Capital Gains Tax: Types, Rate & Calculation Process

The capital gains tax in India, under Union Budget 2018, 10% tax is applicable on the LTCG on sale of listed securities above Rs.1 lakh and the STCG is taxed at 15%. Besides this, both long-term and short-term gains are taxable in the case of debt mutual funds. The STCGs on debt MF are added to the income of the taxpayer and are taxed according to the individual’s IT slab rate, whereas, the LTCGs on debt MF are taxed at 20% with indexation and 10% without indexation. Indexation can be described as the adjustment of the purchase value for inflation. In the case of inflation, the indexation increases, which in turn leads to increased purchase costs and lower gains.

Recent reports suggest that the Government plans to make changes in the capital gain tax structure as it has been receiving several proposals from the industry to simplify capital gains tax. These changes are expected to be announced in the Budget of 2023-24.

What is Capital Gains Tax (CGT)?

Capital gain refers to any gain or profit that is earned by the individual from the sale of a capital asset. The profit that arises from the sale of the capital asset is taxed under the head of ‘Income from Capital Gain’.  The profit is earned by selling the capital asset at a higher price than what it was bought for. This tax does not apply to the inherited property, as there is only a transfer of ownership and no sale. Any asset which is received as a gift by way of will or inheritance is exempted from the Online Income Tax Act 1961. However, CGT will be applicable if the individual who inherits the asset decides to sell it.

Capital Assets and Their Classification

Some examples of capital assets include land, house property, building, vehicles, machinery, jewellery, patents, trademarks, etc. Capital assets also include the holding rights of management or control in or in relation to an Indian company.

1. Long-term Capital Asset

   Long-term capital assets are considered an asset which is held by the taxpayers for more than 36 months before the transfer. Capital assets such as land, house property, and building are classified as a long-term capital asset if it is held for a period of more than 24 months (from FY 2017-18). Whereas, if the below assets are held for a period of more than 12 months, they will be categorized under long-term capital assets.

   • Equity shares in a company registered on a recognized stock exchange in India

   • Securities such as bonds, debentures, government securities, etc. registered on a recognized stock exchange in India

   • UTI units, units of an equity-oriented mutual fund, whether quoted or not

   • Zero coupon bond

2. Short-term Capital Asset

   Short-term capital assets are considered assets which are held by the taxpayers for a time period of 36 months or less from the date of their transfer. 

   For immovable properties such as land, house property, and buildings, the main criteria are 24 months with effect from FY 2017-18. However, the property should be sold after 31st March 2017. This 24-month revised criterion does not apply to movable property like jewellery or debt-oriented mutual and others.

   Some of the short-term capital assets are held for 12 months or less. This is only applicable if the transfer date of the asset is after 10th July 2014 (irrespective of the date of purchase). These assets are:

   • Equity shares in a company registered on a recognized stock exchange in India

   • Securities such as bonds, debentures, government securities, etc. registered on a recognized stock exchange in India

   • UTI units, units of an equity-oriented mutual fund, whether quoted or not

   • Zero coupon bond

Types of Capital Gains Tax

The tax that is charged on the gains earned from the selling of capital assets is known as capital gains tax. As mentioned above, capital assets are generally categorised into two categories i.e., short-term capital assets and long-term capital assets.

Tax Rate on Long-Term Capital Gains and Short-Term Capital Gains

Tax Rate on Equity and Debt Mutual Funds

Calculating Capital Gain

Capital gains tax is computed differently for assets held for a shorter period and assets held for a longer period.

How to Compute Long-term Capital Gains Tax?

Step 1- The assessee should start with the full value of consideration accruing or received.

Step 2- Deduct the indexed cost of acquisition + indexed cost of transfer + indexed cost of improvement

Wherein;

Indexed cost of acquisition= cost of acquisition X cost of inflation index of the acquisition year/cost of inflation index of the transfer year.

Indexed cost of transfer= the brokerage paid for arranging legal expenses incurred, deals and cost of advertising, etc.

Indexed cost of improvement= cost of improvement X cost of inflation index of the improvement year/cost of inflation index of the transfer year.

Step 3: Deduct exemptions provided under sections 54, 54EC, 54F, and 54B

Long-term Capital Gains = FVC accruing or received - (Indexed cost of acquisition + Cost of transfer + indexed cost of improvement + Deductible expenses from full value for consideration)

How to Compute Short-Term Capital Gains Tax?

