Income Tax

Capital Gains Tax & What is Capital Gains Tax in India, Types, Tax Rates, Calculation, Exemptions & Tax Savings

Any profit or gain arising from the sale of a ‘capital asset’ is known as ‘income from capital gains’. Capital gain is taxed in the year in which the capital assets are transferred. This is called the Capital Gains Tax. There are two types of Capital Gains; they are short-term capital gains (STCG) and long-term capital gains (LTCG).

Investing in a house property is one of the most popular investments, mainly because you own a house. At the same time, some invest to earn profit upon selling the property in the future. For income tax, a house property is regarded as a capital asset. Further, any gain or loss arising from the sale of a house property will be taxed under the ‘Capital Gains’ head. In a similar manner, capital gains or losses may emerge from the sale of different types of capital assets. In this blog, we will discuss the chapter on ‘Capital Gains’ in detail.

Definition of Capital Assets

A few examples of capital assets are land, house property, buildings, patents, trademarks, vehicles, leasehold rights, jewellery and machinery. It includes having rights in or in relation to an Indian company and further includes rights of management or control or any other legal right.

The following do form a part of capital assets:

1. Any stock, raw material or consumables held for the business or profession
2. Personal goods such as clothes and furniture
3. Agricultural land in rural India
4. 61/2% gold bonds (1977) or 7% gold bonds (1980) or National Defence gold bonds (1980) issued by the Central Government.
5. The Special Bearer Bonds (1991)
6. The Gold deposit bond provided under the Gold Deposit Scheme (1999) or deposit certificates provided under the Gold Monetisation Scheme, 2015

What are the Types of Capital Assets?

1. Short-term capital asset (STCG)

An asset held for a period of up to 36 months or less is a short-term capital asset. The criteria for land, building and house property is 24 months for immovable properties from the Financial Year 2017-18. For instance, if you sell a house property after a period of 24 months, any income arising from selling the property after 31 March 2017. The reduced period of 24 months is inapplicable to movable property such as jewellery, debt-oriented mutual funds, etc.

For some assets, the criteria is that they should be held for up to 12 months. This rule applies if the date of transfer is after 10 July 2014, without regard to the date of purchase. These assets include:-

1. Equity or preference shares of a company listed on a recognized stock exchange in India.
2. Securities such as debentures, bonds, government securities, etc., are listed on a recognized stock exchange in India.
3. Units of UTI, whether quoted or not
4. Units of equity-oriented mutual fund, whether quoted or not
5. Zero coupon bonds, whether quoted or not
6. Long-term capital asset (LTCG)

An asset held for a period of more than 36 months is a long-term capital asset. Capital assets like land, buildings and house property should be treated as long-term capital assets if the owner keeps it for more than 24 months (from FY 2017-18).

Below-listed assets, if held for more than 12 months, will be treated as long-term capital assets:-

1. Equity or preference shares of a company listed on a recognized stock exchange in India
2. Securities such as debentures, bonds, government securities, etc., listed on a recognized stock exchange in India
3. The Units of UTI, whether quoted or not
4. Units of equity-oriented mutual fund, whether quoted or not
5. The Zero coupon bonds, whether quoted or not

Classification of Inherited Capital Asset

In case an asset is obtained by gift, will, succession or inheritance, the duration for which the earlier owner held the asset is also included while determining whether it’s a short-term or a long-term capital asset. In the case of bonus or right shares, the holding period is calculated from the date of allotment of bonus shares or rights shares, respectively.

LTCG & STCG -Tax Rates

Tax Type	Condition	Applicable Tax
Long-term capital gains tax (LTCG)	Sale of: Equity sharesUnits of equity-oriented mutual fund	10% over and above INR 1 Lakh
	Others	20%
Short-term capital gains tax (STCG)	When Securities Transaction Tax (STT) is not applicable	Normal slab rate
	When STT is applicable	15%

Tax on Equity and Debt Mutual Funds

Gains arising from the sale of debt funds and equity funds are treated differently. Any fund that invests heavily in equities, i.e., more than 65% of their total portfolio, is called an equity fund.

Funds	On or before 1 April, 2023		Effective from 1st April 2023
	Short-term Gains	Long-term Gains	Short-term Gains	Long-term Gains
Debt Funds	As per tax slab rates of the individual	Either 10% without indexation or 20% with indexation, whichever is lower	As per tax slab rates of the individual	As per the slab rate of the individual
Equity Funds	15%	10% over and above INR 1 lakh without indexation	15%	10% over and above INR 1 lakh without indexation

Tax Rules for Debt Mutual Funds

Recently, because of the amendment to Finance Bill 2023, gains from debt mutual funds will not be taxed at slab rates and will be considered short-term, irrespective of the holding period. It means that no indexation benefit will be applicable. Before 1 April 2023, to qualify as a long-term capital asset, debt mutual funds had to be held for more than 36 months. It also means that you have to remain invested in these funds for at least three years to avail the benefit of long-term capital gains tax. If it is redeemed within three years, the capital gains will be considered income and taxed as per the income tax slab rate.

