Did you own some assets in the form of house property, equity shares, or jeweler? If yes, then you must know the tax implications on capital gains or losses arising on the sale of such assets. The tax you need to pay on the sale of these assets depends on how much period you hold the assets. So let’s understand in detail what is capital gains, types, calculations, and exemptions.
What is Capital Gain?
When you sell a capital asset at a higher price than its investment/cost, you earn a profit; it is considered as capital gain income. This income is chargeable under the Income Tax Act.
The capital assets are buildings, land, shares, trademarks, patents, jewellery, machinery, etc.
Types of Capital Gains
1. Short-term capital Gain
When you sell the assets before the holding period of 36 months from the date of acquisition/purchase, then it is called short-term capital gain.
There are, however, few exceptions to this rule:
- Where the capital assets are in the nature of listed equity shares/mutual funds, the holding period gets reduced to 12 months in place of 3 years.
- Moreover, where there are capital assets like Immovable Property & Unlisted shares are involved, the holding period is reduced to 24 months.
The tax you need to pay on a capital gain arising out of securities, like equity shares or mutual funds or debt funds, also depends on security transaction tax. When there is a security transaction, the tax you pay is 15%. When security transaction tax is not applicable, tax on short-term capital gain will be calculated based on the taxpayers’ income and charged at normal slab rates.
2. Long-term capital Gain
Long-term capital gain occurs when you hold assets for 36 months or more.
There are, however, few exceptions to this rule:
- Where the capital assets are in the nature of listed equity shares/mutual funds, long-term capital gain arises on sale of capital assets after a holding period of 12 months.
- Moreover, where there are capital assets like Immovable Property & Unlisted shares are involved, long-term capital gain arises on sale of capital assets after a holding period of 24 months.
The tax on long-term capital gain is 20%, except for sales of equity shares and units of equity funds, where Long-term gain is 10%, charged over and above the gain of Rs 1 lakh.
How to Calculate Capital Gain Tax in India?
When calculating capital gains tax, you must check the capital gain type because short-term capital gains calculations vary from long-term capital gains. However, before calculating the capital gains tax, you must understand the full consideration value.
What is the Full value of consideration?
The full value of the consideration means the money you receive when you transfer the capital assets.
There are two other important terms:
- Indexed Cost of Acquisition
- Indexed Cost of improvement
-
Indexed Cost of Acquisition
The value at which the seller acquired capital assets is considered as the Cost of acquisition. In the Cost of acquisition, the purchase price and expenses incurred during acquisition are included, such as stamp duty and registration; they are excluded from maintenance costs, such as insurance, utilities, and taxes.
| Cost of acquisition calculation | Cost of acquisition X CII of the year in which the asset is transferred ) / CII of the year in which the asset was first held by the seller or FY 2001-02, whichever is later |
-
Indexed Cost of improvement
The Cost of improvement is the money spent on improving capital assets. The money you spend on the improvement is added to the Cost of acquisition to calculate the capital gains.
Renovation costs, upgrades, or repairs increase the value of assets. However, if you spend money on improvement before 1st April 2001, it will not be considered the acquisition cost.
| Calculation of cost of improvement | Cost of improvement x CII (year of asset transfer) / CII (year of asset improvement) |
How to calculate different types of capital gains tax in India ?
- Short term capital gain
| Full value of consideration | XXX |
| Less: expenses incurred on transferring the asset | XXX |
| Less: cost of acquisition | XXX |
| Less: cost of the improvement | XXX |
| Short term capital gain | XXX |
For example – A house property was bought on 1st January 2022 for Rs 50 lakhs. On 1st January 2023, Rs 5 lakhs were spent on improving the house. On 1st November 2023, the house was sold for INR 65 lakhs. The house is sold after 22 months of buying it, so it is considered short term capital gain.
| The full value of consideration | Rs 65 lakh |
| Less: cost of acquisition | Rs 50 lakh |
| Less: cost of the improvement | Rs 5 lakh |
| Short term capital gain | Rs 10 lakh |
- Long term capital gain
| The full value of consideration | XXX |
| Less: expenses incurred in transferring the asset | XXX |
| Less: indexed cost of acquisition | XXX |
| Less: indexed cost of the improvement | XXX |
| Less: expenses allowed to be deducted from the full value of the consideration | XXX |
| Less: exemptions available under Sections 54, 54B, 54EC, and 54F, etc. | XXX |
| Long term capital gain | XXX |
Exemptions from Capital Gains Tax in India
Tax on capital gain takes a lot of money from the earnings, so it becomes essential for individuals to use tax-saving strategies to reduce their tax liability. The government is providing an exemption under certain capital gains income to reduce liability.
