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Capital Gains Tax India

A guide to tax impact on income from capital gains

Updated on

To make more money out of the said investments, of course. You invest in mutual funds because you want to earn a fixed income or considerable returns after maturity. People invest in properties so that they can either occupy it themselves (thus saving on rent) or sell them later at higher prices. In this article, we will explore capital gains in detail.
  1. What is a Capital Gain?
  2. Defining Capital Assets
  3. Types of Capital Assets?
  4. Calculating Capital Gains
  5. Exemption on Capital Gains
  6. Saving Tax on Sale of Agricultural Land
  7. Frequently Asked Questions

1. What is a Capital Gain?

Simply put, any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain. This gain or profit is considered as income and hence charged to tax in the year in which the transfer of the capital asset takes place. This is called capital gains tax, which can be short-term or long-term. Capital gains are not 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.

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2. Defining Capital Assets

Here are some examples of capital assets: land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewellery. This includes having rights in or in relation to an Indian company. It also includes rights of management or control or any other legal right. The following are not considered 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)

Definition 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 a rural area. Also, it should not fall within a distance (to be measured aerially) given below – (population is as per the last census).

Distance

Population

2 kms 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
6 kms from local limit of municipality or cantonment board If the population of the municipality/cantonment board is more than 1 lakh but not more than 10 lakh
8 kms from local limit of municipality or cantonment board If the population of the municipality/cantonment board is more than 10 lakh
 

3. Types of Capital Assets?

1. Short-term capital asset

An asset which is held for not more than 36 months or less is a short-term capital asset. The criteria of 36 months have been reduced to 24 months in the case of immovable property being 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 long-term capital gain provided that property is sold after 31st March 2017.    

2. Long-term capital asset

An asset that is held for more than 36 months is a long-term capital asset. The reduced period of aforementioned 24 months is not applicable to movable property such as jewellery, debt-oriented mutual funds etc. They will be classified as a long-term capital asset if held for more than 36 months as earlier. 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: 

a. Equity or preference shares in a company listed on a recognized stock exchange in India

b. Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India

c. Units of UTI, whether quoted or not

d. Units of equity oriented mutual fund, whether quoted or not

e. Zero coupon bonds, whether quoted or not

When the above-listed assets are held for a period of more than 12 months, they are considered as 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 the 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 Short-Term and Long-Term Capital Gains

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, the 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, the short-term capital gain is taxable at the rate of 15% +surcharge and education cess. 

Tax on Equity and Debt Mutual Funds

Gains made on the 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.
Funds
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
Equity Funds 15% Nil 15% Nil

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.

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4. 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 in exchange for his assets, which he has transferred. 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 incurred to make improvements to the capital asset by the seller. Note that improvements made before April 1, 1981, is never taken into consideration.

How to Calculate Short-Term Capital Gains?

  1. Start with the full value of consideration
  2. Deduct the following:
    • Expenditure incurred wholly and exclusively in connection with such transfer
    • Cost of acquisition
    • Cost of improvement
  3. This amount is a short-term capital gain
Short term capital gain = Full value consideration Less expenses incurred exclusively for such transfer Less cost of acquisition Less cost of improvement.

How to Calculate Long-Term Capital Gains?

  1. Start with the full value of consideration
  2. Deduct the following:
    • Expenditure incurred wholly and exclusively in connection with such transfer
    • Indexed cost of acquisition
    • Indexed cost of improvement
  3. From this resulting number, deduct exemptions provided under sections 54, 54EC, 54F, and 54B
  4. This amount is a long-term capital gain
Long-term capital gain Full value consideration Less : Expenses incurred exclusively for such transfer Less: Indexed cost of acquisition Less: Indexed cost of improvement Less expenses that can be deducted from full value for consideration* (*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.) As per Budget 2018, long term capital gains on the sale of equity shares/ units of equity oriented fund if more than Rs 1 lakh will be taxed at @ 10% without the benefit of indexation. Uptil 31st March 2018, investors had a relief to exempt amount of capital gains up to 31 Jan 2018. The amount of Gains made thereafter the cut-off date will be taxed.

Example:

Mr A purchased shares for Rs. 100 on 30th September 2017 and sold them on 31st December 2018 at Rs 120.  The Value of the Stock was Rs. 110 as of 31st January 2018. Out of the capital gains of Rs. 20 (i.e 120-100), Rs. 10 (i.e 110-100) is not taxable. Rest Rs. 10 is taxable as Capital gains @ 10% without indexation.

In the case of sale of house property, these expenses are deductible from the total sale price:

a. Brokerage or commission paid for securing a purchaser

b. Cost of stamp papers

c. Travelling expenses in connection with the transfer – these may be incurred after the transfer has been affected.

d. 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.

In the case of sale of shares, you may be allowed to deduct these expenses:

a. Broker’s commission related to the shares sold

b. STT or securities transaction tax is not allowed as a deductible expense

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 the sale price of assets for calculating capital gains are not allowed as a deduction under any other head of the income tax return, and these can be claimed only once.  

Indexed Cost of Acquisition/Improvement

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

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:

 

Indexed cost of acquisition = Cost of acquisition * Cost Inflation Index (CII) of the year in which the asset is transferred Cost inflation index (CII) of the year in which asset was first held by the seller or 1981-82 whichever is later.

  Indexed cost of improvement = Cost of improvement *Cost inflation index of the year in which the asset is transferred Cost inflation index of the year in which improvement took place

(Note: From FY 2017-18, the base year of 2001-02 will be considered instead of 1981-82)

5. 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. 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 1.17 crore. The net capital gain is Rs 63, 00,000. Long-term capital gains 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

Exemption under section 54 is available when the capital gains from the sale of house property are 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 number of capital gains, the exemption shall be limited to the total capital gain on sale.
  The new property can be purchased either 1 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 three years from the date of sale. 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. It’s important to note that this exemption can be taken back if this new property is sold within 3 years of its purchase/completion of construction.

