CAPITAL GAIN
TO KNOW CAPITAL GAINS LET US FIRST UNDERSTAND WHAT ARE CAPITAL ASSETS…?
Capital Assets can be land, house property, building, trademark, leasehold rights, machinery, patents and jewellery.
FOLLOWING THINGS ARE NOT INCLUDED IN CAPITAL ASSETS…,
- Agricultural land in a rural area in India.
- Stock on trade.
- Personal used items such as wearing apparels and furniture.
- Raw material and consumable stores held for the purpose of Profession or Business.
- Gold Deposit Bonds issued under Gold Deposit Scheme, 1999.
- Special Bearer Bonds, 1991, issued by the Central Government.
- 6.5% Gold Bond, 1977 or 7% Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government.
- Deposit Certificates issued under the Gold Monetisation Scheme, 2015.
WHAT DOES TERM ‘LONG-TERM CAPITAL ASSET’ MEANS?
- Any capital asset held by a person for a period of more than 36 months immediately preceding the date of its transfer will be treated as long-term capital asset.
- In respect of certain assets like shares which are listed in a recognised stock exchange in India, units of equity oriented mutual funds, listed securities like debentures and Government securities, Zero Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months.
- In case of unlisted shares, the period of holding to be considered is 24 months instead of 36 months.
- With effect from Assessment Year 2018-19, the period of holding of immovable property (being land or building or both), shall be considered to be 24 months instead of 36 months.
Capital Gain refers to profit that is earned by individual from the sale of a Capital Asset. The profits arising from the sales of the Capital Asset is taxed under the head “Income from Capital Gain”.
DO YOU KNOW…?
- Capital Gain Tax is not applicable to the Inherited Property, as there is an only transfer of ownership and no actual sales.
- Any asset which is received by way of Will or Inheritance is totally exempt from the Income Tax Act, 1961.
- Capital Gain Tax will be applicable if the individual who inherit the asset decides to sell it.
WHAT IS LONG-TERM CAPITAL GAIN AND SHORT TERM CAPITAL GAIN..?
- Gain arising on transfer of long-term capital asset is termed as long-term capital gain.
- Gain arising on transfer of short-term capital asset is termed as short-term capital gain.
- However, there are a few exceptions to this rule, like gain on depreciable asset is always taxed as short-term capital gain.
CAPITAL GAIN TAX SLAB
Asset | Asset Duration Short Term | Tax Rate Short Term | Asset Duration Long Term | Tax Rate Long Term |
Immovable Property like House | Less than 2 Years | As per IT Slab | More than 2 Years | 20% with Indexation |
Movable Property like Gold/Jewellery | Less than 3 Years | As per IT Slab | More than 3 Years | 20% with Indexation |
Listed Shares | Less than 1 Years | 15% | More than 1 Years | 10% Over and above Rs.100000/- |
Unlisted Shares | Less than 2 Years | As per IT Slab | More than 2 Years | 20% with Indexation |
Equity Oriented Mutual Funds | Less than 1 Years | 15%
|
More than 1 Years | 10% Over and above Rs.100000/- |
Debt Oriented Mutual Fund | Less than 3 Years | As per IT Slab | More than 3 Years | 20% |
HOW TO CALCULATE LONG TERM CAPITAL GAINS ON SALE OF HOUSE…?
To consider long term capital gains we need to first calculate Indexed cost of acquisition and Indexed cost of improvement.
Indexed cost of acquisition =
Cost of acquisition × Cost inflation index of the year of transfer of capital asset
Cost inflation index of the year of acquisition
Indexed cost of improvement =
Cost of improvement × Cost inflation index of the year of transfer of capital asset
Cost inflation index of the year of improvement
EXAMPLE OF LONG TERM CAPITAL GAIN..
On 01st April, 2010, Mr. A bought a house worth INR 50 lakhs. He spent INR 3.0 lakhs on improving the house and he sold it in September 2019 for INR 95 lakhs. His agent charged him INR 95,000. The cost of inflation index for purchase that was made in 2010 was 167 whereas, in the year of sale the cost inflation index was 289.
Particulars | Amount in INR |
Full value of Sales consideration of asset | ₹ 95,00,000 |
Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (E.g., brokerage, commission, etc.) |
₹ 95,000 |
Net sale consideration | ₹ 94,05,000 |
Less: Indexed cost of acquisition | (5000000 * 289/167) ₹ 86,52,694 |
Less: Indexed cost of improvement, if any | (300000 * 289/167) ₹ 5,19,161 |
Long-Term Capital Gain | ₹ 2,33,145 |
Maximum up to ₹ 50 Lakhs can be invested in 54EC Capital Gain Bonds in a Financial Year to reduce further tax. i.e. in the above example if the entire long-term capital gain amount is invested in 54EC Capital Gain Bonds then there won’t be any tax payable.
EXAMPLE OF SHORT TERM CAPITAL GAIN..
On 01st April, 2010, Mr. A bought a house worth INR 50 lakhs. He spent INR 3.0 lakhs on improving the house and he sold it in December 2011 for INR 60 lakhs. His agent charged him INR 60,000. The cost of inflation index for purchase that was made in 2010 was 167 whereas, in the year of sale the cost inflation index was 184.
Particulars | Amount in INR |
Full value of consideration (i.e., Sales value of the asset) | ₹ 60,00,000 |
Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (E.g., brokerage, commission, etc.) | ₹ 60,000 |
Net Sale Consideration | ₹ 59,40,000 |
Less: Cost of acquisition (i.e., the purchase price of the capital asset) | ₹ 50,00,000 |
Less: Cost of improvement (i.e., post purchase capital expenses incurred on addition / improvement to the capital asset) | ₹ 3,00,000 |