Gains, which arise from the transfer of capital assets, are subject to tax under the Income-tax Act. If one sells an asset such as bonds, shares, mutual fund units, property etc, one must pay tax on the profit earned from it. This profit is called Capital Gains. The tax paid on this amount of capital gains is called Capital Gains Tax. Conversely, if you make a loss on sale of assets, you incur a Capital Loss. This post explains about the Capital Gains, type of assets, time of holding assets, Cost of acquisition, Cost of improvements, Expenditure incurred exclusively in connection with the transfer. Exemptions allowed under the income Tax Act, Capital Loss.
Table of Contents
Income Tax and Capital Gains
For the purpose of Income Tax, Under Section 14 income is classified under the following heads:
- Income from house property.
- Profits and gains of business or profession.
- Capital gains.
- Income from other sources.
Our post Income tax overview deals in detail on calculation of Income tax.
Type of Assets
Capital asset means property of any kind held by an assessee whether or not connected with his business or profession. Assets which are considered for computation of capital gains can be classified as:
- Debt Mutual Fund
- Equity Mutual Funds with Securities Transaction Tax (STT) paid
- Stocks with Securities Transaction Tax (STT) paid
- Fixed Maturity Plan(FMP)
- Real Estate, Gold etc.
Securities Transaction Tax: Securities Transaction Tax (STT) has been applied on all stock market transactions since October 2004 but does not apply to off-market transactions and company buybacks.As per Section 10(38) of Income Tax Act, 1961 long term capital gains on shares or securities or mutual funds on which STT has been deducted and paid, no tax is payable.
Classification of Mutual Funds: The Mutual Funds where equity holding is more than 65% of the total portfolio will be categorized as Equity Funds. Other Mutual Funds come under Debt category Examples:
- Fund of Funds (mutual funds which invests in other funds)
- International funds (funds which have more than 35% exposure to international equities)
Exchange Traded Funds (ETF) ETF will be treated as equity or non equity fund depending upon the underlying security. If it invests in domestic equity it will be equity fund, otherwise non equity.
Capital Assets does not include the following:
- Stock in trade, consumable stores or raw materials held for the purpose of business or profession.
- Personal effects, being moveable property (excluding Jewellery, archaeological collections, drawings, paintings, sculptures or any other work of art) held for personal use.
- Agricultural land, except land situated within or in area upto 8 kms, from a municipality, municipal corporation, notified area committee, town committee or a cantonment board with population of at least 10,000.
- Six and half percent Gold Bonds, National Defence Gold Bonds and Special Bearer Bonds.
- Gold Deposit Bonds under Gold Deposit Scheme, 1999 notified by the Central Govt.
Transfer of Asset
If you carefully look at the definition of Capital Gains it says Gains, which arise from the transfer of capital assets, are subject to tax under the Income-tax Act. The word transfer has been given a very wide definition but in simple terms transfer includes
- Sale of asset
- Exchange of asset
- Relinquishment of any right in the asset
- Extinguishment of any right in the asset
- Compulsory acquisition of an asset under the law
For ex: if an insured asset such as property is destroyed and insurance compensation is received, no capital gains is leviable as there is no transfer of asset or right of asset to insurance company.
Certain transactions are not regarded as transfers and hence, the profits and gains arising from such transfer are not taxable under the head Capital Gains such as
- Under section 46,Distribution of assets in kind by a company to its shareholders on its liquidation.
- Under section 47(i) ,Distribution of capital assets in kind by a Hindu undivided family to its members at the time of total or partial partition.
- Under section 47(iii) , Any transfer of a capital asset under a gift or will or an irrevocable trust.
- Under section 47(viii), Any transfer of agricultural land in India effected before the 1st day of March, 1970
finance.indiamart.com:Tax upon Income from Capital Gains gives an overview of the transactions are not regarded as transfers.
Computation of Capital Gains
Computation of capital gains depends upon following things:
- The nature of capital asset that is transferred ex: Mutual Fund, Stocks, Property, Gold
- Time for which asset was owned based on the type of asset. Ex: If Shares, Equity Mutual Funds are for which Securities Transaction Tax(STT) has been paid, are transferred after being held for an year it class as Long Term Capital Gain. If Period of holding is less than 1 year it classifies as Short Term Capital Gain.
- Cost of acquisition, Cost of improvements, Expenditure incurred exclusively in connection with the transfer.
