What is Capital Gain tax in India?

What is Capital Gain tax in India?

Capital Gain Tax

 

Capital gain tax is basically if you have sold real estate, mutual funds, shares, etc during the year, in such cases capital gain/ loss arises,  which needs to be reported while filing tax returns.

 

1) What is Capital Asset
2)What are the types of Capital Assets?
3)Some important jargons for calculating Capital Gain Tax
4)What is Capital Gain Tax?
5)What are the steps to calculate Long Term Capital Gain (LTCG)?
5.a) What is Indexed Cost of Acquisition or Improvement?
6)What are the steps to calculate Short Term Capital Gain tax in India (STCG)?
7)What are the tax rates to calculate STCG Tax and LTCG Tax?
8)Special deductions allowed in the form of expenses at the time of sale of the asset.
9)Special exemptions for Equity Shares or Units of Equity Oriented Funds.
9.a) What are the other exemptions allowed in Capital Gains Tax?
10) Case Study:  Capital Gain tax on Sale of Property
11) Case Study:  Capital Gain tax on Sale of Equity Shares
12) Case Study:   Capital Gain on Debt Mutual Fund

1) What is Capital Asset?

A capital asset is the property that one owns for investment or possess in expectation to generate profit. Eg  land, building,  house property (flat), vehicles, machinery, patents, trademarks, valuable jewellery etc.  The legal rights to manage or control any Indian Company is also a capital asset.  There are few exclusions:

  1. Personal goods such as clothes, furniture kept aside for personal use
  2. Any stock or consumables or raw material held for business purposes
  3. Agriculture land in rural India
  4. Special Bearer Bonds
  5. 5% Gold Bonds (1977) or 7% Gold Bonds (1980) or Defense Gold Bonds (1980) issued by Central Government
  6. Gold Deposit Bond issued under The Gold Deposit Scheme (1999) or Deposit Certificates issued under Gold Monetization Scheme (2015)

2) What are the types of Capital assets?

Short Term Capital Asset:

A capital asset if held for 36 months or lesser period is termed as Short Term Capital Asset. However there are few exceptions to this 36 months criteria as follows:

 

Name of the asset Criteria for STCA
Immovable Property Lesser than  24 months
(Eg land, building and house property)
Unlisted shares
Equity or Preference shares in listed company Lesser than 12 months
Listed Securities
(Eg Debentures, Bonds, Government Securities)
Units of UTI
Units of Equity Oriented Mutual Fund
Zero Coupon Bonds

 

Long Term Capital Asset:

If the Capital Asset is held for more duration than above mentioned short term criteria it will automatically get categorized as Long Term Capital Asset.

For Eg Mr XY purchased some listed shares on July 1, 2013 and sold these shares on August  20, 2014, this will be classified as Long Term Asset as the listed shares are held for more than 12 months.

 

capital gain tax filing


3) Some important jargons for calculating Capital Gain Tax

Calculation of Long Term Capital Gain Tax or Short Term Capital Tax differ because the tax rates are different for STCG and LTCG. But in order to calculate Capital Gain we need to first understand few important terms:

  • Full value consideration: It is the amount received by the seller as a result of sale of his Capital Asset. Capital Gains are chargeable for tax in the year of transfer even if the consideration is partially received.
  • Cost of Acquisition: It is the amount spent by the seller while acquiring the asset. If the asset is acquired by inheritance, gift, succession, or by way of will in that case the cost of acquisition will be the amount spend by the original owner while purchasing the asset.

Eg Mr AB bought house property in year 2000 by paying Rs 50 lakhs. In 2012 the house property gets transferred to Mr. Junior AB  after Mr. AB’s death by way of inheritance.  So if Mr Junior AB wants to sell the house, the cost of acquisition for capital gain tax calculation purpose will be Rs 50 lakhs (of course we need to give effects of indexation before calculating capital gains)

  • Cost of improvement: Capital expenses incurred in making any additions or alterations to the Capital Asset are called Cost of Improvement. But such improvement if made before April1, 2001 is not considered in the calculation.

Eg. If in 2008, Mr. XY spends some amount on alterations in the flat where the expenses are capital in nature this is considered as Cost of Improvement when he sells the flat in 2015.

