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
-
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.
-
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
-
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.
-
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
-
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.
-
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 |
Learn more about ITR filing in india
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.
Discover the seamless power of online bookkeeping – empowering your business with real-time insights and financial clarity, all at your fingertips.
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:
-
Step 1: Provide Sale Details
- Sale price
- Purchase price
- Number of units
- Purchase date, year, and month
- Sale date, year, and month
-
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.
Plan, estimate, and save – our Online Tax Calculator is designed for your financial success.
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:
-
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.
-
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.
-
Tax-Free Bonds:
- Interest earned is tax-free.
- Returns upon maturity or sale are categorized based on the holding period.
-
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.
Classification of Inherited Capital Asset
Determining whether a capital gain is short-term or long-term is crucial for calculating the correct tax. For inherited assets, the holding period includes the time the previous owner held the asset.
Holding Period
- Inherited Assets: The holding period begins from the date the original owner acquired the asset.
- Bonus or Rights Shares: The holding period starts from the date of allotment.
Tax Rates
- Long-Term Capital Gains (LTCG):
- Equity shares and equity-oriented mutual funds: 10% tax on gains exceeding Rs. 1 lakh.
- Other assets: 20% tax.
- Short-Term Capital Gains (STCG):
- Without Securities Transaction Tax (STT): taxed at your regular income tax slab.
- With STT: 15% tax rate.
Exemption on Capital Gains
Selling a property can result in significant capital gains, often leading to a substantial tax liability. However, the Income Tax Act provides certain exemptions to mitigate this burden.
One such exemption allows taxpayers to reinvest the capital gains from the sale of a residential property into another residential property within a specified timeframe. By doing so, you can defer or even eliminate the tax on the initial capital gain.
Key factors to consider include the holding period of the original property, the reinvestment timeline, and the specific conditions outlined in the tax laws. Careful planning and adherence to these guidelines can help you optimise your tax position when selling a residential property.
It’s essential to consult with a tax professional to understand the specific rules and eligibility criteria for availing of these exemptions.
Section 54F: Exemption on Capital Gains on Sale of Any Asset Other than a House Property
If you sell a long-term capital asset (other than a residential property), you might be eligible for tax relief under Section 54F of the Income Tax Act.
To claim this exemption, you must reinvest the entire sale proceeds into a new residential property. This property can be purchased either within a year before or two years after the sale of the original asset. Alternatively, you can use the proceeds to construct a new residential house, provided it’s completed within three years of the sale.
It’s important to note that only one property qualifies for this exemption. If you sell the newly purchased property within three years, you’ll lose the tax benefits.
The amount of exemption depends on your investment. If you invest only a portion of the sale proceeds, the tax exemption is calculated proportionally.
Section 54B: Exemption on Capital Gains From Transfer of Land Used for Agricultural Purpose
If you sell agricultural land that has been owned for at least two years, you might qualify for tax relief under Section 54B of the Income Tax Act. This exemption applies to individuals, their parents, and Hindu Undivided Families (HUFs).
To claim this exemption, you must reinvest the sale proceeds into new agricultural land within two years. The exemption amount is equal to the investment in the new land or the total capital gain, whichever is lower.
It’s important to hold onto the newly acquired agricultural land for at least three years to maintain the tax benefits. If you’re unable to invest within the two-year timeframe, you can deposit the capital gains in a designated account under the Capital Gains Account Scheme.
By understanding the conditions and requirements of Section 54B, you can potentially reduce your tax liability on the sale of agricultural land.
Section 54D: Capital Gains on Transfer of Land and Building Which is Used for Industrial Undertaking
If you’re forced to sell industrial land and buildings due to compulsory acquisition, you might qualify for tax relief under Section 54D.
To claim this exemption, the property must have been used for business operations for at least two years prior to the sale. The capital gains from the sale can be reinvested in new industrial property within three years. If reinvestment isn’t immediate, you can deposit the amount in a Capital Gains Account Scheme (CGAS).
The amount of tax exemption depends on the reinvestment. If the new property’s cost equals or exceeds the sale proceeds, the entire capital gain is exempt. Otherwise, the exemption is limited to the cost of the new property.
When Can You Invest in the Capital Gains Account Scheme?
Investing in a new property to claim capital gains exemption can be time-consuming. To accommodate this, the Income Tax Department allows you to deposit the capital gains into a designated account.
If you haven’t found a suitable property to reinvest your capital gains by the tax filing deadline (usually July 31st), you can deposit the amount in a Capital Gains Account Scheme (CGAS) at a specified bank. This deposit helps defer the tax liability.
However, it’s crucial to remember that this is a temporary measure. If you don’t invest the deposited amount in a qualifying asset within the stipulated time frame, the funds will be treated as short-term capital gains, and you’ll be liable for taxes accordingly.
Capital Gains Tax Strategies to Reduce the Tax Burden
Capital gains can significantly impact your overall tax liability. To minimise this burden, consider the following strategies:
- Hold onto Your Assets: Extending your investment horizon can be beneficial. Long-term capital gains typically attract lower tax rates compared to short-term gains.
- Strategic Reinvestment: Investing the proceeds from asset sales into qualifying assets can defer or potentially eliminate capital gains tax. Explore options like purchasing a new property or investing in capital gain bonds.
- Utilise Tax-Saving Schemes: Explore tax-saving schemes and deductions that can offset your capital gains. Consult with a tax professional to identify opportunities.
- Understand Tax Laws: Stay informed about the latest tax regulations and changes. Knowledge of tax laws empowers you to make informed decisions and maximise your tax savings.
- Seek Professional Advice: A tax expert can provide tailored guidance based on your specific financial situation, helping you implement effective tax-saving strategies.
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.