Calculating Capital Gains

Capital Gains are calculated differently for long-term capital assets and for short-term capital assets.

Terms You Need to Know:

Full value consideration – The consideration received by a seller for the transfer of his capital assets. Capital gains are taxed in the year it is transferred, irrespective of whether the transfer has been received or not.

Cost of Acquisition – It is the value for which the seller acquired the capital asset.

Cost of improvement – It is an expense of capital nature made during any additions or alterations to the capital asset by the seller.

Note:–

• In cases where the capital asset becomes the taxpayer’s property rather than by an outright purchase, the Cost of acquisition and the Cost of improvement by the previous owner would also be included.
• Any improvements made prior to 1 April 2001 are never considered.

Calculation of Short-Term Capital Gains

Step 1: Take the full value of consideration

Step 2: Subtract the following:

• Expenditure made wholly and exclusively in connection with such transfer
• Cost of Acquisition
• Cost of Improvement

Step 3: The amount obtained is short-term capital gain.

Calculation of Long-Term Capital Gains

Step 1: Take the full value of consideration

Step 2: Subtract the following:

• Expenditure made wholly and exclusively in connection with such transfer
• Indexed Cost of acquisition
• Indexed Cost of improvement

Step 3: From the amount obtained, subtract exemptions provided under Sections 54, 54EC, 54F and 54B.

Exception to LTCG

The Budget 2018 made long-term capital gains on the sale of equity shares or units of equity oriented fund obtained after 31 March 2018, will remain exempt up to INR 1 lakh per annum. Further, a 10% tax will be levied on Long-Term Capital Gains on shares/units of equity-oriented funds exceeding INR 1 lakh in one financial year without the benefit of indexation.

Deductible Expenses

1. Sale of house property: The following expenses are deducted from the entire sale price
2. Any brokerage or commission paid to settle with a purchaser
3. The Cost of stamp papers
4. Any travelling expenses in connection with the transfer- these may be after the transfer has been effected.
5. In the case of inherited property, the expenditure made concerning procedures associated with the will and inheritance, obtaining a succession certificate, and the Cost of the executor may also be allowed in some cases.
6. Sale of Shares: The following deductions are allowed to be deducted:
7. Any broker’s commission related to the shares sold
8. No securities transaction tax (STT) is allowed as a deductible expense
9. Selling of jewellery: In case of the sale of a broker’s jewellery and where a broker’s services are associated with securing a buyer, the Cost of these services can be deducted.

Note: Expenses deducted from the sale price of assets for calculating capital gains are disallowed as a deduction under any other head of income and can be claimed only once.

Indexed Cost of Acquisition or Improvement

The Cost of acquisition and improvement is indexed by applying CII (Cost Inflation Index). This is done to adjust the inflation over the years of holding the asset. It increases one’s cost base and lowers the capital gains. The calculation of the indexed Cost of acquisition is done as follows:

Indexed Cost of acquisition = Cost of acquisition * CII of the year the asset is transferred) ÷ CII of the year the asset was with the seller or FY 2001-02, whichever is later.

The Cost of acquiring assets before 1 April 2001 should be the actual Cost or FMV as of 1 April 2001 as per the taxpayer’s option.

Calculation of the indexed Cost of improvement:–

Indexed Cost of improvement = Cost of improvement * CII ( year of asset transfer) ÷ CII (year of asset improvement)

Note: Any advancement made before 1 April 2001 will not be considered.

Exemption on Capital Gains

Example: Abhishek bought a house in July 2004 for INR 50 lakh, and the total value considered received in FY 2016-17 is INR 1.8 crore.

Capital asset type: As the property has been held for over three years, it will result in long-term capital assets.

Cost of acquisition: For inflation, the cost price is modified, and indexed Cost of acquisition is used. Utilizing the indexed Cost of acquisition formula, the adjusted Cost of the house is INR 1.17 crore.

Capital Gain: The net capital gain is INR 63,00,000.

Tax: Long-term capital gains on the sale of house property are taxed at 20%. For a net capital gain of INR 63,00,000, the total tax outgo will be INR 12,97,800. This is a huge amount to be paid out in taxes. It can be reduced by taking benefit of exemptions under the Income Tax Act.

Section 54: Exemption on Sale of House Property on Purchase of Another House Property

Section 54 provides exemptions that can be availed when the capital gains from the sale of a house property are reinvested into purchasing or constructing two other house properties. Exemption on two house properties will be permitted once in a lifetime of a taxpayer based on the fact that the capital gains do not exceed INR 2 crores. The taxpayer must invest the amount of capital gains, not the entire sale proceeds. Where the purchase price of the new property is more than the amount of capital gains, then the exemption shall be limited to the total capital gain on sale.