Whenever we calculate the cost of improvement we need to keep in mind if the asset is acquired by way of inheritance, gift, succession, or by way of will then in that case the amount spent by the previous owner is also considered while calculating the cost of the improvement.

4) What is Capital Gain Tax?

Any profit or gains arising from the sale of Capital Assets is called Capital Gain. This Capital Gain is taxable under Income Tax Act 1962. You need to pay the amount of tax while filing income tax returns under the capital gain tax in the year in which such a sale takes place.  This Capital Gain Tax can be either Long Term (LTCG) or Short Term (STCG).

Eg.Mr. SK had bought some house property in 1990 and he wishes to sell that property in 2021. In that case, the profit earned in this transaction will be taxable under Capital Gain Tax.

Capital Gain Tax is not applicable on the property transferred by way of inheritance, gift, succession, or by way of will because there is no sale only the transfer of ownership takes place.

Eg.  Mr. AB dies and leaves behind a big house for Mr. Junior AB in 2012. Mere transfer of property does not lead to taxation under the capital gain tax. But if Mr. Junior AB plans to sell that property in 2021, he will have to pay taxes on the profit earned.

5) What are the steps to calculate Long Term Capital Gain (LTCG)?        

Step 1 Determine Full Value Consideration XXXX
Step 2 Deduct these amounts:
Expenditure incurred in connection with this transfer     XX
Indexed  Cost of Acquisition                                                  XXX

Indexed Cost of Improvement                                                 XXX

(XXX)
Step 3 Deduct the exemptions  u/s 54, 54EC, 54F, 54B                                   (XXX)
Step 4 We will arrive at LTCG                                   XXXX

 

5A)  What is the Indexed Cost of Acquisition or Improvement?

Cost of acquisition or improvement is indexed (increased) by applying CII (Cost inflation index). It is generally done to adjust for the inflation over the years of holding the capital asset. Indexation increases the cost (acquisition or improvement) and in turn, reduces the capital gain amount which ultimately leads to lesser tax liability.

 

Indexed Cost of Acquisition                       =    Actual cost of acquisition X CII of the year of transfer
CII of the year in which asset is first held by the seller or 2001-02 whichever is later

 

Indexed Cost of Improvement            =                              Actual cost of improvement X CII of the year of transfer
                                    CII of the year in which improvement took place

 

Current Cost Inflation Index for your ready reference. (The Central Government fixes this index and publishes it in the official gazette for measuring inflation)

Financial Year Cost Inflation Index (CII)
2001-2002 (Base year) 100
2002-2003 105
2003-2004 109
2004-2005 113
2005-2006 117
2006-2007 122
2007-2008 129
2008-2009 137
2009-2010 148
2010-2011 167
2011-2012 184
2012-2013 200
2013-2014 220
2014-2015 240
2015-2016 254
2016-2017 264
2017-2018 272
2018-2019 280
2019-2020 289
2020-2021 301

 

6) What are the steps to calculate Short Term Capital Gain(STCG)?

Step 1 Determine Full Value Consideration XXXX
Step 2 Deduct these amounts:

Expenditure incurred in connection with this transfer     XX

Cost of Acquisition                                                                        XXX

Cost of Improvement                                                                  XXX

 

 

 

(XXX)

Step 3 We will arrive at STCG                                    XXXX

 

7) What are the tax rates to calculate STCG Tax and LTCG Tax?

Tax Rates for Equity Mutual Fund:

Short Term Gains Long Term Gains
15% 10% over and above 1 lakh

Tax Rates for Debt Mutual Fund:

Short Term Gains Long Term Gains
At slab rates of the individual At 20% with indexation

 

Tax Rates for other residual STCG and LTCG transactions:

 

Long Term Capital Gain Tax
On Capital Gains of Equity Shares or Units of Equity Oriented Fund Capital Gains apart from Equity Shares or Units of Equity Oriented Fund
10% over and above 1 lakh 20%
Short Term Capital Gain Tax
When Securities Transaction Tax (STT) is applicable When Securities Transaction Tax (STT) is not applicable
15% At slab rates of the individual

8) Special deductions allowed in the form of expenses at the time of sale of the asset.

