Capitals Gain Income Tax

Capitals Gain Income Tax

Indian taxpayers are subject to capital gains tax under the Income Tax Act 1961 on the profits received from the sale of assets.

Written by : Shipra Chaudhary

Reviewed by : Lalit Lata

Lalit Lata

2023-02-02

4485 Views

16 minutes read

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Selling a property is a huge and tiresome task, and contemplating that you will be imposed a tax on your capital gains can be a huge apprehension. An investment executed on procuring land is regarded as a capital asset, and when you trade it, the resulting earnings are known as capital gains. Hence, if you trade your property, you will pay capital gain tax on the earnings gained after conceding the indexed cost of acquisition and inflation. However, there are numerous techniques to save on the capital gain tax.

Table of Content

What is Capital Gains Tax in India?

The profit or gains you make by selling a capital asset is known as a capital gain. The gain from the capital asset can be classified under two types: short-term capital gains and long-term capital gains, depending on the duration of the asset remaining in your ownership.

The tax charged on this capital gain is known as the capital gain tax. This tax is charged under the head of capital gains for the sale made in the previous year. You are liable to pay the capital gain tax when:

  • You have sold an asset that comes under the category of a capital asset
  • You have profited from the sale
  • The sale is made in the previous year (the year immediately before the assessment year)

What are Capital Assets?

A capital asset is any tangible or intangible property that is purchased as an investment for the long term. Capital Assets serve as the basis for the calculation of capital gains. According to the Income Tax Act, you can include the following under capital assets.

What is Included?
 

  • Property: This is a wide head and includes both tangible as well as intangible properties. Tangible properties can be:

    • Land
    • Building
    • Machine
       
  • Intangible properties can include intellectual property, on the other hand. For example:

    • Patent
    • Trademark
    • Lease rights
  • Securities: The securities that are held by FII under the rules of SEBI can also be called capital assets.

Which Assets Are Not Included?

The following, though called assets, are not included under capital assets:

  • Any raw materials that are used in business, as well as the stock in trade of any business or profession
  • Items for daily personal use, such as clothes, footwear, utensils, etc.
  • Household items such as movable furniture, personal vehicles, etc., excluding paintings and jewellery
  • Agriculture land that is situated in the rural part of India is also not considered
  • Gold bonds issued by the government under the gold deposit scheme are also not classified as capital assets.

What are the Types of Capital Assets?

Capital Assets can be classified based on the duration you hold them. These can be

  • Short-Term Capital Assets
  • Long-term Capital Assets

Let’s understand a bit about both of these categories

Short-Term Capital Assets

Any capital asset that you hold for less than 36 months can be called a "short-term capital asset." However, for some specific assets, these criteria can be lowered to a period of 24 months or 12 months.

Exceptions:

  • Short-term assets have a criterion of holding for 24 months

    • Immovable properties such as buildings, houses, land, etc
    • Shares that are not listed (unlisted shares)

If you hold land or an unlisted share for more than 24 months, you will be subject to long-term capital gains tax.

  • Short-term assets have a criterion of holding for 12 months

    • Equity shares that are listed and recognised on the Indian Stock Exchange (NSE/BSE)
    • Preference listed in the stock market (NSE/BSE)
    • Units from the Unit Trust of India
    • Equity mutual fund units
    • Debentures and government securities listed on the stock market in India
    • Zero-coupon bonds

Note: The transfer of the categories listed above should have been made after July 2014.

Long-Term Capital Assets

The capital assets that you hold for more than 36 months can be classified as long-term capital assets. Movable assets such as jewellery, if held for more than 36 months, will be considered long-term assets. This period can be 12 months or 24 months as well, depending on the type of asset.

Types of Capital Gain Tax

Understanding the distinction between long-term and short-term capital gains is significant because both of these gains are handled individually when it comes to taxation. The tax benefits and rates that pertain to the reinvestment of these two kinds of capital gains diversify.

Long-Term Capital Gains Tax (LTCG)

Capital gains income tax can be divided into long-term and short-term capital gains. The profits that you make from an investment over a long period are known as long-term capital gains. These are the capital gains made from long-term capital assets that are held for 1-3 years. These gains are eligible to be taxed under the Income Tax Act and are called "long-term capital gains tax" more commonly known as "LTCG."

