Any profits made on the sale of any asset is treated as taxable income and liable to capital gains tax. Here, we look into how capital gains tax is applicable specifically in India.
What is Capital Gains Tax (CGT)?
Capital Gains Tax Definition: Capital gains tax refers to the tax imposed on profits gained from the sale of assets during ownership transfer.
While all capital gains are subject to taxation, the approach to taxing long-term gains differs from that of short-term gains. Taxpayers can employ tax-efficient strategies to mitigate the impact of capital gains taxes.
Here’s an illustration to clarify:
Let’s consider Mr. B who purchased a house for Rs. 50 lakh in July 2004. By FY 2016-17, its full value stood at Rs. 1.8 crore. As the property was held for over 36 months, it qualifies as a long-term capital asset.
Factoring in inflation, the cost price was adjusted, and the indexed cost of acquisition was calculated at Rs. 1.17 crore. Consequently, Mr. B realized a net capital gain of Rs. 63 lakh. Applying a long-term capital gains tax rate of 20%, his tax liability totaled Rs. 12,97,800.
Capital Assets and Their Classification
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Long-term Capital Asset
Assets held for more than 36 months fall into the long-term category. For certain assets like land, buildings, and house properties, the period is 24 months from FY 2017-18. Others, including equity shares, securities, and mutual funds, qualify if held for over 12 months.
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Short-term Capital Asset
Assets held for 36 months or less are considered short-term. The 24-month rule applies to immovable properties. For specific assets like equity shares and bonds, if held for less than 12 months after July 10, 2014, they are treated as short-term.
Types of Capital Gains Tax
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Short-term Capital Gain Tax:
Assets held for under 36 months are short-term. Profits from their sale are subject to short-term capital gain tax, taxed according to the individual’s income tax slab.
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Long-term Capital Gain Tax:
Assets held for more than 36 months are long-term. Profits from their sale are considered long-term capital gains and are taxed accordingly.
Tax Rate on Long-Term Capital Gains and Short-Term Capital Gains
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Long-Term Capital Gains Tax
- Long-term capital gains tax is applicable at a rate of 20% for most assets, except for equity-oriented fund units and equity shares.
- For the sale of equity-oriented fund units or equity shares, the long-term capital gains tax is 10% on gains exceeding Rs. 1,00,000.
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Short-Term Capital Gains Tax
- When securities transaction tax (STT) is not applicable, short-term capital gains tax is added to the taxpayer’s income tax slab rate.
- If STT is applicable, the short-term capital gains tax rate is 15%.
Tax Rate on Equity and Debt Mutual Funds
Effective 1 April 2023
| Type of Funds | Short-Term Gains | Long-Term Gains |
| Debt Funds | 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 |
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Calculating Capital Gain
Capital gains are computed by deducting the cost of acquiring an asset from its selling price. The cost of acquisition encompasses the buying price, brokerage charges, and additional expenses associated with the asset’s purchase. Conversely, the selling price encompasses the sale value, brokerage charges, and additional expenses linked to the asset’s sale.
Calculation of Short-Term Capital Gains Tax
The assumption behind short-term capital gains is that an asset was purchased not for the purpose of safeguarding one’s savings but to take advantage of the appreciation in the value of the asset and to sell it with the intent of making a profit and not out of circumstantial requirement. So short-term capital gains, in general, are added to the regular income of an individual and are taxed according to the slab rate applicable to individuals in that particular assessment year. So the equation that is applicable to the calculation of the capital gain is the selling price of the asset minus the buying price. And if there has been any improvement made to the asset that has increased the value of the asset, for instance, you have spent on jewellery design after having bought some gold ornament, then you can deduct that amount from the selling consideration of the asset while calculating the income from capital gain. Any stamp duty or brokerage charges paid while purchasing or selling the asset also can be considered as a deduction.
The capital gain you arrive at is then added to your income from other sources and the applicable slab rate for that assessment year is applied to it. But the short-term capital gain on one asset is exempt from this rule and is taxed flatly, irrespective of your income from other sources, and that is the short-term capital gains made from the sale of stocks and shares. Any stock or share held for a period of less than a year and sold for a profit is taxed flatly at the rate of 15%, plus any cess if applicable. This has been done to encourage long-term investment in the stock market which in turn helps build national wealth.
