Income under Capital gains

What are Capital Gains?

Capital gains are the profits arising from the sale of a ‘capital asset’. Capital gain is charged to tax in the year in which the transfer of the capital asset takes place.

What are Capital Assets?

Capital assets are the property of any kind whether or not connected with business or profession. Some of the examples could be: land, buildings, house property, vehicles, patents, trademarks, leasehold rights, machinery, jewellery etc.

The income tax act specifically excludes the following assets:

  • Any stock-in-trade or consumables held for business or profession
  • Personal goods such as clothes, furniture etc. held for personal use. However jewellery, drawings, paintings or any work of art are capital assets
  • Agricultural land in rural area
  • Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government.
  • 6½ per cent Gold Bonds, 1977, or 7 per cent Gold Bonds, 1980, or National Defence Gold Bonds, 1980, issued by the Central Government;
  • Special Bearer Bonds, 1991, issued by the Central Government;

What are long term and short term Capital Assets?

When a capital asset is held for not more than 36 months or less it is considered as a short-tem capital asset. And if the asset is held for more than 36 months is a long-term capital asset

There are a few assets which are listed as short-term capital assets, even if they are held for 12 months or less. When the below listed assets are held for a period of more than 12 months, they are considered long-term capital asset:

  • Equity or preference shares in a company listed on a recognized stock exchange in India.
  • Units of UTI, whether quoted or not
  • Units of equity oriented mutual fund, whether quoted or not
  • Securities (like debentures, bonds, Govt securities etc) listed on a recognized stock exchange in India
  • Zero coupon bonds, whether quoted or not.

Tax on short term and long term capital gains

  • Tax on long-term capital gain: Long-term capital gain is taxable at 20% + surcharge and education cess.
  • Tax on short-term capital gain when securities transaction tax is not applicable: If securities transaction tax is not applicable, short-term capital gain is added to your income tax return and the taxpayer is taxed in accordance with the applicable income tax slab
  • Tax on short-term capital gain if securities transaction tax is applicable: If securities transaction tax is applicable, short-term capital gain is taxable at the rate of 15% +surcharge and education cess.

Calculating tax on capital gain

Steps to calculate tax on short term capital gain

  • Begin with full value of consideration: This is the sale proceeds of the asset sold
  • Reduce full value of consideration with the following:
  • Cost of acquisition: is the amount you have spent to acquire the capital asset
  • Cost of improvement: is the amount incurred to make improvements on the asset. Improvements made prior to April 01 1981 are not taken into consideration.
  • Expenses incurred on making the sale: this includes any expense made to make the sale happen
  • Further subtract the exemptions provided under section 54, 54B, 54EC, 54F etc. Check what these exemptions are here
  • The resultant amount is the short term capital gain

Steps to calculate tax on short term capital gain

  • Begin with full value of consideration: This is the sale proceeds of the asset sold
  • Reduce full value of consideration with the following:
  • Indexed Cost of acquisition: is the amount you have spent to acquire the capital asset indexed with cost inflation index. Use Calculator to compute indexed value
  • Indexed Cost of improvement: is the amount incurred to make improvements on the asset indexed with cost inflation index. Improvements made prior to April 01 1981 are not taken into consideration. Use Calculator to compute indexed value
  • Expenses incurred on making the sale: this includes any expense made to make the sale happen, this is not indexed.
  • Further subtract the exemptions provided under section 54, 54B, 54EC, 54F etc.
  • The resultant amount is the long term capital gain

 

Exemptions from long term capital gains

Section 54: Exemption on sale of house property by purchasing another house property

Quantum of exemption

Long term capital gain from sale of house property shall be exempt to the extent it is invested in purchase or construction of new house.

Conditions

  • This exemption is available only to a individual or HUF
  • New house property can be purchased within 1 year or 2 years after the date of sale of house property
  • New house can be constructed within a period of 3 years from the date of sale of house property
  • Purchased or constructed house property cannot be sold up to a period of 3 years from date of acquisition

On violation of the condition i.e. if new house is sold within 3 year, then for the purpose of computing capital gain on transfer, the cost of acquisition would be reduced by the amount of capital gain exempted under this section and this will always be a short term capital gain

Section 54 F: Exemption on sale of any asset by purchasing a house property

Quantum of exemption

The amount of exemption depends upon the fact that what proportion of sale consideration is invested in buying the house property.

If entire amount of sale consideration is invested, entire amount of capital gain is exempt. Otherwise the amount of exempted capital gain would be calculated as follows:

Exempted amount 

= Capital gain x (Amount invested in house property / Net Proceeds from sale of capital asset)

Conditions

  • This exemption is available only to a individual or HUF
  • New house property can be purchased within 1 year or 2 years after the date of sale of house property
  • New house can be constructed within a period of 3 years from the date of sale of house property
  • Purchased or constructed house property cannot be sold up to a period of 3 years from date of acquisition
  • You should not own more than 1 residential house property on the date of transfer of such asset exclusive of the one he has bought for claiming exemption under this section

Section 54 EC: Exemption on sale of any asset by purchasing specified bonds

Quantum of exemption

Capital gain would be exempt to the extent it is invested in specified bonds which are usually issued by REC and NHAI subject to a maximum of 50 lakhs

Conditions

  • Investment in bonds should be made within a period of 6 months after the date of transfer
  • Minimum lock in period up to which amount should remain invested in the specified bonds is 3 years

In case the investment in specified asset is transferred or converted into money within 3 years, the amount of capital gain exempted under this section would be treated as long term capital gain

Set off and carry forward rules

Adjustments within the financial year (Set off)

  • Long term capital loss can be adjusted only against other long term capital gain
  • Short term capital loss can be adjusted against both short term and long term capital gain
  • Loss under this head cannot be adjusted against any other income head.

Adjustments in the coming financial years (Carry- forward)

Un-adjusted long term capital loss can be carried forward for 8 subsequent years and adjusted only against long term capital gain in future years.

Un-adjusted short term capital loss can be carried forward for 8 subsequent years and adjusted against long term as well as short term capital gain in future years.

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