What Qualifies as Long-Term Capital Gains?

The period for which you hold your capital asset will help determine whether the capital gains made can be considered a long-term capital gain or not. These are the assets or investments that can help you generate long-term capital gains.

  • Sale of Property: Property can include assets such as land, buildings, house property, etc. If you possess such immovable properties for more than 2 years (24 months) and sell them at a profit, then this can be considered long-term capital gains.
  • Selling of Stocks: If you have invested in shares of companies that are recognised and are listed on the stock exchange and have kept them for more than 12 months, then the gains you make from selling them are long-term capital gains.
  • Sale of Bonds: Not only equity and preference shares but the sale of securities, such as bonds, debentures, etc., that you have held for more than a year is included in long-term capital gains.
  • Sale of Agricultural Land: If you own agricultural land that is not situated in a rural area, then the proceeds that you receive from selling this land will be counted as a long-term capital gain and are eligible for tax.

Did you know?

Long-term capital gains tax in India is fixed at 20.8% (rate including health and education cess @ 4%) with indexation for most assets. But, it can be significantly reduced

Claim Settlement Ratio

Short-Term Capital Gains Tax (STCG)

Gains you make in the short term are also subject to tax. The tax that is levied on the profits or gains made by you by selling a capital asset in the short term is known as the "short-term capital gains tax." A short-term duration is a period that is less than 36 months. For some assets, this period is between 12 and 24 months as well.

Tax Rates - Long-Term Capital Gains and Short-Term Capital Gains

Both long-term and short-term capital gains have different tax rates depending on the asset type and the duration. Here is the table depicting these tax rates:

Nature of TaxConditionTax applicable
Long-term capital gains taxIf you sell Equity shares/ or the units of equity-based mutual funds10% over and above ₹1 lakh
 If you sell any capital assets other than the items listed above20%
Short-term capital gains TaxThe securities transaction tax is not applicableAdded to your tax liability, you will pay tax as per the slab you fall in.
 The securities transaction tax is applicable15%

 

Tax Applicable on Equity and Debt Mutual Funds

Mutual funds come in various types, with two of the most favored categories being equity mutual funds and debt mutual funds. Equity mutual funds are those that consist of at least 65% of the equity in the whole fund. Here are their tax rates.

  • Before July 2014:
Type of FundTax-Rate
Short-Term Equity Funds15%
Long-Term Equity FundsNA
Short-Term Debt FundsAs per the tax slab, your income falls in
Long-Term Debt Funds10% without indexation or 20% with indexation, whichever is lower

 

  • After July 2014:
Type of FundTax-Rate
Short-Term Equity Funds15%+ health and education cess
Long-Term Equity Funds

10%+ health and education cess

if the gains are more than Rs 1 lakh (without indexation)

Short-Term Debt FundsAs per the tax slab, your income falls in
Long-Term Debt Funds

10%+ health and education cess

without indexation

20% +health and education cess

with indexation

(lower of the 2)

3 Ways to Save on Capital Gain Tax on the Sale of Property

The taxes charged on the revenue generated by the trade of capital assets are regarded as capital gains taxes and are defined by the term of possession of the asset as well as the actual variation between its purchase and sale price. This tax assessment is exclusively applicable if the asset is traded after a specific duration of ownership

  • Invest in CGAS (Capital Gains Account Scheme)

Investing in the Capital Gains Account Scheme (CGAS) is another means to save capital gains tax on property sales. This scheme is perfect for individuals who cannot invest in a brand-new property before their income tax return filing, and this scheme provides a huge relief to the taxpayers.

You can invest in this CGAS scheme for three years, and throughout this duration, you can utilise the capital gains to buy or build a residential house on your property. The deposit in this CGAS account must be made before filing or registering an income tax return, and then this investment in the CGAS must be specified in the income tax return.

This CGAS account can be opened only with designated banks. Regional and cooperative banks are not qualified to open this account. The deposit in this account can either be made through monthly instalments or a lump sum to save taxes on capital gains.

