The profits earned by investors on the sale of capital assets is referred to as ‘Capital Gains’. The gains are made by selling the capital asset for a price higher than what it was purchased for. These gains are considered as income and therefore, are added to the taxable income for the year when the capital asset was transferred. The tax that applies to such gains is called as Capital Gains Tax (CGT).
What are capital assets?
Capital assets can be a house property, building, land, vehicles, trademarks, patents, machinery, leasehold rights, and jewelry. Any legal rights including the rights of control or management are also considered as capital rights.
Capital assets do not include the following:
- Stock in trade.
- Consumable stores or raw materials held for the purpose of business or profession.
- Items held for personal use such as clothes and furniture.
- Agricultural land in rural areas.
- 6.5 percent Gold Bonds, National Defence Gold Bonds, and Special Bearer Bonds.
- Gold Deposit bonds under Gold Deposit Scheme.
Capital Gains Tax and Types:
Capital gains tax is a tax that is charged on the profits that he has made by selling his capital asset. For making it easy for taxation, the capital assets are classified to ‘Short-Term Capital Asset; and ‘Long-Term Capital Asset’.
- Short-Term Capital Asset:
If the shares and securities are held by the taxpayer for a period not more than 36 months preceding the date of its transfer will be treated as a short-term capital asset.
- Long- Term Capital Asset:
If the taxpayer holds the shares and securities for a period exceeding 36 months before the transfer will be treated as a long-term capital asset.Equity shares which are listed in a recognised stock exchange, units of equity oriented mutual funds, listed debentures and Government securities, units of UTI and Zero Coupon Bonds’ period of holding will be considered for 12 months instead of 36 months. Transfer is giving up your right on an asset it includes sale, exchange, compulsory acquisition under any law and relinquishment.
Capital Gains Tax in India:
In India, the long-term capital gains on sale of listed securities exceeding Rs.1 lakh are taxed at 10% as per the Union Budget 2018. The short-term gains will be taxed at 15 percent. In case of debt mutual funds, both short and long term capital gains are taxed. The short-term capital gain on debt mutual fund is added to the income and taxed as per the individual’s Income Tax Slab and the long-term capital gains on debt mutual funds are taxed at 20 percent with indexation and 10 percent without indexation. Indexation is adjusting the purchase value for inflation. The indexation increases the purchase cost and lowers the gain.
The recent Budget 2019 has announced a revision in the capital gains related to the sale of a residential property. Earlier, under Section 54 of the Income Tax Act, the capital gains earned by selling a residential property could be used for construction or to buy another house to save on capital gains tax. Now, after the announcement of the Budget 2019, the benefit of rollover has been increased to two residential houses if the capital gains fall within the Rs.2 crore limit.
This simply means that if an individual has earned up to Rs.2 crore as capital gains on selling a house property, he/she can invest the amount in two house properties but this facility will be available only once in a lifetime. To claim tax exemption, the individual should purchase a new residential property or construct a house and the purchase or construction will be allowed for only one house property. The purchase had to be made within 1 year of the sale of the property or 2 years after the property has been sold. In case the seller wishes to construct a new house with the gains he/she must do so within 3 years of the property/asset sale.
Computation of Capital Gains:
The computation Formula for the capital gains are as follows:
Cost of transfer: It is a brokerage paid for arranging the deal, legal expenses incurred, cost of advertising, etc.
Mr. Sharma is a resident individual and he sells a residential house on 12/4/2013 for Rs.25,00,000. He had purchased the house on 5/7/2011 for Rs.5,00,000 and spent Rs.1,00,000 on its improvement during May 2012. During the previous year, 2013-2014, his income under all heads excluding capital gains was NIL.
Since the asset was held for less than 36 months, it is a short term capital asset and the
Short-term capital gain: 25,00,000 – 5,00,000 – 1,00,000 = 19,00,000
In case Mr. Sharma is selling the house on 12.3.2015 for the same price, then he would’ve had the asset for over 36 months.
The indexed cost of acquisition will be 5,00,000 X 852/711 = 5,99,156
The indexed cost of improvement will be 1,00,000 X 852/785 = 1,08,535
Long-term capital gain: 25,00,000 – (5,99,156 + 1,08,535) 707691 = 17,92,309
Capital Gain Index:
It is important to know about the cost inflation index when you are calculating the long-term capital gains. The long-term capital gain is computed by deducting the indexed cost of acquisition and indexed cost of improvement.
