Capital Gains Tax – LTCG & STCG Tax in India, Definition, Types, Rates, Exemptions
Capital gain can be understood as the net profit which an investor makes on selling any capital asset which exceeds the purchase price. This total value that one earns by selling any capital asset is taxable income as per the Income Tax Act 1961. For anyone to be eligible to get tax benefits in a particular financial year, this change of ownership of the capital asset must occur in the preceding financial year.
Any financial gains that one gets by selling any asset are not applicable to any kind of inherited property. One is eligible for capital gains for transferring ownership. As per the Income Tax Act, any of the assets that are received by inheritance or as gifts are not considered as Capital Gains for calculating income for any individual.
Read More – Taxes in India
What is Capital Asset?
Lands, buildings, vehicles, houses, jewelry and mutual funds are capital assets. Further, legal rights or management rights in any company are also treated as capital assets.
The below mentioned are not treated as capital assets by the income tax department:-
- Any raw material, consumables or stock which is in possession of the person for any profession or business.
- Any goods like furniture or clothes which one has for any personal use.
- Agricultural land in rural India.
- Issued in 1991 the special bearer bonds.
- Gold bonuses that are given by the Central Government like in 1977 there was a 6.5% bonus on gold, 1980 there was a 7% bonus on gold, and gold bonus in 1980 for defense.
- Others include deposits on gold bonds which have been issued through the gold deposit scheme of 1999 or certificates of deposits that have been issued through the 2015 Gold Monetisation Scheme.
Types of Capital Gain
The gains against any investment can basically be divided into two subcategories depending on the nature of the capital gains:-
- Short term capital gain
- Long term capital gain
Short term capital gain –
If an asset has been sold in a time span of 35 months then the profits which one makes out of it are called short-term capital gains. For example, if a house is sold after a span of 20 months from its acquisition then short-term capital gains are considered. But every asset has a different time period before it is considered under long-term capital gains. Like listed shares and mutual funds are considered as long-term capital gain after they are held for a period of one year.
Long term capital gain –
The profit which is earned by any person after selling any asset which they have in possession for greater than 3 years is also called long-term capital gains. Post-March, 2017, the IT department has changed the period for holding immovable property to 24 months but this is not currently applicable to other movable assets like debt-oriented mutual funds, jewelry and others.
Additionally, some of the other assets are treated as short-term capital gains if they are held for a period of less than a year. Below mentioned is the list of assets as per the Income Tax Act which follows the above-mentioned rule:-
- Any company’s equity shares that are registered under the Indian stock exchange by a person
- Securities such as debentures, bonds, and others which are registered under the Indian stock exchange
- Quoted or unquoted units of UTI
- The gains on the Mutual Funds which are in general equity-oriented, irrespective of them being are unquoted or not
- Zero-coupon bonds
All the above-mentioned assets are treated as long-term capital assets if they are held for a period greater than a year. When an asset is received through gift or inheritance then the tenure for which it was in possession of the previous owner would also be considered for calculating capital gains. Additionally, for the rights shares or bond shares, the holding period is also considered from the allotment date.
Table for Asset Holding Period
How are capital gains calculated?
The simple answer to this question is that it is totally dependent on the kinds of assets and their period of holding. Given below are some terms that one must know prior to calculation of gains against one’s capital investments–
- Consideration of full value –
This is a type of consideration that is taken by a seller in return for a capital asset.
- Acquisition cost –
At the time of a seller acquiring an asset, he considers the value of that particular asset as its acquisition cost.
- Improvement cost –
The total amount of expenditure made by a seller in making any alterations or additions to the capital asset is called its improvement cost.
In order to ascertain the real value of short-term capital gain, the full amount of consideration is needed to be determined right from the starting point. The next step is deducting the cost of improvement, cost of acquisition and the total expenditure incurred during the transfer of ownership from the total value. The resultant figure thus obtained will be the capital gain on investments.
