Income Tax

Capital Gains in ITR Form and Tax Exemptions

One should disclose capital gains or losses while filing Income Tax Return regardless of the amount gained or lost. So what is capital gain, and how can one disclose capital gains in ITR form? We will find out in this article.

Meaning of Capital Gains in ITR Form

Capital gain refers to the profits accrued through the capital assets sale. The capital gains are of two types, namely, short term and long term. Long term capital assets are held for 36 months or more, whereas short term assets are held for a shorter time period.

Capital gains arise if you sell a capital asset for an amount more than what you paid for. Capital assets refer to an investment product such as mutual funds, stocks or a real estate product such as land, house etc. An enhancement in the value of these investment products when you sell them is called as capital gain. Likewise, capital loss is used where there is a decrease in the assets’ value for its purchase price. A realized capital gain takes place when one sells the asset at a high price than its original purchase price. 

How to calculate Capital Gains?

• Short term capital gains tax

For short term capital gains, the following formula is used:

Short term capital gain= Full value consideration – (cost of acquisition+ cost of improvement + cost of transfer).

• Long term capital gains tax

For long term capital gains, the following formula is used:

Long term capital gain= full value of consideration received/accruing- (indexed cost of acquisition + indexed cost of improvement + cost of transfer) where the indexed cost of acquisition= cost of acquisition x cost inflation index of year of transfer/cost inflation index of year of acquisition. Indexed cost of improvement = cost of improvement x cost inflation index of year of transfer /cost inflation index of the year of improvement.

Capital gains rate

The rate at which the capital gains in ITR form is calculated may vary from one year to another. In case of long term capital gains, individuals are taxed at the rate of 20.6%. There are no deductions which can be availed under capital gains tax. It may be noted that the short term capital gains tax is charged at the tax slab under which an individual comes.

Gains from the transfer of immoveable property

Gains from the transfer of immoveable property within 2 years of purchase is considered as short term capital gains, and after the two year period, they are considered as long term capital gains. The long term capital gains rate is 20% with indexation, whereas the short term capital gains is taxed at the slab rate.

Gold and bonds, jewellery or bullion, are chargeable to capital gains tax regardless of the method of acquisition-self purchased, gifted or inherited. If it is sold before three year period from the purchase date, then gains are considered short term capital gains otherwise, it is Long term capital gains.

Short term capital gains from the sale of gold is taxed at the slab rate, and the long term capital gains at 20% with indexation. Gains from the transfer of shares and equity oriented mutual funds within one year of purchase are considered as short term capital gains, and after the one year period, they are considered as long term.

Disclosing Capital gains in ITR Form: Tax Exemptions

There are a number of exemptions provided by the government which can be claimed on the capital profits made. Below we have discussed the exemptions list which can be claimed with respect to gains from capital assets.

As per Section 54 of the IT Act^[1], a person is entitled to tax exemption on profit earned if the whole profit amount is used to purchase a house. The seller may purchase a new house within 2 years from the sale date of his previous property or build a new house in 3 years from the date of sale.

Section 54 EC entitles an individual for tax exemption in case the entire capital profit is invested in bonds issued by the NHAI (National Highway Authority of India) or Rural Electrification Corporation. Under Section 54 EC, there is a limit to exemption.

Capital gains shall not be applicable to the sale of property in case the whole amount is invested to form a small scale or medium scale industry. In order to avail tax exemption, the tools and machinery for manufacturing should be purchased within 6 months of the sale.

Conclusion

For computation of tax, capital losses can be used to offset effect of tax on capital gains, but Long term capital losses can be set off against LTG only. Short term capital losses can be set off against short term and LTCG.

Read our article: Misreporting and Under-reporting of Income: Legal Provisions