The concept of indexation was introduced as the value of a rupee keeps changing due to inflation. If it is fair to pay more for a toothpaste over the years, it is fair to pay capital gain tax with incorporating the effect of inflation on your purchase. Indexation lets you show a higher purchase cost of the capital asset that you bought, this helps lower your overall profit.
The acquisition price is indexed by a factor called the Cost Inflation Index (CII).
CII is the CII for year in which the asset is transferred divided by the year in which the asset was acquired. The CII is then multiplied with the purchase price to arrive at the indexed acquisition cost. The cost inflation index for the year 2016-2017 is 1125.
Tax Rate Chart for Income on Sale of Assets
|Asset||Duration of the Asset||Tax Rate|
|Short Term||Long Term||Short Term||Long Term|
|Immovable Property such as a house||Below 2 year||Over 2 year||Income Tax Slab rate||20.6% with Indexation|
|Movable Property such as Gold/Jewellery||Below 3 year||Over 3 year||Income Tax Slab rate||20.6% with Indexation|
|Listed Shares||Below 1 year||Over 1 year||15.45%||Exempt|
|Equity Oriented Mutual Funds||Below 1 year||Over 1 year||15.45%||Exempt|
|Debt Oriented Mutual Funds||Below 3 year||Over 3 year||Income Tax Slab rate||20.6% with Indexation|
Note: The taxes mentioned above do not include surcharge @10% on income between Rs.50 lakh to Rs.1 crore and 15% of income above Rs.1 crore.
Capital Gain Tax on Property:
Selling a house attracts tax and it is charged on the amount gained from the sale and not on the entire amount itself. If you sell the property in three years, then it is termed as short-term capital gain and will be taxed directly as per the income slab you fall under. It attracts a flat 20 percent tax.
The long-term gain arising from the sale of a capital asset is exempt under Section 54 and 54F if invested in purchase or construction of a house property subject to certain conditions. To get the exemption, the taxpayer has to purchase the residential house within a period of 1 year before or 2 years after the transfer of the original house. Under construction properties must be completed within 3 years from the date of transfer of the original house. The investment on the house property must be situated in India. This will apply to the assessment year 2015-2016 and for the subsequent years.
The advance that will be paid for sale of property will be taxed and it will be later fortified by individuals for sale of flat if the transaction does not go through. The amount will be taxed in the same year under ‘income from other sources’. Such amount can be reduced from cost of acquisition of the asset in the year of sale of the capital asset while determining the capital gains.
You can buy or build a house from the capital gain within 2 years of selling the property. You can book a flat with the capital gain and save the tax. You can also save tax by investing the capital gains in special Capital Gains Account Scheme (CGAS) with the bank. Another option is to invest in specified bonds such as Rural Electrification Corp. Ltd. and National Highways Authority of India within 6 months from the date of sale of the property.
Remember that with one sale of property, you can invest in only one new asset and you cannot invest in multiple acquisitions to reduce the tax. If you are selling more than one property, you can invest the cumulative capital gain amount in only one new property.
Capital Gains Tax Exemption:
- Agricultural land in rural area in India is not considered as a capital asset and therefore no capital gains will be applicable on its sale.
- You will not be taxed if you use the entire sale proceed of your capital asset to buy a house property. You must satisfy the following conditions to avail exemption under Section 54F:
- You will have to purchase a house in 1 year before or 2 years after the sale.
- Under construction properties must be completed within 3 years from the date of transfer of the original house.
- You will not sell the house within 3 years of the purchase or construction.
- The new house must be situated in India.
- You must not own more than 1 residential house other than the new one on the date of transfer.
- You do not purchase a new house apart from the new one within 2 years or construct a residential house within a period of 3 years.
When you satisfy these conditions and when you invest the entire sale proceeds towards the new house, you won’t have to pay any tax on the capital gain.
- When you invest in Capital Gains Account Scheme, then you won’t have to pay tax on the capital gains. However you must invest the money for a specified period as specified by the bank. If you fail to keep the money invested for the specified period, then it will be treated as capital gain.
