Introduction to Capital Gain:
Our work revolves around us creating assets and wealth in a bid to lead a more comfortable lifestyle. Asset creation is a hard task in itself, involving time and effort but the end results are often worth the toil and sweat. As citizens of India it is our duty to pay taxes on our wealth, which includes assets as well, and Capital Gain refers to the profit which one gets when he/she transfers a capital asset. Capital Gains are further classified as Short term capital gains and Long term capital gains, with the tax levied on them referred to as Capital Gains tax.
Types of Capital Assets:
Capital assets are classified into two broad categories, as mentioned below:
Property – This refers to any kind of property owned by an individual, regardless of whether it is related to his/her business or profession.
Securities – These include any and all securities held by a FII invested as per regulations under the SEBI Act of 1992.
What are Short Term Capital Assets?
Short term capital assets refer to any asset owned by a taxpayer for under than 36 months from date of initial transfer. For example, Miss Rita purchases a building in January 2014 and sells it in January 2015, holding it for just a year. Here, her building will be considered as a short term capital asset.
This time period reduces to 12 months in case of assets like shares listed in recognized stock exchange markets in the country.
What is Short Term Capital Gain?
Short term capital gain refers to any capital gain/profit which an individual gets on sale of short term capital assets. This includes any gain on depreciable assets.
Example: Miss Rita purchased the building for Rs 10 lakh and sold it a year later for Rs 15 lakh, a profit/gain of Rs 5 lakh. In this case her short term capital gain is Rs 5 lakh.
Tax on Short Term Capital Gain:
Tax levied on short term capital gain is referred to as Short term capital gain tax. In the above example Miss Rita will have to pay a tax on her profit, i.e. Rs 5 lakh. Any expenses incurred to improve the asset or paid towards the asset can be deducted before calculating the short term capital gain and its tax. In the above example if Miss Rita paid a brokerage of Rs 50,000, then her total capital gain becomes Rs 4.5 lakh and tax will be computed on this.
Short Term Capital Gain on Securities:
Equity gains which are listed in recognised stock markets in India and units of equity inclined Mutual Funds and business trusts attract small term capital gains under section 111A. Such units transferred after October 1, 2004 are liable for securities transaction tax, provided they are transferred via a recognised stock exchange.
Exemptions to Short Term Capital Gains under Section 111A:
There are certain exemptions to securities which do not fall under section 111A, some of which are mentioned below.
- Short term capital gains on sale of equity shares through unrecognised stock exchange.
- Short term capital gain due to sale of any shares apart from equity shares.
- Short term capital gains on sale of non-equity oriented MFs.
- Short term capital gains arising out of sale of bonds, government securities and debentures.
- Short term capital gains arising out of sale of immovable property, silver, gold,etc.
Short Term Capital Gain on Property:
All property transactions attract short term capital gains tax, provided property transfer happens within 3 years of ownership/purchase. Selling inherited property is also bound to attract Short term capital gains and one is inclined to pay the tax on it. This tax, could however have rebate concessions which cover any additional cost incurred on fixing or redeveloping a property.
Short Term Gain Tax Rate:
The tax applicable on short term gains is fixed by the government and comes under section 111A of the Income Tax Act. The current rate stands at 15%, minus surcharge and cess, which are generally extra. Short term capital gains which do not fall under section 111A fall under Normal short term capital gains and are charged taxes based on the total taxable income of a particular individual.
Short Term Capital Gain Exemption:
Individuals who wish to claim deductions/exemptions on short term capital gains can do so under Sections 80C to 80U of the Income Tax, provided short term capital gains do not fall under section 111A. In cases where gains fall under the ambit of Section 111A, individuals cannot opt for deductions under Sections 80C to 80U.
Mr. Kumar purchased a plot in Bangalore for Rs 15,00,000 in December 2012. He sold it in October 2013 for Rs 25,00,000. A sum of Rs 1,50,000 was invested by him in PPF and another Rs 50,000 in NSC. What is Mr. Kumar's total taxable income and his short term capital gains tax?
Solution: Property does not fall under section 111A of the IT Act and as such MR. Kumar can claim deductions under Section 80C to 80U. He can claim a total deduction to the tune of Rs 2,00,000 (PPF+NSC). The calculations now become like this:
Short term gains on sale of property - Rs 20,00,000 – Rs 15,00,000 = Rs 5,00,000/-
This is his gross total income.
Deductions under Section 80C to 80U – Rs 2,00,000/-
Taxable Amount = Rs 5,00,000 – Rs 2,00,000 = Rs 3,00,000/-
He is now inclined to pay a 15% short term capital gains tax towards this amount (minus the cess)[this is keeping in mind his current income slab].
This means he has to pay Rs 45,000 as short term capital gains tax.