- Section 54: Exemptions on Sale of House Property on Purchase of Another House Property
The taxpayer (individual & HUF only) gets exempted when the capital gain from the sale of house properties is reinvested into the purchase or construction of another house property once in a lifetime. The capital gain income should not be at more than Rs 10 crore to get an exemption under section 54.
Here, the taxpayer must invest the whole of the capital gains amount and need not to invest the entire sale proceeds. The exemption will be limited to the total gain on sale when the purchase price of the new property is higher than the capital gain.
The conditions to meet capital gain tax in India on property such as follows:
- The new property can be bought in one year before or two years after the old property has been sold.
- Gains from a first property can be invested in the construction of the property, and that construction must be completed within three years from the sale of the property.
- According to the 2018-19 Budget, the taxpayer can invest in 2 house properties that could be purchased or constructed to get the benefit of exemption. This exemption is available once in the lifetime of the taxpayer, where the Capital gain income is not more than Rs. 2 crores, as per 2020 Finance Act.
- The exemption can be revoked if you sell new property within three years of purchase.
- Section 54B: Exemption on Capital Gains From Transfer of Land Used for Agricultural Purpose
When you make a short-term or long-term capital gain from the transfer of land situated in urban areas, used for agriculture purposes by individuals, Parents of Individual’s or Hindu Undivided Families, for at least two years prior to the sale date, such capital gain can be exempted if invested into another agricultural land.
The exempted amount is determined as the lesser of the investment in a new asset or the amount of capital gain. Reinvestment into new agricultural land, whether in urban or rural areas, must occur within two years from the date of transfer.
The conditions to meet the exemption on capital gain in India are as follows:
- When you want to claim an exemption on capital gains for new agricultural land purchased, you should wait to sell it within three years from the date of purchase.
- When you can’t purchase new agricultural land before filing your income tax return, the amount of capital gain should be deposited in any branch of a public sector bank before the due date in accordance with Capital Gains Account Scheme, 1988. You can claim an exemption for the amount deposited as well.
- Exemption Section 54EC – Exemption on Sale of House Property on Reinvesting in specific bonds
To get an exemption, the taxpayer must follow these conditions:
- Invest in bonds up to Rs 50 lakhs issued by the National Highway Authority of India or Rural Electrification Corporation.
- You can redeem invested money after 5 years, but it cannot be sold before the lapse of 5 years from the date of sale of property.
- House property holders have 6 months to invest the profit in these bonds. But to claim this exemption, you must invest before the tax filing deadline.
- Under Section 54F- Exemption on capital gains earned from selling any capital asset other than a house property
When you need to claim an exemption under section 54F, you must invest the entire sales consideration and not only at capital gain to buy a residential house property. You can purchase the new house property either before one year of sale or two years after the sale of the property. This amount can be used in construction, but construction must be completed within three years of the sale of the property.
- Section 54D: Capital Gains on transfer of land and building which is used for industrial undertaking
To get an exemption, follow these conditions.
- You must purchase land and buildings for industrial purposes.
- The land and building must be used for purposes of the business of the industrial undertaking in the 2 years before the date of transfer.
- The property holder must purchase land or building or construct any building within 3 years from the date of transfer.
- If such an investment is not made before the date of filing income tax returns, then the capital gain income needs to be deposited under the CGASor Capital Gains Account Scheme.
Conclusion
In capital gains tax in India , you profit from selling capital assets at a higher price than investing. Investments such as real estate, stocks, and jewellery. The concept of capital gains involves factors such as the full value of consideration, cost of acquisition, and cost of improvement. There are various exemptions you get under capital gains. If you need help filing your income tax returns, you can contact us at Kor Taxsolution.
