INTRODUCTION
An investment in a home is one of the most sought-after investments. The major motivation is to purchase a home, while others invest to profit from the immovable property's sale. For income tax purposes, a house property is a capital asset. The gain or loss on the sale of a house property is either taxable or deductible on your tax return. Similarly, different sorts of assets result in capital profits or losses. This is where we'll talk about the "Capital Gains."
Simply explained, a capital gain is any profit or gain derived from the sale of a "capital asset." Because this gain or profit falls under the category of "income," you will be required to pay tax on it in the year in which the capital asset is transferred. This is referred to as capital gains tax, and it can be either short- or long-term. Because there is no sale and merely a transfer of ownership, capital gains are not applicable to an inherited property. Assets obtained as gifts by means of inheritance or will are specifically exempted under the Income Tax Act. However, capital gains tax will apply if the asset is sold by the person who inherited it.
WHAT ARE CAPITAL ASSETS?
Capital assets include land, buildings, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewellery, to name a few. Having rights in or relating to an Indian firm falls under this category. It also covers management or control rights, as well as any other legal right. The following items are not considered capital assets:
- Any stock, consumables, or raw materials stored for business or profession.
- Personal items held for personal use, such as clothing and furniture
- Agricultural land in India's rural areas
- Rural area definition (from AY 2014-15) – A rural area is defined as any area with a population of 10,000 or more that is not under the jurisdiction of a municipality or cantonment board. It should also not fall inside the following distance (to be measured aerially) - (population is as per the last census).
- The central government's 6.5 percent gold bonds (1977) or 7 percent gold bonds (1980) or national defence gold bonds (1980)
- Special bearer bonds
- A gold deposit bond or deposit certificate issued under the Gold Deposit Scheme (1999) or the Gold Monetisation Scheme (2015)
TYPES OF CAPITAL ASSETS:
SHORT-TERM CAPITAL ASSET
A short-term capital asset is one that is kept for less than 36 months. From FY 2017-18, the 36-month requirement for immovable properties such as land, buildings, and houses has been reduced to 24 months. For example, if you sell a house property after holding it for 24 months, any income you receive will be treated as long-term capital gain if you sell it after March 31, 2017.
LONG TERM CAPITAL ASSET
A long-term capital asset is one that has been kept for more than 36 months. The decreased time of 24 months does not apply to movable property such as jewellery or debt-oriented mutual funds, for example. If held for more than 36 months, they will be classified as a long-term capital asset. When assets are held for less than a year, they are classified as short-term capital assets. If the transfer date is after July 10, 2014, this regulation applies (irrespective of what the date of purchase is). The following are the assets:
- Equity or preference shares in a corporation that is publicly traded in India on a recognised stock exchange.
- Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India
- Units of UTI, whether quoted or not
- Units of equity oriented mutual fund, whether quoted or not
- Zero coupon bonds, whether quoted or not
When the above-mentioned assets are retained for longer than a year, they are referred to as long-term capital assets. When evaluating whether an asset was obtained by a gift, bequest, succession, or inheritance, the previous owner's holding duration is also taken into account when deciding whether the asset is a short-term or long-term capital asset. The holding term for bonus shares or rights shares begins on the date of allotment of the bonus shares or rights shares, respectively.
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TYPE OF ASSET
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SHORT TERM DURATION
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LONG TERM DURATION
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Immovable assets (e.g. real estate)
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Less than 2 years
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More than 2 years
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Moveable property (e.g. Gold)
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Less than 3 years
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More than 3 years
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Listed Shares
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Less than 1 year
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More than 1 year
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Equity Oriented Mutual Funds
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Less than 1 year
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More than 1 year
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Debt Oriented Mutual Funds
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Less than 3 years
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More than 3 years
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TAX ON LONG TERM AND SHORT-TERM CAPITAL GAINS
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TAX TYPE
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CONDITION
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TAX APPLICABLE
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Long term capital gains tax
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Except on sale of equity shares/ units of equity oriented fund
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20 per cent
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Long term capital gains tax
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On sale of Equity shares/ units of equity oriented fund
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10 per cent over and above Rs. 1 Lakh
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Short-term Capital Gains
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When securities transaction tax is not applicable.
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The short-term capital gain is added to your income tax return and the taxpayer is taxed according to his income tax slab.
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Short-term capital gains tax
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When securities transaction tax is applicable
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15 per cent
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TAX ON EQUITY AND DEBT MUTUAL FUNDS
Gains from the sale of debt and equity funds are dealt with differently. An equity fund is one that invests extensively in equities (greater than 65 percent of its overall portfolio).
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FUNDS
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EFFECTIVE 11 JULY 2014
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ON OR BEFORE 10 JULY 2014
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Short-Term Gains
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Long-Term Gains
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Short-Term Gains
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Long-Term Gains
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Debt Funds
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At tax slab rates of the individual
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At 20% with indexation
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At tax slab rates of the individual
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10% without indexation or 20% with indexation whichever is lower
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Equity Funds
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15%
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10% over and above Rs 1 lakh without indexation.
