On this page, you'll find information on everything from the rate at which short-term and long-term capital gains are taxed to making the most of the tax exemptions specified under Section 54, 54EC and 54F.
What are capital assets and how do you determine whether your asset is long-term or short-term?
Know what goes into the calculation of capital gains and how cost price is adjusted for inflation in this section.
What are the various exemptions available on capital gains under Section 54, 54EC and 54F?
Are you planning to sell the agricultural land you inherited? It could be wholly exempt from tax. Jump ahead to read.
Enter your email address to get tax planning advice from tax experts.
Any profit or gain that arises from the sale of a 'capital asset' is a capital gain. This gain or profit is charged to tax in the year in which the transfer of the capital asset takes place.
No capital gains is applicable when an asset is inherited because there is no 'sale', only a transfer. However, if this asset is sold by the person who inherits it, capital gains tax will be applicable. The Income Tax Act has specifically exempted assets received as gifts by way of an inheritance or will.
Here are some examples of capital assets: land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, jewellery.
This includes rights in or in relation to an Indian company, including rights of management or control or any other right.
The following are not considered capital assets:
1Definition of Rural Area - 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 Rural Area, if it does not fall within distance(to be measured aerially) given below - (population is as per the last census).
|2kms from local limit of municipality or cantonment board||If the population of the municipality/cantonment board is more than 10,000 but not more than 1 lakh|
|6kms from local limit of municipality or cantonment board||If the population of the municipality/cantonment board is more than 1lakh but not more than 10 lakh|
|8kms from local limit of municipality or cantonment board||If the population of the municipality/cantonment board is more than 10 lakh|
A capital asset held for not more than 36 months or less is a short-term capital asset. An asset that is held for more than 36 months is a long-term capital asset.
For example, a house property held for more than 3 years is termed as a long-term capital asset, whereas equity funds are considered short-term when held for 12 months or less. Debt Funds are long-term assets when held for more than 36 months.
It is important to find out the specific holding period applicable to your asset because it impacts how the capital gains will be calculated.
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.
The assets are:
When the above listed assets are held for a period of more than 12 months, they are considered long-term capital asset.
In case an asset is acquired by gift, will, succession or inheritance, the period this asset was held by the previous owner is also included when determining whether it's a short term or a long term capital asset. In case of Bonus Shares or Rights Shares the period of holding is counted from the date of allotment of bonus shares or Rights Shares respectively.
Tax on long-term capital gain: Long-term capital gain is taxable at 20% + surcharge and education cess.
Tax on short-term capital gain when securities transaction tax is not applicable: If securities transaction tax is not applicable, short-term capital gain is added to your income tax return and the taxpayer is taxed according to his income tax slab.
Tax on short-term capital gain if securities transaction tax is applicable: If securities transaction tax is applicable, short-term capital gain is taxable at the rate of 15% +surcharge and education cess.
Gains made on sale of debt funds and equity funds are treated differently. Funds that invest heavily in equities, usually exceeding 65% of their total portfolio, is called an equity fund.
|Effective 11 July, 2014
||On or before 10 July, 2014|
|Short Term Gains||Long Term Gains||Short Term Gains||Long Term Gains|
|Debt Funds||At tax slab rates of the individual||At 20% with Indexation||At tax slab rates of the individual||10% without indexation or 20% with indexation whichever is lower|
Change in tax rules for debt mutual funds
Debt mutual funds have to be held for more than 36 months to qualify as a long-term capital asset. This change, in effect from last year's Budget, means that investors would have to remain invested in these funds for at least three years to take the benefit of long-term capital gains tax.
If redeemed within three years, the capital gains will be added to one's income and will be taxed as per one's income tax slab.
Get help on your income taxes and tax filing from us. Tax experts can prepare your tax returns and e-file within 48 hours. Plans start at Rs.1800 for taxpayers with capital gains and losses.
Check out the Expert Assisted Plans →
Capital gains are calculated differently for assets held for a longer period and for those held over a shorter period.
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.
In case of sale of house property, these expenses are deductible from the total sale price:
In case of sale of shares, you may be allowed to deduct these expenses:
Where jewellery is sold, and a broker's services were involved in securing a buyer, the cost of these services can be deducted.
Note that expenses deducted from sale price of assets for calculating capital gains are not allowed as deduction under any other head of the income tax return, and these can be claimed only once.
Indexed cost of acquisition is calculated as:
Cost of acquisition / Cost inflation index (CII) for the year in which the asset was first held by the seller, or 1981-82, whichever is later X cost inflation index for the year in which the asset is transferred.
Indexed cost of improvement is calculated as:
Cost of improvement / CII for the year in which the improvement took place X cost inflation index for the year in which the asset is transferred.
Why is cost of acquisition and improvement indexed? Indexation, done by applying CII (cost inflation index), is made to adjust for inflation over the years. This increases one's cost base and lowers the capital gains.
Manya bought a house in 2004 for Rs. 50 lakhs and the full value of consideration today is for Rs.1.5 crore. Since this property has been held for over 3 years, this would be a long-term capital asset. 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. 1.06 crore. The net capital gain is Rs. 44,00,000.
Long-term capital gains are taxed at 20%. For a net capital gain of Rs. 44,00,000, the total tax outgo will be Rs. 8,80,000. 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.
Exemption under Section 54 is available, when the capital gains from the sale of house property is reinvested into buying another house property.
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 exemption shall be limited to the total capital gain on sale.
The new property can be purchased either ONE year before the sale or TWO years after the sale of the property. 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.
In the Budget for 2014-15, it has been clarified that only ONE house property can be purchased or constructed from the capital gains to claim this exemption. Its important to note that this exemption can be taken back if this new property is sold within 3 years of its purchase.
Exemption under Section 54F is available, when there is capital gains from sale of a long-term asset other than a house property. A new residential house property must be purchased to claim this exemption.
The new property can be purchased either one year before the sale or 2 years after the sale of the property. The gains can also be invested in the construction of a property, but construction must be completed within 3 years from the date of sale.
In Budget 2014-15, it has been clarified that only ONE house property can be purchased or constructed from the capital gains to claim this exemption. Its important to note that this exemption can be taken back if this new property is sold within 3 years of its purchase.
The entire sale proceeds towards the new house will be exempt from taxes, if you meet the above said conditions.
However, if you invest a portion of the sale proceeds, the exemption will be the proportion of the invested amount to the sale price or exemption = cost of new house x capital gains/net consideration.
Exemption is available under Section 54EC when capital gains from sale of the first property is reinvested into specific bonds.
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 agrees with these limitations.
If capital gains have not been invested until the date of filing of return (usually 31st 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 short term capital gains in the year in which the specified period lapses.
In some cases, capital gains made from sale of agricultural land may be entirely exempt from income tax or it may not be taxed under the head Capital Gains.
If your agricultural land wasn't sold in any of these cases, you can seek exemption under Section 54B.
When short-term or long-term capital gains is made from transfer of land used for agricultural purpose by the taxpayer or his parents for 2 years immediately prior to the sale, exemption is available under Section 54B.
The amount, investment in the new asset or capital gain, whichever is lower, that is reinvested into a new asset within 2 years from the date of transfer is exempt.
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 purchase of agricultural land, it shall be treated as the capital gain of the year in which the period of 2 years from the date of sale of land expires.