.
- For inherited property, expenses associated with will procedures, inheritance, and obtaining succession certificates may be allowed in some cases.
B. Sale of Shares: Allowable deductions for the sale of shares may include:
- Broker’s commission related to the shares sold.
- Securities Transaction Tax (STT) is not eligible as a deductible expense.
C. Sale of Jewelry: When selling broker’s jewelry and involving a broker’s services in securing a buyer, the cost of these services can be deducted.
Note: Expenses deducted from the sale price for calculating capital gains cannot be claimed as deductions under any other income head, and they are only claimable once.
Indexed Cost of Acquisition/Improvement
The cost of acquisition and improvement is indexed using the Cost Inflation Index (CII) to account for inflation over the holding period. This adjustment increases the cost base and reduces capital gains.
Indexed Cost of Acquisition:
Indexed cost of acquisition = (Cost of acquisition X CII of transfer year) / CII of the year when the asset was first held by the seller or FY 2001-02, whichever is later.
For assets acquired before April 1, 2001, the cost of acquisition should be the actual cost or fair market value (FMV) as of April 1, 2001, at the taxpayer’s discretion.
Indexed Cost of Improvement:
Indexed cost of improvement = (Cost of improvement x CII of transfer year) / CII of improvement year.
Note: Improvements made before April 1, 2001, should not be considered in the calculations.