  • Set off all Capital Losses

This is, again, the most suitable way to save tax on capital gains resulting from the sale of your property. It enables you to set off all capital gains or profits against the capital losses you incurred earlier. It is analogous to the same-year adjustment of capital loss and capital gains. However, the capital loss must be from the former date, and a short-term capital loss can only be set off against short-term capital gains.

  • Invest in Bonds

If you have recently traded your property and want to save on tax, you can further invest in specified financial assets. Investment in such financial assets holds the power to save your capital gains as these long-term capital gains are exempt under Section 54EC of the Indian Income Tax Act, 1961.

To obtain this tax exemption on your capital gains, you should invest the sum earned in bonds within 6 months of the transfer of the sum and realisation of gains. In addition to this, the funds are required to be invested in these bonds for a minimum of three years as a lock-in period.

If you keep the funds invested in these bonds for a period beyond the lock-in period of three years, you will not gain any interest, and the redemption of these capital gain bonds will become automated. Other restrictions on investing your capital gains from property sales include the inability to assign, contract, or trade these bonds.

How to Calculate Short-Term Capital Gains?

Now that you know how to save capital gain tax, let’s move forward to understand how to calculate the capital gains from your assets. Here is a step-by-step guide for you to follow:

Short-Term Capital Gains Calculation:

If you want to calculate the short-term capital gains you made in the previous year, follow these simple steps.

  • Step 1: Add the full value of consideration: It is the amount that you receive by selling a capital asset. This can be either in cash or in kind.
  • Step 2: Deduct the expenses that you incurred to make the transfer possible. These can be transport and settling charges, commissions, etc.
  • Step 3: Deduct the following:

    • Cost of Acquisition: It is the price paid for the asset
    • Cost of Improvement: The cost incurred in improving and maintaining the asset
  • Step 4: From the amount you get, you must deduct the exemptions provided u/s 54B/54D to find the short-term capital gains

Long-Term Capital Gains Calculation:

The long-term capital gains can be computed by following the steps given below.

  • Step 1: Add the full value of consideration.
  • Step 2: Deduct the expenses incurred on the transfer of the asset.
  • Step 3: Deduct the following:

    • Indexed Cost of Acquisition (ICOA)
    • Indexed Cost of Improvement (ICOI)
  • Step 4: From this, you can find the gross long-term capital gain. From this amount, deduct the exemptions provided by the Income Tax Act to arrive at a long-term capital gain, or LTCG. Exemptions are available u/s 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA, 54GB.

Using the capital gains tax calculator, you can easily calculate the value and maximise your savings.

What are the Exemption on Capital Gains?

The capital gains you make are generally large and attract a tax rate of 20%. Thus, the government has introduced various exemptions to lower your capital gains tax liability.

Let's understand with an example.

Akshay purchased land in the year 2000 for a value of ₹10,00,000. Twenty years later, in the year 2020, he decided to sell it for a whopping ₹1 Cr.

On calculation, his LTCG tax will be:

  • Consideration = ₹1,00,00,000
  • I.C.O.A = ₹28,90,000
  • LTCG = ₹71,10,000
  • Tax = 20%
  • LTCG payable = ₹14,22,000

Thus, he now has to pay over ₹14 lakhs for the capital gain you made. But knowing all about income tax, Akshay knew he could bring the amount further down by making use of the exemptions.

These are explained in the section below.

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

The exemption under this section is regarding the profit that you earn on the sale of property that you use for your residence. Under this section, the whole capital gain can be exempt if it is fully utilised.

Eligibility:

  • If the capital gain is more than ₹2 Cr, you must purchase another residential property within one year before or two years after you sell the property.
  • If the capital gain is less than ₹2 Cr, you have the option of purchasing two residential houses or constructing two residential houses within three years.
  • There is a lock-in period of 3 years. You can avail of an exemption if you have held the property for at least three years.

Section 54F: Capital Gains Tax Exemption on the Sale of any Asset other than a Home

This exemption comes into play if the capital asset is other than a house property. You can avail yourself of this exemption if you decide to invest the entire consideration in a property. The exemption will be provided to you only if:

  • The consideration you receive is invested in a house property one year before or two years after you sell the capital asset.
  • Or the consideration that you receive is invested in house property in India within three years of the asset sale.

