Are you aware that any profit you make by selling a capital asset is referred to as ‘capital gain’ and is taxable as per the Income Tax Act? The gains or profit that takes place with the sale of the capital asset comes under the category of income, and therefore, one needs to pay taxes as per the applicable tax slab.
Let us take an example here to make things clear.
Suppose you plan to sell a house property. Being one of the most sought-out investments, you will make the sale at a comparatively much greater price than the price at which you bought the property. Now, whatever profit you make on this sale will be shown as your income, and therefore, it will be accountable to taxation, which refers to capital gains tax.
Dive in to know more about the details associated with capital gains tax so that you can plan accordingly while you plan to sell a capital asset.
What is the Capital Gains Tax (CGT)?
Capital Gains Tax, often referred to as CGT, is the tax levied on the profit incurred on the sale of individual or corporation assets such as real estate, bonds, stocks, property, and many more listed as per the Income-tax laws. As the profit received is counted under the income category, one needs to pay tax accordingly.
The provision of Capital Gains Tax is not applicable in the inherited property as it does not include sale or transfer of the property. According to the Income Tax Act, 1961, if any individual receives any capital asset as a gift by way of will or inheritance, he will not have to pay Capital Gains Tax. However, if the individual decides to sell the inherited asset, CGT will be applicable.
Types of Capital Gains Tax
Now that you know that the tax charged on capital gain is referred to as capital gains tax, it’s time you understand the types of capital assets that determines the tax payable as CGT. The capital assets can be broadly divided into two main groups, namely, short term capital assets and long term capital asset.
Short term capital asset
The assets held by the individual taxpayers for 3 years (36 months) or less than that from the date on which the sale or transfer is made comes under the category of short term capital asset.
However, this duration has been reduced from 36 months to 24 months in immovable assets such as buildings, land, and house property. It is also important to note that if the capital asset has been inherited or gifted as per will, the time duration for which the previous owner held the property determines whether the investment will be considered a long-term or short-term asset.
Long term capital asset
When an individual owns a capital asset for a period of more than 3 years ( or 36 months), that asset is classified as a long term investment and can be referred to as long term capital asset. If the assets are held for more than 12 months, they are considered long term capital assets and are, therefore, taxed accordingly.
Applicable Tax Rate on Short term and Long term Capital Gains
| Type of CGT | Certain Conditions | Tax Rate |
| Long term CGT | For the sale of equity shares | 10% if the amount is more than Rs. 1,00,000 |
| Long term CGT | Other than the sale of equity shares | 20% |
| Short term CGT | If securities transaction tax is applicable | 15% |
| Short term CGT | If securities transaction tax is not applicable | The STCGT is added to the Income Tax Returns of the individual and the tax is charged in accordance with his income tax slab. |
How to calculate Capital Gains Tax?
The computation method used to calculate CGT is different for long term capital assets and short term capital assets. Let’s understand the differences:
Computation process of long term capital tax gains
The computation methodology for long term capital tax gains is as follows:
Step 1: The individual concerned must take into account the full value of the capital asset.
Step 2: Next, take into consideration the below-mentioned deductions:
- The money spent on transfer
- Costs due to the acquisition
- Money spent on improvement
Step 3: After calculating the amount from the steps, deduct any exemptions provided to you under Section 54, 54F, 54B, and 54EC.
Computation process of short term capital tax gains
The computation process of short term capital gains tax is as follows:
Step 1: The person concerned must consider the full value of the asset.
Step 2: Deductions, as per the following points must be made.
- Costs incurred for the transfer of property
- Costs incurred for acquiring the property
- The amount spent for improvement of the asset
Step 3: The amount left after the deductions is the short term capital gain.
Capital Gains Tax Exemption
Go through the points mentioned below to know about the cases in which CGT has been exempted.
- When a person invests all the money earned from selling a capital asset to buy a house property, however, this is possible if:
- The person needs to purchase a house within one year or two years after making the sale.
- Any property under construction should be done within a time of three years, counting from the date of transfer of the original house.
- He will not be able to sell this property within three years of purchase.
- The person has to buy a house that is situated in India.
- He must not own any other residential house property, apart from the one that he is buying.
- The individual may be exempted from paying tax on the capital gain if he invests in the Capital Gains Account Scheme (CGAS). However, in this case, the person will have to continue making investments for a time period, as stated by the bank. Not abiding by this will lead the profit to be considered as a capital gain.
2. In the case of the sale of agricultural lands in rural India, the concept of capital gains is not applicable.
3. The taxes will be exempted by investing in capital gains bonds. However, it is essential to note that this is only applicable in long-term capital assets and the deductions are applicable as per Section 54EC.
Significant changes incorporated in Budget 2019
Some amendments were made to Section 54 of the Income Tax Act in Budget 2019. According to the amendments made, if an individual taxpayer earns up to Rs. 2crores as capital gains by selling a property, he can purchase two house properties with that amount, which was previously restricted to one house property purchase.
However, the purchase needs to be made within 1-2 years from the date of transfer. If the individual wants to invest the capital gains to construct a new house, it has to be done within three years from the sale of the property. Also, this facility can be used by an individual only once in his lifetime.
Wrapping Up
With various complexities associated with the Income-tax laws, Capital Gains Tax is a broad concept that involves a thorough understanding of multiple sections to get things right. Therefore, if you plan to transfer any capital asset, understand the rules first, and then step out to make a sale.
Financial tax regulations seem like a hassle, and you can’t wrap your head around capital gains tax? Contact us right away for the best financial advice you can rely on.