Understanding Capital Gains Tax

What are Capital Gains Taxes? 

The basic requirements for Capital Gains are:

• Existence of a Capital Asset
• Transfer or Sale of such Capital Asset
• Profit earned from such transfer.

Sometimes, when the capital asset depreciates and is sold at a value lower than the original purchase price, we say a capital loss is incurred.

What are Capital Assets?

Capital Asset can be defined as a property of any kind held by a person who may or may not is connected with his business or profession. 

So, buildings, land, houses, vehicles, jewellery, patents, trademarks, leasehold rights, machinery and investments in mutual funds are some of the examples of capital assets. This also includes rights in or concerning an Indian company. The following are excluded from the category of capital assets:

• Any stock, consumables or raw materials held for business purposes or profession
• Personal goods 
• Agricultural land in a rural area
• Special bearer bonds (1991)
• 6 ½% of gold bonds (1977) or 7% gold bonds (1980) or national defence gold bonds (of 1980) issued by the Central Government
• Deposit certificates issued under the Gold Monetization Scheme, 2015 or Gold deposit bonds issued under the gold deposit scheme (1999).

Types of Capital Gains

There are two types of Capital Gains based on the tenure of holding an asset. They are:

• Short Terms Capital Gains (STCG)
• Long Term Capital Gains (LTCG)

What are Short-Term Capital Gains?

An asset held for 36 months or less is termed a Short-Term Capital Gains asset. 

What is LTCG?

If the asset is in holding for more than 36 months it is known as long term capital gains. 

There are some exceptions to this rule. 

• The holding period of the non-moveable property was changed to 24 months from 1st April 2017. It does not apply to debt-oriented mutual funds or moveable property like jewellery etc. So, property held for 2 years or more, qualify as a Long-Term Asset.
• Some assets are considered short-term if they are in holding for 12 months or less. This rule is applied to any asset sold after 10th July 2014( irrespective of the date of purchase). These assets are
  1. Equity or preference shares in a stock exchange listed company
  2. Securities listed on a stock exchange in India
  3. Units of Unit Trust of India, irrespective of being quoted or not
  4. Equity oriented mutual fund units ( quoted or unquoted)
  5. Zero-coupon bonds ( quoted or unquoted)

These assets become long term capital assets if they are held for more than 12 months. 

• An asset acquired by gift, will, succession or inheritance, the period of holding of the previous owner is also taken into consideration for deciding whether it is an STCG or an LTCG asset. 
• The period of holding of bonus shares or rights shares is counted from the date of allotment of the shares. 

What is Capital Gains Tax in India? 

The profit earned from the sales of any capital asset is an income of the individual or an organisation. They are taxable under Income tax laws. You have to pay the Income tax on capital gains for the assessment year in which the transfer of the capital asset takes place. The tax paid is known as Capital Gains tax. It does not apply to any inherited property as there is no sale involved in it. But if the person sells the property inherited, he will have to pay capital gains tax. 

Short Term Capital Gains Tax India

Short term capital gains taxes are the tax levied on the profit earned from the sales of a capital asset in holding for a period defined by the government as short term. The short term period is different for various assets; For example, the term period for immovable properties like houses or land is considered short term if held for 24 months or less from the 2017-18 financial year. 

Long Term Capital Gains Tax India

The tax levied on the profit earned from the sales of capital assets held for a period that is considered long term by the government. It is generally more than 36 months barring a few exceptions mentioned above. 

Capital Gains Tax Calculator

The calculation of Capital Gains Tax depends on the type of asset and their holding period.

To understand how to calculate capital gains tax, we must know some of the terms first:

• Full value consideration – It is the payment a seller receives in return for a capital asset. The tax is chargeable in the year of transfer even if no compensation is received.
• Cost of acquisition – It is the value of an asset when a seller acquires it.
• Cost of improvement- It is the expenses incurred by a seller in making any additions or alterations to a capital asset. Cost of improvement done before 1st April 2001, will not be taken into consideration. The property acquired in any other way other than direct purchase will add the costs of acquisition and improvement by the previous owner. 

Income Tax Indexation

Capital Gains Indexation is done to adjust the costs of acquisition and improvement values considering the inflation that has taken place over the years. 