- Exemptions allowed under the income Tax Act.
Period or Time of Holding
The period for which an asset has been held by the person prior to its transfer is also relevant in determining the quantum of capital gains. For example a person might not have himself acquired the property, but might have become the owner of the property due to say:
- Distribution of assets on the total or partial partition of a Hindu Undivided family.
- Under a gift or will
- By succession, inheritance or devolution
- Distribution of assets on the liquidation of a company.
In such situations in computing the period for which asset was held, the period for which asset was held by previous owner should also be included. In such cases the purchase/cost price would be the cost to the previous owner. For example:
Mr Sharma receives a house property as gift on 14-2-2012. If the donor has originally acquired the property on say 11-1-2009 and person decides to sell the property on 18-2-1993( i.e 5 days after receiving the gift) the period for which the property was held will be worked out as follows:
- Period for which previous owner held the asset (11-1-2009 to 13-2-2012): 37 months and 3 days
- Period for which Mr Sharma held the asset (14-2-2012 to 18-2-2012): 5 days
Total period of holding: 37 months and 8 days. Hence house property will be treated as a long term capital asset for capital gain purposes.
Net Consideration, Cost of Acquisition, Cost of Improvement
Some of the technical terms involved in acquiring and selling of the capital asset are given below.
Full value of consideration : Price received from the sale of the capital asset without any deduction whatsoever.
Net Consideration: From the Full value of consideration deduct the Expenditure incurred wholly and exclusively in connection with such transfer by the transferor. Expenditure incurred should have a direct connection to transfer e.g. stamp duty, registration etc.
Cost of Acquisition: Value for which asset was acquired. As mentioned above in situations where a person might not have himself acquired the asset then the cost would be the cost to the previous owner. Expenses of capital nature for completing or acquiring the title to the property may be included in the cost of acquisition.
Cost of improvement: It refers to all expenditure of a capital nature that is incurred in making any additions or alterations to the capital asset by the current owner or the previous owner. The expenditure must go to appreciate the value of the asset, like making structural additions/alterations to a house property. Revenue expenditure such as Property taxes, Routine repairs and maintenance expenses, estate duty if paid on inherited property cannot be treated as Cost if Improvement. Year considered for improvement is the year in which improvement took place, irrespective of the year of payment of such costs.
Indexation and Cost inflation index
Indexation allows the taxpayer to factor in the impact of inflation on cost. It helps to counter the erosion in the value of the asset over a period of time. Using the Cost inflation index, the purchase price of the asset gets increased hence the capital gains and so may get reduced. For Ex:
- If a property is purchased in Financial year 1995-96 for Rs 20 lakh.
- It is sold in Financial year(FY) 2011 -12 for Rs 80 lakh.
- Gain would be = Rs 80 lakh – 20 lakh = Rs 60 lakh.
But if CII is considered then we need to calculate cost of 20 lakh of 1995-96 in the year 2011-2012. The Inflation index in year 1995-96 was 281 and year 2011-2012 is 785.
So Indexed cost of Rs 20 lakh in the year 2011-2012 is = 20 * (785/281) = 55.871. So Long term capital gain = 80-55.871 = 24.128 lakh instead of Rs 60 lakh
Cost of improvement can also be indexed. In indexation and capital gain parlance, the purchase price with indexation is called indexed cost of acquisition, cost of improvement if indexation is applied will be indexed cost of improvement. Our post Cost Inflation Index,Indexation and Long Term Capital Gains deals with Cost Inflation Indexation in details including details on when the indexation might not be beneficial.