- By purchasing Capital Gains Bonds, the tax will be exempted. This is applicable only in case it was a long-term capital asset and the exemption is under Section 54EC. 10% taxation on LTCG more than Rs.1 lakh on sale of securities as per Union Budget 2018. If you don’t intend to invest in another property, then there is no use investing in the Capital Gains Account Scheme. In that case, you can invest in certain bonds for a specified purpose and these are redeemable after 3 years. You will be given a period of 6 months to invest in these bonds.
Capital Gains Bonds:
As per Section 54EC, one can claim tax relief by investing the capital gains earned from long-term capital assets in bonds issued by National Highway Authority of India or by the Rural Electrification Corporation Limited. The investment in bonds must be done within a period of 6 months. These will not be redeemable before 3 years. You can earn a guaranteed rate of interest on the bond. The maximum amount that can be invested in capital gain bonds is Rs.50,00,000 during a financial year. This benefit cannot be availed for a short-term capital gain.
Capital Gain Tax Calculator:
Capital gain calculators are easily available online to help you ascertain the capital gain that you have made on the sale. You will have to fill in the following details:
- Purchase price
- Sale price
- Number of units
- Purchase details like the date, month and the year it was purchased on.
- Sale details like the date, month and the year it was sold on.
- Investment detail. You can invest the capital gains toward share, debt mutual funds, equity mutual funds, real estate, gold and fixed maturity plan.
On hitting the calculate capital gain button, you will be provided the following details:
- Investment type.
- Time between the purchase and the sale.
- Gain type, if it is a short-term capital gain or a long-term capital gain.
- Difference between the sale and purchase price.
- Cost inflation index of the year of purchase.
- Cost inflation index of the year of sale.
- Purchased index cost.
- Difference between the sale and the indexed purchase price.
- Long-term capital gain without indexation.
- Long-term capital gain with indexation.
The long-term capital gains on stocks and equity mutual funds are taxed at 10% if the gains on sale of listed securities exceeds Rs.1 lakh (as per Union Budget 2018) and the short term gains are taxed at 15 percent. The short-term capital gain on debt mutual fund is added to the income and taxed as per the individual’s income tax slab and the long-term capital gains on debt mutual funds are taxed at 20 percent with indexation and 10 percent without indexation.
Capital Gains FAQs
- What is meant by long-term capital asset?
- What is meant by short-term capital assets?
- What is the reason for differentiating gains as long-term and short-term?
- How do I calculate long-term capital gain?
- How do I calculate short-term capital gain?
Long-term capital assets are those that have been held by an individual for over three years immediately after the date on which they were transferred. However, with regard to assets such as shares (preference or equity) that are listed on a prominent stock exchange in the country, units of UTI, listed securities such as government securities and debentures, zero coupon bonds, and units of equity oriented mutual funds, the holding period will be one year instead of three. The holding period for unlisted shares in companies is two years. Starting from FY 2017-18, the holding period of immovable property is two years.
Short-term capital assets are those that have been held by an individual for less than three years after the date on which they were transferred. However, for certain assets such as shares (preference or equity) that are listed on a prominent stock exchange in the country, units of UTI, listed securities such as government securities and debentures, zero coupon bonds, and units of equity oriented mutual funds, the holding period will be one year instead of three. The holding period for unlisted shares in companies is two years. Starting from FY 2017-18, the holding period of immovable property is two years.
Capital gains are taxed based on their nature, i.e. if they are long-term or short-term. In order to determine how much tax is charged to a gain, they are classified into long-term and short-term.
In order to calculate long-term capital gains from a particular asset, you will have to take the overall value of consideration (the asset’s sales consideration) and subtract from it the expenditure incurred fully and exclusively with regard to the transfer of a capital asset (commission, brokerage, etc.). The figure that you get from this calculation is called the net sale consideration, from which you will have to subtract the indexed cost of acquisition and the indexed cost of improvement, if any, and you will get the long-term capital gain amount.
To calculate short-term capital gain, you will have to take the overall value of consideration (the asset’s sales consideration) and subtract from it the expenditure incurred fully and exclusively with regard to the transfer of a capital asset (commission, brokerage, etc.). The figure that you get from this calculation is called the net sale consideration, from which you will have to subtract the cost of acquisition and the cost of improvement and you will get the short-term capital gain amount.