ITRTaxation

What Exactly Is Capital Gains Tax in India?

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.

Classification of Capital Gains

Any asset owned by an Indian citizen is classified as ‘capital’. But for the purposes of taxation, they are bifurcated into two categories. An asset is a ‘long term asset’ or a short-term asset depending on how long you have been holding the asset. Different assets are assessed with different holding periods for the purpose of determining which category they fall into. For instance, stocks and shares held for less than one year before being sold are considered short-term capital. But a gold asset can be held for three years before it falls into the category of long-term capital. And any immovable asset, such as land or building, will be considered short-term capital if it is sold within two years from the date of purchase. This is why when you calculate the long-term capital gain, the nature of the asset and the time period it is held for play a very important role in determining whether the income from the sale of the asset is a long-term capital gain or a short-term capital gain.

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%.

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.

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