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Complete Guide of Capital Gains Tax in India

Capital Gain Tax – a tax levied by the Indian Government on profits from asset sales like stocks, bonds, real estate, and investments. Applicable to individuals and businesses, it's categorized into short-term and long-term gains based on asset holding periods.

Capital gains refer to the profits obtained from the sale of various assets, including investments and real estate properties. These gains are subject to taxation, referred to as capital gains tax.

In this guide, we will delve into the concept of capital gains tax, its types, and how it impacts individuals.

What is Capital Gains Tax?

Gains tax is the tax levied on the profits gained from the transfer of ownership of capital assets. It applies to all capital gains and varies depending on whether the gains are short-term or long-term. This tax can be reduced using tax-efficient financial strategies.

What are Capital Assets?

Capital assets, whether tangible or intangible, hold substantial value and are usually retained for the long term. They're not meant for immediate resale but for extended use or investment. Now, let's explore some common examples of capital assets:

  • Land
  • House property
  • Building
  • Trademark
  • Vehicles
  • Leasehold rights
  • Machinery
  • Patents
  • Jewellery

Legal rights, along with management and control rights, are also regarded as capital rights.

EXCLUSIONS: The subsequent assets are excluded from the category of capital assets:

  • Agricultural land in India (from A.Y. 2014-15)
  • Any stock-in-trade
  • Consumable stores
  • Personal items for personal use, such as clothes and furniture
  • Raw materials and consumable stores held for professional or business use
  • Gold deposit scheme gold bonds
  • Special bearer bonds, including 6.5% gold bonds (1977), 7% gold bonds (1980), and National Defence gold bonds (1980) issued by the Central Government
  • Gold deposit bonds (1999) issued under the Gold Deposit Scheme, or Deposit Certificates issued under the Gold Monetisation Scheme, 2015, as notified by the Central Government.

Types of Capital Assets

capital assts

Capital assets are typically divided into two categories: short-term capital assets and long-term capital assets:

Short-term Capital Assets: Short-term capital assets are those held for less than a specified period, which is:

  • 36 months for assets like shares, equity-oriented mutual funds, and debt funds.
  • 24 months for immovable properties such as land, house property, and buildings, starting from F.Y. 2017-18. However, this revised 24-month criterion does not apply to movable property like jewelry or debt-oriented mutual funds.

Long-term Capital Assets: Long-term capital assets are assets held by taxpayers for more than a specified period, which is:

  • More than 36 months for assets like shares, equity-oriented mutual funds, and debt funds.
  • 24 months or more for immovable properties such as land, house property, and buildings, effective from F.Y. 2017-18.

Types of Capital Gains Tax

capital gain

1. Short-term Capital Gain Tax (STCG)

Assets held for less than 36 months are considered short-term assets. For immovable properties, this duration is 24 months. Any profits generated from the sale of short-term assets are categorized as short-term capital gains and taxed accordingly.

2. Long-term Capital Gain Tax (LTCG)

Assets held for more than 36 months fall under the category of long-term assets. Profits earned from the sale of long-term assets are treated as long-term capital gains and attract taxation accordingly. Assets such as preference shares, equities, UTI units, securities, equity-based mutual funds, and zero-coupon bonds are also considered long-term capital assets if held for over a year.

Tax Rates – Long-Term Capital Gains and Short-Term Capital Gains

Type of Investment

Holding Period for Long Term Capital Asset

Long Term Capital Gain Tax (LTCG)

Short Term Capital Gain Tax (STCG)

Remarks

Stocks

> 1 year

10% of gain

15% of gain

LTCG Tax is applicable only if total Long-term gain/profit in a financial year exceeds Rs. 1 Lakhs.

Unit Linked Insurance Plan (ULIP Funds)

> 5 years

10% of gain

15% of gain

LTCG Tax is applicable only if total Long-term profit in a financial year exceeds Rs. 1 Lakhs.

Equity Oriented Mutual Funds (Mutual Funds that invest at least 65% of their Portfolio in Stocks)

> 1 year

10% of gain

15% of gain

LTCG Tax is applicable only if total Long-term profit in a financial year exceeds Rs. 1 Lakhs.