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Calculation of Long Term Capital Gains Tax
Calculation of tax on long-term capital gains is very different from short-term capital gains because of the time element that comes into play when taking long-term capital gains into consideration. The value of something in one particular year can be drastically different from the same item in another year because of inflation. And so while deducting the buying cost from the selling cost to arrive at the long-term capital gain, the buying cost has to be adjusted for inflation so as to arrive at what that value would be on the date it is being sold. The technical word for this adjustment is called ‘indexation’ due to the ‘Cost of Inflation Index’ or CII that is used to calculate this value. This is a value calculated and issued by the income tax authority every year depending on the change in the cost of living.
In order to arrive at the adjusted value of the buying cost, you first look up the CII value for the year in which the asset was bought. Next, you look up the present CII value, i.e, the year in which it is being sold. Now you divide the present value by the value in the year it was bought. Finally, you multiply the original purchase value with this value to find the adjusted buying price which is then deducted from the selling price to know the taxable long-term capital gain.
However, the opposite of the assumption of short-term capital gains holds true for long-term capital gains in most cases. The assumption is that a long-term asset is sold off due to circumstantial reasons and if the sale consideration is used to make an investment in another asset within a certain time frame, then long-term capital gains tax is not applicable. So if you sell off a long-term capital asset and use the money to buy land or any other immovable property, then you are exempt from long-term capital gains tax. Investment in up to two properties is permitted under this rule.
Long-term capital gains tax on the sale of shares and securities was exempt until the year 2018-19. But during the budget of that year, stocks and shares are no longer exempt from long-term capital gains. Any capital gain on the sale of stocks and shares held for more than a period of one year and exceeds ₹1 lakh is liable to a long-term capital gains tax of 20%.
Capital Gains Tax Calculator
Calculating capital gains tax depends on the holding period of the asset. Here’s how to use a capital gains tax calculator:
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Step 1: Provide Sale Details
- Sale price
- Purchase price
- Number of units
- Purchase date, year, and month
- Sale date, year, and month
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Step 2: Additional Details
- Investment type
- Period between purchase and sale
- Type of capital gain
- Inflation cost index of purchase year
- Inflation cost index of sale year
- Purchased index cost
- Difference between indexed purchase price and sale price
- Long-term capital gains without indexation
- Long-term capital gains with indexation
By inputting these details, you can accurately calculate your capital gains tax.
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Capital Gains Tax on Property
Capital gains tax on property sales follows specific rules based on the holding period:
- Selling within 2 years results in short-term capital gain, taxed according to your income tax slab.
- Selling after 2 years leads to long-term capital gain, taxed at a flat rate of 20.8%.
Section 54 Exemptions
- Individuals can invest capital gains up to Rs. 2 crore from property sales in two new properties under certain conditions.
- Available to individuals or Hindu Undivided Families (HUF).
- Only applies to residential properties held for the long term.
- Purchase or construction should occur within specified time frames.
- Redemption of invested amount after 5 years, or sale before 5 years, not allowed.
Capital Gains Tax on Bonds
Different bonds have varying capital gains tax rates:
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Regular Taxable Listed Bonds:
- Held for over 12 months: Long-term gains taxed at 10% without indexation.
- Held for less than 12 months: Short-term gains taxed as per applicable slab rates.
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Regular Taxable Unlisted Bonds:
- Held for over 36 months: Long-term gains taxed at 20% without indexation.
- Held for less than 36 months: Short-term gains taxed according to applicable slab rates.
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Tax-Free Bonds:
- Interest earned is tax-free.
- Returns upon maturity or sale are categorized based on the holding period.
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Tax-Saving Bonds:
- Profits from selling assets can be invested in 54EC bonds to save taxes.
- No long-term capital gain tax if reinvested within 6 months of sale.
- Capital Gains Tax Exemption
Suppose Manya sells a house after holding it for over 3 years. Here’s how the calculations work:
- Cost price: Adjusted for inflation, indexed cost is Rs. 1.17 crore.
- Capital gain: Net gain is Rs. 63,00,000.
- Tax: 20% long-term capital gain tax amounts to Rs. 12,97,800.
To minimize tax liability, one can utilize exemptions by reinvesting profit into buying another asset, as per Income Tax Act provisions.
Conclusion
Capital gains, like any other income, are liable to tax. But the calculation of the capital gains differs from asset to asset and the period for which that asset was held before it was sold. Contact our experts at Vakilsearch to get a more specific understanding of any assets you have sold or are planning to sell so you can make a more informed decision with planning your capital gains tax.
