Capital Gains Tax - CGT

Capital gains refer to the profits earned by investors on the sale of capital assets. Such a profit is taxed under the head ‘Income from Capital Gains. The transfer of the asset must be made in the previous financial year for it to be taxed

Capital gains is the profit that the investor realizes when he sells the capital asset for a price higher than its purchase price. The transfer of capital asset must be made in the previous year. This is taxable under the head ‘Capital Gains’ and there must exist a capital asset, transfer of the capital asset and profit or gains arising from the transfer.

Capital Gains include any property held by the assesse except the following:

  • Stock in trade.
  • Consumable stores or raw materials held for the purpose of business or profession.
  • Personal effects that are movable except jewellery, archaeological collections, drawings, paintings, sculptures or any art work held for personal use.
  • Agricultural land. The land must not be located within 8kms from a municipality, Municipal Corporation, notified area committee, town committee or a cantonment board with a minimum population of 10,000.
  • 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.

As per Union Budget 2018, Long-term Capital Gains (LTCG) on the sale of listed securities exceeding more than Rs.1 lakh will be taxed at 10% without the benefit of indexation. Fortunately, existing investors can get relief on the exempt amount of capital gains till 31 January 2018. However, the amount of gains made thereafter (after 31 January 2018) will be taxed. For better understanding, here is an example:

On 1 August 2017, Mr. Raj purchased shares at Rs.150 and sold it on 31 December 2018 at Rs.170. The value of the stock was Rs.160 on 31 January 2018. Out of the capital gains of Rs.20, Rs.10 is not taxable. The remaining Rs.10 is taxable as LTCG at 10% without indexation.

The taxpayer can avail the capital gains statement from CAMSOnline and Karvy, they send the statement through the mail.

Computation of Capital Gains:

Capital Gains Tax
CGT

The computation Formula for the capital gains are as follows:

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

Long-term capital gain = Full value of consideration received or accruing – (indexed cost of acquisition + indexed cost of improvement + cost of transfer).

Where;

Indexed cost of acquisition = Cost of acquisition X cost inflation index of the year of transfer/ cost inflation index of the year of acquisition

Indexed cost of improvement = cost of improvement X cost inflation index of the year of transfer / cost inflation index of the year of improvement

Cost of transfer: It is a brokerage paid for arranging the deal, legal expenses incurred, cost of advertising, etc.

For Example:

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.

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

  1. What is meant by long-term capital asset?
  2. 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.

  3. What is meant by short-term capital assets?
  4. 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.

  5. What is the reason for differentiating gains as long-term and short-term?
  6. 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.

  7. How do I calculate long-term capital gain?
  8. 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.

  9. How do I calculate short-term capital gain?
  10. 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.

News About Capital Gains Tax

  • 10% Long Term Capital Gains Tax on Capital Gains Above Rs.1 Lakh Introduced in Budget 2018

    Arun Jaitely, the Finance Minister of India introduced long term capital gains tax on the sale of a number of prescribed securities. For the gains to be taxed, they have to be more than Rs.1 crore. The benefit of indexation will not be allowed on the tax either. However, the gains accrued until January 31 shall be grandfathered, while short term capital gains will remain the same at 15%.

    2 February 2018

  • 10% Long Term Capital Gains Tax on Capital Gains Above Rs.1 Lakh Introduced in Budget 2018

    Arun Jaitely, the Finance Minister of India introduced long term capital gains tax on the sale of a number of prescribed securities. For the gains to be taxed, they have to be more than Rs.1 crore. The benefit of indexation will not be allowed on the tax either. However, the gains accrued until January 31 shall be grandfathered, while short term capital gains will remain the same at 15%.

    2 February 2018

  • No capital gains tax on stock trading in the 2017-18 Budget

    Tax exemption on long-term capital gains was declared in 2004, in India. Last month, Prime Minister Narendra Modi said that taxpayers profiting through financial markets should make a fair contribution through taxes to help the nation grow. Following his remarks, many expected the government to impose tax on long-term capital gains in the 2017-18 Budget. However, that may not be the case. There is no imposition of capital gains tax on stock trading but there could be a change in the time limit of long-term capital gains. Currently, the time limit on the capital gains tax relief is 1 year. In the 2017-18 Budget, the time limit may be extended to 3 years, keeping with the amended DTAAs that India had signed with Singapore and Mauritius.

    In case the new time limit is implemented, retail and institutional investors may have to pay 15% capital gains tax if the stock is sold within 3 years. The extended time limit may prevent retail investors from selling stocks during volatile market conditions caused by external factors. However, the new rule could cause a huge shuffle in institutional investment portfolio and result in reduced funds for the stock market.