  1. Brokerage or commission paid for the sales transaction
  2. Cost of stamp paper
  3. Travelling expenses
  4. Cost of executor or cost of obtaining succession certificate ( in case the property is transferred by way of inheritance or will)

In case of sale of shares, securities Transaction Tax is not allowed as deduction.

9) Special exemptions for Equity Shares or Units of Equity Oriented Funds.

LTCG on sale of Equity Shares or Units of Equity Oriented Funds realized after March 31,2018 will remain exempt upto  Rs 1 lakh p.a. If the LTCG exceeds Rs 1 lakh the remaining amount after giving exemption of 1 lakh will be taxable @ 10% without giving any benefit for the indexation

9a) What are the other exemptions allowed in Capital Gains Tax?

Section Explanation Example
Sec 54 #If long term capital gains from sale of house property are reinvested into buying or constructing 2 another house property, the assessee can  claim exemption u/s 54.

# This exemption on two house properties will be allowed once in lifetime of a taxpayer, provided the capital gains do not exceed Rs 2 crores.

# The taxpayer has to invest amount of capital gains and not necessarily the entire sales proceeds

# If purchase prices of these two house properties collectively  exceed the capital gain so earned the exemption amount will be limited to LTCG so earned.

# The new house property can be purchased either 1 year before sale or 2 years after sale.

# The gains can be invested in construction of property provided the construction gets completed within 3 years from the sale.

# This exemption can be taken back if this new property is sold within 3 years from its purchase

 

Mr XYZ sold the house property on Oct 23,  2020 (which was bought by him in 2012). The sales proceeds amounted Rs 4 crores whereas the long term capital gain on this transaction amounted to Rs 1.80 crores after all the deductions.

a)      Mr XYZ needs to reinvest Rs 1.80 crs(and not 4 crs) in one or two house property or properties to claim this exemption.

b)     Irrespective of the reinvestment amount the exemption amount is limited to Rs 1.80 crs

c)      Mr XYZ can purchase such house property either 1 year prior or 2 years from  date the of sale.

d)     Mr XYZ has an option to invest in construction of new house property provided it gets completed by Oct 23, 2023.

 

Sec 54EC # When capital gains earned from sale of house property are reinvested into specific bonds, the amount so reinvested is exempt from the tax upto 50 lakhs.

# These specific bonds are issued by National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC)

# The money so reinvested can be redeemed after 5 years but bonds cannot be sold before lapse of 5 years from date of sale of the original asset.

# The assessee has six months time to reinvest capital gains in these bonds but needless to say the exemption can be claimed only if the reinvestment is done within tax filing deadline.

Mr  XYZ sold the house property on Oct 23,  2020 (which was bought by him in 2012). The sales proceeds amounted Rs 2 crores whereas the long term capital gain on this transaction amounted to Rs  80 lakhs after all the deductions.

a)      Out of the capital gains so earned Rs 50 lakhs can be reinvested into specific  bonds( NHAI or REC) to claim the exemption

b)     This investment should be done by April 23, 2021.

c)      Assesseecan not sell these bonds before 5 years from Oct 23, 2020.

Sec 54F # This exemption is available for the LTCG earned other than sale of house property.

# To claim the exemption the taxpayer has to reinvest entire sales proceeds (and not just LTCG) in purchasing new (only one) residential house property.

# To claim this exemption new property should be purchased either one year before the sale or 2 years after the sale of property.

# The assessee can claim the exemption if he reinvests the amount into construction of new house property provided the construction is completed within 3 years of sale.

# This exemption can be taken aback if the new house property is sold with 3 years of its purchase.

# If entire sales proceeds are reinvested into purchase of new house property then entire capital gain arising from this transaction will be exempt.

# If only some portion of the sales proceeds are reinvested then the exemption amount reduces to some extent as expressed in following formula:

Exemption=( LTCG x cost of new house )/ Net Sales Consideration.