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15%
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Nil
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To qualify as a long-term capital asset, debt mutual funds must be held for at least 36 months. To take advantage of the long-term capital gains tax benefit, you must invest in these funds for at least three years. If you redeem your stock within three years, the capital gains will be added to your income and taxed at your marginal rate.
CAPITAL GAINS TAX ON PROPERTY
Individuals can claim tax exemptions under Section 54EC if capital gains statements are produced for selected bond investments made with the proceeds from the sale of a property.
The money invested can be withdrawn three years from the date of sale, but the bonds cannot be sold during that time. As with the 2018-19 fiscal year, this period has been extended to five years. These one-of-a-kind bonds must be purchased within six months following the sale of a home.
If capital gains statements are issued for certain bond investments made with the proceeds from the sale of a property, individuals can claim tax exemptions under Section 54EC.
Money deposited can be withdrawn three years after the sale, but bonds cannot be traded during that time. This time has been extended to five years beginning with the 2018-19 fiscal year. These one-of-a-kind bonds have to be obtained within six months of a home's sale.
Because there are so many fantastic investment opportunities today, capital gains are much easier to come by. Furthermore, if capital gains are appropriately reinvested, capital gains tax may be reduced, resulting in increased savings.
Capital gains are considerably easier to obtain by today because there are so many excellent investing possibilities. Furthermore, capital gains tax may be lowered if properly reinvested, resulting in higher savings.
CAPITAL GAINS CALCULATION
For assets held for a longer period of time, capital gains are calculated differently than for assets maintained for a shorter amount of time.
IMPORTANT TERMS:
- Full Value Consideration- The amount paid or expected to be paid to the seller as a result of the transfer of his capital assets. Even if no consideration is paid, capital gains are taxed in the year they are transferred.
- Acquisition costs- The price at which the seller purchased the capital asset.
- Improvement costs- Capital expenses incurred by the seller in making any additions or adjustments to the capital asset.
To calculate the value of a short-term capital gain, you must first estimate the total amount of consideration. Cost of acquisition, cost of improvement, and total expenditure incurred in connection with the transfer of ownership must all be subtracted from the acquired value. The capital gain on investments will be the consequent value.
It's worth noting that improvements made before April 1, 2001, are never taken into account. The cost of acquisition and cost of improvement incurred by the previous owner would be included in certain cases where the capital asset becomes the taxpayer's property other than through an outright purchase by the taxpayer.
STEPS FOR CALCULATING SHORT TERM CAPITAL GAINS
Step 1: Begin with the full value of consideration
Step 2: Subtract the following from the total:
- Expenses incurred solely for the purpose of making such a transfer
- Acquisition costs
- Improvement costs
Step 3: This is a capital gain on a short-term basis. Capital gain over a short period of time = full value consideration Expenses incurred solely for such a move are lower. Acquisition costs are lower. Improvements are less expensive.
STEPS FOR CALCULATING LONG-TERM CAPITAL GAIN
Step 1: Begin with the complete consideration value.
Step 2: Subtract the following from the total:
- Expenses incurred solely for the purpose of making such a transfer
- Acquisition costs that are indexed
- Cost of Improvement Indexed
Step 3: Subtract the exemptions offered by sections 54, 54EC, 54F, and 54B from the total.
Long-term capital gain = full consideration of value
Less: Expenses incurred just for such a transfer
Less: Inflation-adjusted acquisition costs
Less: Cost of Improvement Indexed
Less: Expenses that can be subtracted from the total amount to be considered*
(*Expenses from capital asset sale revenues that are entirely and directly related to the sale or transfer of the capital asset may be deducted. These are the costs that must be paid in order for the transfer to take place.)
Long-term capital gains on the sale of equity shares/units of equities oriented funds, realised after March 31, 2018, will be exempt up to Rs. 1 lakh per year, according to Budget 2018. Furthermore, only LTCG on shares/units of equity oriented funds exceeding Rs 1 lakh in a financial year without the benefit of indexation will be subject to a 10% tax.
In the case of a sale of a housing property, the following expenses are deducted from the total sale price:
a. The fee or commission paid to secure a buyer.
b. The price of stamp papers
c. Transfer-related travel expenses — these could be incurred after the transfer has been completed.
d. In some situations, expenses made in connection with the will and inheritance, such as acquiring a succession certificate and the executor's costs, may be granted.
In the case of a stock sale, you may be able to deduct the following expenses:
- The commission paid to the broker on the shares sold
- The STT, or securities transaction tax, is not deductible as an expense.
Where the jewellery is sold: If a broker's services were used to find a buyer, the cost of these services can be deducted. It's worth noting that expenditures subtracted from the sale price of assets to calculate capital gains aren't recognised as a deduction under any other section of your tax return, and you can only claim them once.
INDEXED COST OF ACQUISITION
The CII (Cost Inflation Index) is used to calculate the purchase cost in today's terms. It is done to alter the values by accounting for inflation that occurs throughout the years while the asset is held.
