What is Capital Gains Tax In India: Types, Tax Rates, Calculation, Exemptions & Tax Saving

Investment in a house property is one of the most sought-after investments primarily because you get to own a house. While others may invest with the intention of earning a profit upon selling the property in the future. It is important to note that a house property is regarded as a capital asset for income tax purposes. Consequently, any gain or loss incurred from the sale of a house property may be subject to tax under the 'Capital Gains' head. Similarly, capital gains or losses may arise from sale of different types of capital assets such as stocks, mutual funds, bonds and other investments. We will delve into the chapter on ‘Capital gains’ in detail here.

Budget 2024 Update

Budget 2024 has proposed the following amendments effective from FY 2024-25 - 

• For classifying assets into long-term and short-term, there will only be two holding periods: 12 months and 24 months. The 36-month holding period has been removed.
• The holding period for all listed securities is 12 months. All listed securities with a holding period exceeding 12 months are considered Long-Term. The holding period for all other assets is 24 months.
• The taxation of Short-Term Capital Gain for listed equity shares, a unit of an equity-oriented fund, and a unit of a business trust has been increased to 20% from 15%. Other financial and non-financial assets which are held for short term shall continue to attract the tax at slab rates.
• The limit on the exemption of Long-Term Capital Gains on the transfer of equity shares or equity-oriented units or units of Business Trust has increased from Rs.1 Lakh to Rs.1.25 lakh per year. However, the rate at which it is taxed has increased from 10% to 12.5%. 
• The exemption limit to Rs. 1.25 lakhs has been increased for the whole of the year, whereas the tax rate has changed on 23rd July 2024.
• The tax on other assets is reduced from 20% to 12.5% with effect from 23rd July 2024. On the other hand, the indexation benefit that previously was available on the sale of long-term assets has now been eliminated. However, the Government has given taxpayers an option to compute taxes on real estate transactions purchased before 23rd July 2024 either at 12.5% without indexation or at 20% with indexation. 

What is Capital Gains Tax In India?

Any profit or gain that arises from the sale of a ‘capital asset’ is known as ‘income from capital gains’. Such capital gains are taxable in the year in which the transfer of the capital asset takes place. This is called capital gains tax. There are two types of Capital Gains: short-term capital gains(STCG) and long-term capital gains(LTCG).

Defining Capital Assets

Land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewellery are a few examples of capital assets. This includes having rights in or in relation to an Indian company. It also includes the rights of management or control or any other legal right.

 The following do not come under the category of capital asset:

a. Any stock, consumables or raw material, held for the purpose of business or profession

b. Personal goods such as clothes and furniture held for personal use

c. Agricultural land in rural(*) India

d. 6½% gold bonds (1977) or 7% gold bonds (1980) or National Defence gold bonds (1980) issued by the central government

e. Special bearer bonds (1991)

f. Gold deposit bond issued under the gold deposit scheme (1999) or deposit certificates issued under the Gold Monetisation Scheme, 2015 and Gold Monetisation Scheme, 2019 notified by the Central Government.

*Definition of rural area (effective from AY 2014-15) – Any area which is outside the jurisdiction of a municipality or cantonment board, having a population of 10,000 or more is considered a rural area. Also, it should not fall within a distance given below

Types of Capital Assets?

1. STCA ( Short-term capital asset ) An asset held for a period of 36 months or less is a short-term capital asset. So, if you sell the asset within a period of 36 months of purchasing, then it would be called as a short-term capital asset. However, in some of the assets, the holding period is reduced to 24 months and 12 months. 

The criteria is 24 months for unlisted shares (those shares which are not listed in a recognized stock exchange in India) and immovable properties such as land, building and house property from FY 2017-18. For instance, if you sell house property after holding it for a period of 24 months, any income arising will be treated as a long-term capital gain, provided that property is sold after 31st March 2017. The reduced period of the aforementioned 24 months is not applicable to movable property such as jewellery, debt-oriented mutual funds etc.