Indexed Cost of Acquisition
The acquisition cost is ascertained on the present terms by the process of applying the CII, i.e., the Cost Inflation Index. It is calculated while taking into account the inflation rate that comes into action over the span of time of holding the asset to adjust the values.
The cost of acquisition that is indexed can be calculated as the ratio of the CII (Cost Inflation Index)of the year when a seller sells a specific asset to that of the year when the asset was acquired or the FY 2001-2002, whatever is later, then multiplied by the CII (Cost of acquisition).
For instance, if an individual acquired an asset in FY 2004-2005 at Rs. 50 Lakh and then he decides to sell the property in the FY 2018-19. In this case, the CII of the FY 2004-05 and 2018-19 are 113 and 280 respectively.
Therefore, the Indexed Cost of Acquisition will be calculated as 50 X 280 / 113 which is equal to Rs. 123.89 Lakh.
Cost of Improvement that is indexed
In order to calculate the (indexed) cost of the improvement, we have to multiply the associated cost of improvement that was needed to the CII of the year which is then again divided by the CII of the FY in which the improvement happened.
How should one compute short-term capital gains?
Follow the steps mentioned below:-
- Step 1 – Start with the full consideration value
- Step 2 – Minus the acquisition cost + transfer cost+ improvement cost from consideration value
- Step 3 – The amount which one gets is the short-term capital gain.
Formula to calculate short term capital gains
Short-term capital gain= Full consideration value – (acquisition cost + transfer cost+ improvement cost)
How should one compute long-term capital gains?
Follow the steps mentioned below:-
- Step 1 – Start with the full consideration value received or accruing
- Step 2 – Minus the indexed acquisition + transfer cost+ indexed improvement cost from full consideration value
- Step 3 – The amount which one gets is the long-term capital gain.
Formula to calculate long term capital gains
Long-term Capital Gains = FVC received or accruing – (Indexed acquisition + transfer cost + indexed improvement cost)
Exemptions of Tax on Capital Gains
Exemptions of tax on Capital Gains can be sought under the following heads on the revenue earned against assets –
1. Exemption under Section 54 –
If any sum of money earned by the sale of a residential property is further invested in purchasing another property, then the earning of capital gains by ownership transferring of that property is exempted from tax. But deductions can be sought only if the conditions listed below are met –
- It is mandatory to buy a 2nd property within 24 months of the sale of the 1st property before.
- If the property is under construction, then the second property needs to be completed in a span of 3 years before the transfer of the ownership for the first property.
- The new property should not be sold in 3 years after its purchase.
- The new property should be in India.
An amendment was made in the provision which states that one can get tax exemption on investing with long-term gains for selling of 2 properties but it should be less than Rs 2 crore earlier it was limited to 1 property.
2. Exemption under Section 54F –
This is claimed of the capital gains that are earned from any long-term assets except residential property. But the exemption is invalid if one sells this asset in 3 years post-construction or purchase.
3. Exemption under Section 54EC –
These exemptions are claimed under Section 54EC on the condition that capital gains statements need to be submitted for any investments for certain specific bonds with the amount which one gets by the sale of any property.
Such an invested amount could be redeemed after a span of 3 years after the date of sale, but such bonds should not be sold in that period. It has been increased from 3 to 5 years in the 2018-19 financial year. One is required for investing in such special bonds in 6 months from the date of a property sale.
One can earn capital gains through different investment options. Also, if one can reinvest the money properly, the tax on the capital gains could be which implies higher savings.
How to Calculate Capital Gains Tax Using Calculator?
For calculating capital gains tax using a calculator one needs to fill up the below-mentioned details and click on compute the tax. The process of tax computation is quite a simple and easy process for determining the capital gains tax. The details to be filled in are mentioned below:-
- Purchase price
- Sale price
- Total units
- Purchase details of the asset like the month, year and date.
- Details of sale like the month, date and year when the asset was sold on.
- All other investment details.