The indexed cost of acquisition is calculated by multiplying the Cost Inflation Index (CII) of the year when an asset was sold by a seller by the Cost Inflation Index (CII) of the year when the property was bought or the financial year 2001-2002, whichever is later.
Assume a person purchased a property for Rs. 50 lakh in the fiscal year 2004-2005 and wanted to sell it in the fiscal year 2018-19. In the fiscal years 2004-05 and 2018-19, the CII was 113 and 280, respectively.
As a result, the indexed acquisition cost will be 50 X 280 / 113 = Rs. 123.89 lakh.
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 2001-02 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
INDEXED COST OF IMPROVEMENT
The linked cost of improvement that was required to the CII of the year divided by the CII of the year in which the improvement took place yields the indexed cost of the improvement.
TAX EXEMPTIONS ON CAPITAL GAINS
On the profit made against assets, tax exemptions can be claimed under the following sections -
- Section 54: If the proceeds from the sale of a residential property are used to purchase another home, the capital gains generated by the transfer of ownership are tax-free. Deductions, on the other hand, can only be claimed if the following conditions are met:
1. Individuals must buy a second property within two years of selling the first or one year before transferring ownership.
2. The purchase of a second property should be completed within three years of transferring ownership of the first property in the event of an under-construction property.
3. Within three years of purchase, newly acquired property cannot be sold.
4. The newly purchased property must be located in India.
- Section 54F: When capital gains on a long-term asset other than a residential residence are achieved, exemptions under Section 54F can be claimed. The exemption, however, is void if you sell the new asset within three years of its purchase or development. A new property should be purchased within two years of generating the necessary funds. In addition, construction must be finished within three years of the date of sale.
- Section 54EC: Individuals can claim tax exemptions under Section 54EC if capital gains statements are provided for specified bond investments made with the proceeds from the sale of a property.
The money invested can be withdrawn after three years from the date of sale, but the bonds cannot be sold during that time. With effect from the 2018-19 fiscal year, this time has been extended to five years. Individuals must invest in these unique bonds within six months of selling a home.
Capital gains are considerably easier to earn now since there are so many profitable investing possibilities available. Furthermore, capital gains tax can be lowered if properly reinvested, resulting in bigger savings.
INVESTING IN CAPITAL GAINS ACCOUNT SCHEME
Individuals can claim tax exemptions under Section 54EC if capital gains statements are produced for certain bond investments made with the proceeds from the sale of a property.
Money placed can be withdrawn three years after the sale, but bonds cannot be traded. Beginning with the 2018-19 fiscal year, this period has been extended to five years. These one-of-a-kind bonds must be purchased within six months following the sale of a home.
Capital gains are considerably easier to come by now days because there are so many wonderful investing alternatives. Furthermore, capital gains tax may be lowered if capital gains are properly reinvested, resulting in improved savings.
LATEST DEVELOPMENTS
The tax benefits on capital gains have been expanded as part of the 2019 Interim Budget, which was announced on February 1, 2019. Mr. Piyush Goyal, temporary finance minister, announced that capital gains up to Rs 2 crore can now be invested in up to two residential dwelling assets. This will be done instead of the existing requirement of making an investment in a single residential housing property. However, the investor can only use this option once in his or her lifetime.
Long-term capital gains tax will not apply to the sum invested in these two houses. To make the capital gains tax-free, the long-term capital gain must be invested in either purchasing a residential house property in the following two years, constructing a house in the next three years, or investing in bonds u/s 54EC within six months. However, beginning in the fiscal year 2019-20 (assessment year 2020-2021), taxpayers will be able to use this new approach to invest in two residential residences for a once-in-a-lifetime benefit of Rs 2 crore.
CAPITAL GAINS TAX FOR NRI
Non-resident Indians (NRIs) selling property in India after 36 months of acquisition are liable to a 20% LTCG tax, just like resident Indians. If the property is sold within 36 months of acquisition, the STCG tax rate is determined by the individual's income tax bracket.
NRIs are subject to a TDS of 30% and 20% on their short-term and long-term capital gains, respectively, in addition to the capital gains tax. NRIs, on the other hand, can avoid paying TDS on LTCGs by investing in another property in India within two years of selling the previous one. When it comes to capital gains bonds, the reinvestment must be made within six months to avoid the tax deducted at source.
NRIs selling their properties can apply to the income tax authorities for a tax exemption certificate under the Income-tax Act. The application must be filed in the same jurisdiction as the NRI's Permanent Account Number (PAN), and it must include papers confirming capital gain re-investment.
CONCLUSION
Different forms of incomes are taxed differently and when a capital asset is liquidated by the taxpayer, the same is also chargeable to tax as per the Income Tax Act. Keeping this in mind, the capital gains tax is applicable on transactions involving sale of capital assets, however, some exceptions to avoid this tax have also been provided in the law which are available in only certain circumstances.
Any capital gain needs to be disclosed in the income tax return of the taxpayer and evasion is equivalent to tax fraud, which attracts due prosecution, penalty and interest.
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