Some assets are considered short-term capital assets when these are held for 12 months or less. This rule is applicable if the date of transfer is after 10th July 2014 (irrespective of what the date of purchase is). These assets are:

• Equity or preference shares in a company listed on a recognized stock exchange in India
• Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India
• Units of UTI, whether quoted or not
• Units of equity oriented mutual fund, whether quoted or not
• Zero coupon bonds, whether quoted or not

2. LTCA ( Long-term capital asset ): An asset held for more than 36 months is a long-term capital asset. They will be classified as a long-term capital asset if held for more than 36 months as earlier. So, if you sell the asset after a period of 36 months of purchasing, then it would be called as a long-term capital asset. However, in some of the assets, the applicable holding period is 24 months and 12 months. 

Capital assets such as land, building and house property shall be considered as long-term capital asset if the owner holds it for a period of 24 months or more (from FY 2017-18).

Whereas, below-listed assets if held for a period of more than 12 months, shall be considered as long-term capital asset.

1. Equity or preference shares in a company listed on a recognized stock exchange in India
2. Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India
3. Units of UTI, whether quoted or not
4. Units of equity oriented mutual fund, whether quoted or not
5. Zero coupon bonds, whether quoted or not

Note: Capital gains from the sale of units of a specified mutual fund acquired on or after April 1, 2023, and market-linked debentures will always be treated as short-term capital gains, regardless of how long they have been held.

Note: With effect from FY 2024-25, For classifying assets into long-term and short-term, there will only be two holding periods: 12 months and 24 months. The 36-month holding period has been removed. The holding period for all listed securities is 12 months. All listed securities with a holding period exceeding 12 months are considered Long-Term. The holding period for all other assets is 24 months.

Classification of Inherited Capital Asset

In case an asset is acquired by gift, will, succession or inheritance, the period for which the asset was held by the previous owner is also included in determining whether it’s a short term or a long-term capital asset. In the case of bonus shares or rights shares, the period of holding starts from the date of allotment of bonus shares or rights shares respectively.

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

According to the ammendment in Budget 2024, with effect from 23rd July 2024 tax on long term and short term Capital Gains are to be taxed as follows 

Tax on Equity and Debt Mutual Funds

Gains made on the sale of debt funds and equity funds are treated differently. Any fund that invests heavily in equities (more than 65% of their total portfolio) is called an equity fund.

Tax Rules for Debt Mutual Funds

Recently in amendment to Finance Bill 2023, gains from debt mutual funds will now be taxed at slab rates and they will be considered as short-term irrespective of the holding period. Which means you will lose out the indexation benefit. Prior to 1st April 2023, debt mutual funds had to be held for more than 36 months to qualify as a long-term capital asset. It means you need to remain invested in these funds for at least three years to get the benefit of long-term capital gains tax. If redeemed within three years, the capital gains will be added to your income and will be taxed as per your income tax slab rate. It is to be noted that according to Budget 2024, Unlisted bonds and debentures are brought in line with the taxation on debt mutual funds and market-linked debentures. They will attract tax on capital gains at applicable slab rates. (i.e., they will be treated as short-term irrespective of the period of holding.)

How Will Change in Income Tax Rules Affect Taxation on Debt Mutual Funds?

Here is calculation of the tax on debt funds before and after the investments as per the new regime:

Suppose Mr. Vinay invested Rs. 10,00,000 in FY 2018-19 in a debt mutual fund. He sold the investment after three years in FY 2023-24 for Rs. 18,00,000, resulting in a capital gain of Rs.8,00,000. 

Tax Liability after the changes in Income Tax Rules (Under the new regime).

Suppose Mr. Vinay invested Rs. 10,00,000 in April 2023 in a debt mutual fund. He sold the investment after sometime in FY 2023-24 for Rs. 18,00,000, resulting in a capital gain of Rs.2,00,000 and he had other Income of Rs. 10,00,000

LTCG taxation before and after the amendment.

From the above example, it is clear that the changes in income tax rules will have a positive impact on the people if it is held for shorter period but if it is held for a longer period the indexation benefit will be foregone and it will lead to negative impact for the taxpayer.

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Calculating Capital Gains

Capital gains are calculated differently for assets held for a longer period and for those held over a shorter period.

Terms You Need to Know:

Full value consideration: The consideration received or to be received by the seller as a result of transfer of his capital assets. Capital gains are chargeable to tax in the year of transfer, even if no consideration has been received.

Cost of acquisition: The value for which the capital asset was acquired by the seller.  
Cost of improvement: Expenses of a capital nature incurred in making any additions or alterations to the capital asset by the seller.

