Capital Gains Tax in India: Staying Informed for Financial Planning

India is a developing economy that needs a constant boost of funds in order to maintain the rate of economic growth. As investors and realtors play a big part in driving India’s economic growth, Capital Gains Tax becomes an important tool under which they get certain tax benefits, thus encouraging them to buy and sell assets frequently. The budget for each year is announced on the 1st of February and various rate changes are released.

What does the capital gains tax in India mean?

Capital Gains are simply a gain or profit that you make while selling an asset. This is considered an “income” that is taxable under Section 80C of the Income Tax Act. You need to pay the tax on this amount in the year your asset has been transferred. This is Capital Gains Tax. However, capital gains tax is not applicable in case a person gains an asset via inheritance or will. But it becomes taxable once the person inheriting the asset sells the same property to someone else.

 What qualifies as long-term capital gains (LTCG)?

Long-term capital gains refer to profits made by selling a capital asset that has been held for more than two years. Here are some points to keep in mind when determining what qualifies as long-term capital gains.

• Types of Capital Gains: Long-term capital gains can be made on various types of capital assets, such as property, shares, mutual funds, and gold.
• Holding Period: To qualify for long-term capital gains, the asset must be held for more than two years. If it is held for less than two years, it is classified as a short-term capital gain.

Taxation: Long-term capital gains are taxed at a lower rate than short-term capital gains. For example, the LTCG tax rate on equity is currently 10% for gains exceeding INR 1 lakh.

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Definition of Capital Assets

Any land (including agricultural land), building, patents, machinery, real estate, trademarks, vehicles, leasehold rights, and jewellery that has rights in India or is related to any Indian company can be defined as capital assets. The following does not come under the capital asset category:

• Any stock or raw materials that are held for business purposes
• Personal items such as clothing and furniture
• Agricultural lands in the rural part of India
• Government-issued national defence bonds or 7% gold bonds or 6 ½% gold bonds
• Special bearer bonds
• A gold Deposits bond that is issued under the gold deposit scheme

Types of Capital Assets

Capital Assets are of two types

1. Long-Term Capital Asset
2.  Short Term Capital Asset

Long Term Capital Asset (LTCA)

When an asset is kept on hold by an individual for more than 36 months, it is considered a Long-Term Capital Asset. There is no reduction of 24 months on movable properties like jewellery and debt-oriented mutual funds. 

According to a rule passed on 10th July 2014, the following assets are said to be short term capital assets in situations where they are held for less than a year/12 months:

• Equity/Preference shares in a listed company on any recognized stock exchange
• Securities (Debentures, bonds, government securities) on recognized stock exchanges
• UTI units, quoted or not
• Equity oriented mutual fund units, quoted or not
• Zero-coupon bonds, quoted or not

When the assets mentioned in the above list are kept for a term exceeding 12 months., it is considered as a long-term capital asset.

Short Term Capital Asset (STCA)

Assets held for 36 months or less are classified as short-term capital assets. The 36-month criterion has been reduced to 24 months in the case of immovable property such as land and buildings starting in the fiscal year 2017-18. Therefore, if you wish to sell your asset after holding it for 24 months, the income generated will be subject to long-term capital gains tax (LTCG).

In the event of an asset being acquired by inheritance, will, or as a gift, the period the property was owned by the former owner is as well, calculated to determine if it’s a short-term or a long-term capital asset. 

In the case of a short-term capital gains tax on the bonus or rights shares, the period of ownership shall count from the date of allocation of the rights shares and free/bonus shares or rights shares, respectively. Here is detailed information on the tax on Short-Term and long-term Capital Assets.

Long-Term Capital Gains (LTCG) Tax Rate:

• Equity shares/units of equity-oriented funds: 15% (capped).
• Other assets: 20% (before Budget 2022).

Long-Term Capital Gains (LTCG) Tax Rate on Equity:

• 10% on gains above 1 lakh.

Short-Term Capital Gains (STCG) Tax Rate:

• If Securities Transaction Tax is not applicable: Added to income tax as per slab.
• If Securities Transaction Tax applicable: 15%.

Capital Gains Tax on Equity and Debt Mutual Funds

• Effective from 11th July 2014, the short-term capital gains tax rate for debt funds depends on the tax slab rates of the individual, while long term capital gains tax rate is 20% with indexation.
• Short-term capital gains tax on equity funds is 15%, while no LTCG tax is levied on them.
• Borrowed mutual funds must be held for over 36 months to be considered long-term capital assets. If they are repaid during this time, the capital gains will be added to your income and you will be taxed according to your rate for income tax slab.

Listed Securities

Any shares, debentures that are traded through recognized stock exchanges such as the BSE, NSE are called listed securities. In India, one can trade listed securities through Demat accounts. While trading, one has to pay the Securities Transaction Tax on the selling value of the shares. Since the tax is paid on the sale value, taxpayers enjoy benefits like lower tax rates (15%) for short-term capital gain income and complete tax exemptions for long-term capital gain income.

