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Tax Provisions Relating to Capital Gains

Narendra Kumar

| Updated: Jul 30, 2018 | Category: Income Tax, Taxation

Capital Gains

Capital Gains are derived in all such cases where the profit has realized from investments whereby the capital asset has been sold for a price higher than its purchase price. The transferor selling of capital asset made in the previous year is chargeable in the next financial year and is chargeable under the head ‘Capital Gains’.

Capital Gains include any property, shares except the following:

  1. Stock in trade.
  2. 6.5 % Gold Bonds,
  3. (NDGB)National Defence Gold Bonds
  4. (SBB)Special Bearer Bonds.
  5. Gold Deposit bonds under the Gold Deposit Scheme
  6. Consumable stores or raw materials which are held for the purpose of business or profession.
  7. Personal effects that are movable.
  8. Agricultural land. The land must not be located within 8kms from a municipality,

What are the Types of Capital Assets?

Short-Term Capital Asset(STCA):

If the shares and securities are held for a period not more than 36 months from the date of its transfer* by the taxpayer, it will be treated as a short-term capital asset.

Long-Term Capital Asset(LTCA):

If the shares and securities are held for a period more than 36 months from the date of its transfer* by the taxpayer, it will be treated as a long-term capital asset.

Transfer* shall include sale, exchange, compulsory acquisition under any law and relinquishment with respect to the capital asset.

Note that in cases of following STCA or LTCA the Bonds’ period of holding will be considered for 12 months instead of 36 months:

  1. Equity shares which are listed in a recognized stock exchange[1],
  2. Units of equity-oriented mutual funds,
  3. Listed debentures and
  4. Government securities,
  5. Units of UTI and Zero Coupon

Chargeability: The amount which is liable to be taxed is the money which has been actually received by the capital asset holder at the time of transfer of the asset.

Is Capital Gain Eligible for Tax Deductions?

The Capital Gain Investments is not allowed to be part of deductions under Chapter VI-A (such as deductions under Section 80C, 80D, etc.) except if invested/contributed in tax-saving instruments, in that case also, what you can claim is amount after deduction from your gross income excluding LTCG.

How is Tax Charged on Capital Gains?

The tax is charged on LTCA and STCA in two forms one is through general taxes and another is Special taxes as given below:

Our Recommendation: Cost Inflation Index for Transfer of Capital Asset Acquired by Inheritance.

In the case of Long-term Capital Gain (LTCG):

  1. General Taxes (For individual)

In case your taxable income after availing all the Deductions (including the Tax saving instrument LTCG) is less than the maximum exempt limit as per slab rates, which is Rs 2, 50,000 for AY 2018-19, then the difference between Rs 2, 50,000 and your taxable income (excluding Long-term capital gains) will be allowed as deduction and you will be charged tax @ 20% of the remaining amount.

Tax charged in General rates cases is as follows:

Sr. No.Assessment YearFinancial yearRate (%)Education Cess (%)
1.2018-20192017-2018203
2.2018-20192019-2020204
Observation: The maximum tax saving that can be made on LTCG is (if the tax rate is 20% and education cess is 3 % i.e. 20.6%) is nothing but 20.6% of Rs 2, 50,000/- in numbers that are 51,500/-
  1. Special Taxes (For individual)

For the sale of equity shares and equity-oriented mutual funds, held for more than one year, on or after April 1, 2018, the tax rate is at 10 percent plus cess @ 4 percent (instead of @3 % until FY 2017-2018).

Note:

  1. That indexation benefit will not be allowed on such transactions.
  2. From FY 2018-2019 capital gains up to Rs 1 lakh in a single financial year will be exempt from
  3. In case of NRI, tax @ 10% without giving effect to indexation on your LTCG is to be charged, instead of paying tax @ 20% after giving effect to indexation., in ONLY cases of if the LTCG arise from sale/transfer of unlisted securities (like shares of a private limited company).

In the case of Short-term Capital Gain:

  • General Taxes (For individual)

In short-term Capital Gain Investments, the benefit arising out of such tax is simply added to the gross total income and basis the individual tax slab limit the taxpayer falls in, the capitalization rate is charged.

  • Special Taxes (For individual)

Similarly, STCG from the sale of equity shares or equity oriented mutual funds on which STT is charged on sale transaction following is the tax rate:

Sr. No.Individual tax slab rate (in %)Capital tax applicable (in %)
1.1010
2.20-3015

Also, Read: What are the Income Tax Laws for Startups in India.

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Narendra Kumar

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