What is Capital Gains Tax in India?

Any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain. This gain comes under the category ‘income’, and hence you will need to pay tax on that amount in the year in which the transfer of the capital asset takes place. This is called capital gains tax, which can either 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.

Defining Capital Assets

Any land, building, house property, 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:

• Any stock, consumables or raw material, held for the purpose of business or profession.
• Personal goods such as clothes and furniture held for personal use
• Agricultural land in rural area.
• 6½% gold bonds (1977) or 7% gold bonds (1980) or national defence gold bonds (1980) issued by the central government
• Special bearer bonds (1991)
• Gold deposit bond issued under the gold deposit scheme (1999) or deposit certificates issued under the Gold Monetisation Scheme, 2015

Long-term & Short-term Capital Assets?

A capital asset can be a long-term capital asset or short-term capital asset depending upon the period of holding of the capital asset.

Section 2(29A) of the Act provides that Long-term Capital Asset (LTCA) means any capital asset other than Short-term Capital Asset (STCA). Generally, Capital Asset shall be classified as the STCA if the POH is not more than 36 months. However, for specified assets, POH is as under:

• For Listed equity and preference shares, Listed Securities, Units of Unit Trust of India, Unit of an Equity Oriented Fund or a Zero-Coupon Bond, POH for the purpose of computing capital Gains is 12 months.
• Further, for Unlisted equity and preference shares and Immovable property being land, building, or both, POH is 24 months.

Calculating Capital Gains

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

Understanding of some General terms:

The full value of consideration: The consideration received or to be received by the seller as a result of the 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:

• Improvements made before April 1, 2001, are never taken into consideration.
• 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 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/ Indexed cost of acquisition
• Cost of improvement/ Indexed cost of improvement

Step 3: This amount is a short-term/long-term capital gain.

Taxability of Capital Gains:

Capital gains constitute special rate income and are taxed are the following tax rates basis their type and the nature of asset transferred. The below table summarizes the rates for taxability of capital gains in India:

Note 1: In order to avail the rate of tax as mentioned, in the case of listed equity shares the security transaction tax (STT) is required to be paid at the time of acquisition of shares as well as at the transfer of shares while, in the case of units of equity-oriented mutual funds and units of business trust, security transaction tax (STT) is required to be paid only at the time of transfer of units.

Exemption on Capital Gains

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

The exemption under section 54 is available when the capital gains from the sale of house property are reinvested into buying or constructing two other house properties. 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 number 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 the sale.

Conditions for availing of this benefit:

• 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.
• 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 the 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.

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 bonds

The exemption is available under Section 54EC when capital gains from the 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 the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC).

The money invested can be redeemed after 5 years, but it cannot be sold before the lapse of 5 years from the date of sale. The taxpayer has to invest the capital gains within 6 months of transfer in these bonds to claim the exemption.

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 the 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, the 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.

The 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.