Exemptions on Income Tax for capital Gains
Income tax act grants exemptions from capital gain tax, either totally or partially, if certain conditions are satisfied. The exemptions mentioned Section 45 are as follows: References to specific sections are from VakilNo1: Income Tax Law
|54||Profit on sale of property used for Residence.|
|54B||Capital gain on transfer of land used for agricultural purposes not to be charged in certain cases.|
|54D||Capital gain on compulsory acquisition of lands and buildings not to be charged in certain cases.|
|54E||Capital gain on transfer of capital assets not to be charged in certain cases|
|54EC||Capital gains – Not to be charged on investment in certain bonds|
|54F||Capital gain on transfer of certain capital assets not to be charged in case of investment in residential house|
|54G||Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area|
|54H||Extension of time for acquiring new asset or depositing or investing amount of capital gain.|
|115F||Capital gains on transfer of foreign exchange assets not to be charged in certain cases|
Please check the current tax law before deducting the exemption as the exemptions keep on changing. Some sections might become outdated. For example Section 54EA, Section 54EB were replaced by Section 54EC from Apr 2001.Ref:Outlookmoney:Touch And Go!(Sep 2000). Some of the exemptions that became outdated are given below
|54EA||apital gain on transfer of long-term capital assets not to be charged in the case of investment in44[specified securities].||Apr 2001|
|54EB||Capital gain on transfer of long-term capital assets not to be charged in certain cases:||Apr 2001|
|54ED||Capital gain on transfer of certain listed securities or unit, not to be charged in certain cases.||2006|
Some of the exemptions for Long Term Capital Gains are given below:
Calculation of Capital Gains
Calculation of Capital Gains consists of following steps:
- Finding out type of asset.
- Find out time of holding of asset(including that of previous owner) the Financial Year in which the asset was acquired and sold. Remember for the Tax purposes Financial Year is considered.
- Find out the net value of consideration after deducting expenditure incurred wholly and exclusively in connection with such transfer.
- Finding out Cost of acquisition.
- Finding out Cost of improvement.
- Based on the type of asset and time period of holding applying the indexation or not
- Finding out if any exemption is available.
Capital Gain = Net Consideration – Cost of Acquisition- Cost of Improvement – Exemption
Table below lists the Capital gain tax based on Type of assets and Time of holding, indexation used or not
|Type of Asset||Short Term Capital Gain||Long Term Capital Gain||Tax on Short Term CG||Tax on Long Term CG|
|Debt Mutual Fund||Selling before 3 year||Before Aug 2014:Selling after 1 yearAfter Aug 2014:Selling after 3 year||Added to income and taxed as per tax slab.||Before Aug 2014 If indexation used 20%, Without indexation 10%After Aug 2014 If indexation used 20%|
|Equity Mutual Funds with STT paid||Selling before 1 year||Selling after 1 year||Taxed at 15%.||the new LTCG tax of 10% would be levied only on LTCG of an individual exceeding Rs 1 lakh in one fiscal or financial year.
(before 1 Apr 2018 LTCG was NIL)
|Stocks with STT paid||Selling before 1 year||Selling after 1 year||Taxed at 15%.||the new LTCG tax of 10% would be levied only on LTCG of an individual exceeding Rs 1 lakh in one fiscal or financial year.
(before 1 Apr 2018 LTCG was NIL)
|Fixed Maturity Plan(FMP)||Selling before 3 year||
|Added to income and taxed as per tax slab.||Before Aug 2014 If indexation used 20%, Without indexation 10%After Aug 2014 If indexation used 20%|
|Real Estate, Gold & Others||Selling before 3 years||Selling after 3 years||Part of total income and normal tax rates are applicable.||Indexation benefit is available and tax rate is 20%|
If you are interested in finding the Capital gains etc, you can try Capital Gain Calculator shown below.
Cases may arise when there is a capital loss i.e consideration for transfer is less than the cost of acquisition and improvement. Such loss, whether it relates to a short-term capital asset or a long term capital asset cannot be set off against positive income under any head. It can be carried forward to the next year and can be set off only against Capital gains but under specific categories. Morever, the law allows for any unabsorbed loss to be carried forward for 8 years. However the taxpayer has to file a loss return, failing which the unabsorbed loss will not be allowed for set-off. The table from itaxindia.org:SET OFF CARRY FORWARD OF LOSSES INCOME TAX INDIA given below tries to explain which capital loss can be offset or carried forward under which head.
- Capital Gain Calculator from FY 2017-18 with CII from 2001-2002
- How to Calculate Capital gain Tax on Sale of House or property?
- Buying a House,Renting,Home Loan,Tax,Selling,Capital Gain
- RSU of MNC, perquisite, tax , Capital gains, eTrade
Hope our post helped you in explaining about the Capital Gains, type of assets, time of holding assets, Cost of acquisition, Cost of improvements, Expenditure incurred exclusively in connection with the transfer. Exemptions allowed under the income Tax Act, Capital Loss. Apologies upfront for any mistakes. Please let us know and we will correct. If we missed out anything please let us know. If you liked it please let us know too!