Mr PQR sold a machinery on Oct 23, 2020(which was bought by him in 2013). The sales proceeds amounted to Rs 2 crs and LTCG after all the deductions amounted to Rs 1.80 crs.

a)      To claim the exemption u/s 54F Mr PQR needs to invest entire sales proceeds Rs 2 crs  (and not just LTCG)  in purchasing ONE New house property in the span of 3 years. (That is Oct 23,2019 to Oct 23, 2022)

b)     Instead of purchasing a house Mr PQR can reinvest the amount in construction of any ONE house property to claim the exemption provided the construction gets over by Oct 23, 2023.

c)      In case Mr PQR reinvests only partially i.e. 1 cr the exemption reduces to 90 lakhs

 

Exemption=1.80Cr x 1 Cr / 2 Crs

= 90 lakhs

Balance amount of LTCG (1.80 Cr- 90 lakhs) will be taxable as per the applicable rates.

10) Case Study on Capital Gain on Sale of Property.

 

   a) Short Term Capital Gain

Case 1:Mr ABC bought a plot on April 10, 2020 for Rs 10 lakhs. He sold his plot on March 21, 2021 for Rs 21 lakhs.  He spent Rs 2 lakhs on stamp duty and brokerage.

Solution:  Since the plot is sold within 24 months from purchasing it, so its going to a short term capital gain.

Step 1 Determine Full Value Consideration 21,00,000
Step 2 Deduct these amounts:

Expenditure incurred in connection with this transfer        ————————————————————–2,00,000

Cost of Acquisition————————————10,00,000

 

 

 

12,00,000

Step 3 We will arrive at STCG                              9,00,000

 Taxability:  This STCG Rs 9,00,000 will be added to total income of the assessee. Mr ABC and it will be taxable as per the applicable slab rate.

b) Long Term Capital Gain.

Case 2: Mr ABC bought a plot in December 2004 for Rs 10 lakhs. He sold his plot on March 21, 2021, for Rs 41 lakhs.  He spent Rs 2 lakhs on stamp duty and brokerage.

Solution:  Since the plot is sold after 24 months from purchasing it, so it’s going to a long-term capital gain.

Let’s calculate the indexed cost of purchase before going further.

Indexed Cost of Acquisition     =                                  Actual cost of acquisition x CII of the year of transfer (2020-2021)
                         CII of the year in which asset is first held by the seller (2004-2005)
Indexed Cost of Acquisition     =                                                                       10,00,000 x 301
                                                                                 113

Indexed Cost of Acquisition                       =   26,63,717.

 

Step 1 Determine Full Value Consideration 41,00,000
Step 2 Deduct these amounts:

Expenditure incurred in connection with this transfer——————————————————————–2,00,000

Indexed  Cost of Acquisition                                           26,63,717

 

 

 

(28,63,717)

Step 3 Deduct the exemptions  u/s 54, 54EC, 54F, 54B                                –
Step 4 We will arrive at LTCG                         12,36,283

 

Taxability: This LTCG Rs 12,36,283 will be chargeable @20%. So here the tax liability will be Rs 2,47,257.

11) Case Study on Capital Gain Tax on Sale of Equity Shares.

  1. Short Term Capital Gain

Case 3: Mr XYZ made an investment of 300 equity Shares in October 2020 at the rate of Rs 100 per share. So he paid Rs 30000 to purchase the shares.  He sold these shares for Rs 150 per shares so his sales value is Rs 45000 in March 2021. The brokerage charges (0.5%) levied at the time of transfer of shares was Rs 225.

Solution:  The shares are sold within 12 months of purchase, so it is going to be short term capital gain.  

 

 

Step 1 Determine Full Value Consideration 45,000
Step 2 Deduct these amounts:

Expenditure incurred in connection with this transfer————————————————————————  225

Cost of Acquisition                                                                   30,000

 

 

 

30,225

Step 3 We will arrive at STCG                                14,775

Taxability: This  STCG Rs 14,775 will be taxable at @15%. So here the tax liability will be Rs 2,216.25.

 

  1. Long Term Capital Gain tax

Case 4a): Mr XYZ bought equity shares on March 10, 2016 for Rs 12,00,000. FMV of the shares was Rs 15,00,000 as on January 31, 2018. He sold the shares on May 6, 2020 for Rs 18,00,000.

