Everything You Need To Know About Capital Gains Tax
This tutorial will teach you all there is to know about capital gains as well as the taxes that apply to them.
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What is capital gains tax and how does it work?
The government-determine tax on the profit from the sale of such an asset is known as capital gains tax. The obligation to pay capital gains tax occurs when a property and stock shares are sold for a profit.
The profit you make from such a transaction is known as capital gains, and the tax you pay on it is known as capital gains tax.
The capital gains tax burden does not arise until the sale is completed. This is due to the fact that capital gains tax is only applied to ‘realized gains.’
As a result, even though the value of your asset increases by a factor of ten, you will not have to pay capital gains tax on the increase if you do not sell it and ‘realize’ the profit.
What is the definition of a capital asset?
A capital asset is everything you own, such as bonds, stocks, or real estate. A capital gain or loss can come from the sale of a capital asset. While capital gains tax must be paid, losses can be used to minimize the amount of tax due.
The following are examples of capital assets:
- Any type of property is acceptable.
- Any securities that held by a FII own (foreign institutional investor).
- Paintings, drawings, sculptures, archaeological collections, or other piece of art, as well as expensive stones and jewellery made of silver, gold, platinum, or any other valuable metal.
What isn’t considered a capital asset?
Under Indian law, the following assets are not consider capital assets:
- Consumable stores, raw commodities held for the purpose of a business or profession are all examples of stock-in-trade.
- Personal property held for personal use and for any family member who is a dependent.
- Gold bonds with certain terms.
- The Gold Monetization Scheme issued deposit certificates in 2015.
- Bonds with a special bearer.
- Agricultural land in India that is not in the following locations:
(a) A municipality, cantonment board, town area committee, or notified area committee with a population of at least 10,000 people is under its control.
(b) Within the following aerial distances from any municipality’s or cantonment board’s local limits:
- The population of the area if is more than 10,000 but not more than 1 lakh, the distance should not exceed 2 kilometres.
- If the population of the area is more than 1 lakh but not more than 10 lakhs, the distance should not exceed 6 kilometres.
- If the population of the area is greater than 10 lakhs, the distance should not exceed 8 kilometres.
Capital assets are divided into several categories.
Short-term capital asset: A short-term capital asset is one that is held for less than 36 months (three years). However, starting FY 2017-18, a time frame of up to 24 months (2 years) for immovable properties has been considered short-term.
Exception: If the date of transference is after July 10, 2014, some capital assets are deemed short-term capital assets even if they are held for one year or less. These are some of them:
- A public company’s equity or preference shares.
- Securities that have been listed on an exchange.
- Units of UTI
- Mutual fund units that are invested in stocks.
Long-term capital asset: A long-term capital asset is one that has been kept for at least 36 months (three years). An immovable property owned for more than 24 months (2 years) is now considered a long-term capital asset, as of FY 2017-18.
Types of Capital Gains Tax
There are two types of capital gains taxes:
- Capital gains tax on short-term gains
- The Capital gains tax on long-term gains
Capital gains tax on short-term gains
The profit earned on the sale of a capital asset held for a short period is known as a short-term capital gain, and it is subject to short-term capital gains tax.
The Capital gains tax on long-term gains
The profit earn on the sale of a capital asset kept for a longer period is referred to as long-term capital gain, and long-term capital gains tax is applied.
Tax rate on short-term capital gains
|
Sale type |
Tax rate
|
|
When the tax is based on securities |
15% |
|
When the tax is not based on securities |
The income is added in your total income for the financial year and taxed according to your tax slab |
Long term capital gains tax rate
|
Item |
Tax rate
|
|
Sale of equity shares |
10% of the amount which is more than Rs 1 lakh |
|
Any other sale |
20% |
Inheritance property is subject to capital gains tax.
Under the current income tax rules, you are not obligate to pay any capital gains tax whether you have inherited a property in India. Capital gains tax is not apply to assets acquired through a gift deed or a will. However, this is only true provided you do not sell the inherited asset. If you sell your home, you’ll have to deal with capital gains tax.
The advantage of indexation
Despite the fact that the profit produce from the sale of real estate is taxed, the owner might greatly reduce his or her tax obligation by adopting indexation. Indexation is a method of adjusting the cost of acquiring an asset against inflation. It is used on long-term assets such as property & debt funds.
Indexation is the practice of adjusting the cost of acquiring an asset to account for inflationary increases in the asset’s value over time. The indexed cost of purchase is calculated using the government’s cost inflation index (CII). The indexed cost of acquisition is determine using the following formula:
- The year in which the asset was purchased or improve.
- The year in which the asset was sold or transferred.
- The cost inflation index for the asset’s acquisition/improvement year.
- The rising cost index during the year in which the asset was transferred.
What is the formula for calculating short-term capital gains tax?
To calculate the short-term capital gains on the sale of an asset, do the following:
- Calculate the total gain.
- Subtract the expenses spent solely as a result of the transaction.
What is the formula for calculating long-term capital gains tax?
To calculate long-term capital gains on the sale of an asset, do the following:
- Calculate the total gain.
- Subtract the expenses spent solely as a result of the transaction.
For example, in the case of a property sale, expenses could include document work, brokerage fees, stamp paper costs, and so on.
- Utilize the advantages of indexation.
- Apply the tax deductions provided by Sections 54, 54EC, 54F, and 54B of the Internal Revenue Code.
Example of calculating short-term capital gains
Assume you sold a house for a net profit of Rs 20 lakhs within two years of purchasing it. Assume you’ve already removed the costs of making the deal, such as the brokerage fee and travel expenditures.
The ‘income’ of Rs 20 lakhs will be add to your overall income for the year and taxed according to your tax bracket. Your tax rate will be 30% because this is more than Rs 15 lakhs. As a result, the net tax on this income would be Rs 6 lakhs.
Example of calculating long-term capital gains
Assume a house was purchased for Rs 20 lakhs in FY 1992. For that year, the CII is 199.
Assume this property was sold in FY 2009 for Rs 80 lakhs. For that year, the CII is 582.
When we use the indexed cost formula, we get:
(CII for the sale year/CII for the purchasing year) x actual cost
= (582/199) x Rs 20 lakhs = Rs 58.49 lakhs
After applying the indexation benefit, the seller will have to pay long-term capital gain tax on the difference between Rs 80 lakhs & Rs 58.49 lakhs. This difference, referred to as the indexed long-term capital gain, will be Rs 21.51 lakhs. As a result, his LTCG tax liability will be Rs 21.51 lakhs, or 20%. As previously stated, the seller can choose to lower his or her responsibility by taking advantage of various deductions or exclusions.
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