Generic selectors
Exact matches only
Search in title
Search in content
Post Type Selectors
Search
Personal Finance

Capital Gains Tax in India: 2 Types, Tax Rates You Should Know

Capital Gains Tax
Spread the love

Capital gains tax in India is a critical aspect of the country’s tax system, impacting both individual and corporate taxpayers. This tax is levied on the profits earned from the sale of capital assets, making it an essential consideration for anyone involved in transactions such as selling property, shares, or mutual funds. Understanding the intricacies of capital gains tax, including its computation, applicable rates, and exemptions, is crucial for effective financial planning and compliance.

Table of Contents

Definition of Capital Gains

Capital gains refer to the profit realized from the sale of a capital asset. These gains can be classified into two main categories: short-term and long-term, depending on the holding period of the asset before it is sold.

Importance and Purpose of Capital Gains Tax in India

The primary purpose of capital gains tax is to ensure that the profits earned from the sale of assets are taxed appropriately, contributing to the country’s revenue. This tax also discourages speculative trading and encourages long-term investments by offering favorable tax rates for long-term holdings.

Types of Capital Gains: Short-term and Long-term

Types of Capital Assets

Capital assets are divided into two broad categories:

Movable Assets

  1. Shares: Investments in equity shares of companies.
  2. Mutual Funds: Investments in equity and debt mutual funds.
  3. Gold: Investments in physical gold, gold ETFs, and sovereign gold bonds.

Immovable Assets

  1. Real Estate Property: Residential and commercial properties, land, and buildings.

Classification and Examples

Capital assets can be further classified based on their holding period, which determines whether the gains are considered short-term or long-term.

Types of Capital Gains Tax

There are two types of capital gains tax which are:

  • Short Term Capital Gains
  • Long Term Capital Gains

Short-term Capital Gains (STCG) Definition and Duration

Short-term capital gains arise when an asset is sold within a short period after its acquisition. In India, the period considered “short-term” varies based on the type of asset:

  • For immovable property such as land and buildings, a holding period of up to 24 months is considered short-term.
  • For movable assets like shares and securities listed on a recognized stock exchange, mutual funds, and bonds, a holding period of up to 12 months is deemed short-term.

Tax Rates

The tax rate for short-term capital gains also depends on the type of asset:

  • For equity shares and equity-oriented mutual funds, short-term capital gains are taxed at a flat rate of 15%, provided the sale is subject to Securities Transaction Tax (STT).
  • For other assets, short-term capital gains are added to the investor’s income and taxed as per the applicable income tax slab rates.

Example Calculation

Suppose you purchase 100 shares of a company at ₹500 each and sell them six months later at ₹600 each. The short-term capital gain is:

STCG=(Sale Price per Share−Purchase Price per Share)×Number of Shares

STCG=(600−500)×100=₹10,000

Since these are equity shares, the applicable tax rate is 15%, resulting in a tax liability of:

Tax=10,000×0.15=₹1,500

Long-term Capital Gains Definition and Duration

Long-term capital gains are realized when an asset is held for a more extended period before being sold. The duration defining “long-term” varies similarly:

  • For immovable property, a holding period exceeding 24 months qualifies as long-term.
  • For shares and securities listed on a recognized stock exchange, mutual funds, and bonds, a holding period exceeding 12 months is considered long-term.

Tax Rates

  • For equity shares and equity-oriented mutual funds, long-term capital gains exceeding ₹1 lakh are taxed at 10% without the benefit of indexation.
  • For other assets, long-term capital gains are taxed at 20% with the benefit of indexation.

Indexation Benefit

Indexation is the process of adjusting the purchase price of an asset to account for inflation. This adjustment reduces the taxable capital gain and subsequently lowers the tax liability. The Cost Inflation Index (CII) is used for this purpose.

Cost Inflation Index (CII)

The CII is a number issued by the Income Tax Department every year. It reflects the rise in the cost of living or inflation. The purpose of CII is to bring parity between the cost of an asset when it was purchased and its value when it is sold, considering the inflation over the period.

Indexed Cost of Acquisition ( For LTCG)

Example Calculation

Imagine you purchased a piece of land for ₹10 lakhs in 2015 and sold it for ₹25 lakhs in 2021. The indexed cost of acquisition, using the CII for 2015-16 (254) and 2020-21 (301), is calculated as:

Indexed Cost of Acquisition = (Cost of Acquisition × CII of Sale Year​)/ CII of Purchase Year

Indexed Cost=(10,00,000×301​)/254 =₹11,85,039

The long-term capital gain is then:

LTCG=Sale Price−Indexed Cost=25,00,000−11,85,039=₹13,14,961

The tax liability at 20% would be:

Tax=13,14,961×0.20=₹2,62,992.2

Holding Period for Various Assets

  1. Shares and Equity Mutual Funds: STCG if held for less than 12 months; LTCG if held for more than 12 months.
  2. Debt Mutual Funds: STCG if held for less than 36 months; LTCG if held for more than 36 months.
  3. Real Estate: STCG if held for less than 24 months; LTCG if held for more than 24 months.

