Income Tax on Capital Gain
Capital gain
Capital Assets
Capital assets are any kind of property owned by an individual except the following:
- The stock in trade, consumables or raw materials which are held for use in business or profession.
- Personal belongings which are meant for personal use like clothes, furniture, etc. except Ornaments made of gold, silver, platinum or any other precious metal or precious stones.
- A piece of agricultural land located in a rural area.
Types of Capital Asset
Short term capital assets are those which are held for less than or equal to 36 months and Long term capital Assets are those held for more than 36 months.
However, in below cases, a reduced period of holding is considered.
- For Immovable property like land, building or house, the period of holding would be considered to be 24 months. This means that if you sell off an immovable property within 24 months of buying it, the property would be called a short term capital asset.
- Equity shares of a company listed on the Recognized stock exchange, securities listed on the Recognized stock exchange, UTI units, Equity oriented mutual fund units and zero coupon bonds holding period of 12 months is considered. If these assets are sold within 12 months of their purchase, they would be called short-term capital assets.
Types of capital gain
There are two type of capital gains. Short term capital gains are profits which you earn when you sell off short term capital assets and long-term capital gains are the profits which you earn when you sell of long term capital assets
Short term capital gains
Short term capital gains are added to your taxable income and then taxed at the slab rate under which your income qualifies. If, however, in the case of listed equity share or equity oriented mutual funds, where STT is paid, short term capital gains are taxed at the rate of 15%.
Calculation
Full value of consideration Money that seller has received or would receive in exchange for transferring his capital asset. | xxx |
Less: expenses incurred on transferring the asset Stamp paper charges, brokerage or commission expense | (xxx) |
Less: cost of acquisition Price at which you bought the capital asset. | (xxx) |
Less: cost of improvement Money spent on the capital asset to improve it after 1st April,2001. | (xxx) |
| Short term capital gain | xxx |
Long term capital gains
Long term capital gains are taxed at a flat rate of 20%. However, in the case of listed equity share or equity oriented mutual funds, STT is applicable, long term capital gains up to Rs. 1,00,000 will be exempt and more than that will be taxed at the rate of 10%.
Calculation
|
Full value of consideration Money that seller has received or would receive in exchange for transferring his capital asset. |
xxx |
|
Less: expenses incurred in transferring the asset Stamp paper charges, brokerage or commission expense |
(xxx) |
|
Less: indexed cost of acquisition* |
(xxx) |
|
Less: indexed cost of improvement* |
(xxx) |
|
Less: exemptions available under Sections 54, 54EC, 54B and 54F |
(xxx) |
|
Long term capital gain |
xxx |
*indexation of cost
Indexation is done to adjust the cost of capital asset for inflation or increase in price level over the years the capital asset is held by you. Since inflation decreases the value of money, indexation of the acquisition cost and improvement cost increases the amount of these costs thereby lowering the capital gain. Cost Inflation Index (CII) is used to account for the inflation incurred over the holding period.
Indexed cost = Actual cost * CII of the year in which asset is transferred / CII of the year in which asset was acquired/ cost incurred (whichever is later)
Financial year | Cost Inflation Index (CII) |
2001-02 | 100 |
2002-03 | 105 |
2003-04 | 109 |
2004-05 | 113 |
2005-06 | 117 |
2006-07 | 122 |
2007-08 | 129 |
2008-09 | 137 |
2009-10 | 148 |
2010-11 | 167 |
2011-12 | 184 |
2012-13 | 200 |
2013-14 | 220 |
2014-15 | 240 |
2015-16 | 254 |
2016-17 | 264 |
2017-18 | 272 |
2018-19 | 280 |
2019-20 | 289 |
2020-21 | 301 |
Deductions under section 54
Various reinvestment options are available to avoid / reduce the capital gain tax.
The capital gains to the extent of Rs 2 Crore on sale of house property can be invested in upto two residential house properties. The amount so invested in these two house property shall not attract any long term capital gains tax. The long term capital gain is presently required to be invested either in purchasing a residential house property in next two years or constructing a house in next 3 years or invest in bonds u/s 54EC within 6 months to make the capital gains tax free.
Individual can also claim exemption from Long term capital gain by investing in long term bonds redeemable after 5 years issued by NHAI, RECL or any other bond specified by Central Government.
We recommend contacting our tax experts to understand various ways to save taxes in detail and reduce your tax liability.