Filing Capital Gains Tax

Get the complete benefits from your capital assets. File your capital gain tax and reduce your tax burden considerably!

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What is capital gains tax?

Capital gains tax refers to the gains gained from transfer or sales of capital assets such as property, gold, shares, and bonds. These gains are taxed under the title ‘capital gains’. These capital gains are differentiated based on the period of their holdings, into two types. The two types of capital gains tax are short-term capital gains tax and long-term capital gains tax. The method of calculating capital gains tax varies from asset to asset.


Conditions of capital gains tax

  • When it comes to property inherited it will not be applicable for capital gains tax, as the ownership of property is not purchased through the exchange of money, but simply transferred. The Income Tax Act has exemptions in place for property or gifts received as an inheritance or through a will. However, if the property is then sold off by the person who inherits it, capital gains tax will be applicable to it.
  • While capital gain refers to the profit received from the sale of a capital asset, short-term capital gains tax rate starts from 15% while long-term capital gains start from 10%. Capital gains or profits fall under the income category for which tax has to be paid, as stipulated by the income tax department.

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Types of Capital Assets

Based on the capital gains tax filed, there are two types of capital assets;


Long-term capital asset:

A capital asset that is held on for 36 months or more is considered as a long term capital asset, and any profit gained from them is liable to be filed for long term capital gains tax. Debt-oriented mutual funds, jewelry, etc. will come under this category, with no option for a 24-month reduction period.

Certain assets are considered as long term assets if they are held for more than 12 months:

  • Unit Trust of India (UTI) units (regardless of whether they are quoted or not).
  • Zero-coupon bonds (regardless of whether they are quoted or not)..
  • Mutual Fund units equity based (quoted or unquoted).
  • All stock listed on a stock exchange recognized in India, such as government securities, bonds, and debentures.
  • A company-held preference shares or equities listed on a stock exchange that is recognized in India.

Short-term capital asset:

A capital asset that is held on for 36 months or less is considered as a short-term asset, and any profit gained from them is liable to be filed for short-term capital gains tax. However, assets that are immovable such as property, land, etc. the duration has been reduced from 36 months to 24 months.

Hence, when a property that has been held longer than the duration of 24 months is sold off, the profit that is earned from the sale comes under long term capital gain. If the property has been given as a gift, the period held by the previous owner is also considered when determining whether the property can be considered as a short term capital asset or a long term capital asset.

Benefits of Capital gains tax on different assets


Gains from the sale of property:

When it comes to gains generated from the sale of an immovable property (land, house, shop or office) within 24 months of its purchase, it is considered as short-term gains and applicable for. short-term capital gains tax, as per the standard rate. However, if the period extends beyond 24 months, it is applicable for long-term capital gains tax charged as per long term capital gain tax rate at 20%, after indexation.

Gains from the sale of securities, stocks, and funds

If stocks or equity-oriented mutual funds held for 1 year or less are sold off, the profits gained from that sales are considered short-term gains and taxed at 15%. However, if the stocks or equity-oriented mutual funds held for more than 1 year the profits gained from that sales are considered long-term gains, which are considered as capital gains exemption for profits up to Rs. 1,00,000/-. If the profits generated are more than Rs. 1,00,000/-, it will be taxed as per long term capital gain tax rate at 10%.

Gains from the sale of gold and gold bonds

Profits generated from the sale of physical gold (jewelry, coins, bars) held for less than three years are considered as short-term gains and taxed as short-term capital gains tax. However, if sold after three years, it is considered as long-term gains and taxed as long-term capital gains tax as per the long-term capital gain tax rate 20% after indexation. When it comes to sovereign gold bonds introduced by the RBI, they have capital gains exemption if they are held until their maturity. If sold prematurely, the gains are taxed as per profits generated through the sale of gold.