Indexed costs of acquisition

Indexed costs of acquisition can be calculated as the ratio of the Cost Inflation Index (CII) of the year of sale of the asset and the year of acquisition of the property or the financial year 2001-2002 (whichever is later), multiplied by the Costs of acquisition

Indexed Costs of improvement

We calculate the Indexed Costs of improvement by multiplying the CII of the year in which the improvement took place by the costs of improvement required. 

Short-Term Capital Gains Tax Calculator

To calculate the short term capital gains tax, follow the following steps:

1.  Start with the full-value consideration
2. Deduct 
   1. All the expenses incurred wholly or exclusively in connection with the transfer.
   2. Cost of acquisition
   3. Cost of improvement. 

The result will be the Short term capital gain.

Long Term Capital Gains Tax Calculator

To calculate the Long term capital gains tax in India, follow the following steps:

1.  Start with the full-value consideration
2. Deduct 
   1. All the expenses incurred wholly or exclusively in connection with the transfer.
   2. Indexed Costs of acquisition
   3. Indexed Costs of improvement. 
3. Deduct the capital gains tax exemptions provided under sections 54,54EC, 54F and 54B. 

The result will be the Long term capital gains. 

Capital Gains Tax Rates

The long term and short term capital gains tax start from 10% and 15%. The tax rates may change with each accounting year.

Short Term Capital Gains Tax

The government may apply 15% short term capital gains tax when securities transaction charges are applicable. When securities transaction tax is not applicable, the short term gain is added to the income tax computations of the taxpayer according to his income tax slab. 

Income tax on capital gains is applicable if a property is inherited as there is no sale associated. If one sells the inherited property after inheritance, the capital gains tax on the property is applicable and, the duration will include the holding period of the previous owner. 

Long-Term Capital Gains Tax Rate

The LTCG tax rate is 10% of the amount that is more than Rs. 1 lakh for equity shares and 20% for all other long term capital gains calculators for AY 2020-21except Equity. 

Capital Gains Tax Exemption

One has to pay a sizeable amount of money as CGT for income from capital gains. One can lower it by availing of the following exemptions provided by the Income Tax Act on capital gains:

1. Section 54: Provides for exemption on the Sale of House Property and thereafter using the sales proceeds to purchase a different house property. 
2. Section 54F: Provides for tax exemption on the capital gains received due to sales of any other asset apart from house property. It is ideal for people who sell the property to pay for a new residential property. 
3. Section 54EC: Exemption on sale of house property on reinvesting in specific bonds. It is for those who are not interested in buying a new residential property. 
4. Invest in Capital Gains AccountsScheme in approved banks for a minimum of 3 years.  It is for people who want to park the money and buy a residential property later.

Saving Tax on Agricultural Land

Capital gains made from the sale of agricultural land may be entirely exempted from income tax or may not be taxed under capital gains in some cases, like, 

• Agricultural land in rural areas is not chargeable to tax. 
• You can hold agricultural land as stock-in-trade. But, if you buy and sell regularly or for business, capital gains tax on the sale of land will be applicable under Business and Profession.
• Capital gains on compensation received for compulsory acquisition of urban agricultural land are exempted from tax under Section 10(37)of the Income Tax Act. 

If your reason for sale is not pertaining to any of the above, then you can look for exemption as per Section 54B.

Section 54B provides for Exemptions on capital gains from the sale of land used for agricultural purposes. 

Cost Inflation Index – its impact on Capital Gains. 

Prices of goods increase over time. The purchasing power of a unit of money decreases due to inflation. This increase in the price of goods and assets due to inflation is estimated year to year by using the Cost Inflation Index Chart. 

The CII = 75%of the average rise in the Consumer Price Index (urban) for the preceding year. The Central Government notifies it.

for the 2021-22 Financial Year the CII is 317. The base year for CII has been taken as 2001-02 and has an index value of 100. 

The CII is used to calculate the Indexed Cost Chart for Acquisition and Improvement while calculating the Long term capital gains tax. 

Capital Gain Highlights 2021

The capital gains made from ULIPs with a premium of over 2.5 lakhs are on par with the equity mutual funds in the Union Budget of 2021. Thus capital gains from Such ULIPs issued on or after 1st February 2021 will be treated as capital gains and taxed accordingly. ITR forms pre-filled with details on dividends, interest and capital gains will be made available to make it easy for taxpayers. 

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