Solution: The shares were there with the assessee for more than 12 months it’s going to be long-term capital gain. Since the purchase is done before January 31,2018 and sale is done after April 1, 2018, the Grandfathering Provision will be applicable here.

Whenever grandfathering provision is applicable one needs to determine the Cost of Acquisition by following criteria:

Cost of Acquisition (COA) will be higher of:

  1. Original COA (Rs 12,00,000)   and
  2. Lower of : a)  FMV as on 31.1.2018 (Rs 15,00,000) and  b) Sale price  (Rs 18,00,000)

Here the COA will be Rs 15,00,000.

Step 1 Determine Full Value Consideration 18,00,000
Step 2 Deduct these amounts:

Expenditure incurred in connection with this transfer

 

Cost of Acquisition                                                              15,00,000

 

 

 

15,00,000

Step 3 We will arrive at LTCG                              3,00,000

Taxability:  This LTCG will be taxable @ 10% over and above Rs 1 lakh. So here the tax liability will be Rs 20,000   {(3,00,000-1,00,000)@10%}.

 

 Case 4b) Mr ABC has purchased 24000 shares of a company on May 6, 2019 @ Rs 100 each. He sold these shares @ Rs 120 each on January 12, 2021. He paid brokerage @2% on this transaction.

Solution:  Since the shares were there with the assessee for more than 12 months, it’s going to be a long-term capital gain. The purchase and sales both happening after March 31, 2018 the grandfathering provision is not applicable here.

Step 1 Determine Full Value Consideration (24000*120) 28,80,000
Step 2 Deduct these amounts:

Expenditure incurred in connection with this transfer 28,80,000

@ 2%                                                                             57,600

Cost of Acquisition (2400*100)                                       24,00,000

 

 

 

24,57,600

Step 3 We will arrive at LTCG                              4,22,400

Taxability: This LTCG will be taxable @ 10% over and above Rs 1 lakh. So here the tax liability will be Rs   32,240. (4,22,400-1,00,000)@10%)

12) Case Study on Capital Gain tax on Debt Mutual Fund.

1.Short Term Capital Gain

Case 5: Mr XYZ invested Rs 50,000 in units of Debt Mutual Fund in October 2020. He sold these units for Rs 70,000 in March 2021. The brokerage charges (0.5%) levied at the time of transfer of Rs 350.

Solution:  The units are sold within a year of purchase so its going to be short term capital gains

Step 1 Determine Full Value Consideration 70,000
Step 2 Deduct these amounts:

Expenditure incurred in connection with this transfer              350

Cost of Acquisition                                                                   50,000

 

 

 

50,350

Step 3 We will arrive at STCG                                 19,650

Taxability: This short-term capital gain of Rs 19,650 will be added to the other income of the assessee and will be taxable as per slab rates applicable.

2. Long Term Capital Gain

Case 6:  Mr ABC invested Rs 1,00,000 in units of  Debt Mutual Fund in October 2016. He sold these units for Rs 1,25,000 in November 2020.

Solution: The units are sold after 3 years of purchase therefore its going to be long term capital gains.

Let’s calculate the indexed cost of purchase before going further.

Indexed Cost of Acquisition       =                                  The actual cost of acquisition x CII of the year of transfer (2020-2021)
                         CII of the year in which asset is first held by the seller (2016-2017)

 

Indexed Cost of Acquisition       =                                                                       1,00,000 x 301
                                                                                 264

               

                    Indexed Cost of Acquisition        =      1,14,015

 

Step 1 Determine Full Value Consideration 1,25,000
Step 2

Deduct these amounts:

Indexed  Cost of Acquisition                                           1,14,015

 

 

 

(1,14,015)

Step 3 We will arrive at LTCG                                 10,985

 

Taxability:  This LTCG Rs 10,985 will be chargeable @20%. Here the tax liability will be Rs 2,197.

If you are someone who file Income tax returns on your own, we recommended reviewing your Form 26 AS before filing tax returns or check  this guide of our’s before filing income tax returns on your own

 

Prepared by CA Sonal N Tharthare (from taxsane.com ) with the latest information available till April 29,2021.