    16 January 2017

  • Singaporean PM Cautions India Against Withdrawal of Exemption on Capital Gains

    Singapore recently conveyed its concerns to India on the issue of Capital Gains tax, saying that a withdrawal on the exemption would impact investor sentiment and alter the outlook of the Indian tax regime in the eyes of Singapore investors. In a recent meeting where the Singaporean Prime Minister met PM Modi, he cautioned India on its intention to withdraw the exemption on Capital Gains, a move India has already implemented in Mauritius to prevent routing of cash by Indian firms. This move goes back to the 2006 tax treaty that India signed with Singapore wherein any tax regime modification in the Mauritius treaty will hold good for Singapore too. Over the last one decade, investments worth almost $100 Billion have come from Singapore.

    10 October 2016

  • Capital Gains Tax to be levied on investments through Cyprus

    The Double Taxation Avoidance Agreement (DTAA) with Cyprus was approved by the Union Cabinet on Wednesday. This will enable Indian authorities to levy capital gains tax in the country for investments originating in Cyprus.

    Similar to the recent amendment of the DTAA with Mauritius, this update has also lead to the provision of residence-based taxation on capital gains. These changes are in subsequence to the assumption of power by the NDA government and their sustained efforts in narrowing down tax evasions and round-tripping of funds.

    The proposed DTAA with Cyprus will prevent the misuse of beneficial provisions of the agreement and the distortion of financial flows that create challenges in tax collection.

    30 August 2016

  • Exemption on Long-Term Capital Gains Tax on Purchase of Multiple Houses

    Indian tax laws state that a tax assesse can exemption on long-term capital gains tax if he or she purchases a residential house on sale of another asset or property. Although the Section 54 and 54F amendment states that capital gains tax will only be exempted if the investment is on one residential property, you can still claim the tax exemption if you purchase multiple houses. The claim is legal when the purchases flats or houses are used as a single residential unit by the assessee or his or her family.

    In another decision made by a Special Bench of the Mumbai Tribunal, if the tax payer has purchased multiple houses in different locations, the tax exemption can be claimed for only one house.

    8 August 2016

  • Panel Examines Problem Areas in India-Mauritius DTAA

    The committee examining India’s revised Double Taxation Avoidance Agreement (DTAA) with Mauritius has found problems in the new rule that capital gains tax won’t be applicable on equity bought before April 1, 2017.

    Among the ambiguous areas in the DTAA discovered by the panel – consisting of officials from SEBI, Central Board of Direct Taxes, HSBC and Franklin Templeton – are: mergers, conversions of securities and American Depositary Receipts (ADRs), and bonus stocks. The key question is whether any change in ownership in case of stocks, or conversion of securities after April 1, 2017 but bought before that time, would attract capital gains tax or not.

    The new DTAA also states that investors from Mauritius will be liable to pay short-term capital gains tax in India at half the prevailing rate for two years from April 1, 2017. From April 1, 2019, they will have to pay the full rate.

    28 July 2016

  • From April 2017, Cyprus will no more enjoy capital tax waiver

    Cyprus, the European island country which is also a major FDI investor in India will no more enjoy capital tax waiver on investments made in India. The change is to get rolled out from April 2017. Since a long time India has been putting pressure on the island country to do away with the tax-free status enjoyed by it on investments made in India. However, Cyprus always got away citing the same status enjoyed by Mauritius and Singapore.

    With the recent India-Mauritius DTAA, Singapore and Mauritius both have lost the tax-free status on capital gains made on investments in India. This gave more negotiating power to India. As a result of these tax treaties, Indian will be able to reign in round-tripping of Indian funds and tax evasion in general.

    5 July 2016

  • Capital Gains Tax Goes Up Over Lower Inflation Rates

    If you are claiming long-term capital gains this year, be prepared to pay a higher tax. The Cost Inflation Index (CII), which is the basis of computing long-term capital gains, has been reduced for the year 2016-17 by the Central Board of Direct Taxes (CBDT).

    The CBDT has increased the CII for 2016-17 by 4.07 percent, reducing the margin of profit an individual can make on sale of a long-term asset.

    Adjusting for inflation helps determine how much profit you make on the sale of a property in real-time. CII is used to arrive at the current price of a property that has been purchased more than 3 years ago. So if the inflation is lower, the current price of a property may be lower than it would have under a higher inflation figure, which makes the profit you make on a sale higher. Long-term capital gains tax has to be paid on this profit that you make.

    22 June 2016

  • New Draft Rules on Capital Gains of MNCs in India

    The Income Tax Department has introduced draft rules to bring out some clarity on taxes on capital gains and on indirect transfer of shares. The rules are meant for assessing the asset’s value earned by multinational companies in the country and abroad. These rules are expected to prevent disputes in the future.

    Apart from bringing clarity to taxes on these transactions, the rules might also make the reporting requirements for the Indian arm of the global entities more time consuming. The last year’s budget stated that overseas capital gains will be taxable if more than 50% of the assets was in the country. According to the present draft rules, the tax department has now clarified on the calculation of fair market value. A multinational company making capital gains is also required to reveal all account statements of the foreign entity or company holding assets within the country.

    10 June 2016

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