Capital Gains Tax
The tax levied on the profit or gain earned on selling of the capital assets is known as Capital gains tax. Based on the holding period, capital gains tax divided into two forms i.e. long-term capital gains tax or short-term capital gains tax.
LTCG is 10% for stocks and equity mutual funds and 20% with indexation for debt mutual funds, real estate, and other assets. LTCG on equities/equity mutual fund does not get the benefit of indexation. Short term capital gains tax levied as per the slab rate. The holding period for classifying long-term capital gains and short-term capital gains changes from asset to asset.
Long term capital gains applied in those cases where a holding period of real estate is more than 2 years. It is also applicable if you are holding debt funds for more than 3 years and stocks/equity mutual funds for more than 1 year.
Capital Asset
Assets such as vehicles, leasehold earning, machinery, jewelry or intellectual property which is either in the form of patents and trademarks are all considered as a capital asset.
Assets that have a direct right and are part of Indian companies, also includes ownership control or rights of management as well as other holding rights are also considered as capital assets.
Capital Gain
It is a net profit that an investor earns after selling any capital assets at a price more than the original purchased price. Transferring of such capital assets being done in the previous financial year to get eligibility for taxation in the current year. The sale value of an asset is taxable under the income head which is known as a capital gain. There are three main fundamental assets in the whole process:
- A capital asset such as property, gold etc.
- The transfer of such capital asset
- A profit earned as a result of this transfer.
Any assets that are acquired through gift or partition of HUF property or any inherited assets are not applicable for paying any capital gains.
Assets which gets an exemption from capital gains are as follows:
| Any stock which held in trade (profits on this will be taxed on business income) |
| Consumable raw materials which are kept for specific purpose of any business or as per profession (taxed under business income) |
| Agricultural land which is not covered within 8km radius of any municipal corporation, municipality, any town committee /cantonment area board or notified area board having minimum residential population of around 10,000. |
| National Defense Gold Bonds 6.5 % Gold Bonds or the Special Bearer/ Gold Deposit bonds under the Government Gold Deposit Scheme. |
Type of Capital Gain
| Capital gain forms |
Holding period of assets |
| Long term Capital Gain: Asset which is being held for greater than a specific period. |
2 years of real estate
1 year of stocks/equity mutual funds/listed debentures / Government securities/zero coupon bonds/units of UTI
3 years for debt finds /any other assets.
|
| Short term Capital gain (STCG): When any asset sold before expiry |
Holding period of these assets are less than mentioned period. |
How to do calculation of Capital Gains?
Taxation on short term capital gain
It is calculated by adding capital gain to the total income of the taxpayer. Income tax is applied as per the individual’s tax bracket.
Taxation on long-term capital gains –
LTCG is levied at
- 20% for real estate, debt funds, other assets, after giving taxpayers the benefit of indexation
- 10% for stocks/equity mutual funds/listed bonds/zero coupon bonds/units of UTI
What is the concept of indexation in Capital gains?
This concept is related to calculate the effect of inflation to reduce tax liability. This calculation is being done by CII, which is known as the Cost inflation index, maintained by the Income Tax Department. The cost inflation index for the running financial year 2020-21 is being calculated as 289.
For instance, you bought a debt fund in 2017 for RS 150 and sell the same in 2020 for Rs 150. As you sold it after three years, it comes under long term capital gains tax of 20% with indexation will apply.
Cost Inflation index for the financial year 2017 was Rs 200 and for Financial year 2020 was 272. As a result, purchase price for tax will be calculated as
272/200*100 = 136
(Cost Inflation index financial year 2018/ Cost Inflation index Financial year 2015*100)
Your Taxable gain
150-136=14
Tax payable will be 20% of 14=Rs 2.8
Hence even though you have made a gain of Rs 50, your actual tax is not 20% of Rs 50 or Rs 10 but rather only Rs 2.8 after applying indexation.
Methodology for computing Capital Gains
| Short-term capital gain tax = A- (B+C+D) |
Long-term capital gain = A-(B+C+D), whereas, |
|
A= Sale value of the asset
B= cost of acquisition
C= cost of improvement
D= the cost of expenditure incurred totally and solely in the connection with a transfer
*Indexed cost of acquisition = A X (B / C), wherein
A= Cost of acquisition
B=CII of the year of transfer
C= CII of the year of acquisition
|
A=Full value of consideration received or accruing
B=indexed cost of acquisition*
C= indexed cost of improvement**
D= cost of expenditure incurred wholly and exclusively in connection with such a transfer
**Indexed cost of improvement = A X (B / C), wherein,
A=cost of improvement
B=CII of the year of transfer
C= CII of year of year of improvement
Cost of transfer is the brokerage paid for managing the deal, cost of advertising plus legal expenses incurred etc.
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What are Capital Gain Exemptions?
The exemptions mentioned below can be claimed partially or fully.
Example
Purchased Price – 80 Lakh
Sale price – 1 crore
Capital gain – 1 Cr – 80 Lakh = 20 Lakh
If you make a deposit of Rs 50 Lakh according to below mentioned exemptions, you can able to get an exemption on half of capital gain i.e. 20/2= 10 Lakh and only 10 lakhs will be taxable.
Section 54: If the sale proceeds of a residential property utilize to buy another property, then the person is liable to get the capital gain exemption, it is subjected under the following conditions:
a. Make sure that property purchased either one year before selling the property or purchased within 2 years of the sale.
b. In case it is under construction property, the purchase should be done within 3 years from the transfer date of the previous property.
It is not possible to further sold the newly acquired property within 3 years. Newly acquired property should be in India.
Section 54 F: If you make the sale of any of the agricultural land within 10 km of the city or any valuable jewelry, paintings, debt funds, etc. Then one can avail the benefit of Section 54 F in this case. Under this section, a grant given for deduction for the purchase of a house property from the proceeds of the sale of any capital asset. The following additional conditions apply:
- In case it is under construction property, the purchase should be done within 3 years from the transfer date of the previous property.
- It is not possible to further sold the newly acquired property within 3 years. Newly acquired property should be in India.
- On the date of doing transfer, the person should not have more than one residential property.
- No purchase of property to be made within 1 year of transfer or construction takes place within 3 years of the transfer.
The investor can deposit the sale proceeds in the Capital gains account scheme before the due date of filing Income Tax returns to take the benefit of the above sections i.e. Section 54 and Section 54F. It is valid only in that situation when he or she has not brought or constructed another property. However, a person must construct or purchase a new property within the mentioned stipulated period and can pay for the same using the money deposited in the Capital Gains Account Scheme.
Section 54 EC: Capital gain bonds that are issued by the National Highway Authority of India and Rural Electrification Corporation are eligible for exemptions of up to 50 Lakh from the capital gains tax. Capital gain tax has a tenure of 5 years with a fixed interest rate of 5.25%. Interest earned on these bonds is taxable. Only capital gain in real estate are eligible for this deduction.
For example, if you buy an asset for Rs 10 lakh and sell it for Rs 20 lakh investing the entire Rs 20 lakh in NHAI/REC capital gains bonds, the said transaction would not attract capital gains tax.