Step 1- The assessee should start with the full value of consideration.

Step 2- Deduct the cost of acquisition + cost of transfer + cost of improvement

Step 3- The final amount will be short-term capital gain.

Short-term capital gain= FVC-(Cost of acquisition + cost of transfer + cost of improvement)

Capital Gains Tax Calculator:

One can make use of capital gain income tax computation in a very simple and hassle-free way to determine the capital gain that has been made on the sale. To calculate the capital gains tax the taxpayer will need to fill in the following details:

• Sale price

• Purchase price

• Number of units

• Details of purchase such as the date, year, and month it was bought

• Sale details such as the year, month, and date it was sold

• Investment detail. The taxpayer can invest the gains toward debt mutual funds, shares, real estate, equity mutual funds, fixed maturity plans, and gold

• Once you fill in all the details you will need to click the calculate capital gain button. Along with these details, the taxpayer will also require to provide the following details

  • Investment type

  • The period between the purchase and the sale.

  • Type of capital gain

  • Difference between purchase and sale price.

  • Inflation cost index of the year of purchase.

  • Inflation cost index of the year of sale.

  • Purchased index cost.

  • Difference between the indexed purchase price and sale.

  • Long-term capital gains without indexation.

  • Long-term capital gains with indexation.

Capital Gains Tax on Property:

Capital gains tax is chargeable on the profit earned from the sale of the house property; however, the tax is not charged on the entire amount itself. In case, a person sells the property after holding it for less than 2 years, it will be taxed directly according to the income tax slab the person falls under and will be termed as a short-term capital gain. If sold after 2 years, it will be considered as long-term capital gains and will attract a flat 20.8% tax.

According to the amendment to section 54, under budget 2019, if an individual earned capital gains up to Rs. 2 crore on selling a house property then they can invest the amount in 2 house properties. However, this facility can only be availed once in a lifetime.  

Basic conditions to claim the benefit of section 54 of the Finance Act, 2020:

• Available only to an individual or HUF

• Applicable only for residential house property wherein the asset should be a long-term asset

• The purchase should be made within 1-2 years of the sale of the property. If the seller wants to construct a new house with the capital gains earned then he/she should do it within 3 years of the asset/property sale.

Individuals can avail of these exemptions under section 54EC on long-term capital gain tax on the property if the profit from selling the property is re-invested to purchase specific bonds. Some of the conditions include:

• Re-investing the profit generated from the sale of a property into investment schemes like bonds from recognized institutions up to an amount of Rs. 50 lakhs

• Redeem the invested amount after 5 years but cannot sell the newly purchased assets before 5 years from the selling date

• Investment needs to be made within 6 months of selling the property

The advance that is paid for the sale of the house property is taxed and it is later fortified by the person for the sale of the flat in case the transaction does not go through. Under the head of ‘income from other sources,’ the advance amount that is paid is taxed in the same year. At the time of determining the CG, the advance amount can be reduced from the acquisition cost of the asset in the year the capital asset is sold.

An individual can build or purchase a house from the capital gains in 2 years from selling the house property. Moreover, the individual can also book a flat and save on taxes with the capital gain. Besides this, the individual can also avail of the tax benefit by investing the capital gains in the bank's Capital Gains Account Schemes (CGAS). Apart from this one can also invest in specific bonds like National Highway Authority of India and Rural Electrification Ltd. within 6 months from the date of the sale of the property.

However, while capital gains tax on the property offers tax exemption, it is important to keep in mind that with one sale of property one can invest only in one new asset and cannot an investment in multiple assets to minimize the tax. In case, a person is selling more than one property then they can invest the accumulative capital gain amount in only one new property.

Capital Gains Tax on Bonds:

Similar to other investment assets, capital gain on these bonds is of two categories, that is, long-term capital gains and short-term capital gains. 

• For regular taxable listed bonds: If the holding period is more than 12 months, the realized returns are termed long-term capital gain. If the holding period is below 12 months, individuals earn short-term capital gain upon the sale of these bonds. Short-term capital gain is taxed at applicable slab rates, while LTCG is taxed at a rate of 10% without indexation.  

• For regular taxable unlisted bonds: If the holding period is more than 36 months, gains from these financial instruments come under long-term capital gain. The rate of taxation is 20% without indexation. However, if the holding period is less than 36 months, any gains coming from these are categorized as short-term capital gain and taxed as per the applicable tax slab rate.

