A categorical guide to impact on tax, by income from the capital gains
Section – I – Basic Concepts:
Capital Gain: It is any gain earned from the sale of a capital asset which is known as a “Capital Gain.” The profit is chargeable to the tax in the year where there are capital gains. It is not applicable when the asset is inherited and there is no sale but transfer. And if it sold by the person who is having it, then it’s applicable and exemption is provided to those assets which are received as gifts by inheritance.
Capital Asset: Land, building, house, property, machinery, jewellery, patents, trademarks etc are some of the examples of capital assets. These include the rights in relation with companies of India, including management rights or any control or any other rights.
The given lists below are not considered as Capital Assets:
- Farming land in rural areas
- Clothes, furniture etc (personal goods)
- Stocks and equity (by business or profession)
- Gold bonds (6.5% – 1977, 7% – 1980, National Defense gold bonds, under gold deposit scheme – 1999)
- Any special bonds issued under 1991
Some Assets are considered to be short term when they are kept for less than a year, and these type of assets include:
- Preference shares of a company listed in any stock exchange markets in India.
- Any Securities listed in stock exchange markets in India.
- Units of UTI
- Units of equity under mutual funds
- Any Zero coupon bonds
And if these are kept more than 12 months, will be considered as Long term assets. In case if the assets are received as gifts or any inheritance, it includes previous owner despite of being a short term or a long term capital asset. In case of any shares or rights including bonus, the period of holding is started from the day the bonus received.
TAX on long term capital gains: 20% + surcharge and education cess, short term capital gains:
- When securities transaction tax is not applicable: It is added with IT returns and tax is payed according to his Income Tax Slab
- When securities transaction tax is applicable: 15% + surcharge and education cess
TAX on Capital Gains through equity and debt are treated in a different manner
Debt Funds : Short Term: At tax slab rates of individual.
Long Term: At 20% with Indexation
Equity Funds: Short Term: 15%
Long Term: Nill
Tax rules – Changes for Debt Mutual Funds: These should be kept more than a 36 months, then only it will qualify for being a long term asset. And if it redeemed within 3 years, the capital gains are added to person’s income and will be payed in tax slab of the individual.
Section – II– Calculation of Capital Gains
Keep in mind:
- Cost of Acquisition: The amount for which capital asset was acquired by seller
- Cost of Improvement: Expenses raised because of improvement to the capital asset by seller.
- Full Value Consideration: The consideration received by seller in exchange to tax in the year of transfer.
Calculation of Short Term Capital Gains:
- Starting with the full value consideration less cost of acquisition and cost of improvement and expenditure in connection with such transfers.
- From the obtained number less exemptions under 54, 54EC, 54F, 54B.
The amount resulted is a “SHORT TERM CAPITAL GAIN.”
Calculation of Long Term Gains:
- Starting with the full value consideration less indexed cost of acquisition and indexed cost of improvement and expenditure in connection with such transfers.
- From the obtained number less exemptions under 54, 54EC, 54F, 54B.
The amount resulted is a “LONG TERM CAPITAL GAIN. ” Expenses to be lessened from full value consideration. The expenses which are directly related to sale or any transfer of the capital assets can be deducted.
In case of House Hold Property:
- Brokerage or Commission paid
- Travelling expenses
- Expenses associated with will and inheritance, obtaining sub session certificate, executor costs etc.
In case of Shares sales:
- Brokerage Commissions related to shared sold.
- STT is not accepted to deduct as a expense.
In case of jewellery sold:
- Costs incurred for broker’s services
*** The expenses deducted from selling price of assets, used for capital gains calculating, are not accepted as a deduction under any Income Tax return rules. And these cannot be claimed more than once. Calculation of indexed cost of acquisition also called cost inflation index (CII): CII, in the year where the asset was under seller or in 1981-82, whichever the latest multiplied cost inflation index for that year is transferred. Calculation of indexed cost of acquisition: CII is taken as in the year which improvement took place multiplied by CII for the year it has been transferred. This is done to adjust for the inflation taking place in next coming years. This increases the cost base and lessens capital gains.
Section – III– Ways to exemption on Capital Gains
Lets, understand about the exemptions with an Illustration. Karan brought a home in 2004 worth – 50 Lakh Full Value of consideration present day – 1.5 cr. And for inflation, cost price is adjusted and indexed cost of acquisition is used.By the formula of Indexed cost of acquisition, the adjusted cost of house is 1.6 cr. The capital gains: 44,00,000 Long term capital gains are taxed at 20%, so the total tax outgo is 8,88,000. This is the amount that is to be paid in taxes. *can lower the amount by taking the benefits over exemptions decided by IT department Act on the capital gains, when the gain from the sales, which are reinvested into buying another one.
Section – 54: exemptions provided on sale of house property and on purchase of other property. The person payable to tax, should put all his capital gains amount and not entire sale proceedings. And if rate of property about to purchase is more than capital gains amount, exemptions will be limited to total capital gain on sale.And new property can be purchased one year before selling or two years after. These gains can also put in a construction of a new asset, but it should complete before 3 years from the date it sold. **And from budget 2014-15 it is cleared that only one property can be purchased or constructed from these capital gains to claim these exemptions and will be taken back if this property is sold before 3 years of purchase.
Section – 54F: exemptions provided on sale of any asset other than house property. If there are capital gains from sale of long term capital asset other than house, a new house should be brought to get benefit out of this claiming exemptions. And new property can be purchased one year before selling or two years after. These gains can also put in a construction of a new asset, but it should complete before 3 years from the date it sold. **And from budget 2014-15 it is cleared that only one property can be purchased or constructed from these capital gains to claim these exemptions and will be taken back if this property is sold before 3 years of purchase. The total sale proceeds regarding this new asset can claim exemption from taxes, if you meet all the mentioned clauses above. And if you put a small portion of sale proceedings then exemption will be the amount invested to sales price. Exemption = cost of new house X Capital gains / net consideration.
Section – 54EC: exemptions provided on sale of house property on reinvesting in capital gains. If there are capital gains from sale of house property and if these are invested back into any special bonds.
- You can invest upto 50 lakhs in those bonds issued by NHAI (National Highway Authority of India) or Rural Electrification Corporation.
- The invested amount can be redeemed after 3 years, but cannot be sold before 3 years of date of sold.
The owner is allowed upto 6 months to invest the amount gained in these bonds, although to claim this, he should invest before tax filing date.
Section – IV– Sale of Agricultural land – Saving Tax:
Sometimes, the capital gains made from the sale of agricultural land can get full exemption from the income tax or some times it is not even considered.
- Any agricultural land from rural areas are not considered under capital assets, so they are not considered for payable of tax.
- If there is regular buying and selling of agricultural land, then the sales of these lands are taxable under business / profession.
- Capital gains on compensation received on compulsory acquisition of urban farming land is excluded, under section- 10(37) of IT Act.
**If your farming land is not sold under any of these cases, you can get exempted under 54B
Section – 54B – Exemption on capital gains from land transferred to use as agricultural land.
The exemption is available to the one whose short term or long term capital gains incurred from the transfer of land into agriculture by the one who is payable to tax or his parents for 2 years immediately before the sale. This new agricultural land is purchased to claim these exemptions should not be sold within 3 years from the purchase date.**If, you missed to purchase this land before the date of producing Income Tax return filing, the amount of these capital gains should be deposited before the date of filing return in any Public Sector Banks or IDBI under 1988 capital gains scheme.**If the amount which was deposited as Capital gains account scheme, not used to purchase agricultural land within 2 years of date of sale of land expires.
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