Capital Gains Tax in India

Budget 2019 Proposals: Benefit of rollover of Capital gains tax is to be increased from investment in one residential house to two residential houses. This for the taxpayers having capital gains up to Rs. 2 Crores under section 54 and can exercised once in a lifetime.


1. What is a Capital Gain?

Profit or gains deriving from the transfer* of a ‘capital asset’ is a capital gain. This gain or profit shall be chargeable to income tax under the head capital gains in the year in which the capital asset was transferred. Similarly, if there is a decrease in the value of an asset with respect to its purchase price, it will be considered a Capital Loss.

In a case where the asset is inherited and sold by the person who inherits it, capital gains tax will be applicable. Assets received as gifts are exempted from the Income Tax Act.


* Definition of Transfer under section 2(47) – Transfer” includes-

 

1. Sale, exchange or relinquishment of a Capital asset; or

2. Extinguishment of rights to use a Capital Asset; or

3. Compulsory acquisition of Capital Asset by the government; or

4. Conversion of capital asset into stock in trade of business; or

5. Maturity or redemption of a zero coupon bond. 

6. Transaction of allowing the possession of any immovable property to be taken or retained in part performance of a contract as referred under section 53A of the Transfer of Property Act, 1882.


2. What is a Capital Asset?


As per section 2(14) of Income Tax Act, 1961, “Capital Asset” essentially means-

A)   Any property that is held by the taxpayer irrespective of the usage of that property towards his business or profession.

B)   Securities held by an Foreign Institutional investor who has invested in such a security in accordance with the regulations made under SEBI.

 

The Following assets are excluded from the definition of “capital assets’:-

i. Any stock-in-trade, consumables and raw materials used in the daily course of your business or profession

ii. Personal items that are movable such as clothes that are worn or furniture held by you are not considered capital assets. However, other items owned by you which are movable but yet considered a capital asset are:

a. Jewellery

b. Archeological collections

c. Drawings, paintings, sculptures or any other type of work of art

iii. Agricultural land in rural area India

iv. 6½% gold bonds (1977) or 7% gold bonds (1980) or national defence gold bonds (1980) issued by the central government

v. Special bearer bonds (1991)

vi. Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government



3. Types of Capital Assets:


Short-term capital asset is any capital asset that is held for not more than 36 months or less. Any gain arising from this asset is termed as Short-term capital gain.

Long-term capital asset is any asset that is held for more than 36 months. Any gain arising from this asset is termed as Long-term capital gain.

 

*In case of securities, the time period shall be taken as 12 months instead of 36 months.

From AY 2018-19 onwards – The requirement of 36 months has been reduced to 24 months in the case of immovable property such as land, building, and house property.

 

To illustrate - If you sell your land after holding it for 24 months or more, any income deriving will be treated as long-term capital gain provided that property is sold after 31st March, 2017.

The same will not apply to movable property such as jewellery, paintings or sculptures etc. These need to be held for a period of 36 months to be categorized as a long term holdings.


Some assets ‘transferred’ after 10th July, 2014 (irrespective of their purchase date) and held for a period less than 12 months thereafter will be considered short term holdings. 

These assets are:

  • Equity or preference shares of a listed company. Such company should be listed on a recognized stock exchange in India such as Bombay Stock Exchange (BSE) or National Stock Exchange (NSE)
  • Units of Unit Trust of India, whether listed on an exchange or not
  • Other Securities such as bonds, debentures etc which are also listed on a well-known stock exchange in India
  • Equity oriented mutual fund units, whether listed on an exchange or not
  • Zero coupon bonds (ZCBs), whether listed on an exchange or not

Where the above listed assets are held for a period of more than 12 months, they are considered long-term capital asset.

 

For Example if Mr. Rakesh Fernandes buys equity shares of Reliance Industries and on 21/08/1992 and transfers it to his son Mr. Rohan Fernandes on 21/08/2018, Mr. Rohan must hold it for a period of atleast 12 months (i.e. till 21/08/2019) for it to be considered long term. If he cannot hold it for a period of 12 months and sells it in the interim, short term capital gains rules will apply.

 

4. Difference between Capital Asset and Current Asset?

  • Capital Assets are long-term assets that an individual expects to hold more than one year and that cannot be readily convertible into cash.
  • Current assets are assets which can be readily convertible into cash within one year, it includes cash, accounts receivable etc.


