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Capital Gains Tax: Types, Rate & Calculation Process

CGT means “Capital Gains Tax”. The capital gains tax is a tax on individuals and corporations assets including stocks, bonds, real estate, and property. Two types of capital gains tax which is levied on long term and short term gains starts from 10% and 15%, respectively.

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

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

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 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.  Capital gains tax is not applicable to the inherited property, as there is an only transfer of ownership and no sale. Any asset which is received as a gift by way of will or inheritance is totally exempted from the Online Income Tax  Act 1961. However, CGT will be applicable if the individual who inherits the asset decides to sell it.

Types of Capital Gains Tax

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

Long-term Capital Asset

Long-term capital assets are considered as an asset which is held by the taxpayers for a time period of more than 36 months before the transfer. In case the above-listed assets are held for a period of more than 12 months then they are considered as a long-term capital asset.

Short-term Capital Asset

Short-term capital assets are considered as assets which are held by the taxpayers for a time period of 36 months or less from the date of its transfer. Some of the short-term capital assets are held 12 months or less. This is only applicable if the transfer date of 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 equity oriented mutual fund, whether quoted or not.
  • Zero coupon bond.

Tax Rate on Long Term Capital Gains and Short-Term

Tax Type Condition Tax Applicable
Long-term capital gains tax Except on sale of equity oriented fund units/ equity shares 20%
Long-term capital gains tax on sale of equity oriented fund units/ equity shares 10% over and above Rs.1,00,000
Short-Term capital gains tax When securities transaction tax is not applicable The STCGT is added to the ITR of the taxpayer and the individual is taxed as per his income tax slab.
Short-Term capital gains tax When securities transaction tax is applicable 15%

Calculating Capital Gain

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

How to Compute Long-term Capital Gains Tax?

Step1- The assesse should start with the full value of consideration accruing or received.

Step2- 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.
  • Long-term Capital Gains = FVC accruing or received-(Indexed cost of acquisition + cost of transfer + indexed cost of improvement)

How to Compute Short-Term Capital Gains Tax?

Step1- The assesse should start with the full value of consideration.

Step2- Deduct the cost of acquisition + cost of transfer + cost of improvement

Step3- 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 in order to determine the capital gain that has been made on the sale. In order 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 on.
  • Sale details such the year, month and date it was sold on.
  • Investment detail. The taxpayer can invest the capital gains toward debt mutual funds, share, real estate, equity mutual funds, fixed maturity plan, and gold.

Once you fill 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 time period between the purchase and the sale.
  • Type of capital gain, if it is a short-term or a long-term 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.
  • LTCG without indexation.
  • LTCG with indexation.

The long-term capital gains on stocks and equity mutual funds are taxed at 10% if the gains on the sale of listed securities exceed Rs.1 lakh (as per Union Budget 2018) and the short term gains are taxed at 15 percent. The STCGs on debt mutual fund is added to the taxpayer income and is taxed according to the individual’s income tax slab and the LTCGs on debt mutual funds is taxable at 20 % with indexation and 10 % without indexation.

Capital Gains Tax on Property:

Capital gains tax is chargeable on the profit earned from the selling of house property, however, the tax is not charged on the entire amount itself. In case, a person sells the property in the time period of three years then 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. Short-term capital gain attracts a flat 20% tax.

Income tax exemption is applicable on the long-term gain which occurs from the sale of a capital asset under section 54 and 54F of IT Act if the investment is made in construction and purchase of house property, subject to specific conditions. In order to avail tax exemption, the individual should buy the residential house within the tenure of 2 years after or 1 year before the transfer of the original house. Any under construction properties should be completed in the time period of 3 years from the transfer date of the original house. It is important to keep in mind that the investment made on the house property should be situated in India.

The advance that is paid for the sale of the house property is taxed and it is later fortified by the person for sale of 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 capital gains, 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 the time period of 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 tax benefit by investing the capital gains in banks 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 sale of the property.

However, 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 Exemption:

  • No capital gain is applicable to the sale of agriculture land in the rural areas of India and the agricultural land in rural areas is not considered as 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.
  • The assessment must satisfy the below-mentioned conditions in order to avail tax benefit under Section 54F:
    • An individual requires buying a house within 2 years after or 1 year before the sale.
    • Any under construction properties should be completed in the time period of 3 years from the transfer date of the original house.
    • The individual cannot sell the house property within 3 years of the buying or construction.
  • It is important to keep in mind that the investment made on the house property should be situated in India.
    • The individual should not own more than 1 residential house property other than the new one on the date of transfer.
  • The individual will not have to pay tax in capital gain if they invest in CGAS (capital gains account scheme). However, the person should make an investment for a specific time period as stated by the bank. If the taxpayer fails to make the investment for a specific time period, then it will be considered as a capital gain.
  • By buying capital gains bonds, the tax will be deducted. This is only applicable if it is a long-term capital asset and the deduction is under Section 54EC. According to the union budget 2018, 10% tax is applicable to long-term capital gain more than Rs.1 lakh on the sale of securities. There is no use of investing in CGAS if the taxpayers don’t want to invest in another property.

Capital Gains Tax on Bonds:

Under Section 54EC of IT Act, one can also invest in specific bonds like the National Highway Authority of India and Rural Electrification Ltd. within 6 months from the date of sale of the property. Capital gains cannot redeem before 3 years. The individual can earn a guaranteed rate of interest on the bond. During a financial year, one can invest up to maximum Rs.50,00,000 in capital gain bonds. This benefit is only available for long-term capital bonds.

In case of sale of House Property

Following expenses are deducted from the total sale price:

  • Commission or brokerage paid for securing the purchaser.
  • Stamp paper cost.
  • Expenses related to traveling along with the transfer.
  • The place of inheritance of property, expenses occurred with respect to the process associated with the inheritance and the will, gaining the certificate of succession, in some of the cases, cost of the executor is also applicable.

In the case of Sale of Shares

The following expenses can be deducted:

  • Commission of brokers related to the sold shares.
  • Securities transaction tax (STT) is not allowed as a deductible expense.

Income Tax Rate for Income on Sale of Assets

Asset Asset Duration Tax Rate
Short Term Long Term Short Term Long Term
Immovable Property like house Less than 2 year More than 2 year IT Slab rate 20.6% with Indexation
Movable Property like Gold/Jewellery Less than  3 year More than 3 year IT Slab rate 20.6% with Indexation
Listed Shares Less than 1 year More than  1 year 15.45% Exempt
Equity Oriented Mutual Funds Less than  1 year More than 1 year 15.45% Exempt
Debt Oriented Mutual Funds Less than  3 year More than 3 year IT Slab rate 20.6% with Indexation

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

Terms that should be kept in Mind

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 gains tax is taxable in the transfer year, even if the seller receives no consideration.

Cost of Acquisition

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

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, is 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 gains, 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.

Budget 2019

Amendment to Section 54 - Capital Gain Exemption

According to the amendment made to Section 54, under budget 2019, the assesses can avail tax exemption by investing in long-term capital gains from the sale of up to two house property. Earlier, the provision of investment was limited 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 crore.

What are Capital Assets?

Capital assets can be land, house property, building, trademark, vehicles, leasehold rights, machinery, patents, and jewelry. Any legal rights, as well as the rights of management and control, are also considered as 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 the purpose of profession or business.
  • Gold deposit scheme gold bonds.
  • 6.5% gold bond, special bearer bond and national defense gold bonds.
Written By: PolicyBazaar - Updated: 19 October 2020
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