Taxation Of Capital Gains

Capital gain is profits and gains that arise from transfer of different types of capital assets. We purchase or acquire assets for the purpose of investment or for gains or for any other reasons. Whatever the reason maybe when we transfer capital assets in cases other than regular transactions in ordinary course of business, the profits made shall be taxable as income under the head capital gains.

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What are capital assets?

Capital assets are any property, securities and any other assets such as trademarks, patents, jewellery, vehicles, paintings, artistic works etc. Capital assets are defined as all assets other than the following:

Any stock, consumables or raw material, held for the purpose of business or profession
Personal goods such as clothes and furniture held for personal use excluding jewellery, drawings, paintings, sculptures, archaeological collections or any other work of art.
Rural agricultural land in India
6½% gold bonds (1977) or 7% gold bonds (1980) or National Defence gold bonds (1980) issued by the central government
Special bearer bonds (1991)
Gold deposit bond issued under the gold deposit scheme (1999) or deposit certificates issued under the Gold Monetisation Scheme, 2015

Nature Of Capital Assets

The different capital assets are classified based on their period of holding as follows:

Capital asset	Period of holding	classification
1. Securities listed on recognised stock exchange 2. Units of UTI/equity Mutual funds 3. Zero coupon bonds	> 1 year ——————– Up to 1 year	Long term capital asset ———————— Short term capital asset
1. Unlisted shares 2. Immovable property	> 2 years —————– Up to 2 years	Long term capital asset ——————— Short term capital asset
Any other assets	> 3 years —————– Up to 3 years	Long term capital asset —————— Short term capital asset

Tax Rates

The tax rates on transfer of long term capital asset and short term capital asset are different. The tax rates for capital gains are as follows:

Long term capital gains

Capital asset	Tax rate
Equity shares/ Units of equity oriented mutual funds	10% on capital gain exceeding Rs. 1 lakh
Any other assets	20%

Short term capital gains

Capital asset	Tax rate
Equity shares/ Units of equity oriented mutual funds	15%
Any other assets	Taxpayer’s slab rates

Indexation benefit

For an asset that has been held for a long time, it would not be appropriate to determine gains by merely reducing purchase price from sale price without giving any effect to the inflation. Hence, the concept of indexing the purchase price has been brought in. Indexation means recalculation of asset purchase price after adjusting the inflation index. This way, the indexed purchase price can be reduced from sale price to determine gains. So, indexation applies only to assets held for long-term.

Computing Capital Gain

The capital gain on transfer of an asset is calculated in the following manner:

Particulars	Amount
Full value consideration	xxx
Less: Expenses incurred exclusively for such transfer	(xx)
Net consideration	xxx
Less: Cost of acquisition (COA)/ Indexed COA for LTCA	(xxx)
Less: Cost of improvement (COI)/Indexed COI for LTCA	(xxx)
Capital gain/ Capital loss	xxx / (xxx)

Exemptions

There are certain exemption benefits given under Income tax Act subject to certain conditions. Claiming these exemptions helps the taxpayer to save taxes. Exemption under capital gains is limited to Rs. 10 crores (Limit for exemption under sec 54 to sec 54F). Some major exemptions are as follows:

1. Exemption on Sale of House Property on Purchase of Another House Property (sec 54)

The exemption under Section 54 is available when the capital gains from the sale of house property are reinvested into buying or constructing two another house properties. The exemption on two house properties will be allowed once in the lifetime of a taxpayer, provided the capital gains do not exceed Rs. 2 crores.

The new property can be purchased either 1 year before the sale or 2 years after the sale of the property.
The gains can also be invested in the construction of a property, but construction must be completed within three years from the date of sale.
Lock-in period is 3 years (exemption is withdrawn if property is sold within 3 years of purchase/ completion)

2. Exemption on capital gains on sale of any asset other than a house property (sec 54F)

The exemption under Section 54F is available when there are capital gains from the sale of a long-term asset other than a house property. You must invest the entire sale consideration and not only capital gain to buy a new residential house property to claim this exemption.
If the entire sale proceeds are invested towards the new house, the entire capital gain will be exempt from taxes if you meet the above-said conditions. However, if you invest a portion of the sale proceeds, the capital gains exemption will be in the proportion of the invested amount to the sale price. [LTCG exemption = Capital gains x (Cost of new house / Net consideration)].

The new property can be purchased either 1 year before the sale or 2 years after the sale of the property.
The gains can also be invested in the construction of a property, but construction must be completed within three years from the date of sale.
Lock-in period is 3 years (exemption is withdrawn if property is sold within 3 years of purchase/ completion)

3. Exemption on Sale of House Property on Reinvesting in specific bonds (sec 54EC)

The exemption is available under Section 54EC when capital gains from sale of the first property are reinvested into specific bonds i.e., bonds issued by National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC) up to Rs. 50 lakhs.

Lock-in period is 5 years from the date of sale.
The taxpayer has time limit of 6 months to invest the capital gain in these bonds. But to be able to claim this exemption, you will have to invest before the tax filing deadline.