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Income from Capital Gains

Simply put, any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain. This gain or profit is considered as income and hence charged to tax in the year in which the transfer of the capital asset takes place. This is called capital gains tax, which can be short-term or long-term. Capital gains are not applicable when an asset is inherited because there is no sale, only a transfer. However, if this asset is sold by the person who inherits it, capital gains tax will be applicable. The Income Tax Act has specifically exempted assets received as gifts by way of an inheritance or will.

Here are some examples of capital assets: land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewellery. This includes having rights in or in relation to an Indian company. It also includes rights of management or control or any other legal right. The following are not considered capital asset:

  1. Any stock, consumables or raw material, held for the purpose of business or profession
  2. Personal goods such as clothes and furniture held for personal use
  3. Agricultural land in rural India
  4. 6½% gold bonds (1977) or 7% gold bonds (1980) or national defence gold bonds (1980) issued by the central government
  5. Special bearer bonds (1991)
  6. Gold deposit bond issued under the gold deposit scheme (1999) or deposit certificates issued under the Gold Monetisation Scheme, 2015

Definition of rural area (from AY 2014-15) – Any area which is outside the jurisdiction of a municipality or cantonment board, having a population of 10,000 or more is considered a rural area. Also, it should not fall within a distance (to be measured aerially) given below – (population is as per the last census).

Distance

Population

2 kms from local limit of municipality or cantonment board If the population of the municipality/cantonment board is more than 10,000 but not more than 1 lakh
6 kms from local limit of municipality or cantonment board If the population of the municipality/cantonment board is more than 1 lakh but not more than 10 lakh
8 kms from local limit of municipality or cantonment board If the population of the municipality/cantonment board is more than 10 lakh

Types of Capital Assets

Short-term capital asset An asset which is held for a period of 36 months or less is a short-term capital asset. The criteria of 36 months have been reduced to 24 months in the case of immovable property being land, building, and house property, from FY 2017-18.

For instance, if you sell house property after holding it for a period of 24 months, any income arising will be treated as long-term capital gain provided that property is sold after 31st March 2017.

Long-term capital asset An asset that is held for more than 36 months is a long-term capital asset. The reduced period of the aforementioned 24 months is not applicable to movable property such as jewellery, debt-oriented mutual funds etc. They will be classified as a long-term capital asset if held for more than 36 months as earlier.

Some assets are considered short-term capital assets when these are held for 12 months or less. This rule is applicable if the date of transfer is after 10th July 2014 (irrespective of what the date of purchase is). The assets are:

  1. Equity or preference shares in a company listed on a recognized stock exchange in India
  2. Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India
  3. Units of UTI, whether quoted or not
  4. Units of equity oriented mutual fund, whether quoted or not
  5. Zero coupon bonds, whether quoted or not

When the above-listed assets are held for a period of more than 12 months, they are considered as long-term capital asset. In case an asset is acquired by gift, will, succession or inheritance, the period for which the asset was held by the previous owner is also included when determining whether it’s a short term or a long-term capital asset. In the case of bonus shares or rights shares, the period of holding is counted from the date of allotment of bonus shares or rights shares respectively.

Tax on Short-Term and Long-Term Capital Gains

Tax on long-term capital gain: The Long-term capital gain is taxable at 20%.

Tax on short-term capital gain when securities transaction tax is not applicable: If securities transaction tax is not applicable, the short-term capital gain is added to your income tax return and the taxpayer is taxed according to his income tax slab.

Tax on short-term capital gain if securities transaction tax is applicable: If securities transaction tax is applicable, the short-term capital gain is taxable at the rate of 15%.

Tax on Equity and Debt Mutual Funds

Gains made on the sale of debt funds and equity funds are treated differently. Funds that invest heavily in equities, usually exceeding 65% of their total portfolio, is called an equity fund.

Funds Effective 11 July 2014 On or before 10 July 2014
Short-Term Gains Long-Term Gains Short-Term Gains Long-Term Gains
Debt Funds At tax slab rates of the individual At 20% with indexation At tax slab rates of the individual 10% without indexation or 20% with indexation whichever is lower
Equity Funds 15% Nil 15% Nil

Change in Tax Rules for Debt Mutual Funds

Debt mutual funds have to be held for more than 36 months to qualify as a long-term capital asset. It means that investors would have to remain invested in these funds for at least three years to take the benefit of long-term capital gains tax. If redeemed within three years, the capital gains will be added to one’s income and will be taxed as per one’s income tax slab.

Calculating Capital Gains

Capital gains are calculated differently for assets held for a longer period and for those held over a shorter period.

Full value consideration The consideration received or to be received by the seller as a result of transfer of his capital assets. Capital gains are chargeable to tax in the year of transfer, even if no consideration has been received.

Cost of acquisition The value for which the capital asset was acquired by the seller.

Cost of improvement Expenses of a capital nature incurred in making any additions or alterations to the capital asset by the seller. Note that improvements made before April 1, 2001, is never taken into consideration.

How to Calculate Short-Term Capital Gains?

  1. Start with the full value of consideration
  2. Deduct the following:
    • Expenditure incurred wholly and exclusively in connection with such transfer
    • Cost of acquisition
    • Cost of improvement
  3. This amount is a short-term capital gain

Short term capital gain = Full value consideration Less expenses incurred exclusively for such transfer Less cost of acquisition Less cost of improvement.

How to Calculate Long-Term Capital Gains?

  1. Start with the full value of consideration
  2. Deduct the following:
    • Expenditure incurred wholly and exclusively in connection with such transfer
    • Indexed cost of acquisition
    • Indexed cost of improvement
  3. From this resulting number, deduct exemptions provided under sections 54, 54EC, 54F, and 54B
  4. This amount is a long-term capital gain

Long-term capital gain= Full value consideration

Less : Expenses incurred exclusively for such transfer

Less: Indexed cost of acquisition

Less: Indexed cost of improvement Less:expenses that can be deducted from full value for consideration*

(*Expenses from sale proceeds from a capital asset, that wholly and directly relate to the sale or transfer of the capital asset are allowed to be deducted. These are the expenses which are necessary for the transfer to take place.)

As per Budget 2018, long term capital gains on the sale of equity shares/ units of equity oriented fund, realised after 31st March 2018, will remain exempt up to Rs. 1 lakh per annum. Moreover, tax at @ 10% will be levied only on LTCG on shares/units of equity oriented fund exceeding Rs 1 lakh in one financial year without the benefit of indexation.

In the case of sale of house property, these expenses are deductible from the total sale price:

  1. Brokerage or commission paid for securing a purchaser
  2. Cost of stamp papers
  3. Travelling expenses in connection with the transfer – these may be incurred after the transfer has been affected.
  4. Where property has been inherited, expenditure incurred with respect to procedures associated with the will and inheritance, obtaining succession certificate, costs of the executor, may also be allowed in some cases.

In the case of sale of shares, you may be allowed to deduct these expenses:

  1. Broker’s commission related to the shares sold
  2. STT or securities transaction tax is not allowed as a deductible expense

Where jewellery is sold, and a broker’s services were involved in securing a buyer, the cost of these services can be deducted. Note that expenses deducted from the sale price of assets for calculating capital gains are not allowed as a deduction under any other head of the income tax return, and these can be claimed only once.

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