As per the various relief measures announced by the Hon'ble Finance Minister on 24 March 2020 due to COVID-19 outbreak, taxpayers can make the investments for roll over benefits of capital gains upto 30 June 2020.
What is a capital gain?
Capital gain is nothing but the profit that you get when you sell off a capital asset. When you sell a capital asset at a higher price than the cost at which you acquired it, you make a profit. This profit is called capital gain which is your income. This income is chargeable to tax and the tax which is calculated on capital gains is called the tax on capital gains or capital gain tax.
To understand capital gains, you need to understand the concept of capital assets.
So, What are Capital Assets?
Capital assets are any kind of property [which can be transferred] that you own except the following –
- The stock of consumables or raw materials which are held for use in business or profession.
- Personal belongings which are meant for personal use like clothes, furniture, etc.
- A piece of agricultural land located in a rural area.
- Special bearer bonds, 6.5% gold bonds (1977), 7% gold bonds (1980) or national defense gold bonds (1980) which have been issued by the Central Government.
- Gold deposit bond (1999) which had been issued under the gold deposit scheme or deposit certificate issued under Gold Monetisation Scheme, 2015 notified by the Central Government.
Besides these assets, any other property that you own would be called a capital asset like land, building, shares, patents, trademarks, jewellery, etc.
Types of capital assets
Capital assets are divided into two types based on the period after which they are sold off. The types of capital assets are as follows –
Short term capital assets
Short term capital assets are those which are held for less than or equal to 36 months. This means that if you sell off the asset within 36 months of buying it the asset would be called a short term capital asset. However, in some cases, the period of holding is reduced to 24 months and 12 months. These cases include the following –
- If the asset is an immovable property like land, building or house then the period of holding would be considered to be 24 months. This means that if you sell off an immovable property within 24 months of buying it, the property would be called a short term capital asset.
- Similarly, equity shares of a company listed on the Recognized stock exchange, securities listed on the Recognized stock exchange, UTI units, Equity oriented mutual fund units and zero coupon bonds have a holding period of 12 months. If these assets are sold off before 12 months of their purchase, they would be called short-term capital assets.
Long term capital assets
Long term capital assets are those which are held for more than 36 months and then sold off. Immovable property which is sold after 24 months would be categorised as long term capital asset. In case, of equity shares, securities, mutual fund units, etc., however, the holding period of 12 months is applicable. If they are sold off after 12 months, they would be called long term capital assets.
Types of capital gains
Now that you have understood what capital assets are and their types, it’s time to understand the types of capital gains. Capital gains are also divided into short term capital gains and long term capital gains –
Short term capital gains are profits which you earn when you sell off short term capital assets and long term capital gains are the profits which you earn when you sell of long term capital assets.
How capital gain is calculated? What is Full Value Consideration, Cost of acquisition and Cost of Improvement?
Calculation of capital gains depends on the type of capital gain you are earning. Short term capital gains are calculated differently than long term ones. However, before calculating the different types of capital gains, you should understand the concept of full value of consideration, as it forms the basis of capital gains calculation.
Full value of the consideration is, in simple terms, the money that you would receive when you transfer your capital asset. In technical terms, full value consideration is the consideration which the seller has received or would receive in exchange for transferring his capital asset.
Besides full value consideration, other important terms include
- Cost of acquisition and
- Cost of improvement.
The Cost of acquisition is the cost price of the asset. It is the price at which you bought the capital asset.
Cost of improvement is the money spent on the capital asset to improve it. Cost of improvement is added to the cost of acquisition to compute capital gains. However, if the cost of improvement is incurred before 1st April, 2001, it would not be added to the cost of acquisition.
Now that the important terms are understood, here’s how to calculate the different types of capital gains –
Calculation of short term capital gains
|Full value of consideration||xxxxx|
|Less: expenses incurred on transferring the asset||(xxxx)|
|Less: cost of acquisition||(xxxx)|
|Less: cost of improvement||(xxxx)|
|Short term capital gains||xxxxx|
A house property was bought on 1st January 2010 for INR 50 lakhs. On 1st January 2011, INR 5 lakhs was spent in making improvements to the house. On 1st November 2011, the house property was sold for INR 65 lakhs.
Since the house was sold after 22 months of buying it, it would be categorized as a short term capital asset. The gain from selling the house would be called short term capital gain and it would be calculated as follows –
|Full value of consideration||INR 65 lakhs|
|Less: cost of acquisition||INR 50 lakhs|
|Less: cost of improvement||INR 5 lakhs|
|Short term capital gains||INR 10 lakhs|
Calculation of long term capital gains
|Full value of consideration||xxxxx|
|Less: expenses incurred in transferring the asset||(xxxx)|
|Less: indexed cost of acquisition||(xxxx)|
|Less: indexed cost of improvement||(xxxx)|
|Less: expenses allowed to be deducted from full value of consideration||(xxxx)|
|Less: exemptions available under Sections 54, 54EC, 54B and 54F etc||(xxxx)|
|Long term capital gains||xxxxx|
In the calculation of long term capital gains, there are three different concepts which you should understand
- Indexed cost of acquisition,
- Indexed cost of improvement and
- Expenses deducted from the full value of consideration.