Note:

• In certain cases where the capital asset becomes the property of the taxpayer otherwise than by an outright purchase by the taxpayer, the cost of acquisition and cost of improvement incurred by the previous owner would also be included.
• Improvements made before April 1, 2001, is never taken into consideration.

How to Calculate Short-Term Capital Gains?

Step 1: Start with the full value of consideration

Step 2: Deduct the following:

• Expenditure incurred wholly and exclusively in connection with such transfer
• Cost of acquisition
• Cost of improvement

Step 3: From this resulting number, deduct exemptions provided under sections 54B/54D

Step 4: This amount is a short-term capital gain to be taxed

How to Calculate Long-Term Capital Gains?

Step 1: Start with the full value of consideration

Step 2: Deduct the following:

• Expenditure incurred wholly and exclusively in connection with such transfer
• Indexed cost of acquisition
• Indexed cost of improvement

Step 3: From this resulting number, deduct exemptions provided under sections 54, 54D, 54EC, 54F, and 54B 

(*Expenses from sale proceeds from a capital asset, that wholly and directly relate to the sale or transfer of the capital asset are allowed to be deducted. These are the expenses which are necessary for the transfer to take place.)

Exception: As per Budget 2018, long-term capital gains on the sale of equity shares/ units of equity oriented fund, realised after 31st March 2018, will remain exempt up to Rs. 1 lakh per annum. Moreover, tax at @ 10% will be levied only on LTCG on shares/units of equity oriented fund exceeding Rs 1 lakh in one financial year without the benefit of indexation.

Deductible Expenses

A. Sale of house property: These expenses are deductible from the total sale price:

• Brokerage or commission paid for securing a purchaser
• Cost of stamp papers
• Travelling expenses in connection with the transfer – these may be incurred after the transfer has been affected
• Where property has been inherited, expenditure incurred with respect to procedures associated with the will and inheritance, obtaining succession certificate, costs of the executor, may also be allowed in some cases

B. Sale of shares: You may be allowed to deduct these expenses:

• a. Broker’s commission related to the shares sold
• STT or securities transaction tax is not allowed as a deductible expense

C. Where jewellery is sold: In case of sale of broker’s jewellery and where a broker’s services were involved in securing a buyer, the cost of these services can be deducted.

Note: The expenses deducted from the sale price of assets for calculating capital gains are not allowed as a deduction under any other head of income, and you can claim them only once.

Indexed Cost of Acquisition/Improvement

The cost of acquisition and improvement is indexed by applying CII (cost inflation index). It is done to adjust for inflation over the years of holding the asset. This increases one’s cost base and lowers the capital gains.  
Refer to this page for the complete list of CII.  

The indexed cost of acquisition is calculated as:

The cost of acquisition of the assets acquired before 1st April 2001 should be actual cost or FMV as on 1st April 2001, as per taxpayer’s option.

The indexed cost of improvement is calculated as:

Note: Improvements made before 1st April 2001, should not be considered.

Note: The indexation benefit that previously was available on sale of long-term assets, has now been done away with. However, this faced a backlash from the public. So, the Government has passed an amendment that allows taxpayers to compute taxes either at 12.5 per cent without indexation or at 20 per cent with indexation on real estate transactions. The amendment will apply not only to real estate transactions but also to unlisted equity transactions, which are done before July 23, 2024.

Guide to Obtain Capital Gains Statement from CAMS and Import the Data on ClearTax.

Instead of manually entering the details you can simply upload a Realised Gain statement that is a consolidation of your investment performance, capital gains and income for the current and last financial years across CAMS serviced funds.

Guide to Obtain Capital Gains Statement from KARVY and Import the Data on ClearTax.

Instead of manually entering the details you can simply upload a Realised Gain statement that is a consolidation of your investment performance, capital gains and income for the current and last financial years across KARVY serviced funds.

Guide to Obtain Capital Gains Statement from ZERODHA and Import the Data on ClearTax

Instead of manually entering the details you can simply upload a Realised Gain statement that is a consolidation of your investment performance, capital gains and income for the current and last financial years across ZERODHA serviced funds

Guide to Obtain Capital Gains Statement from Groww and Import the Data on ClearTax.

Instead of manually entering the details you can simply upload a Realised Gain statement that is a consolidation of your investment performance, capital gains and income for the current and last financial years across Groww serviced funds.

