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Everything to know about Capital Gains Tax

Everything to know about Capital Gains Tax

Tax & Auditing

Vakilsearch Staff

Vakilsearch Staff

2 Sep 2020, 09:30 — 6 min read

Buying a house or property is a significant investment that requires a lot of capital and planning to achieve. When it comes to Income Tax, a house or property goes by the tag – ‘capital gains/asset’. As per this scheme, the buying or selling of houses come under India’s taxation system, enabling the individual to claim a deduction or pay extra tax. Along the same lines, capital gains and losses can arise as a result of several transactions. Here’s a look at everything you need to know about capital assets, types of capital assets and capital gains tax on property.

 

What is a capital gain, and what are capital assets?

A capital gain is any profit or gains obtained as a result of the sale of a capital asset. Such profits come under the tag of income as per India’s taxation rules. Therefore, individuals have to pay tax for such gains in the fiscal year wherein they gained them. Such taxation goes by the name capital gains tax. However, these gains do not work on any inherited property, as such property transfers in ownership. 

 

Meanwhile, a capital asset can be any building, property, land, trademarks, vehicles, patents, jewellery or machinery. However, certain assets do not come under the category of capital assets;

  1. Stock, raw materials, consumables which come as a part of business
  2. Clothes, furniture and personal goods 
  3. Agricultural land
  4. 6.5% or 7% gold bonds, along with bonds for national defence 
  5. Special bearer bonds 

 

What are the different types of capital assets?

Short-term capital asset: Any asset held for a period lesser than 36 months becomes a short term capital asset. For immovable properties, including properties, buildings and land the term has been reduced to 24 months from 2017.

 

Long-term capital asset: Any asset that has been held for more than 36 months becomes a long term capital asset. However, the reduced term of 24 months does not extend to mutual funds, movable properties and jewellery.

 

Certain assets, such as equity, shares, securities, UTI units, equity-mutual funds, and coupon bonds, are a form of short-term capital assets if they are held for less than 12 months. However, this reduced term is applicable for transfers after July 2014. These assets, when held for longer than 12 months, directly become a long term capital asset.

 

If an asset comes as a gift, via a will, inheritance or succession, then the term for the whole also includes the period the older owner held it. For shares, the period of holding

starts from the date of allotment of the shares. 

 

Taxation on long-term and short -term gains 

Sl No Tax Type Condition Tax Rate
1 Long-term capital gains  Everything except shares and equity-oriented mutual funds 20%
2 Long-term capital gains  For shares and equity-oriented mutual fund units 10% for INR 1lakh and above
3 Long-term capital gains  Debt funds From 11/7/2014

20% with indexation

Before 11/7/2014

Lower of 10% without and 20% with indexation 

4 Long-term capital gains  Equity funds Both before and after 11/7/2014

Nil

5 Short-term capital gains  Not security transaction tax Tax is a part of IT returns and tax rate depends on the IT slab.
6 Short-term capital gains  Security transaction tax applies 15%
7 Short-term capital gains  Debt funds Both before and after 11/7/2014

As per the tax slab rates 

8 Short-term capital gains  Equity funds Both before and after 11/7/2014

15%

 

As per changes in taxation laws, income from debt mutual funds will be a short term capital asset unless held for 36 months. Therefore, people must hold them for longer than 36 months to gain benefits that long term capital assets provide. If not, the gains made become a part of your income, which will then be taxed as per your IT slab.

 

Capital gains tax exemption and calculation

Short-term capital gains tax India

Deduct the following from the full value of consideration:

  1. Expenditure incurred due to the transfer
  2. Acquisition cost 
  3. Improvement cost 

 

Long-term capital gains tax India

Deduct the following from the full value of consideration;

  1. Expenditure incurred due to the transfer
  2. Indexed acquisition cost (Acquisition Cost * Cost Inflation Index)
  3. Indexed improvement cost (Improvement Cost * Cost inflation index)

 

From this amount, deduct exemptions as per;

  • Section 54, Section 54EC, Section 54F, Section 54B

 

Capital gains tax exemptions

  • Section 54: Exemption from taxation on house properties if the individual invests that amount in at least two other properties, until INR 2 crores. 
  • Further, Section 54F: Exemption from tax on the sale of any asset excluding houses, if entire sale consideration helps in buying a new residential property.
  • Section 54EC: Exemption from taxation on the sale of the house if the consideration goes into an investment in specific bonds by NHAI and REC, until INR 50.
  • Additionally, Section 54B: Exemption for taxation on the sale of agricultural land if reinvestment occurs in a new asset or more agricultural land.

 

Also read: How to pay your Income Tax using Challan 280

 

To explore business opportunities, link with us by clicking on the 'Connect' button on our eBiz Card.

 

Image source: shutterstock.com 

 

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views, official policy or position of GlobalLinker

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