Rest of the Mutual Funds

> 3 years

20% with inflation indexation benefits

Gains are taxed as per your applicable income tax rates

-

Government and Corporate Bonds

> 3 years

20% with inflation indexation benefits

Gains are taxed as per your applicable income tax rates

-

Gold

> 3 years

20% with inflation indexation benefits

Gains are taxed as per your applicable income tax rates

-

Gold ETF

> 1 year

10% of gain

Gains are taxed as per your applicable income tax rates

LTCG Tax is applicable only if total Long-term profit in a financial year exceeds Rs. 1 Lakhs.

Immovable Property (like buildings, houses, and land)

> 2 years

20% with inflation indexation benefits

Gains are taxed as per your applicable income tax rates

-

Movable Property (like jewellery, royalty, and machinery)

> 3 years

20% with inflation indexation benefits

Gains are taxed as per your applicable income tax rates

Tax is not applicable for long-term profit reinvested in approved assets.

Privately held Stocks

> 2 years

20% with inflation indexation benefits

Gains are taxed as per your applicable income tax rates

-

Note:   The above-mentioned taxes do not consist of a surcharge levied on your income tax.

The rate of Capital Gain Tax (CGT) varies depending on factors like:

The Capital Gain Tax (CGT) rate is influenced by factors such as:

  • Type of asset
  • Duration for which the asset was held

Capital Gains Tax is applicable to both individuals and businesses when they realize a profit from selling their assets.

Regulations on Short-Term Gain and Long-Term Gain Tax

Under Section 80C of the Income Tax Act

  • Short-term capital gains are taxed at 15% if sold within a year, except when Securities Transaction Tax (STT) is applicable.
  • Long-term capital gains on equity-oriented funds and shares exceeding Rs. 1 Lakh are taxed at 10%, while for other assets, the tax rate is 20%.

Treatment of Equity and Debt Mutual Funds Capital Gains Tax

Gains from the sale of equity funds and debt mutual funds are treated differently:

Type of Funds (On or before 1 April 2023)

  • Debt Funds: Taxed at individual tax slab rates or 10% without indexation or 20% with indexation (whichever is lower).
  • Equity Funds: Taxed at 15% or 10% above Rs. 1 Lakh without indexation.

Type of Funds (Effective 1 April 2023)

  • Debt Funds: Taxed at individual tax slab rates.
  • Equity Funds: Taxed at 15% or 10% above Rs. 1 Lakh without indexation.

Read:- Payment of income for units of a mutual fund, for example- dividends

Calculation of Capital Gains

How to Calculate Short-Term Capital Gains? Refer to the table below for an overview of the short-term capital gains computation:

Full value of consideration (Sales consideration of asset)

XXXXX

Minus: Expenditure incurred on capital asset transfer (e.g., brokerage, commission, and advertisement costs)

XXXXX

Net sale consideration

XXXXX

Minus: Cost of Acquisition

XXXXX

Minus: Cost of Improvements

XXXXX

Short-Term Capital Gains

XXXXX

How to Calculate Long-Term Capital Gains? Explore the breakdown of Long-Term Capital Gains in the following table:

Full value of consideration (Sales price of the asset)

XXXXX

Minus: Expenditure incurred during the transfer of capital asset (e.g., brokerage, commission, and advertisement costs)

XXXXX

Net Sale Consideration

XXXXX

Minus: Indexed cost of acquisition*

XXXXX

Minus: Indexed cost of any improvements*

XXXXX

Minus: Deductible expenses from the Full Value of Consideration

XXXXX

Minus: Exemptions on CGT under Section 54, 54EC, 54B, and 54F

XXXXX

Long-Term Capital Gains

XXXXX

*Indexed cost accounts for inflation adjustments Data Source: Income Tax Department website

Key Terms for Calculating Capital Gain Tax

Capital gain tax computation varies based on the duration of asset holding. To grasp the calculations, familiarize yourself with the following key terms:

Full Value Consideration: The market value of an asset at the time of transfer. It represents the amount to be received as a result of the transfer of the capital asset. Capital gain tax is applicable in the transfer year, even if no consideration is received.

Cost of Acquisition: The charge for acquiring the capital asset, encompassing all direct and indirect costs such as purchase price, legal fees, brokerage fees, and commissions.

Cost of Improvement: Expenses for alterations or additions to the capital asset made by the sellers. Improvements made before April 1, 2001, are not considered.