5. Method of Computation of Long Term Capital Gain (LTCG)


Particulars

Value (Rs)

Value (Rs)

Sale consideration received or accruing as a result of transfer of capital asset



XXX

Less: Indexed cost of acquisition of asset (COA)

(XXX)


Less: Indexed cost of improvement to the asset (COI)

(XXX)


Less: expenditure   incurred in connection with transfer or Cost of Transfer

(XXX)


Long-term capital gain 


XXX


Method of Computation of Short Term Capital Gain (STCG)


Particulars

Value (Rs)

Value (Rs)

Sale consideration received or accruing as a result of transfer of capital asset



XXX

Less: Cost of acquisition of asset (COA)

(XXX)


Less: Cost of improvement to asset (COI)

(XXX)


Less: Cost of transfer

(XXX)


Short-term capital gain 


XXX


While computing Long Term Capital Gains (LTCG):

(a)  “ Indexed Cost of Acquisition” shall be taken instead of “Cost of Acquisition” and

(b)  “Indexed Cost of improvement” shall be taken instead of “ Cost of Improvement”.

 

Here: “ Indexed Cost of Acquisition” means:

Cost of Acquisition   X    Cost Inflation Index (CII) for the year in which asset is transferred

                                      Cost Inflation Index (CII) for the 1st year in which asset was held 

                                      by the assessee or for the year beginning on 1/4/1981 

                                      whichever is later.(CII of the Year of Acquisition)


Here: “ Indexed Cost of Improvement” means:

Cost of Acquisition   X    Cost Inflation Index (CII) for the year in which asset is transferred

                                      Cost Inflation Index (CII) for the year in which improvement of asset took place     


Here: “Cost of Improvement” means the Capital Expenditure incurred on the value addition of a capital asset.


6. NOTIFIED COST INFLATION INDEX UNDER SECTION 48

Cost Inflation Index (CII) is an indexation declared by the government every year in respect of calculating capital gains on long-term assets. New index will be notified soon.


Financial Year

CII

Before 1/4/1981

100

1981-82

100

1982-83

109

1983-84

116

1984-85

125

1985-86

133

1986-87

140

1987-88

150

1988-89

161

1989-90

172

1990-91

182

1991-92

199

1992-93

223

1993-94

244

1994-95

259

1995-96

281

1996-97

305

1997-98

331

1998-99

351

1999-00

389

2000-01

406

2001-02

426

2002-03

447

2003-04

463

2004-05

480

2005-06

497

2006-07

519

2007-08

551

2008-09

582

2009-10

632

2010-11

711

2011-12

785

2012-13

852

2013-14

939

2014-15

1024

2015-16

1081

2016-17

1125


7. Tax on Capital Gains 


The two types are tax on short-term capital gain or tax on long-term capital gain.

 

(1) Tax on long-term capital gain: As per Section 112 of Income Tax Act,

  • Long-term capital gain (after indexation) is taxable at 20% + surcharge and education cess.
  • Long-term capital gain (without indexation) is taxable at 10% + surcharge and education cess.

 

Note: As per Union Budget 2018, long-term capital gains on the sale of listed securities exceeding Rs.1,00,000 will be taxed at the rate of 10%. 

 

(2) Tax on short-term capital gain:

  • If securities transaction tax is not applicable, the short-term capital gain is added to your income tax return and the taxpayer is taxed at the normal rates applicable to the assessee.

  • If securities transaction tax is applicable (Section 111A), the short-term capital gain is taxable at the rate of 15% + surcharge and education cess.

 

Tax on Equity and Debt Mutual Funds


Treatment of Sale of Debt and Equity 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

Tax at slab rates of the individual

20% with indexation

Tax at slab rates of the individual

10% without indexation or 20% with indexation whichever is lower

Equity Funds

15%

Nil

15%

Nil


Changes in Tax Rules for Debt Mutual Funds 


Debt mutual funds, which are held for more than 36 months, qualify as a Long-term capital asset. This change has been in effect from last year’s Budget, which means that investors would have to remain invested in debt mutual funds for at least three years to take the benefit of long-term capital gains tax. In case it is redeemed within three years, the capital gains will be added to the income and will be taxed as per tax slab applicable.       

NOTE: Deductions under chapter VI-A ( Section 80C-80U) shall not allowed to be reduced from LTCG Income referred to in section 112, STCG Income referred to in section 111A and casual income.