The taxpayer may invest to get capital gains from shares, debt mutual funds, fixed maturity plans, equity mutual funds, real estate, and gold. After entering the required details a person is required to enter other details as mentioned below.
- Type of investment
- Period of time lying between the sale and the purchase.
- Different types of gains whether it is a long-term or short-term capital gain.
- The difference between the sale price and purchase price.
- ICI or Inflation cost index in that particular financial year when the purchase was made.
- ICI or Inflation cost index in that particular financial year when the asset was sold.
- The difference in the sale and indexed purchase price.
- Purchased index cost.
- LTCG with indexation.
- LTCG without indexation.
The long term capital gains or LTCG on different equity mutual funds and on stock is taxed at the rate of 10% if there is any gain on the selling of any securities which are listed that exceeds Rs 1 lakhs according to the Union Budget of 2018 and the STCG or short term capital gains are taxed at around 15%. On the debt mutual funds, the STCGs is generally incremented to the income of the taxpayer and under the LTCG the debt mutual funds are generally taxed at 10% without any indexation and 20% with indexation.
Capital Gains Tax on Debt and Equity Mutual Funds
As mentioned above the tax on the equity funds and debt funds are considered differently. If any person invests greater than 65% of the total portfolio in any equity then it is called an equity fund. Below is a table stating the changes in the IT rules:-
|Funds||From July 11, 2014||Before July 11, 2014|
|Short Term Gains||Long Term Gains||Short Term Gains||Long Term Gains|
|Debt Funds||Tax slab rate of that particular individual||20% along with the indexation||Tax slab rate of that particular individual||20% with indexation or 10% without indexation whatever is less|
|Equity Funds||15%||10% for greater than Rs 1 lakh which doesn’t include indexation.||15%||Not Applicable|
Debt Mutual Funds – Change in Tax Rule
Debt mutual funds held for a period greater than 3 years are considered as long-term capital assets. This also means that one needs to have these investments for a minimum period of 3 years for getting the benefit of the LTCG or long-term capital gains tax. For redeeming it in a span of 3 years, these capital gains taxes would be incremented in the person’s income and would be taxed according to the income tax slab rate.
When can a person invent a Capital Gains Account Scheme?
For any person who is selling their asset (property more specifically) finding a seller, arranging some paperwork and getting the funds is a very time taking process so the income tax department understands and offers some time to the taxpayer. If the capital gains are not invested till 31st July then the gains can be easily deposited under Capital Gains Account Scheme, 1988. And it can be treated as an exemption so there is no need to pay any tax in any PSU bank. But if it is not deposited this money would be treated as short-term capital gains.
Agricultural Land Tax
Under certain circumstances the gains earned through the selling of any property then that land is exempted from the income tax.
In rural parts of the country, the capital gains from the agricultural land are not treated under capital gains. Those who sell or buy agricultural lands as a profession are taxed under Business and Profession. For some urban agricultural land, the tax is exempted under Income Tax Act’s Section 10 (37).
Section 54B: Exemption on for Land Agricultural Purpose
If a person or his parents or HUF makes long-term or short-term capital gains from transferring land which has been used for agricultural practices for a tenure of 2 years before selling it then an exemption is offered under Section 54B. But this amount should be again used for buying agricultural property within 2 years.
Cost Inflation Index Number
Here is the CII Number from the financial year 2001 to 2002 to the financial year 2021 to 2022:
Capital Gains Tax FAQs:
1. What is the tax rate for long term capital gains on property?
2. When there is no capital gains taxed?
3. Are senior citizens exempted from capital gains tax?
4. Are capital gains treated as income?
5. What happens if one incurs losses by selling a property?
6. Does one need to pay capital gains for owning any property?
7. Is there any benefit of indexation for short term capital gains?
8. Does one need to pay capital gains for selling and generating gains from the property after 6o years of age?
9. What happens if someone fails to pay capital gains tax?
10. Is rural and urban agricultural property taxed under capital gains in India?
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