Examples to Illustrate STCG and LTCG

  1. Shares: Selling shares held for 10 months results in STCG. Selling shares held for 15 months results in LTCG.
  2. Real Estate: Selling a property held for 20 months results in STCG. Selling a property held for 30 months results in LTCG.
Calculate Capital Gains

How to Calculate Capital Gains

Calculating capital gains is vital for investors and sellers of assets. This guide simplifies the process, covering key concepts like sale consideration, acquisition costs, and indexation. Mastering these calculations helps ensure compliance with tax laws and enhances financial planning and investment decisions.

Formula for Calculating Capital Gains

The formula for calculating capital gains is straightforward but varies slightly for STCG and LTCG.

Terms You Need to Know Before Calculating

  • Sale Consideration: The amount received from the sale of the capital asset.
  • Cost of Acquisition: The original purchase price of the asset.
  • Cost of Improvement: Expenses incurred in making improvements to the asset.
  • Indexed Cost of Acquisition (For LTCG): The cost of acquisition adjusted for inflation using the Cost Inflation Index (CII).

Example Calculation

Consider a property bought for ₹50 lakhs and sold for ₹80 lakhs after 3 years. The indexed cost of acquisition (assuming an index of 1.2) would be:

Indexed Cost=₹50 lakhs×1.2=₹60 lakhs

LTCG=₹80 lakhs−₹60 lakhs=₹20 lakhs

How to Calculate Short Term Capital Gains Tax

Step 1: First write full Sale Consideration Value.

Step 2: Now deduct or minus

  • Cost of Acquisition
  • Cost of Improvement
  • Expenses on Transfer

Step 3: From the result output, deduct exemptions provided under 54B/54D.

Step 4: Now you will get an amount which is short term capital gains to be taxed.

STCG=
Sale Consideration−(Cost of Acquisition + Cost of Improvement + Expenses on Transfer)

How to Calculate Long Term Capital Gains Tax

Step 1: Sale Consideration Value.

First write full Sale Consideration Value.

Step 2: Now deduct or minus

Deduct Indexed Cost of Acquisition + Indexed Cost of Improvement + Expenses on Transfer form Sale Consideration

Step 3: Deduct Exemptions

From the result output, deduct exemptions provided under 54, 54D, 54EC, 54F, and 54B

Step 4: Final result

Now you will get an amount which is long term capital gains to be taxed.

LTCG=
Sale Consideration−(Indexed Cost of Acquisition + Indexed Cost of Improvement + Expenses on Transfer)

Capital Gains Tax Rates

STCG Tax Rates

STCG on equity shares and equity mutual funds (subject to STT) is taxed at 20%. For other assets, STCG is added to the taxpayer’s income and taxed as per their applicable income tax slab rates.

LTCG Tax Rates

LTCG on equity shares and equity mutual funds (subject to STT) exceeding ₹1.25 lakh is taxed at 12.5% without the benefit of indexation. For other assets, LTCG is taxed at 20% with the benefit of indexation.

Indexation Benefits

Indexation helps in adjusting the purchase price of the asset for inflation, thereby reducing the taxable gain.

Capital Gains Tax Exemptions

Exemptions under Section 54, 54F, 54EC, etc.

  1. Section 54: Exemption on LTCG from the sale of residential property if reinvested in another residential property.
  2. Section 54F: Exemption on LTCG from the sale of any asset other than a residential property if reinvested in a residential property.
  3. Section 54EC: Exemption on LTCG if invested in specified bonds within six months of sale.
  4. Section 54B: Exemption on Capital Gains From Transfer of Land Used for Agricultural Purpose.
  5. Section 54D: Capital Gains on transfer of land and building which is used for industrial undertaking

Special Provisions and Considerations

Securities Transaction Tax (STT)

STT is a tax levied on the purchase and sale of securities listed on recognized stock exchanges in India.

Taxation of Equity Mutual Funds and Equity Shares

Gains from equity mutual funds and shares are subject to STCG at 15% and LTCG at 10% for gains exceeding ₹1 lakh.

Taxation of Non-Equity Mutual Funds and Debt Funds

Gains from non-equity mutual funds are subject to STCG as per the applicable income tax slab and LTCG at 20% with indexation.

Double Taxation Avoidance Agreement (DTAA)

DTAA agreements with other countries help prevent double taxation of the same income and provide relief to taxpayers.