Indexation of Cost: An accounting method adjusting the asset's cost to reflect inflation effects. Indexed Cost of Acquisition = (Cost of Acquisition) x (CII of the year of capital asset transfer / CII of the year of acquisition).

Indexation of Cost of Transfer: Brokerage paid for legal expenses, advertising costs, etc.

Indexation of Cost of Improvement: Cost of improvement multiplied by the Cost of Inflation Index (CII) of the improvement year/CII of the transfer year in long-term. Indexed Cost of Improvement = (Cost of Improvement) x (CII of the year of capital asset transfer / CII of the year of capital asset transfer in long-term).

Cost of Inflation Index (CII): A measure of inflation used to calculate long-term capital gains tax in India, published annually by the Central Board of Direct Taxes. CII values have changed since the base year change:

    

Financial Year (F.Y.)

Cost Inflation Index (CII)

2001-02

100

2002-03

105

2003-04

109

2004-05

113

2005-06

117

2006-07

122

2007-08

129

2008-09

137

2009-10

148

2010-11

167

2011-12

184

2012-13

200

2013-14

220

2014-15

240

2015-16

254

2016-17

264

2017-18

272

2018-19

280

2019-20

289

2020-2021

301

2021-2022

317

2022-2023

331

Exemption on Capital Gains Tax in India

To mitigate the burden of capital gains tax, individuals can avail themselves of the exemptions provided by the Income Tax Act. These include:

1. Section 54 - Sale of House Property on Purchase of Another House Property

Exempts gains from the sale of an existing residential property, provided the proceeds are reinvested in another residential property. The capital gains must not exceed Rs. 2 Crore, and this exemption can be availed only once.

2. Section 54EE - Profits from Transfer of Investments

Under Section 54EE, if you sell investments and reinvest the proceeds within six months, you get an exemption. However, selling the new securities within three years reduces the exemption amount. Loans against these new securities are taxable. Also, the investment should not exceed Rs. 50 lakh in the current and following fiscal years.

3. Section 54F - Capital Gains on Sale of Non-Residential Asset

Exempts gains from the sale of any asset other than a residential property, with the condition of reinvesting the sale consideration (including capital gains) in a new property within a specified timeframe in Section 54F.

4. Section 54EC- Profits from Sale of Long-Term Capital Asset

Exempts gains from the sale of an existing residential property if the proceeds are reinvested in specific bonds within six months. The redemption of such bonds is possible only after 60 months.

5. Section 54B - Transfer of Land Used for Agricultural Purposes

Exempts capital gains from the transfer of land for agricultural purposes if the sale of the asset occurs 24 months prior to the transfer. The exempted amount must be reinvested in a new asset within 36 months, and the newly acquired property must not be sold within 36 months of acquisition.

6. Sections 54E, 54EA, and 54EB - Profits from Investments in Certain Securities

Exemptions under Sections 54E, 54EA, and 54EB apply to long-term capital gains. To qualify, you must reinvest in specified securities within six months. If you sell the new securities before three years, the exemption amount is reduced. Additionally, loans against these securities are treated as capital gains.

Capital Gains Tax Strategies to Reduce the Tax Burden

To alleviate the impact of capital gains tax, individuals can adopt various strategies:

1. Holding Assets Longer

Holding onto assets for over 12 months before selling can significantly reduce the tax liability, as long-term capital gains are taxed at a lower rate compared to short-term gains.

2. Reinvesting Proceeds

Reinvesting the profits from the sale of assets into a new property or capital gain bonds within stipulated timeframes can help lower the tax liability on capital gains.

3. Utilizing Capital Gain Account Scheme

Investing capital gains into a designated account when unable to reinvest in a new residential property within the specified time can provide tax relief.

Examples of Capital Gains Tax

If you bought a house on January 1, 2000, for Rs. 30 lakhs and invested Rs. 8 lakhs in repairs on January 1, 2005. On January 1, 2023, you sold the house for Rs. 85 lakhs, incurring a brokerage fee of Rs. 1 lakh. Here are your capital gains:

Particulars

Calculation

Type of Capital Asset

Housing Property

Period of Holding the Asset

36 months

Type of Capital Gain 

Long-Term Capital Gain

Calculation of Capital Gains

Full Value of Consideration

Rs. 85,00,000

Minus: Indexed Cost of Acquisition

= Rs. 30 lakhs × (331/100)
= Rs. 99,30,000

Minus: Indexed Cost of Improvement

= Rs. 19,25,663

Minus: Brokerage Amount Paid

Rs. 1,00,000

Long Term Capital Gains OR Long Term Capital Loss

Rs. 34,55,663 (Loss)

 

Read:- Everything You Need to Know About ITR

End of Line

Understanding capital gains tax types is crucial for individuals aiming to minimize their tax burden. By exploring exemptions and utilizing tax-efficient strategies, individuals can optimize their returns while staying compliant with the Income Tax Act. Stay informed and make informed decisions regarding capital gains tax to maximize financial benefits.

