Capital Gains Tax : Types, Calculation & Exemptions in India

The tax levied on the profit or gain earned on selling capital assets is called capital gains tax. Depending on the holding period, capital gains tax can be Long term Capital Gains Tax (LTCG) or Short term Capital Gains Tax (STCG). LTCG is 10% for stocks and equity mutual funds and 20% with indexation for real estate, debt mutual funds and other assets. LTCG on equities/equity mutual fund does not get the benefit of indexation. STCG is levied as per your slab rate. The holding period for classifying tax as LTCG or STCG changes from asset to asset. LTCG applies to real estate for a holding period of more than 2 years, to debt funds for a holding period more than 3 years and to stocks/equity mutual funds for holding period of more than 1 year.

Capital Asset

Any asset such as immovable property, vehicles, leasehold earning, jewellery, machinery or intellectual property such as patents and trademarks is termed a capital asset. Capital assets include any direct rights, which in of Indian companies, includes the rights of management or ownership control as well as other holding rights.

Capital Gain

Capital gain is the net profit which an investor makes after selling any of his capital assets at a price that exceeds the original purchase price. The transfer of such capital asset should have had been done in the previous financial year in order to be eligible for taxation during the current year. The entire value of this sale is taxable under the income head termed as ‘Capital Gain’. This whole process is backed by three fundamental elements:

A capital asset such as property, gold etc.
The transfer of such capital asset
A profit earned as a result of this transfer.

However if there is any loss at the time of selling the capital assets, in the context of purchase price can result in capital loss, which would of course be tax exempt. Capital gains tax does not apply for inherited assets or assets acquired through gift or partition of HUF property.

Assets exempt from capital gains

Any stock held in trade (profits on this will be taxed as business income).
Consumable raw materials which are kept for the specific purpose of any business or as per profession (taxed under business income).
Any personal effects which are movable/effects kept for personal use.
Agricultural land which is not located within an 8 km radius of any municipality, Municipal Corporation, notified area board, any town committee / cantonment area board having a minimum residential population of 10,000 people.
National Defense Gold Bonds 6.5 % Gold Bonds or the Special Bearer/ Gold Deposit bonds under the Government Gold Deposit Scheme.

Type of Capital Gain

Long-Term Capital gain (LTCG): Capital gain is long term if the asset is held for greater than a specified period. This period is
2 years for real estate
1 year for stocks/equity mutual funds/listed debentures or govt securities/zero-coupon bonds/units of UTI and
3 years for debt funds/any other assets.
Short-Term Capital gain (STCG): The gain in any asset sold before the expiry of a defined period is termed short term capital gain. The holding periods for different assets are given above. Holding these assets for less than the periods mentioned will bring them under STCG.

Calculation of Capital Gains

For the ease of calculation of capital gain tax it is done as per the nature of capital gain.

Taxation on short-term capital gains– STCG is calculated by adding the capital gain to the total income of the taxpayer. Subsequently, income tax is applied as per the individual’s tax bracket.
Taxation on long-term capital gains – LTCG is levied at

20% for real estate, debt funds, other assets, after giving taxpayers the benefit of indexation
10% for stocks/equity mutual funds/listed bonds/zero coupon bonds/units of UTI

Indexation in Capital Gains

This concept takes into account the effect of inflation to reduce your tax liability. It is calculated using CII, an index maintained by the Income Tax Department. You can get the CII details here. Currently the cost inflation index for the running financial year 2018-19 is 280. For example assume that you buy a debt fund in 2013 for Rs 100 and sell it in 2018 for Rs 150. Since you have sold it after three years, the gain is long term and a tax of 20% with indexation will apply. The Cost Inflation Index (CII) in FY 13 was 200 and the CII in FY 18 was 272. As a result your purchase price for tax purposes will rise to (272/200)*100 = 136 and your taxable gain will be 150 – 136 = 14. The tax payable will be 20% of 14 = Rs 2.8. Hence even though you have made a gain of Rs 50, your actual tax is not 20% of Rs 50 or Rs 10 but rather only Rs 2.8 after applying indexation

Methodology for computing Capital Gains

1. Short-term capital gain tax = A- (B+C+D)

A= Sale value of the asset

B= cost of acquisition

C= cost of improvement

D= the cost of expenditure incurred totally and solely in the connection with a transfer

2.Long-term capital gain = A-(B+C+D), whereas,

A=Full value of consideration received or accruing

B=indexed cost of acquisition*

C= indexed cost of improvement**

D= cost of expenditure incurred wholly and exclusively in connection with such a transfer

*Indexed cost of acquisition = A X (B / C), wherein

A= Cost of acquisition

B=CII of the year of transfer

C= CII of the year of acquisition

**Indexed cost of improvement = A X (B / C), wherein,

A=cost of improvement

B=CII of the year of transfer

C= CII of year of year of improvement

Cost of transfer is the brokerage paid for managing the deal, cost of advertising plus legal expenses incurred etc.

Capital Gains Tax Exemptions

These exemptions mentioned below can be claimed either fully or partially. For example if purchase price is Rs 80 lakh and your sale proceeds are Rs 1 crore (hence gains of Rs 20 lakh) and you deposit Rs 50 lakh as per the below mentioned exemptions, half your capital gains (Rs 10 lakh) will be exempt. The other half (Rs 10 lakh) will be taxable.

Section 54: If the sale proceeds of a residential property are further utilized to buy another residential property, the capital gains on the sale proceeds are exempt. This is however subject to the following conditions

a)The purchase of property should be done either 1 year prior to selling the property or within two years of the sale.

b) In case of under construction property, the same should be done within maximum three years from the transfer date of the earlier property.

c)The newly acquired property cannot be further sold within 3 years of purchase or construction.

d) The newly acquired property should be located in India.

Section 54F: If you sell any other asset like agricultural land within 10 km of a city or valuable paintings, jewellery, debt funds etc, you can take the benefit of Section 54F. This section grants deduction for purchase of a house property from the proceeds of the sale of any capital asset. The following additional conditions apply:

a)The purchase of property should be done either 1 year prior to selling the property or within two years of the sale.

b) In case of under construction property, the same should be done within maximum 3 years from the transfer date of the earlier property.

c)The newly acquired property cannot be further sold within 3 years of purchase or construction.

d) The newly acquired property should be located in India.

e) The person should not have more than one residential property on the date of the transfer.

f) No other property is purchased within 1 year of the transfer or constructed within 3 years of the transfer

The investor can deposit the sale proceeds in a Capital Gains Account Scheme before the due date for filing returns in order to take the benefit of the above sections even if he has not bought/constructed another property. However he must buy/construct the new property within the time limits specified above and can pay for it by using the money deposited in the Capital Gains Account Scheme.

Section 54EC: Capital Gains Bonds issued by NHAI (National Highways Authority of India) and REC (Rural Electrification Corporation) are eligible for exemption from capital gains tax up to Rs 50 lakh. They have a tenure of 5 years and carry a fixed interest rate (currently 5.25%). The interest on these bonds is taxable. Only capital gains in real estate are eligible for this deduction. For example, if you buy an asset for Rs 10 lakh and sell it for Rs 20 lakh investing the entire Rs 20 lakh in NHAI/REC capital gains bonds, the said transaction would not attract capital gains tax.