Debt and hybrid funds

As opposed to equity-based securities and stocks, debt and other types of funds do not have the same tax benefits. However, these debt-based funds and hybrid funds are considered to be more tax-efficient than fixed deposits. For this reason, gains generated from them are considered as long-term gain, if held over three years. Gains from debt-oriented funds are considered as long-term gains, if they are held for over three years, and taxed as per the long-term capital gain tax rate of 20% after indexation.

Checklist factors for calculating capital gains

When it comes to calculating capital gains required to file capital gains tax, it is important to consider the holding period concerning the capital assets in hand. Listed below are checkpoint factors that are required for calculating capital gains

  • Additional cost for improvement: If additional costs have been incurred for improving the capital asset, it will be considered for calculating the capital gains of the seller. However, if these improvements were made before April 1, 2001, the cost of those improvements will not be considered.
  • Cost of assets: This total amount spent on purchasing a capital asset by the seller.
  • Period of valuation: The amount of profit earned by the seller on selling a capital asset will be calculated as capital gains from the year the sale was made, even if the actual amount has not been received by the seller in the same year.
  • Costs of the previous owner: In certain special cases, the cost of assets and additional cost for improvement of the previous owner will be included as well, especially if the taxpayer is also the owner of the property.

How to Calculate Long Term Capital Gains?

The procedure to calculate long term Capital Gains is mentioned below:

  • It begins with calculating the cost of the capital asset, which will help in determining its value.
  • Next, include the following deductions:
    • The costs involved in the transfer.
    • Capital asset buying cost
    • The additional cost for improvement.
  • From calculating the above-mentioned deductions, the individual must subtract the capital gains exemption that is provided under Section 54B, Section 54F, Section 54EC, and Section 54.

An example of capital gains calculator, to calculate long-term capital gains

Here is the below example to help calculate long-term capital gains

Assumptions:

  • Let’s consider a house purchased at Rs.30 lakhs
  • The financial year in which the house is purchased is 2010-2011
  • The financial year in which the house is sold is 2018-2019
  • The sale price of the house was Rs.62 lakhs
  • Inflation-adjusted cost: (280/167) x 30 = 50.29 lakhs
  • Long-term capital gains: 62 lakhs - 50.29 lakhs = Rs.11,71,000 (approx)

How to Calculate Short Term Capital Gains?

The procedure to calculate short-term capital gains is mentioned below:

  • It begins with calculating the cost of the capital asset, which will help in determining the full value of the property.
  • Next, include the following deductions:
    • The costs involved in the transfer.
    • The cost of buying the capital asset.
    • The additional cost for improvement.
  • The amount that is calculated after the deduction is short-term capital gain.

To summarise, for short-term capital gains, the full value of the asset (or the cost) is taken and then the following costs are deducted from it. Deductions include the cost involved in the transfer, cost of buying the capital asset and the additional cost for improvement.

An example of capital gains calculator, to calculate long-term capital gains

Here is the below example to help calculate short-term capital gains

Assumptions:

  • Let’s consider a house sold at Rs.55 lakhs
  • Let’s look at the expenses for brokerage, commissions, etc: Rs.30,000
  • Net sale consideration: Rs.54,70,000
  • The house was purchased at Rs.35 lakh
  • Additional cost for improvements: Rs.3 lakh
  • Gross short term Capital Gain: Rs.16,70,000
  • Capital gains exemption under Sections 54, 54B, 54D, 54EC, 54ED, 54F, 54G: Nil
  • Net short term Capital Gain: Rs.16,70,000
  • Short Term Capital Gains: 30% of Rs.16,70,000: Rs.5,01.000

Frequently Asked Questions

Generally, the cost of acquisition of a capital asset is the cost incurred in acquiring the capital asset. It also includes purchase consideration and the costs incurred exclusively for acquiring the capital asset. Now, if the capital asset was purchased before 1st April 2001, the cost of procuring the asset will be higher than the cost of the asset or the market value be higher than on the date, 1st April 2001. However, the same option is not applicable for depreciable assets.​
In such a case, the cost of acquisition will be based on the market value of the capital asset on 1st June 2016, as consideration for the declaration scheme, 2016. Applicable from April 1, 2017.​

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