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Capital Gains Tax - Types, Tax Rates, Exemptions & How to Save Capital Gain Tax?

Capital Gains Tax - Types, Tax Rates, Exemptions & How to Save Capital Gain Tax?

Capital Gains Tax - Types, Tax Rates, Exemptions & How to Save Capital Gain Tax?
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Selling a property is a huge and tiresome task in itself, and contemplating the fact that you will be imposed a tax on your capital gains can be a huge apprehension. An investment executed on procuring land is regarded as a capital assets, and when you trade it, the resulting earnings are known as capital gains.

Hence, if you intend to trade your property, you will be required to pay capital gain tax on the earnings gained after conceding the indexed cost of acquisition and inflation depending upon the holding period of a capital asset. However, there are numerous techniques to save on the capital gain tax at the time of sale of a property.

What is Capital Gains Tax in India?

The profit or the gains that you make by selling a capital asset is known as a capital gain. The gain made from the capital asset can be classified under two types: short-term capital gains and long-term capital gains, depending on the duration of the asset remaining in your ownership.

The tax that is charged on this capital gain is known as the capital gain tax. This tax is charged under the head of capital gains for the sale made in the previous year.

You are liable to pay the capital gain tax when:

  1. You have sold an asset that comes under the category of a capital asset.
  2. You have profited from the sale.
  3. The sale is made in the previous year (the year immediately before the assessment year)

What are Capital Assets?

A capital asset is any tangible or intangible property that is purchased as an investment for the long term. Capital Assets serve as the basis for the calculation of capital gains. According to the Income Tax Act, you can include the following under capital assets.

What is Included?

  1. Property: This is a wide head and includes both tangible as well as intangible properties. Tangible properties can be
    1. Land
    2. Building
    3. Machine

    Whereas intangible properties can include intellectual property. For example

    1. Patent
    2. Trademark
    3. Lease rights

  2. Securities: The securities that are held by FII’s under the rules of SEBI can also be called a capital assets

Which Assets are not Included?

The following, though called assets are not included under capital assets.

  1. Any raw materials that are used in business, as well as the stock in trade of any business or profession
  2. Items for daily personal use such as clothes, footwear, utensils, etc.
  3. Household items such as movable furniture, personal vehicle, etc. This excludes paintings and jewellery
  4. Agriculture land that is situated in the rural part of India is also not considered
  5. Gold bonds issued by the government. The gold deposit bonds issued under the gold deposit scheme are also not classified as capital assets.

What are the Types of Capital Assets?

Capital Assets can be classified based on the duration you hold them. These can be

  1. Short-Term Capital Assets
  2. Long term Capital Assets

Let’s understand a bit about both of these categories

a) Short-Term Capital Assets

Any capital asset that you hold for less than 36 months can be called a "short-term capital asset."

However, for some specific assets, these criteria can be lowered to a period of 24 months or 12 months.

Exceptions

i) Short-term assets have a criterion of holding for 24 months
  • Immovable properties such as buildings, houses, land, etc
  • Shares that are not listed (unlisted shares)

If you hold land or an unlisted share for more than 24 months, you will be subject to long-term capital gains tax.

ii) Short-term assets have a criterion of holding for 12 months
  • Equity shares that are listed and recognised on the Indian stock exchange (NSE/BSE).
  • Preference listed in the stock market (NSE/BSE)
  • Units from the Unit Trust of India
  • Equity mutual fund units
  • Debentures, government securities listed on the stock market in India.
  • Zero-coupon bonds

Note: The transfer of the categories listed above should have been made after July 2014.

b) Long-Term Capital Assets

The capital assets that you hold for more than 36 months can be classified as long-term capital assets. Movable assets such as jewellery, if held for more than 36 months, will be considered long-term assets. This period can be 12 months or 24 months as well, depending on the type of asset.

Long-term and Short-term Capital Gains

Understanding the distinction between long and short term capital gains is significant because both of these gains are handled individually when it comes to taxation. The tax benefits and tax rates that pertain to the reinvestment of these two kinds of capital gains diversify.

Long-term Capital gains on the sale of property are taxed at 20% plus a Health and Education Cess if certain conditions are met. If you sell a gifted property or one that you have received from your ancestors, you will still be subject to paying capital gains tax on these properties.

Learn about capital gain on sale of gifted assets

What is Long Term Capital Gains Tax (LTCG)?

Capital gains income tax can be divided into long term and short-term capital gains. The profits that you make from an investment over a long period are known as long-term capital gains. These are the capital gains made from long term capital assets that are held for 1-3 years.

These gains are eligible to be taxed under the Income Tax Act and are called "long-term capital gains tax" or more commonly known as "LTCG."