How to Calculate Capital Gains?

Before setting out to calculate capital gains, let’s look into some key terms:

• Full value consideration- It is the consideration received/receivable by the seller when transferring an asset. Capital Gains Tax has to be paid in the year of transfer even if there is no consideration.
• Cost of acquisition- The original value at which the seller acquired the sole asset.
• The Cost of improvement- Expenses that are incurred while making additions or improvements to the capital asset by the seller.

How to Calculate Short-term Capital Gain on Sale of Property / Agricultural Land in India?

Here’s how you can calculate the Short term Capital gain on the sale of your property or agricultural land–

1. Determine the holding period: If the holding period is less than 24 months, it is considered a short-term capital gain.
2. Calculate the full value of consideration: This includes the sale price, stamp duty, registration fees paid by the buyer, and any other costs related to the sale.
3. Calculate the cost of acquisition: This includes the purchase price of the property and any expenses incurred during the acquisition, such as stamp duty or registration fees.
4. Calculate the cost of improvement: If any improvements or renovations were made to the property, the expenses incurred can be considered as the cost of the improvement.
5. Calculate the short-term capital gain: Subtract the cost of acquisition and the cost of improvement from the full value of consideration to obtain the short-term capital gain.

Example

1. Let's say you purchased a property in January 2022 for Rs. 50 lakhs and sold it in November 2022 for Rs. 60 lakhs. Since the holding period is less than 24 months, it falls under short-term capital gains.
2. The full value of consideration is Rs. 60 lakhs.
3. The cost of acquisition is Rs. 50 lakhs.
4. The cost of the improvement is assumed to be Rs. 0 for this example.
5. Therefore, the short-term capital gain is Rs. 10 lakhs (60 lakhs - 50 lakhs - 0).

Tax implications

The short-term capital gain will be taxed according to your income tax slab. Let's assume you fall under the 30% tax bracket. In that case, you would need to pay a tax of Rs. 3 lakhs (30% of 10 lakhs) on the short-term capital gain of Rs. 10 lakhs.

Note:

• If the property is used for your residence, you may be eligible for a partial exemption from capital gains tax.
• Indexation benefits can be claimed on the cost of acquisition, which helps in reducing the taxable amount of capital gain.

How to Calculate Long-Term Capital Gain on The Sale of Property/Agricultural Land in India?

      Deduct the following amounts from the full value consideration:

• Expenditure incurred exclusively during this asset transfer
• Indexed cost of acquisition
• Indexed cost of improvement

Deduct exemptions are stated under Sections 54, 54 EC, 54 F, and 54B from the resultant amount and you will get your Long-term capital gain. For example, the original price at which the house was acquired is Rs.30 lakhs. 

• The financial year house was purchased: 2010-2011 
• The financial year house was sold: 2018-2019 
• The selling price of the house is Rs 50.5 lakhs.
• Inflation-adjusted cost is (280/167) x 30 = 50.29 lakh (Selling price+ inflation)
• Therefore, the long-term Capital Gains is Rs 50.50 lakh – 50.29 lakh = Rs.21,000 (approx.) 

To calculate Capital Gains Tax on sale of property, the following expenses can be deducted from the total sale price:

• Brokerage or commission for securing a purchaser
• Stamp papers cost
• Travelling expenses in connection with the transfer of assets
• In case of inheritance of properties, expenditure incurred for wills and inheritance procedures and for obtaining succession certificate might also be considered in some cases.

What Qualifies as Long-Term Capital Gains?

Long-term capital gains refer to profits made by selling a capital asset that has been held for more than two years. Here are some points to keep in mind when determining what qualifies as long-term capital gains.

• Types of Capital Gains: Long-term capital gains can be made on various types of capital assets, such as property, shares, mutual funds, and gold.

• Holding Period: To qualify for long-term capital gains, the asset must be held for more than two years. If it is held for less than two years, it is classified as a short-term capital gain.

Taxation: Long-term capital gains are taxed at a lower rate than short-term capital gains. For example, the LTCG tax rate on equity is currently 10% for gains exceeding INR 1 lakh.

Steps to Obtain the Consolidated Statement of Realized CAMS Gains

1. Visit CAMS Investor Mailback Services. Go to the CAMS online web page.
2. Click on the option to accept T&Cs then click to Proceed
3. Click on the Capital Gain or Loss Statement option
4. Fill in all the required details here 
5. Select “All Mutual Funds” and “e-mail an encrypted attachment” for the delivery option
6. Enter the password for encrypting your mail. It will take approximately 30 minutes for receiving the mail on submission of your form
7. You will get two Capital Gains Statement files for the current and previous FYs (Financial Years)

Steps to Obtain the Consolidated Statement of Realized KARVY Gains

1. Visit the Karvy Online Page
2. Log in, scroll down and click the Investor Service option
3. Select the capital gain by mail option
4. Enter your required details
5. Choose the dates to gain the Capital Gains statement for the previous financial year
6. Fill and submit your form and you will instantly receive the statement in your mail.