Guide to Obtain Capital Gains Statement from Upstox and Import the Data on ClearTax.

Instead of manually entering the details you can simply upload a Realised Gain statement that is a consolidation of your investment performance, capital gains and income for the current and last financial years across Upstox serviced funds.

Guide to Obtain Capital Gains Statement from ICICI and Import the Data on ClearTax

Instead of manually entering the details you can simply upload a Realised Gain statement that is a consolidation of your investment performance, capital gains and income for the current and last financial years across ICICI serviced funds

Guide to Obtain Capital Gains Statement from Paytm Money and Import the Data on ClearTax

Instead of manually entering the details you can simply upload a Realised Gain statement that is a consolidation of your investment performance, capital gains and income for the current and last financial years across Paytm Money serviced funds

ClearTax has now directly integrated with various platforms like 5Paisa, ICICI Direct, Paytm Money, Zerodha, etc. It will help you to import 1000s of capital gains transactions via a single click login.  

Exemption on Capital Gains

Example: Manya bought a house in July 2004 for Rs.50 lakh, and the full value of consideration received in FY 2016-17 is Rs.1.8 crore.  
Capital asset type: Since this property has been held for over 3 years, this would be a long-term capital asset.

Cost of acquisition: The cost price is adjusted for inflation and indexed cost of acquisition is taken. Using the indexed cost of acquisition formula, the adjusted cost of the house is Rs 1.17 crore. (Refer CII here for the calculations)

Capital gain: Hence, the net capital gain is Rs 63, 00,000.

Tax: Long-term capital gains on sale of house property are taxed at 20%. For a net capital gain of Rs 63, 00,000, the total tax outgo will be Rs.12,97,800.

This is a significant amount of money to be paid out in taxes. This can be lowered by taking benefit of exemptions provided by the Income Tax Act on capital gains when profit from the sale is reinvested into buying another asset.

Section 54: Exemption on Sale of House Property on Purchase of Another House Property

Budget 2019 announcement! 

Capital gains exemption under Section 54: Taxpayers can get an exemption from long-term capital gain from the sale of house property by investing in up to two house properties against the earlier provision of one house property with same conditions. However, the capital gain on the sale of house property must not exceed Rs 2 crores.

The exemption under Section 54 is available when the capital gains from the sale of house property are reinvested into buying or constructing two another house properties (prior to Budget 2019, the exemption of the capital gains was limited to only 1 house property).

The exemption on two house properties will be allowed once in the lifetime of a taxpayer, provided the capital gains do not exceed Rs. 2 crores. The taxpayer has to invest the amount of capital gains and not the entire sale proceeds. If the purchase price of the new property is higher than the amount of capital gains, the exemption shall be limited to the total capital gain on sale.

Conditions for availing this benefit:

1. The new property can be purchased either 1 year before the sale or 2 years after the sale of the property.
2. The gains can also be invested in the construction of a property, but construction must be completed within three years from the date of sale.
3. In the Budget for 2014-15, it has been clarified that only 1 house property can be purchased or constructed from the capital gains to claim this exemption.
4. Please note that this exemption can be taken back if this new property is sold within 3 years of its purchase/completion of construction.
5. The capital gains tax exemption limit under Section 54 to 54F is restricted to Rs.10 crore. Earlier, there was no threshold.

If the amount of capital gain exceeds Rs. 2 Crore  

If the amount of capital gain exceeds Rs. 2 Crore  then One residential house property should be purchased within 1 year before the date of sale of house property or 2 years after the date of sale of house property; (OR) Construct a house property within 3 years after the date of sale of house property.

Section 54F: Exemption on capital gains on sale of any asset other than a house property

Exemption under Section 54F is available when there are capital gains from the sale of a long-term asset other than a house property. You must invest the entire sale consideration and not only capital gain to buy a new residential house property to claim this exemption. Purchase the new property either one year before the sale or 2 years after the sale of the property. You can also use the gains to invest in the construction of a property. However, the construction must be completed within 3 years from the date of sale.

In Budget 2014-15, it has been clarified that only 1 house property can be purchased or constructed from the sale consideration to claim this exemption. This exemption can be taken back, if this new property is sold within 3 years of its purchase. If the entire sale proceeds are invested towards the new house, the entire capital gain will be exempt from taxes if you meet the above-said conditions.

