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Capital Gains Tax

Capital Gains

Last Updated 28th Jan 2021

  • Profit from selling capital assets is termed as Capital gain.
  • Capital gains are subject to tax as per the provisions of Capital Gain Tax in the Income Tax Act, 1961.
  • Capital gains are classified into long term capital gains and short-term capital gains.
  • Sections 54, 54F and 54EC offer tax exemptions on capital gains.
INCOME TAX CALCULATOR

What is Capital Gains on Tax?

Capital gain refers to the earnings or profits that come from the sale of any capital asset. This earning falls in the category of income and hence it is taxable. The tax imposed on such capital gains is termed as Capital Gains Tax. Depending upon the holding period of capital asset, capital gains tax can either be long term or short term. The tax rate under long term capital gain and short-term capital gain starts from 10% and 15% respectively. The percentage differs depending on the asset type.

Capital gains tax is not imposed on inherited properties since no selling is involved in the procedure. However, capital gains tax will be applicable on gains from selling an inherited property.

Capital Asset

Capital assets include both movable and immovable properties such as land, property, vehicle, machinery, jewelry and so on. Trademarks, patents, rights in Indian companies, management and leasehold fall in the capital assets as well.

As per the holding period of the asset, Capital assets can be categorized into two parts;

  • Long term capital asset
  • Short term capital asset

Capital Gains

Selling an asset at a higher price than the purchase price generates profits. Such profits that are gained by selling capital assets are capital gains. Capital gains are based on three key factors, that are:

  • Cost of asset
  • Cost of further improvements on the asset.
  • Consideration value received by you on account of selling the asset.

An important point to remember is that profits from selling any asset will be subject to taxation in the coming financial year. If the capital asset has been sold at a lower price than the purchase price, there will be no capital gain and hence, capital gains on tax will not be of concern.

Types of Capital Gains

The capital gains have been classified into two categories. This classification is based on the holding periods of capital assets. 

Long Term Capital Gains – LTCG

An asset held for longer than 24 months is termed as long term capital asset. Thus the profit derived from selling it is long term capital gain. However, for movable properties like jewelry, debt-oriented MF, etc., the period is 36 months. 

Short Term Capital Gains – STCG

When the holding periods of the immovable assets like land or building is less than 24 months, the gain from selling such asset falls under the short term capital gains. 

However, there are some assets which are considered short term assets only when their holding period is 12 months or less. Such assets are: 

  • Quoted and unquoted units of Equity Mutual Funds.
  • Quoted or unquoted Zero-Coupon Bonds. 
  • Equity shares or preference shares of a company which is listed on a recognised stock exchange. 
  • Various securities listed on recognised stock exchange
  • Quoted or unquoted units of UTI. 

Capital Gains Tax Calculation

Capital gains tax is calculated based on the time period for which the asset was held. However, to calculate the capital gains tax, you must have a brief understanding of the following factors.

  • Improvement cost: It refers to the cost for any improvement of the property paid by the seller. Improvements made after April 1, 2001 are only considered under Capital gains.
  • Acquisition cost: It refers to the cost paid by the seller for acquiring the asset.
  • Complete value consideration: It refers to the sum the seller receives after selling the asset. The tax calculation will be done from the year of the transaction even if the capital gain was not received in the same financial year.

Now, let’s have a look at the capital gains tax calculations.

Long term capital gains tax calculation

Deduct the total sum of the indexed acquisition cost, indexed improvement cost and transfer charges from the complete value consideration. Subtract the number from exemptions (if any) under the sections 54, 54F and 54 EC. You will get the long term capital gains.

Short term capital gains tax calculation

Similar to long term capital gains, short term capital gains can be calculated by deducting the acquisition cost, improvement cost and transfer cost from the value consideration.

Methodology for computing Capital Gains

Below are explained the methodologies for computing the long term capital gains tax and the short term capital gains tax.

Long term capital gains tax = A - (X+Y+Z)


A = Complete value consideration

X = Indexed Acquisition cost

Y = Indexed Improvement cost

Z = Expenditure required during transfer


Short term capital gains tax = A - (X+Y+Z)


A = Complete value consideration

X = Acquisition cost

Y = Improvement cost

Z = Expenditure required during transfer


For better understanding of the long term capital gains tax, the formulas for calculating indexed acquisition cost and indexed improvement cost have been given below.

Indexed acquisition cost = X * (Y/Z)

X = Acquisition cost

Y = CII of the the transfer year

Z = CII of the acquisition year


Indexed improvement cost = X * (Y/Z)

X = Improvement cost

Y = CII of the transfer year

Z = CII of the improvement year


Capital Gains Exemption

The following tax exemptions can be availed on capital gains under the Indian Income Tax Act of 1961.

Section 54: Capital gains from residential property used to purchase another residential property

Under 54 section, capital gains isexempt if a residential property has been purchased on selling another one; however, the following conditions are applicable.

  • The newly purchased property must be located in India.
  • The new property must be purchased one year prior to the sale or within 2 years from the purchase date.
  • If the property in concern is under construction, the construction must be completed within three years from the sale.
  • Tax exemption will not be applicable in case the newly purchased property has been sold within three months of the purchase.

Section 54F: Capital gains from assets excluding any residential property used to purchase residential property

The 54F section of the IT act offers tax exemption if capital gain from any asset other than residential property is used to purchase a residential property. The tax benefits under 54F section come with the same conditions as the 54 section. The additional conditions are explained below.

  • On the purchase date, one can own no more than one residential property.
  • No further property can be bought within 1 year or can be put under construction within 3 years from the date of purchase.

Section 54EC: Capital gains invested in specific bonds

The 54EC section grants tax exemption on capital gains if the gain is invested in specific bonds.

However, the below-mentioned conditions are to be kept in mind.

  • Capital gains up to ₹ 50 lakhs can be invested in bonds offered by NHAI and REC.
  • The investment cannot be broken or redeemed before 3 years from the date of transfer.

FAQs

How do I avoid capital gains tax?

You can avoid capital gains tax in the following manner.

  • Hold the asset for longer periods since long term capital gains tax is lower than short term capital gain tax.
  • Reinvest the capital gain in residential property or specific bonds.

How do you calculate capital gains tax?

You can calculate the capital gains tax using the below mentioned formulas.

  • Long term capital gains tax = Complete value consideration - (indexed acquisition cost + indexed improvement cost + expenditure during transfer)
  • Short term capital gains tax = Complete value consideration - (acquisition cost + improvement cost + expenditure during transfer)

What triggers capital gains tax?

Capital gains accumulate whenever a capital asset is sold at a higher price than the purchase price. Since capital gains are considered as income, the gains become subject to tax deduction.

What amount is exempt from capital gains tax?

If any capital asset is sold at a lower price than the purchase price, no capital gain crop ups and hence, no amount is deducted as capital gains tax. When capital gains are reinvested in purchasing new residential property or in specific bonds, they become eligible for tax exemption.

How do you calculate capital gains on sale of property?

To calculate the capital gains, subtract the acquisition cost, improvement cost and any other cost accrued during the transfer from the complete value consideration.

Can you roll over capital gains tax?

No, capital gains tax cannot be rolled over; however, it can be avoided by holding the asset for a longer period and by reinvesting the capital gain in new residential property or specific bonds.

Does long term capital gains count as income?

Yes, long term capital gain is counted as income.

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