Guide to Obtain Capital Gains Statement from ZERODHA

• Visit Zerodha Console here
• Log in with your Kite Details and enter your username and password
• After logging in Click on Reports then on Tax P&L
• Select the Financial year and quarter timeline
• Next, click “Download Trade wise Tax P&L for all segments” at the bottom
• An excel sheet will be downloaded to your system
• Visit the online page of ClearTax
• Upload the excel file and then Proceed
• You will get an ITR-V after e-filing

Capital Gains Tax as per Union Budget 2023

In India, capital gains tax is a tax levied on profits made by selling capital assets. The Union Budget 2023 may bring in new changes that could impact how much an individual or a company pays as capital gains tax. Here are some points to keep in mind.

• New Tax Slab: The Union Budget 2023 may bring in a new tax slab for capital gains. This could mean that individuals or companies may have to pay a higher or lower rate of tax depending on the value of the asset and the duration of holding it.
• Tax on Inherited Assets: Currently, if an individual inherits a property, there is no tax payable. However, the Union Budget 2023 may change this, making it mandatory to pay capital gains tax on inherited assets.
• Tax on Cryptocurrency Gains: The Union Budget 2023 may also bring in a tax on capital gains made through the sale of cryptocurrencies. This could impact individuals who have invested in cryptocurrencies in the past.

The Union Budget 2023 may bring in new changes that could impact how much an individual or a company pays as capital gains tax. If you are planning to sell your property.

Capital Gains Tax in Budget 2022

Finance Minister Nirmala Sitharaman revealed in her Budget 2022 speech on 01-02-2022 that the levy on long-term capital gains (LTCG) will be set at 15%. Long-term capital gains rates range from 10% to 20%, depending on the type or class of assets. LTCG fee is currently only accessible for listed shares and mutual fund units.The applicable surcharge, which is taxable at 37% if an individual has capital gains of more than 5 crores throughout the year, raises the LTCG rate.

The surcharge rate is 25% for capital gains of more than 2 crores but less than 5 crores. Furthermore, where capital gains of more than 10 crores are made during the year, the highest applicable rate of surcharge is 12%. The Association of Persons is also subject to the favourable rate of surcharge (AOP). As a result, if such shares are kept for less than 12 months, they will be taxable as short-term capital gains, with the highest rate of surcharge of up to 37% depending on the number of gains derived.

Saving Tax on Sale of Agricultural Land

If you own agricultural land and are planning to sell it, there are certain tax implications you need to be aware of. Here are some tips to help you save on tax when selling agricultural land.

• Holding Period: If you have held the agricultural land for more than two years, you can claim a long-term capital gain on the property. This can help you save on taxes.
• Reinvestment: You can also save on tax by reinvesting the proceeds from the sale of agricultural land into another agricultural land or residential property. This can help you claim exemption under Section 54F of the Income Tax Act.
• Joint Ownership: If you own agricultural land jointly with other individuals, you can save on tax by dividing the sale proceeds among all the owners. This can help each owner claim a lower tax liability.

Exemption on Capital Gains

This is a section 54 exemption where capital gains from the sale of a property are reinvested in the purchase or construction of two other residential properties. The exemption for two residential properties will be granted once in a taxpayer's lifetime as long as the capital gains do not exceed Rs. 2 crores.

Saving Tax on Sale of Agricultural Land

If you own agricultural land and are planning to sell it, there are certain tax implications you need to be aware of. Here are some tips to help you save on tax when selling agricultural land.

• Holding Period: If you have held the agricultural land for more than two years, you can claim a long-term capital gain on the property. This can help you save on taxes.
• Reinvestment: You can also save on tax by reinvesting the proceeds from the sale of agricultural land into another agricultural land or residential property. This can help you claim exemption under Section 54F of the Income Tax Act.
• Joint Ownership: If you own agricultural land jointly with other individuals, you can save on tax by dividing the sale proceeds among all the owners. This can help each owner claim a lower tax liability.

Capital Gains Tax plays a crucial role in fostering economic growth and facilitating the development of a country. By offering exemptions, it effectively addresses the issue of double taxation on corporate incomes, which can discourage investors from selling assets and hinder economic progress. 

At NoBroker, we understand the importance of navigating the complexities of capital gains taxation. Our dedicated team of experts can provide valuable insights and strategies to help you optimize your tax savings. In addition to our real estate services encompassing buying, selling, and renting properties, we also offer comprehensive assistance in property management, legal documentation, and home loans. If you're seeking financial guidance and considering purchasing a new home, click the link below to tap into the expertise of the professionals at NoBroker.

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