What Qualifies as Long Term Capital Gains?

The period for which you hold your capital asset will help determine whether the capital gains made can be considered a long term capital gain or not.

These are the assets or investments that can help you generate long term capital gains.

1. Sale of Property

Property can include assets such as land, buildings, house property, etc. If you possess such immovable properties for more than 2 years (24 months) and sell them at a profit, then this can be considered long-term capital gains.

2. Selling of Stocks

If you have invested in shares of companies that are recognised and are listed on the stock exchange and have kept them for more than 12 months, then the gains you make from selling them are a long-term capital gain.

3. Sale of Bonds

Not only equity and preference shares, but the sale of securities such as bonds, debentures, etc. that you have held for more than a year is included in long-term capital gains.

4. Sale of Agricultural Land

If you own agricultural land that is not situated in a rural area, then the proceeds that you receive from selling this land will be counted as a long term capital gain and are eligible for tax.

What is Short-Term Capital Gains Tax (STCG)?

Gains you make in a short term are also subject to tax. The tax that is levied on the profits or gains made by you by selling a capital asset in the short term is known as the "short-term capital gains tax." A short-term duration is a period that is less than 36 months.

For some assets, this period is between 12 and 24 months as well.

Tax Rates - Long-Term Capital Gains and Short-Term Capital Gains

Both long-term and short-term capital gains have different tax rates depending on the asset type and the duration. Here is the table depicting these tax rates.

Nature of Tax Condition Tax applicable
Long-term capital gains tax If you sell Equity shares/ or the units of equity-based mutual funds 10% over and above Rs 1 lakh
If you sell any capital assets other than items listed above 20%
Short-term capital gains Tax The securities transaction tax is not applicable Added to your tax liability and you will pay tax as per the slab you fall in.
The securities transaction tax is applicable 15%

Tax Applicable on Equity and Debt Mutual Funds

Mutual funds are of many types. The two of the most popular categories of mutual funds are equity mutual funds and debt mutual funds. Equity mutual funds are those that are consist of at least 65% of the equity in the whole fund.

Here are their tax-rates

A. Before July 2014

Type of Fund Tax-Rate
Short-Term Equity Funds 15%
Long-Term Equity Funds NA
Short-Term Debt Funds As per the tax slab, your income falls in
Long-Term Debt Funds 10% without indexation or 20% with indexation whichever is lower

B. After July 2014

Type of Fund Tax-Rate
Short-Term Equity Funds 15%+ health and education cess
Long-Term Equity Funds 10%+ health and education cess
if the gains are more than Rs 1 lakh (without indexation)
Short-Term Debt Funds As per the tax slab, your income falls in
Long-Term Debt Funds 10%+ health and education cess
without indexation
20% +health and education cess
with indexation
(lower of the 2)

3 Ways to Save on Capital Gain Tax on the Sale of Property

The taxes charged on the revenue generated by the trade of capital assets are regarded as capital gains taxes and are defined by the term of possession of the asset as well as the actual variation between its purchase and sale price. This tax assessment is exclusively applicable, if the asset is traded after a specific duration of ownership

1. Invest in CGAS (Capital Gains Account Scheme)

Investing in Capital Gains Account Scheme (CGAS) is another means to save capital gains tax on property sales. This scheme is perfect for individuals who cannot invest in a brand-new property before their income tax return filing, and this scheme provides a huge relief to the taxpayers.

You can invest in this CGAS scheme for three years, and throughout this duration, you can utilize the capital gains for buying or building a residential house on your property. The deposit in this CGAS account must be made before filling or registering an income tax return, and then this investment in the Capital Gain Account Scheme (CGAS) must be specified in the income tax return.

This CGAS account can be opened only with designated banks. Also, regional banks and cooperative banks are not qualified to open this account. The deposit in this account can either be made through monthly instalments or a lump sum to save taxes on capital gains.

2. Set off all Capital Losses

This is again the most suitable way to save tax on capital gains resulting from the sale of your property. It enables you to set off all capital gains or profits against the capital losses you incurred earlier. It is analogous to the same-year adjustment of capital loss and capital gains. However, the capital loss must be from the former date, and a short-term capital loss can only be set off against short-term capital gains.

3. Invest in Bonds

If you have recently traded your property and want to save on tax, you can further invest in specified financial assets. Investment in such financial assets holds the power to save your arduously earned capital gains as these long term capital gains are exempt under Section 54EC of the Indian Income Tax Act, 1961.

To obtain this tax exemption on your capital gains, you should invest the sum earned in bonds within 6 months of the transfer of the sum and realisation of gains. In addition to this, the funds are required to be invested in these bonds for a minimum of three years as a lock-in period.