However, if you invest a portion of the sale proceeds, the capital gains exemption will be in the proportion of the invested amount to the sale price LTCG exemption = Capital gains x Cost of new house / Net consideration.

Section 54EC: Exemption on Sale of House Property on Reinvesting in specific bonds

Exemption is available under Section 54EC when capital gains from sale of the first property are reinvested into specific bonds.

• If you are not keen to reinvest your profit from the sale of your first property into another one, then you can invest them in bonds for up to Rs. 50 lakhs issued by National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC).
• The money invested can be redeemed after 5 years, but they cannot be sold before the lapse of 5 years from the date of sale.
• The homeowner has six month’s time to invest the profit in these bonds. But to be able to claim this exemption, you will have to invest before the tax filing deadline.

Section 54B: Exemption on Capital Gains From Transfer of Land Used for Agricultural Purpose

When you make short-term or long-term capital gains from transfer of land situated in Urban area used for agricultural purposes – by an individual or the individual’s parents or Hindu Undivided Family (HUF) – for 2 years before the sale, exemption is available under Section 54B. The exempted amount is the investment in a new asset or capital gain, whichever is lower. You must reinvest into a new agricultural land (in urban or rural area) within 2 years from the date of transfer. 

The new agricultural land, which is purchased to claim capital gains exemption, should not be sold within a period of 3 years from the date of its purchase. In case you are not able to purchase agricultural land before the date of furnishing of your income tax return, the amount of capital gains must be deposited before the date of filing of return in the deposit account in any branch (except rural branch) of a public sector bank or IDBI Bank according to the Capital Gains Account Scheme, 1988.

Exemption can be claimed for the amount which is deposited. If the amount which was deposited as per Capital Gains Account Scheme was not used for the purchase of agricultural land, it shall be treated as capital gains of the year in which the period of 2 years from the date of sale of land expires. If you wish to know more about investment choices with good capital gains potential, please invest with ClearTax Invest. Our handpicked plans can help you build a portfolio that is best suited to your financial goals and risk profile.

Section 54D: Capital Gains on transfer of  land and building which is used for  industrial undertaking 

Conditions to be fulfilled :

• There must be compulsory purchase of land and building which is used for an industrial undertaking.
• The land and building should have been used by the assessee for purposes of the business of the industrial undertaking in the 2 years before the date of transfer.
• The assessee must purchase any other land or building or construct any building (for shifting or re-establishing the existing undertaking or setting up a new industrial undertaking) within 3 years from the date of transfer.
• If such investment is not made before the date of filing of return of income, then the capital gain has to be deposited under the CGAS.

Amount of exemption :

• If the cost of a new asset is more than or equal to the sale consideration, then the entire capital gain will be exempted.
• If the cost of a new asset is lesser than Capital gains, capital gains to the extent of the cost of a new asset is exempt. i.e. the cost of a new asset will be exempted.

When can you invest in Capital Gains Account Scheme?

Finding a suitable seller, arranging the requisite funds and getting the paperwork in place for a new property is one time-consuming process. Fortunately, the Income Tax Department agrees with these limitations. If capital gains have not been invested until the due date of filing of return (usually 31 July) of the financial year in which the property is sold, the gains can be deposited in a PSU bank or other banks as per the Capital Gains Account Scheme, 1988.

This deposit can then be claimed as an exemption from capital gains, and no tax has to be paid on it. However, if the money is not invested, the deposit shall be treated as a short-term capital gain in the year in which the specified period lapses.

Saving Tax on Sale of Agricultural Land

In some cases, capital gains made from the sale of agricultural land may be entirely exempt from income tax or it may not be taxed under the head capital gains. See below:

a. Agricultural land in a rural area in India is not considered a capital asset and therefore any gains from its sale are not chargeable to tax. For details on what defines an agricultural land in a rural area, see above.

b. Do you hold agricultural land as stock-in-trade? If you are into buying and selling land regularly or in the course of your business, in such a case, any gains from its sale are taxable under the head Business and Profession.

c. Capital gains on compensation received for compulsory acquisition of urban agricultural land are tax exempt under Section 10(37) of the Income Tax Act.

If your agricultural land wasn’t sold in any of the above cases, you can seek exemption under Section 54B.

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