• For tax-free bonds: Investors do not pay any tax on interest earned from these. However, returns earned from such bonds upon maturity or sale are categorized under long-term capital gain and short-term capital gain depending on the holding period.

• For tax-saving bonds: Individuals with any long-term capital asset can save taxes by investing in these bonds. The sale proceeds of these assets can be invested in 54EC bonds. These bonds are exempted from long-term capital gain tax. However, this tax benefit is applicable if the proceeds are invested within 6 months of the sale of the property.

Capital Gains Tax Exemption:

Some basic exemptions for long-term capital gains for the year 2021-2022 are:

• Resident individuals below the age of 60 years with an annual income of Rs. 2.5 lakhs

• Resident individuals who are 60 years and above with an annual income of Rs. 3 lakhs

• Resident individuals who are 80 years with an annual income of Rs. 5 lakhs

• Non-resident individuals with an annual income of Rs. 2.5 lakhs

• HUF with an annual limit of Rs. 2.5 lakhs

• No capital gain applies to the sale of agricultural land in rural areas of India and agricultural land in rural areas is not considered a capital asset. 

• In case an individual uses the entire sale proceeds of the capital asset to purchase the house property they will not be taxed.

Some of the exemptions under Capital Gains:

• Section 54E, 54EA and 54EB: Proceeds earned through investment in certain securities.
  Individuals can avail such long-term capital gain exemption, if they reinvest in specific securities like UTI units, government securities, targeted debentures, government bonds, etc.

• Section 54EC: Proceeds earned through the sale of a long-term capital asset are exempted when reinvested in specified long-term assets.
  Individuals can avail of such exemptions, given they reinvest their proceeds into specific assets of either the Rural Electrification Corporation or NHAI.

• Section 54EE: Proceeds earned through a transfer of investments

• Section 54: Proceeds earned through the sale of a residential housing property

• Section 54F: Proceeds earned through the sale of capital assets besides a residential housing property

Capital Gains accrued through the sale of an asset other than property used as a residence would be entitled to the exemption, given the proceeds were reinvested in a residential property.

Income Tax Rate for Income on Sale of Assets

Note: The above-mentioned taxes do not consist of a surcharge @10% on income between Rs.50,00,000 lakh to Rs. 1,00,00,0000 and 15% on income above Rs.1 crore.

Terms that should be kept in Mind

1. Full Value Consideration

   The consideration to be received or received by the seller as a result of the transfer of the capital asset is known as full value consideration. Capital gain tax is taxable in the transfer year, even if the seller receives no consideration.

2. Cost of Acquisition

   The cost of acquisition is the charge for which the sellers acquire the capital asset.

3. Cost of Improvement

   Any expenses that occur in making any alteration or additions to the capital asset by the sellers are known as the cost of the improvement. It is important to consider that the improvements made before 1st April 2001, are not taken into consideration.

When can you invest in the Capital Gains Account Scheme?

When it comes to a new property, searching for a suitable seller, getting adequate funds and arranging the paperwork takes time. It’s a good thing that the Income Tax Department agrees with these limitations.

If capital gains earned have not been invested till the date of filing of income tax return (usually 31 July) of the financial year in which the property is sold, the gains can be deposited in a PSU bank or other banks as per the Capital Gains Account Scheme, 1988. The deposited amount can then be claimed as a deduction from capital gain, and no tax is paid on it. However, in case the taxpayer does not invest the money, the deposit made by the taxpayer should be treated as STCGs in the year in which the specified period lapses.

Amendment to Section 54 - Capital Gain Exemption

According to the amendment made to Section 54, under budget 2019, the assesses can avail of tax exemption by investing in long-term capital gains from the sale of up to two house properties. Earlier, the provision of investment was limited to up to 1 house property with the same conditions.  However, the profit gains on the sale of house property should not exceed more than 2 crores.

What are Capital Assets?

Capital assets can be land, house property, building, trademark, vehicles, leasehold rights, machinery, patents, and jewellery. Any legal rights, as well as the rights of management and control, are also considered capital rights. However, these are the things which are not included under the capital assets.

• Rural area agriculture land.

• Stock on trade

• Personal used items such as clothes and furniture.

• Raw materials and consumable stores held for profession or business.

• Gold deposit scheme gold bonds.

• 6.5% gold bond, special bearer bond and national defence gold bonds.