Filing Capital Gains in Income Tax Returns

Reporting of Capital Gains in ITR Forms

Capital gains must be reported accurately in the respective sections of the Income Tax Return (ITR) forms.

Relevant Forms and Sections

  1. ITR-2: For individuals and HUFs not having income from business or profession.
  2. ITR-3: For individuals and HUFs having income from business or profession.
  3. ITR-5: For firms, LLPs, AOPs, and BOIs.

Documentation and Proof Required

  1. Sale Deed: Proof of sale consideration.
  2. Purchase Deed: Proof of cost of acquisition.
  3. Indexation Proof: Calculation of indexed cost.
  4. Investment Proof: Documents for claiming exemptions under relevant sections.
Budget 2024 highlights

Budget 2024 Highlights

1. Asset Classification:

  • Assets are now classified based on two holding periods: 12 months and 24 months.
  • The 36-month holding period is no longer applicable.

2. Listed Securities:

  • Holding period for all listed securities is 12 months.
  • Securities held for over 12 months are considered Long-Term.

3. Other Assets:

  • Holding period for all other assets is 24 months.

4. Short-Term Capital Gains (STCG):

  • Tax rate for listed equity shares, equity-oriented fund units, and business trust units increased from 15% to 20%.
  • Other assets held short-term continue to be taxed at slab rates.

5. Long-Term Capital Gains (LTCG):

  • Exemption limit on LTCG from equity shares, equity-oriented units, and business trust units increased from Rs. 1 lakh to Rs. 1.25 lakh per year.
  • Tax rate on these gains increased from 10% to 12.5%.
  • The increased exemption limit applies for the whole year, but the tax rate change is effective from 23rd July 2024.
  • Tax on LTCG from other financial and non-financial assets reduced from 20% to 12.5%.
  • Indexation benefit on long-term asset sales removed, effective from 23rd July 2024.

Impact of Changes on Taxpayers

Changes in tax laws can have significant implications for taxpayers, affecting their investment and tax planning strategies.

Also read

Case Studies and Practical Examples

Real-life Scenarios and Calculations

  1. Scenario 1: Mr. A sells shares held for 14 months, realizing a LTCG of ₹2 lakhs. He pays 10% tax on ₹1 lakh (₹2 lakhs – ₹1 lakh exemption), resulting in a tax liability of ₹10,000.
  2. Scenario 2: Ms. B sells a property held for 30 months, with an indexed cost of ₹60 lakhs and a sale price of ₹80 lakhs, realizing an LTCG of ₹20 lakhs. She invests ₹20 lakhs in bonds under Section 54EC, availing full exemption.

Tax Planning Tips for Minimizing Capital Gains Tax

  1. Utilize Exemptions: Invest in specified assets to avail exemptions under Sections 54, 54F, and 54EC.
  2. Leverage Indexation: Use indexation benefits to reduce LTCG tax liability.
  3. Plan the timing of asset sales to benefit from lower tax rates.

Common Mistakes and How to Avoid Them

  • Not keeping proper records of purchase and improvement costs.
  • Ignoring indexation benefits.
  • Missing out on exemptions due to lack of awareness.

Conclusion

Capital gains tax is an important aspect of financial planning. Understanding the types, computation, tax rates, and exemptions is crucial for effective tax management.

Proper tax planning can help in legally minimizing tax liabilities and maximizing returns on investments.

Recommended
Stay informed about the latest tax laws and budget announcements. Consult a tax advisor for personalized advice and make informed decisions to optimize your capital gains and tax liabilities.

Frequently Asked Questions

1. What is capital gain tax exemption limit?

Exemption limit on LTCG from equity shares, equity-oriented units, and business trust units is Rs. 1.25 lakh per year.

2. What is STCG interest rates?

Tax rate for listed equity shares, equity-oriented fund units, and business trust units is 20% effective from 23rd July 2024.

3. What is LTCG interest rates?

Tax rate is 12.5% effective from 23rd July 2024.

4. What is Short Term Capital Gains Period?

12 months

5. What is Long Term Capital Gains Period?

24 months

Reference


Spread the love
Avatar

womenlyfe.com

About Author

Women Lyfe is a blog dedicated to women, which shares their incredible lives, inspiring biographies, monumental struggles, and ultimate successes.

Leave a comment

You may also like

Debt Management
Personal Finance

10 Strategies for Debt Management Made Simple

Spread the loveDebt Management: Are you feeling weighed down by debt? You’re not alone. Many people find themselves struggling to
Personal Finance
Personal Finance

10 Tips to Master Your Personal Finance Journey

Spread the lovePersonal finance is a critical aspect of our daily lives, yet many people overlook its importance. It encompasses
error: Content is protected !!
Follow us on