Now equipped with knowledge about capital gains tax, its types, and tax-saving strategies, it's time to take the next step – filing your ITR. Simplify the process with The Tax Heaven , your go-to solution for seamless ITR filing. Visit us to complete your ITR filing within minutes. If taxes seem complex, just rely on us for hassle-free assistance. Let's make tax filing easy!

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Frequently Asked Questions

The long-term capital gains tax (LTCG tax rate) is outlined as follows:

  • LTCG on Equity Shares held for over 1 year is tax-exempt up to Rs. 1 lakh.

  • LTCG on residential property held for over 2 years is tax-exempt if the gains are reinvested in another residential property in India within 2 years of selling the original property.

  • LTCG on agricultural land held for over two years is exempt from tax.

  • For senior citizens (aged 60 and above) and persons with disabilities, LTCG on any type of asset held for over two years is exempt from tax up to Rs. 3 lakh per financial year.

Several common methods to avoid or reduce capital gains tax on property in India include:

  1. Reinvest the capital gains in another residential property: By reinvesting the capital gains in another residential property, you can defer the capital gains tax.

  2. Invest the capital gains in the Capital Gains Account Scheme (CGAS): Placing the capital gains in the CGAS provides a temporary parking space, allowing you time to identify and invest in another property.

  3. Hold the property for more than two years: If you hold the property for over two years, it falls under the long-term capital gains (LTCG) category, which is taxed at a lower rate compared to short-term capital gains (STCG).

  4. Claim depreciation: For properties used for business or profession, claiming depreciation can be a strategy to reduce the capital gains amount subjected to taxation.

The complete form of CGAS is the Capital Gains Account Scheme. It enables you to deposit your capital gains into a dedicated account, where you can invest them in specific assets like government bonds, mutual funds, and real estate. This strategy aids in deferring or potentially avoiding immediate capital gains tax payment.

It's crucial to understand that CGAS is not designed for tax avoidance but serves as a tax deferral scheme.

 

 

 

 

 

 

If the capital gains from the sale of property remain uninvested by the income tax return filing date (usually July 31) of the relevant financial year, they can be deposited in a PSU bank or other banks under the Capital Gains Account Scheme, 1988.

The deposited amount becomes eligible for deduction from capital gains, resulting in no tax liability. However, if the taxpayer fails to invest the funds, the deposit made should be treated as Short-Term Capital Gains (STCG) in the year when the specified investment period lapses.

 

 

 

 

 

 

Capital gains tax (CGT) in India is a tax imposed on the profit earned from selling a capital asset. Capital assets encompass shares, bonds, property, and various other asset types. The calculation of CGT involves deducting the cost of acquiring the asset from the sale proceeds. The outcome represents the capital gain.

For the financial year 2023-24 in India, the long-term capital gain (LTCG) tax rate is 10% for equity shares and units of equity-oriented mutual funds held for more than one year. However, for other types of assets like real estate and debt securities, the LTCG tax rate is 20%. An exemption of up to Rs. 1 lakh is applicable for LTCG on equity shares and units of equity-oriented mutual funds.

There are two primary types of capital gain tax:

  1. Long-term capital gain tax (LTCG): This tax is applicable to profits earned from the sale of a capital asset held for more than one year.

  2. Short-term capital gain tax (STCG): This tax is applied to profits gained from the sale of a capital asset held for one year or less.

 

 

 

 

 

 

To calculate capital gains, subtract the cost of acquiring the asset from the sale proceeds. The formula is: Capital gain=Sale proceeds−Cost of acquisitionCapital gain=Sale proceeds−Cost of acquisition

The cost of acquisition includes the original purchase price of the asset plus any additional costs associated with acquiring it, such as commissions and fees.

Sale proceeds refer to the total amount of money received from selling the asset.

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