Section 54EC: Exemption from the Sale of Real Estate When Reinvesting in Specific Bonds

Every person is eligible for this deduction provided that they have held a long-term asset, i.e., property, for more than 36 months. This exemption is available if you decide to invest the capital gain made through the sale of land, buildings, etc., in certain bonds.

Eligibility:

  • In a fiscal year, the maximum amount invested in bonds cannot exceed Rs 50 lakhs.
  • Within six months of selling your property, you should invest the capital gain in bonds.
  • The bonds that you invest in must be of a long-term nature and be redeemable after at least three years.

The government has provided a list of the bonds you can buy to avail of this exemption.

  • NHAI (National Highway Authority of India)
  • Rural Electrification Corporation Limited (RECL)
  • Central Government Bonds

Section 54B: Exemption of Capital Gains from Transfers of Land Used for Agricultural Purposes

  • If you are an individual or part of a HUF and want to sell land that is used for agricultural purposes, then you are eligible.
  • Note that the land to be sold must have been used for agriculture-related activities for at least two years before the date of transfer.
  • You can avail of the exemption if you purchase any other land for agricultural purposes within two years of the sale.
  • Capital gain equal to the value of the land can be exempt.
  • This exemption also has a lock-in period of 3 years.

Investing in real estate properties can assist in asset creation and provide you with financial protection and stability for the future. Hence, by benefiting from these tax-saving schemes, you can receive the maximum advantage on your property investment.

Wrapping Up

Understanding how to save capital gains tax through strategic investments and utilising tools like a capital gains tax calculator is crucial for maximising returns on investments. By exploring exemptions under the Income Tax Act, such as reinvesting in capital gains bonds or purchasing a new property, taxpayers can effectively manage their tax liabilities and optimise their financial planning. Empowering yourself with these insights not only ensures compliance but also enhances opportunities for wealth creation in a tax-efficient manner.

Glossary

  • Cost Inflation Index (CII): A measure used to adjust the purchase price of an asset for inflation over time. It calculates the indexed acquisition cost to determine long-term capital gains tax.
  • Indexed Cost of Acquisition: It is the adjusted purchase price of an asset after applying the cost inflation index and is used to calculate long-term capital gains tax.
  • Securities Transaction Tax (STT): A tax levied on the purchase and sale of securities such as stocks, bonds, and derivatives traded on stock exchanges in India that facilitates tax collection at the source.
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Capital Gains Tax FAQ’s

Short-term capital gains are usually not exempted from taxes, however, there are certain income levels under which individuals are exempted from the tax:
 

  • Residents aged 80 years or above with an annual income up to ₹5 lakh
  • Residents aged 60 years or above but below 80 years with an annual income of ₹3 lakh
  • Residents below 60 years with an annual income of ₹2.5 lakh

 

Short-term capital gains below ₹1 lakh are taxable at applicable rates according to the individual's income tax slab. However, they benefit from a basic exemption limit and can be offset by deductions and exemptions under the Income Tax Act.

To avoid capital gains tax on the sale of property, consider reinvesting the proceeds in another property within specified timelines under sections like 54, 54EC, or 54F of the Income Tax Act. Utilising exemptions for senior citizens or investing in a Capital Gain Account Scheme (CGAS) are also effective strategies to defer or minimise tax liabilities.

Individuals aged 60 years or older with an annual income of ₹3 lakh or less and those aged 80 years or older with a yearly income of ₹5 lakh or less will not be liable to pay capital gains tax on property.

NRIs are subject to capital gains tax based on the duration of property ownership in India. Long-term gains from properties held over two years incur a flat 20% tax rate, while short-term gains are taxed at applicable income slab rates. 

To reduce the capital gains tax on property, it is advisable to invest in Capital Gains Account Schemes and Bonds and sell off the capital losses.

 

Income tax and capital gains tax are not the same. Income tax is levied on the total income earned by an individual or entity, including salaries, business profits, and interest income. Capital gains tax, on the other hand, is specifically imposed on the profits made from the sale of capital assets, such as property or investments, based on the duration of ownership and type of asset sold.