If you keep the funds invested in these bonds for a period beyond the lock-in period of three years, you will not gain any interest, and the redemption of these capital gain bonds will become automated. Other restrictions on investing your capital gains from property sales include the inability to assign, contract, or trade these bonds.

How to Calculate Short-Term Capital Gains?

Want to calculate the short-term capital gains you made in the previous year? Follow these simple steps.

Step 1

Add the full value of consideration: It is the amount that you receive by selling a capital asset. This can be either in cash or kind.

Step 2

Deduct the expenses that you incurred to make the transfer possible. These can be transport and settling charges, commissions, etc.

Step 3

Deduct the following:

  1. Cost of Acquisition: the price paid for the asset.
  2. Cost of Improvement: This is the cost incurred in improving and maintaining the asset.

How to Calculate Long-Term Capital Gains?

The long-term capital gains can be computed by following the steps given below.

Step 1

Add the full value of consideration.

Step 2

Deduct the expenses incurred on the transfer of the asset.

Step 3

Deduct the following:

  1. Indexed Cost of Acquisition (ICOA)
  2. Indexed Cost of Improvement (ICOI)

Step 4

From this, we arrive at a gross long-term capital gain. From this amount, deduct the exemptions provided by the Income Tax Act to arrive at a long-term capital gain, or LTCG.

Exemptions are available u/s 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA, 54GB

What are the Exemption on Capital Gains?

The capital gains you make are generally a large amount and attract a tax rate of 20%. That's also a lot. Thus, the government has introduced various exemptions to lower your capital gains tax liability.

Let's understand with an example.

Akshay purchased land in the year 2000 for a value of Rs. 10,00,000. Twenty years later, in the year 2020, he decides to sell it for a whopping Rs 1 Cr.

On calculation, his LTCG tax will be

Consideration = Rs 1,00,00,000

I.C.O.A = Rs. 28,90,000

LTCG = Rs 71,10,000

Tax = 20%

LTCG payable = 14,22,000

Thus, he now has to pay over Rs 14 lakhs for the capital gain you made. But knowing all about income tax, Akshay knew he could bring the amount further down by making use of the exemptions.

These are explained in the section below.

Section 54: Exemption on the Sale of House Property on the Purchase of Another House Property

The exemption under this section is regarding the profit that you earn on the sale of property that you use for your residence. Under this section, the whole capital gain can be exempt if it is fully utilized.

Eligibility

  1. If the capital gain is more than Rs 2 Cr, in such a case, you must purchase another residential property within 1 year before or 2 years after you sell the property.
  2. If the capital gain is less than Rs 2 Cr, in this case, you have the option of purchasing two residential houses or constructing two residential houses within 3 years.
  3. There is a lock-in period of 3 years. That is, you can avail of an exemption if you have held the property for at least 3 years.

Section 54F: Capital Gains Tax Exemption on the Sale of any Asset other than a Home

This exemption comes into play if the capital asset is other than a house property. You can avail of this exemption, if you decide to invest the entire consideration in a property.

The exemption will be provided to you only if:

  1. The consideration that you receive is invested in a house property 1 year before or 2 years after you sell the capital asset.
  2. Or the consideration that you receive is invested in house property in India within three years of the asset sale.

Section 54EC: Exemption from the Sale of Real Estate When Reinvesting in Specific Bonds

Every person is eligible for this deduction provided that they have held a long-term asset, i.e., property, for more than 36 months.

This exemption is available if you decide to invest the capital gain made through the sale of land, buildings, etc. in certain bonds.

Eligibility

  1. In a fiscal year, the maximum amount invested in bonds cannot exceed Rs 50 lakhs.
  2. Within 6 months of selling your property, you should invest the capital gain in bonds.
  3. The bonds that you invest in must be of a long-term nature and be redeemable after at least 3 years.

The government has provided a list of the bonds you can buy to avail of this exemption.

  1. NHAI (National Highway Authority of India)
  2. Rural Electrification Corporation Limited (RECL)
  3. Central Government Bonds

Section 54B: Exemption of Capital Gains from Transfers of Land Used for Agricultural Purposes

  1. If you are an individual or part of a HUF and want to sell land that is used for agricultural purposes, then you are eligible.
  2. Note that the land to be sold must have been used for agriculture-related activities for at least 2 years before the date of transfer.
  3. You can avail of the exemption if you purchase any other land for agricultural purposes within 2 years of the sale.
  4. Capital gain equal to the value of the land can be exempt.
  5. This exemption also has a lock-in period of 3 years.

Investing in real estate properties can assist in asset creation and provide you with financial protection and stability for the future. Hence, by benefiting from these tax-saving schemes, you can receive the maximum advantage on your property investment.

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