Amendments to Section 54 – Capital Gains Exemption Taxpayers can now obtain a long-term capital gains exemption on the sale of a house by investing in two houses (upper limit of Rs 2 crore). Earlier, the exemption was available for investment in only one property.
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 comes under the category ‘income’, and hence you will need to pay tax for that amount 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 to an inherited property as there is no sale, only a transfer of ownership. The Income Tax Act has specifically exempted assets received as gifts by way of an inheritance or will. However, if the person who inherited the asset decides to sell it, capital gains tax will be applicable.
2. Defining Capital AssetsLand, 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, 2015Definition 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).
|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 held for a period of 36 months or less is a short-term capital asset. The criteria of 36 months have been reduced to 24 months for 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 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 the 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 notWhen 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 for which the 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 Type||Condition||Tax applicable|
|Long-term capital gains tax||Except on sale of equity shares/ units of equity oriented fund||20%|
|Long-term capital gains tax||On sale of Equity shares/ units of equity oriented fund||10% over and above Rs 1 lakh|
|Short-term capital gains tax||When 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.|
|Short-term capital gains tax||When securities transaction tax is applicable||15%.|
Tax on Equity and Debt Mutual FundsGains 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.
|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 FundsDebt mutual funds have 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.
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4. Calculating Capital GainsCapital 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 that improvements made before April 1, 2001, is never taken into consideration. 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.
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
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
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 expenseWhere jewellery is sold: Here, 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 income tax return, and you can claim the only once.
Indexed Cost of Acquisition/ImprovementCost of acquisition and improvement is indexed by applying CII (cost inflation index). It is done to adjust for inflation over the years of holding of the asset. 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 2001-02, whichever is later X cost inflation index for the year in which the asset is transferred.
5. 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.
6. 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.
7. Guide to Obtain Capital Gains Statement from ZERODHA and Import the Data on ClearTaxInstead 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
8. Exemption on Capital GainsExample: 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 PropertyThe exemption 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.
Section 54F: Exemption on capital gains on sale of any asset other than a house propertyExemption 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 = capital gains x cost of new house /net consideration.
Section 54EC: Exemption on Sale of House Property on Reinvesting in specific bondsExemption 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 3 years, but they cannot be sold before the lapse of 3 years from the date of sale. With effect from the FY 2018-2019, the period of 3 years has been increased to 5 years;
- 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 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 short-term capital gains in the year in which the specified period lapses.
6. Saving Tax on Sale of Agricultural LandIn 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.
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 these cases, you can seek exemption under Section 54B.
Section 54B: Exemption on Capital Gains From Transfer of Land Used for Agricultural PurposeWhen you make short-term or long-term capital gains from transfer of land 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 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.
9. 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 for a long time, 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. This way, the indexed purchase price can be reduced from sale price to determine gains. So, indexation applies only to assets held for long-term.
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.
Period of holding Short Term / Long Term Immovable property < 24 months
>24 months Long Term Listed equity shares <12 months
>12 Months Long Term Unlisted shares <24 months
>24 months Long Term Equity Mutual funds <12 months
>12 months Long Term Debt mutual funds <36 months
Short Term >36 months Long Term Other assets <36 months Short Term >36 months Long Term
Should an NRI pay taxes on gains made on the 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 NRI’s income slab, if the property is a short term asset. If the property is a long term asset, 20% LTCG tax applies. Further, it is important for the NRI to ensure that taxes are deducted on the gains made and not on the sale proceeds. A jurisdictional Assessing Officer can help to determine the gains on which taxes should be deducted by the purchaser.
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