Conditions for availing of this benefit

• New property can be bought either a year before the sale or two years after the sale of the property.
• The gain can also be invested in the construction of a property, but construction must be finished within three years from the date of sale.
• In the Budget 2014-15, it was clarified that only one house property can be bought or constructed from the capital gains to claim exemption.
• The exemption can be redeemed if this new property is sold within three years of purchase or completion of construction.
• The capital gains tax exemption threshold under Sections 54 to 54F is limited to INR 10 crore. Earlier, there was no such limit.

Section 54F: Exemption on capital gains on the sale of an asset except a house property

Exemption under Section 54F is granted when there are capital gains from the sale of long-term assets other than a house property. The entire sale consideration should be invested to buy a new residential house property in order to claim this exemption. The new property should be purchased one year before or two years after the sale. The gains can be used to invest in the construction of a property. But the construction should be finished within three years from the date of sale.

Budget 2014-15 clarified that only one house property can be bought or constructed from the sale consideration to claim this exemption. This exemption can be taken back if the new property is sold within three years of its purchase. If you meet the above criteria, the total capital gain will be tax-exempt if the sale proceeds are invested towards the new house. But if you invest only a part of the sale proceeds, then the capital gains exemption will be applicable in proportion to the invested amount to the sale price. LTCG exemption = Capital Gains * Cost of new house / Net Consideration.

Section 54EC: Exemption of Sale of House Property on Reinvesting in Specific Bonds

Under section 54EX, the exemption is available when capital gains arising from the sale of the first property are reinvested into specific bonds.

• If you are not keen to reinvest your profit from the sale of the property to another one, then you can invest them in bonds for up to INR 50 lakhs issued by the National Highway Authority of India (NHAI)¹ or Rural Electrification Corporation (REC).
• The money invested can be taken back after five years, but it cannot be sold before the expiry of 5 years from the date of sale.
• The homeowner can, within six months, invest the profit in these bonds. To claim this exemption, one has to invest before the tax filing deadline.

When can investment in the Capital Gains Account Scheme be made?

Searching for a suitable seller, arranging the requisite funds and getting the paperwork for a new property is time-consuming. Luckily, the Income Tax Department agrees with these limitations. If capital gains are not invested until the due date of filing of return in the fiscal year in which the property is sold, the gains are to be forwarded to a PSU or other banks as mentioned in the Capital Gains Account Scheme, 1988.

The forwarded amount can then be sought as an exemption from capital gains. No tax has to be paid on it. If the money is not invested, then the deposit shall be considered as a short-term capital gain arising in the year in which the specified period expires.

Saving Tax on Sale of Agricultural Land

In certain instances, capital gains made from the sale of agricultural land may be wholly exempt from income tax, or it may not be taxed under the head capital gains. They are:

• Agricultural land in rural areas is not treated as a capital asset, so any gains arising from the sale are not taxable.
• If you are buying and selling land regularly or in the course of business, then any gains from its sale are chargeable to tax under the Head Business and Profession.
• Capital gains on compensation received from mandatory acquisition of urban agricultural land are tax-exempt as per Section 10(37) of the Income Tax Act.

You can seek exemption under section 54B if your agricultural land was not sold in any of the above cases.

Section 54B: Exemption on Capital Gains from Transfer of Land Used for Agricultural Purposes

Exemption under Section 54B applies if you make short-term or long-term capital gains from transferring land used for agricultural purposes by an individual or individual’s parents or Hindu Undivided Family (HUF) for two years before the sale. The amount exempted is invested in a new asset or capital gain, whichever is lower. Reinvestment into new agricultural land should be done within two years from the date of transfer.

The new agricultural land purchased to claim exemption of capital gains should not be sold within three years from its purchase date. In case you are unable to purchase agricultural land prior to the date of furnishing of your income tax return, then the amount of capital gains must be deposited prior to the date of filing of return in the deposit account in any branch of a public sector bank or IDBI Bank according to the Capital Gains Account Scheme, 1998.

Exemptions can be claimed for the amount which can be deposited. If the amount deposited as per the Capital Gains Account Scheme was not utilized for the purchase of agricultural land, it is considered as capital gains of the year in which 2 years from the date of sale of land expires.

Conclusion

In summation, it can be said that any profit or gain arising from the sale of a ‘capital asset’ is known as ‘income from capital gains’. Capital gain is taxed in the year in which the capital assets are transferred. This is called the Capital Gains Tax. Rest, we have discussed in detail the types, tax rates, calculation, exemptions and tax saving mechanism of capital gains tax.

FAQs

1. https://nhai.gov.in/