Capital Gains Tax in India

Capital Gains Tax in India

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Capital Gains Tax in India
Capital Gains Tax in India

In India, the Total Income of a person is divided into five heads which are:

  • Income from Salary
  • Income from House Property
  • Income from Business & Profession, also known as PGBP
  • Income from Capital Gains
  • Income from Other Sources

‘Capital Gains’ is the head of income under which the profits arising from selling a Capital Asset are calculated and charged to tax.

The provisions governing Capital-Gains tax are contained in the Income Tax Act, 1961. As per section 2(14) of the Income Tax Act, below are the inclusions and exclusions from the definition of Capital Asset.

   Inclusions
  • Property of any kind held by you e.g. House
  • Securities held by a Foreign Institutional Investor
  • Jewellery
  • Paintings
  • Archaeological Collections
  • Sculptures
  • Works of Art
  • Drawing
  • Shares/Debentures/Bonds
    Exclusions
  • Stock in Trade of Business
  • Consumable Stores
  • Personal belongings (movable property) held for use by you or a dependent family member
  • Rural agricultural land
  • Gold Deposit Bonds issued under Gold Deposit Scheme, 1999
  • Apparel/furniture embedded or embroiderd with precious/semi precious stones
Types of Capital Assets:
  1. Long Term Capital Assets: Assets held by the owner for a period of more than 36 months are considered to be long term capital assets. Exceptions to this are:
  • Listed Securities (other than units)
  • Units of Unit Trust of India
  • Units of Equity Oriented Fund
  • Zero Coupon Bond

For the above assets, a holding period of more than 12 months will be considered long term.

  1. Short Term Capital Assets: Assets held for a period of less than 36 months are known as Short Term Capital Assets.
Concept of Indexation:
  • In case of Long Term Assets, the assesee is given the benefit of indexation to provide protection against rising inflation.
  • Every year is assigned a number known as Cost Inflation Index (CII).
  • The Original Cost of Acquisition/Cost of Improvement is multiplied with the CII of year of transfer and divided by CII of the year of purchase to arrive at Indexed Cost of Acquisition/Indexed Cost of Improvement.
  • Benefit of indexation is not available for debentures and bonds irrespective of whether they are long term or short term.
Calculation of Capital Gains:

As per the Income Tax Act, following is the method to be followed to calculate Capital Gains.

Sale Consideration Received/Receivable
Less: Cost of Acquisition of Asset
Less: Cost of Improvement of Asset
Less: Expenditure exclusively incurred on such transfer
=Long Term/Short Term Capital Gains

 

Note:

  • For Long Term Capital Assets, Indexed Cost of Acquisition/Indexed Cost of Improvement will be taken.
  • The above formula can result in a Long Term/Short Term Capital Loss also. In such a case you will be allowed to set it off/carry it forward.
  • For assets purchased before 01.04.1981, you can take Fair Market Value of the asset as on 01.04.1981 as the Cost of Acquisition.
  • Cost of Improvement incurred before 01.04.1981 is always ignored while calculating Capital Gains.
Capital Gains areTaxable in the Year of Transfer: Some Exceptions

The general rule states that Capital Gains will be taxable in the year of transfer. However, below are the exceptions to this rule.

  • Conversion of Capital Asset into Stock-in-Trade of Business
  • Compulsory Acquistion of Capital Asset by Government
  • Damage/Destruction of Capital Asset as a result of natural calamity/war/riot/civil disturbance/accidental fire or explosions
  • In the first case, Capital Gains are chargeable to tax in the year stock in trade is sold or otherwise transferred. Fair Market Value on the date of conversion will be treated as full value of consideration and will be used to calculate both PGBP and Capital Gains.

E.g. you had purchased a building on 01.06.1982 for INR 1, 80,000. This building is converted by you into stock in trade of your property dealing business on 01.01.1992 when the Fair Market Value of this building is INR 9, 00,000. This building is sold by you on 01.01.2016 for INR 13, 00,000.

Now the conversion has taken place in the year 1992, but since the stock in trade has been sold in the year 2016 Capital Gains will be taxable in the financial year 2016-17.

Your PGBP is 13, 00,000-9, 00,000= INR 4, 00,000.

Your Long Term Capital Gains are:

Selling Price 9, 00,000
Less: Indexed Cost of Acquisition

1,80,000×199/109

 

3,28,623
Long Term Capital Gains 5,71,376
  • In the second case, if the Capital Asset is compulsorily acquired by the Government, Capital Gains are taxable in the year full/partial compensation is first received from the Government.

Therefore, if your land was compulsorily acquired in the year 1998, but you first receive compensation in 2005; your Capital Gains will be calculated in the year 2005-06.

  • In the third case, Capital Gains are taxable in the year in which insurance money/asset in lieu of damaged asset is received. The example for this case is similar to the one given above.

Rates of Capital Gain Tax

Exempt Long Term Capital Gains on listed equity shares/units of Unit Trust of India/Units of Business Trust on which STT is paid. Long Term/Short Term Capital Gains on Urban Agricultural Land on fulfilling certain conditions is also exempt.
10% For unlisted securities held by nonresident/foreign company without indexation and without first proviso applicable to non residents. Also applicable to listed securities held by both residents and non residents if it results in a lower tax without indexation.
15% On Short Term Capital Gains under section 111A i.e. on listed equity shares/units of United Trust of India/Units of Business Trust where STT is paid.
20% On Long Term Capital Gains in general. Applicable to resident individuals, HUFs, domestic companies and to non residents as well when the rate of 10% does not apply.
Normal Tax Rate On all Short Term Capital Gains not falling under section 111A.
Other Exemptions under Capital Gains:

Apart from the concessional tax rates and out rightly exempt Capital Gains, there are some other exemptions under section 54 that can be availed under Capital Gains.

They are briefly summarized below
  • Section 54/Section 54 GB: Capital Gains on sale of residential property
  • Section 54B: Capital Gains on Transfer of Land used for Agricultural Purposes
  • Section 54 D: Capital Gains on Cumpolsory Acquisition of Land/Building
  • Section 54 EC: Exemption on Investment of Long Term Capital Gains in Bonds of NHAI/REC
  • Section 54 F: Capital Gains on Certain Assets exempt if Invested in Residential House
  • Section 54 G: Capital Gains on Shifting of Industrial Undertaking from Urban Area
  • Section 54 GA: Capital Gains on Transfer of Assets in case Industrial Undertaking is transferred fro Urban Area to a SEZ

So, if you incur any Capital Gains which are not already exempt; and are wondering whether you qualify for any exemption, you can check the detailed provisions of the above sections.

If you fulfill the conditions laid down in any of the above sections, you can avail exemption.

Author: This blog is written by  Ms. Pragya Chaturvedi, a passionate blogger & intern at  Aapka Consultant.

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