This page describes all essential information regarding long-term and short-term capital gain taxation. Capital gains are taxed at specific rates and exemptions are specified on them. The exemptions are prescribed under the Section 54, 54D, 54EC, 54F, 54G, 54GB etc. of Income Tax Act.
Any profit or gain earned by selling / transfer of “Capital Asset” is called capital gain and it is taxable in the year when the asset transfer completes. But no capital gain is applicable on a gifted or inherited property as these are specifically excluded from tax liability as defined in the Income Tax Act. If the inherited property gets sold by the heir than capital gain will be applicable on it.
Land or building or house property or goodwill of business or patents or trademarks or leasehold rights or drawings or paintings or jewellery are examples of capital assets. Also, rights in or in relation to an Indian Company and management rights, control rights are also counted as capital assets.
Things that are not considered as capital assets:
Agricultural land in rural areas of India:
Any area with a population of 10,000 or more that fall outside of a municipality or cantonment board jurisdiction is specified as a rural area from AY 2014-15. The rural areas must not fall within the distance specified below:
|2 kms from the local limit of municipality or cantonment board||If the population of the municipality/cantonment board is more than 10,000 but not less than 1 lakh|
|6 kms from the local limit of municipality or cantonment board||If the population of the municipality/cantonment board is more than 1 lakh but less than 10 lakhs|
|8 kms from the local limit of municipality or cantonment board||If the population of the municipality/cantonment board is more than 10 lakhs|
Long-term capital asset: a capital asset held for more than 36 months or 3 years.
Short-term capital asset: a capital asset held for 36 months or less.
Finding the specific holding period for capital assets are important as it determines the tax calculation for them. Some assets held for 12 months or less is considered as a short-term capital asset if the transfer date is on or after 10th July 2014 regardless of the purchase date.
Assets that are acquired by gift or will or succession or inheritance is determined short-term or long-term by counting the period held by the previous owner. In the case of Bonus Shares or Rights Shares, the period of holding is counted from the allotment date.
Tax on equity and debt mutual funds:
Capital gains earned from debt funds and equity funds are treated differently in terms of income tax liability.
|Effective from 11th July 2014||Effective from on or before 10th July 2014|
|Short Term Gains||Long Term Gains||Short Term Gains||Long Term Gains|
|Debt Funds||Tax slab applicable to the taxpayers||At a rate of 20% with Indexation||Tax slab applicable to the taxpayers||10% without indexation or 20% with indexation, whichever is lower.|
Change in tax rules for debt mutual funds:
Debt funds held for more than 36 months are considered as a long-term capital asset and this means the investors must keep on investing into these funds for continuous three years. If the funds are redeemed or converted within three years than the capital gains will be added to taxpayer’s income tax liabilities and will be taxed as per their tax slab.
If consideration has been received or to be received in exchange by the seller after transferring the asset, then it will be considered as capital gain. However, the capital gain is anyways taxed liable even if no consideration has been received.
Any expenses made after 1st April 1981 to improve the capital asset is considered as a cost of the improvement.
The value of the asset given by the seller for acquisition.
In the case of house property sale:
In the case of shares sale:
In the case of jewelry sale:
These deductions are not allowed to considered to be calculated under any other head of income tax return except capital gains. These deductions can be claimed only once.
Calculating the indexed cost of acquisition:
The cost of acquisition / Cost inflation index (CII) for the year in which the asset was first held by the seller or 1981-82, whichever is later X cost inflation index for the year in which the asset is transferred.
Calculating the indexed cost of improvement:
The cost of improvement / CII for the year in which the improvement took place X cost inflation index for the year in which the asset is transferred.