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Determining Capital Gains Tax in India

Capital Gains is the profit that an investor receives on the sale of an asset. This profit is taxable under the Capital Gains Tax Act, if there is a capital asset, transfer of the said asset and there is a profit made on the transfer. The transfer of the capital asset must take place in the preceding year.

The Components of Capital Gain Tax

Capital gains tax is a tax that is levied by the government on the profits that are made on the sale of the capital asset. There are two types of capital gains; Long-Term and Short-Term Capital Assets.

Short Term capital asset: The profit made on the sale of an asset which was held for less than the period of 36 months is the Short-Term capital asset.

Long Term capital asset: The profit made on the sale of an asset that was acquired for more than 36 months is called long-term capital gain. For the fiscal year 2017-18, this period has been decreased to 24 months, subjected under the condition that the property is sold after March 31st, 2017. This is not applicable for assets such as jewellery, mutual funds etc.

Capital gain does not include the sale of acquired assets like the following

  • Stocks for trade.
  • Raw or consumable material owned for business or professional purposes.
  • Personal goods and artifacts those are movable except paintings, archeological collection or jewellery.
  • Agricultural land which is located outside the radius of 8 km away from the municipality, town committee or any encampment with a minimum population of 10,000.
  • National Defence Gold Bonds, Special Bearer Bonds, 6.5 percent of Gold Bonds and Gold Deposit Bonds under Gold Deposit Scheme are also not included in the capital gains assets.

Capital Gains Tax in India

In India, the tax is not imposed on the long-term capital gains of stocks and equity mutual funds. But, 15% tax is levied on the short-term gains. Both short and long-term capital gains are taxed in the case of debt mutual funds. While the long-term gains on debt mutual funds are taxed at 20% with indexation and 10% without indexation, the short-term gains are added to the individual’s salary and taxed in accordance with his/her income tax slab. Indexation decreases gains and increases the purchase cost.

Computation of Capital Gains

Capital Gains can be calculated by the following method

  • Short-term capital gain = Full value of consideration – X

    Where X is equal to Cost of Improvement + Cost of Acquisition + Cost of Transfer

  • Long-term capital gain = Full value of consideration – Y

    Where Y is equal to Indexed Cost of Improvement + Indexed Cost of Acquisition + Cost of Transfer

  • Here,Cost Inflation Index (CII)

    Indexed cost of acquisition = (CII of the year of transfer/CII of the year of acquisition) x Cost of Acquisition

    Indexed cost of improvement = (CII of the year of transfer/CII of the year of acquisition) x Cost of Acquisition

    The cost of transfer is the amount paid for brokering or arranging the deal, advertising cost or legal expenses etc.

Capital Gain Tax on Property

Capital Gain Tax on property is charged by the government on the profit made from the sale of a property. If the property is sold before three years, the capital gain earned on it is called short-term gains. If the property is sold after 3 years the gains are called long-term capital gains.

While short-term gains are taxed as per your income slab, which accounts for approximately 20%. Long-term gains are exempted from taxation under Section 54, and 54F, if the gains are invested in the purchase or construction of a house under specific conditions.

The conditions under which an individual can incur tax exemption on the long-term gains earned from the sale of a property are listed below

  • If the new residential property is bought a year before the sale of the current property.
  • If the new house is bought within 2 years of the sale of original house property.
  • If the property is undergoing construction, it must be completed within 3 years of the sale.
  • The invested house property must be in India.
  • There should be only one house in your possession other than the new one during the transfer of the asset.
  • Book a flat with the capital gains.
  • After buying the house property from the capital gains, if you do not buy another property within 2 years or construct new house somewhere else within 3 years, you will be exempted from tax.

The advance paid for the sale of the property is taxable. This amount will be later secured by the individual if the deal does not go through. The amount will be taxed under Income from Other Sources in that year. This amount is to be subtracted from the cost of acquisition of the property in the year of sale of the capital asset while determining capital gains.

It must be noted that an individual can only make an investment in one new asset to claim a deduction on tax. Even if more than one property is sold, the capitals gains can be invested in a single asset only.

Capital Gains Investment in Bonds

An individual taxpayer can claim tax exemption on the capital gains earned from the sale of long-term assets by investing them in bonds issued by National Highway Authority of India or by the Rural Electrification Corporation Ltd. under Section 54EC. This investment should be done within six months period. A maximum amount of Rupees 50 Lakhs can be invested in these bonds. Though guaranteed rate can be earned on the investment, it will not be redeemable before 3 years. This investment is not available for short term gain assets.

Capital Gain Tax Calculator

To simplify the calculation of Capital Gain Tax various calculators are available online.

To compute your CGT you have to fill the following details

  • Purchase Price of the asset.
  • Selling Price of the asset.
  • The number of units acquired.
  • Date of purchase of the asset.
  • Investment of capital gains made towards debt mutual funds, gold, real estate and fixed maturity plan.

After the above details are filled, click on calculate capital gains button and another page will open.

In this page, you need to provide following details

  • Type of investment.
  • The period between the purchase and sale.
  • Capital Gain type; Short term or Long-Term Capital Gains.
  • The difference between sale and purchase cost of the asset.
  • Cost inflation index (CII) of the year of purchase.
  • CII of the year of sale.
  • Purchase index cost.
  • The difference between the selling price and purchase index price.
  • Indexed Long-term gains.
  • Long Term gain without Indexation.

As mentioned above no tax is levied on the long-term capital gains invested in stocks and equity mutual funds while 15% tax is imposed on the investment of short-term capital gains.

Capital Gain Tax Exemption

Capital Gain Tax (CGT) can be exempted in the following cases

  • No capital gain tax is applicable on the agricultural land in rural areas because land is not considered as a capital asset. This exemption is available under Section 54 B.
  • If the entire income from the sale of the house is invested in buying another house, no tax will be levied on it.
  • If the money earned from capital gains is invested in Capital Gains Account Scheme, no tax will be imposed on it. However, the money invested must be vested for the period specified by the bank. Failure of doing so will result in the money being taxed under Capital Gains.
  • Capital gain tax is exempted on the capital that is invested in the bonds provided by the government. Under Section 54 EC, this scheme is only available for long-term capital assets.

In the News

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