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 sale of a long-term asset other than a house property.
Entire sale consideration and not only capital gain should be invested to buy 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 1 house property can be purchased or constructed from the capital gains to claim this exemption. It’s 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.

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 very keen to reinvest your profit from 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 3 years, but they cannot be sold before the lapse of 3 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.
 

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 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

6. Saving Tax on Sale of Agricultural Land

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.

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 exempt from tax, under Section 10(37) of the Income Tax Act.

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

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

When short-term or long-term capital gains are 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 agricultural land 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.  

 

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7. Frequently Asked Questions

 
  • Is the benefit of indexation available for computing capital gains arising on sale of a short term capital asset?
    Capital gains is determined by reducing the purchase price from the sale price. However, for an asset that has been held long, it would not be appropriate to determine gains by merely reducing purchase price from sale price without giving any effect to the inflation. Hence the concept of indexing the purchase price has been brought in to determine the indexed purchase price which can be reduced from sale price to determine gains.
    Therefore, this benefit is available only for assets held for long term and not applicable to short term capital assets. .
  • Are all assets held for less than 36 months short term and those held for more than 36 months long term capital assets?
    Different assets have different periods of holding to be called short term and long term. Here is a table that defines period of holding for different classes of asset in order to be classified as short term or long term.
    Asset
    Period of holdingShort Term / Long Term
    Immovable property< 24 months

    Short Term

    >24 monthsLong Term
    Listed equity shares<12 months

    Short Term

    >12 MonthsLong Term
    Unlisted shares<24 months

    Short Term

    >24 monthsLong Term
    Equity Mutual funds<12 months

    Short Term

    >12 monthsLong Term
    Debt mutual funds<36 months

    Short Term
    >36 monthsLong Term
    Other assets<36 monthsShort Term
    >36 monthsLong Term
  • Should an NRI pay taxes on gains made on sale of property in India?
    Property sold in India is generally subject to tax deduction. The person buying the property, must deduct taxes at the rate applicable to the income slab the NRI falls under if the property is a short term asset and if the property is a long term asset, taxes must be deducted at 20%. Further, it is important for the NRI to ensure that taxes are deducted on the gains made and not on the sale proceeds. For determining the gains on which taxes should be deducted by the purchaser, the NRI can consider approaching his jurisdictional assessing officer.
  • Can I set off my short term capital loss against any other head of income?
    First and foremost, capital losses can be set off only against capital gains. Accordingly, short term capital losses can be set off against any income under capital gains be it short term or long term.
    However, long term capital losses can be set off only against long term capital gains.
  • What is the rate of tax on long term capital gains on sale of house property?
    Long Term Capital Gains on sale of house property is taxable at the rate of 20% flat on the quantum of gains made

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All Articles

  1. Taxpayers have an option of depositing such unutilised capital gains in ‘Capital Gains Account’ introduced under Capital Gains Account Scheme. Read this article to know more
  2. How you compute capital gains on property that you have received as a gift or inheritance? Read this article to know more about the capital gains on the sale of gifted assets
  3. A shift in base year from 1981 to 2001 was announced in Budget 2017 for computing LTCG. Read on to know the intent and impact of this move
  4. What happens if you Sell land or building. Valuation differences between the consideration and the SVA? How can the variances impact the capital gains
  5. An analysis on tax saving strategies for long term capital assets detailing two scenarios and an illustration for an enhanced understanding.
  6. Budget 2018 has proposed an amendment to Section 54EC. Exemption now restricted to LTCG from sale of land / building or both.
  7. Budget 2018 has proposed to delete Section 10(38) of the Income-tax Act...introduction of Section 112A to tax LTCG on sale of..Equity shares...
  8. Know about capital gains exemption on sale of agricultural land and calculate your capital gains. Find out how to save capital gains tax.
  9. Find out if you need to pay tax on income earned from selling shares. Know about STT and taxation on short term, long term gains & losses on Equity Shares.
  10. Know about set off of capital losses and carry forward of losses. See how long term loss on shares and equity funds are treated.
  11. Find out how to calculate capital gains tax on sale of inherited property. An example has been provided with the calculations done for better understanding.
  12. Know about capital gains exemption on sale of land and find out how to save capital gains tax. Check out the tax rates and calculate your capital gains.
  13. Know how much capital gain tax on sale of property/shares/gold/ is applicable.Find out the taxation of long term & short term capital gain on sale of shares
  14. File Income Tax Returns online with ClearTax. ClearTax is fast, safe and very easy to use. Save money. ClearTax handles all cases of Income from Salary, Interest Income, Capital Gains, House Property, Business and Profession. ClearTax maximize your deductions by handling all deductions under Section 80 like section 80C, 80D, 80CCF, 80G, 80E, 80U and the rest. You can use your digital signature to e-file. Our products are trusted by hundreds of CAs and corporations for filing taxes and TDS.
  15. File Income Tax Returns online with ClearTax. ClearTax is fast, safe and very easy to use. Save money. ClearTax handles all cases of Income from Salary, Interest Income, Capital Gains, House Property, Business and Profession. ClearTax maximize your deductions by handling all deductions under Section 80 like section 80C, 80D, 80CCF, 80G, 80E, 80U and the rest. You can use your digital signature to e-file. Our products are trusted by hundreds of CAs and corporations for filing taxes and TDS.