[ecis2016.org] This guide tells you everything you need to know about capital gains and the tax applicable on it
What is capital gains tax?
Capital gains tax is the government-determined tax that has to be paid on the profit from the sale of an asset. The responsibility to pay capital gains tax arises on sale of a property or stock shares, at a profit.
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Capital gains are the profit you earn from such a sale and capital gains tax is the tax you pay on that income.
The liability to pay capital gains tax does not arise till the sale is complete. This is because capital gains tax is paid on ‘realised gains’.
So, even if the value of your asset increases multi-fold, you are not liable to pay any capital gains tax on this appreciation, as long as you do not make a sale and ‘realise’ the profit.
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What is a capital asset?
A capital asset is an asset you own, including bonds, stocks and property. The sale of a capital asset can result in capital gain or capital loss. While you must pay capital gains tax, losses can be used to reduce the tax amount.
Capital assets include:
- Any kind of property.
- Any securities held by a FII (foreign institutional investor).
- Jewellery, costly stones and ornaments made of silver, gold, platinum or any other precious metal, paintings, drawings, sculptures, archaeological collections, or any work of art.
[ecis2016.org] What are capital gains?
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What is not a capital asset?
The following assets do not fall in the category of capital asset under Indian laws:
- Stock-in-trade, consumable stores, raw materials held for the purpose of business or profession.
- Movable property held for personal use or for any dependent member of the family.
- Specified gold bonds.
- Deposit certificates issued under the Gold Monetisation Scheme, 2015.
- Special bearer bonds.
- Agricultural land in India that is not situated:
(a) Within the jurisdiction of a municipality, or cantonment board, or town area committee or notified area committee and which has a population of not less than 10,000.
(b) Within the following distance measured aerially from the local limits of any municipality or cantonment board:
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- Not more than 2 kms, if the population of such area is more than 10,000 but not exceeding 1 lakh.
- Not more than 6 kms, if the population of such area is more than 1 lakh but not exceeding 10 lakhs.
- Not more than 8 kms, if the population of such area is more than 10 lakhs.
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Types of capital assets
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Short term capital asset: A capital asset held for up to 36 months (three years) is considered as a short-term capital asset. However, since FY 2017-18 a holding period of up to 24 months (two years) is considered as a short-term for immovable properties.
Exception: Some capital assets are considered as short-term capital assets even when they are held for one year or less if the date of transfer is after July 10, 2014. These include:
- Equity or preference shares in a listed company.
- Listed securities.
- Units of UTI.
- Units of equity oriented mutual fund.
Long term capital asset: A capital asset that is held for more than 36 months (three years) is considered as a long-term capital asset. However, since FY 2017-18 an immovable property held for over 24 months (two years) is considered as a long-term capital asset.
Capital gains tax: Types
Capital gains tax are of two types:
- Short term capital gains tax
- Long term capital gains tax
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Short term capital gains tax
When a capital asset is held for a brief period, the profit earned on sale is termed short term capital gain and short-term capital gains tax applies.
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Long term capital gains tax
When a capital asset is held for an extended period, the profit earned on sale is termed long term capital gain and long-term capital gains tax applies.
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Short term capital gains tax rate
| Sale type | Tax rate |
| When the tax is based on securities | 15% |
| When the tax is not based on securities | The income is added in your total income for the financial year and taxed according to your tax slab |
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Long term capital gains tax rate
| Item | Tax rate |
| Sale of equity shares | 10% of the amount which is more than Rs 1 lakh |
| Any other sale | 20% |
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Capital gains tax on property inheritance
In case you have inherited a property in India, you are not liable to pay any capital gains tax under the existing income tax law. Assets inherited through a gift deed or through a will are also exempted from capital gains tax. This is, however, true only if you do not sell this inherited asset. In case of a sale, capital gains tax implications will come into picture.
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Indexation benefit
Even though the profit earned through the sale of property attracts tax, the owner can significantly lower the tax liability, by using indexation. Applicable on long-term investments, such as property and debt funds, indexation helps to adjust the cost of acquisition of the asset against inflation.
Indexation is a process through which the cost of acquisition of an asset is adjusted against inflationary rise in the value of the asset over a period of time. The government’s cost inflation index (CII) helps calculate the indexed cost of purchase. Indexed cost of acquisition is calculated based on:
- Year of acquisition of the asset / improvement to the asset.
- Year of sale or transfer of the asset.
- Cost inflation index for the year of acquisition / improvement of the asset.
- Cost inflation index for the year of transfer of the asset.
Read our guide on indexation benefits to understand the concept.
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How to calculate short term capital gains tax?
To arrive at the short-term capital gains on the sale of an asset:
- Compute the full gain.
- Deduct the expenses incurred exclusively due to the sale.
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How to calculate long term capital gains tax?
To arrive at the long-term capital gains on the sale of an asset:
- Compute the full gain.
- Deduct the expenses incurred exclusively due to the sale.
In case of a home sale, for example, the expenses may include the paper work, brokerage charge, the cost of stamp paper, etc.
- Apply indexation benefits.
- Apply tax deductions offered under Sections 54, Section 54EC, Section 54F and Section 54B.
Short term capital gains calculation: Example
Suppose you sold a property within two years of buying it, for a net profit of Rs 20 lakhs. Assume that you have already deducted the expenses incurred to make the sale, like brokerage charge and travel expenses.
The Rs 20 lakhs ‘income’ will be added to your total income for the financial year and will be taxed according to your tax slab. Since this is over Rs 15 lakhs, your tax rate will be 30%. The net tax on this income would, thus, be Rs 6 lakhs.
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Long term capital gains calculation: Example
Suppose a property was purchased in FY 1992 for Rs 20 lakhs. The CII for that year is 199.
Suppose this property was sold for Rs 80 lakhs in FY 2009. The CII for that year is 582.
Applying the formula for indexed cost, we get:
(CII for the year of sale/CII for the year of purchase) x actual cost
= (582/199) x Rs 20 lakhs = Rs 58.49 lakhs
This means the seller will have to pay long term capital gain tax on property on the difference between Rs 80 lakhs and Rs 58.49 lakhs, after applying the indexation benefit. This difference, or indexed long term capital gain will be Rs 21.51 lakhs. Thus, his LTCG tax liability will be 20% of Rs 21.51 lakhs. As mentioned earlier, the seller can opt for certain deductions/exemptions, to reduce this liability.
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FAQs
What is the tax on capital gains in India?
The rate of capital gains tax in India depends on the period – short or long – for which the asset is owned by the taxpayer. While the implications of short-term capital gains are higher, the rate of tax on long term capital gains is lower.
How much tax do I pay on capital gains?
Capital gains tax rate will be decided based on the holding period. Check the list in the article to find out which type of capital gains tax is applicable in your case.
How can I avoid capital gains tax?
There are two ways to lower your capital gains tax liability: (1) Hold an asset for a longer period so that profits earned qualify as long-term capital gains. (2) Make sure you are aware of all the deductions offered to you under the income tax laws and claim them.
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