Indexation of cost
Indexation of costs is done to factor in inflation over the years when the capital asset is held by you. Since inflation decreases the value of money, indexation of the acquisition cost and improvement cost increases the amount of these costs thereby lowering the capital gain earned. To calculate indexation, Cost Inflation Index (CII) is used to account for the inflation incurred over the holding period. To calculate the indexed costs, the following formula is used –
With effect from the last budget (presented on 1st February 2018), the base year for CII has changed from 1981 to 2001. That is why, when calculating indexed cost of acquisition, CII of 2001-02 is taken into consideration if the asset was purchased before the financial year 2001-02.
With the shift in the base year, the CII numbers have also changed. The CII for different years, as determined by the Central Government, are as follows –
|Financial year||Cost Inflation Index (CII)|
Expenses allowed to be deducted from the full value of consideration
These are the expenses which were necessary to be incurred when selling the asset. Without these expenses, the asset would not have been purchased. These expenses, since mandatory, are allowed to be deducted from the full value of consideration which lowers the selling price / increasing the cost of acquisition and also decreasing the capital gain. The expenses which are allowed to be deducted include the following –
|Asset is a house property||If the asset is shares||In case asset is jewellery|
|. Stamp paper cost|
. Brokerage or commission paid to a broker for arranging a buyer
. Traveling expenses incurred for sale of the asset
. Expenses incurred in obtaining succession certificates, paying the executor of the Will and on other legal procedures if the property is acquired through a Will or inheritance
|. Commission paid to the broker for selling the shares||. Commission paid to the broker for arranging a buyer for the jewellery|
A house property was purchased on 1st January 2000, for INR 20 lakhs. On 1st January, 2005, repairs were done on the house which amounted to INR 5 lakhs. On 1st January 2018, the house was sold for INR 75 lakhs. A brokerage was paid to the broker which was INR 1 lakh. What would be the capital gain amount?
Since the asset has been held for more than 36 months, it is a long term capital asset and the gain is a long term capital gain. The gain would be calculated as follows –
|Full value of consideration||–||INR 75,00,000|
|Less: indexed cost of acquisition||Cost of acquisition * CII of the year in which the asset is sold / CII of the year in which the asset was acquired = 20 lakhs * (CII of 2017-18 / CII of 2001-02 since it is the base year)= 20 lakhs * (272/100)||INR 54,40,000|
|Less: indexed cost of improvement||Cost of improvement * CII of the year in which the asset is sold / CII of the year in which the asset was improved = 5 lakhs * (CII of 2017-18 / CII of 2004-05)= 5 lakhs * (272/113)||INR 12,03,540|
|Less: brokerage paid||–||INR 1,00,000|
|Long term capital gain||–||INR 7,56,460|
Capital Gain Tax in India
Now that you have understood the calculation of short term and long term capital gains, it’s time to understand capital gain tax in India. Just like gains are short term and long term, capital gain tax in India is also divided into short term capital gain tax and long term capital gain tax. Let’s see the capital gain tax rate for these respective taxes –
Short term capital gains tax (STCG tax) Short term capital gains are taxed at your income tax slab rate if Securities Transaction Tax (STT) is not applicable on the gains. In such cases, the gains are added to your taxable income and then taxed at the slab rate under which your income qualifies. If, however, in the case of equity share, STT is applicable, short term capital gains are taxed at the rate of 15%.
Long term capital gains tax (LTCG Tax) Long term capital gains are taxed at a flat rate of 20% Though STCG and LTCG are taxed at the above-mentioned rates, in case of equity and debt related investments, the tax rates and rules are different. Here is how equity and debt fund investments are taxed –
|Type of fund||STCG Tax||LTCG Tax|
|Equity funds (which have 65% or more investments in equity)||15%||10% if the gain is more than INR 1 lakh in a financial year|
|Debt funds (which have 65% or more investments in debt)||At the income tax slab rate||20% with the benefit of indexation|
Capital Gain tax on sale of property
With the Interim Budget, 2019 announced on 1 Feb 2019, the tax benefits on capital gains have been widened. Extending the benefits the interim finance minister Mr. Piyush Goyal pronounced that the capital gains to the extent of Rs 2 Crore can now be invested in upto two residential house properties. this is to be done in lieu of the existing provision of investment required to be made in one residential house property. But this option can be availed only once in lifetime of the investor.
The amount so invested in these two house porperty shall not attract any long term capital gains tax. The long term capital gain is presently required to be invested either in purchasing a residential house property in next two years or constructing a house in next 3 years or invest in bonds u/s 54EC within 6 months to make the capital gains tax free. But, from the financial year 2019-20 (the assessment year 2020-2021) the taxpayer would be made eligible to adopt this new system to invest in two residential houses for once in a lifetime for an aggregate benefit of Rs 2 crore.
So, understand what capital gains are, when they are incurred, their types and how they are taxed when you are filing your income tax return. To file your taxes or get the best tax planning done, Contact us Now!!
Frequently Asked Questions
Q- What DDT means?
Ans. DDT or Dividend Distribution Tax is required to be paid by the companies on the dividends they issue. As per Budget 2020 speech, no Dividend Distribution Tax (DDT) shall be paid by the Companies from FY 2020-21.
Q- What is the DDT full form in tax?
Ans. DDT means the Dividend Distribution Tax which is required to be paid by the companies on dividend distribution.
Q- Do I have to pay capital gains tax if my total income is less than 2.5 Lakh?
Ans. If the total income of assessee including capital gains is below the basic exemption limit then no tax is levied.
Q- What are the best ways to avoid capital gain tax?
Ans. There are various ways to avoid capital gains tax by investing the amount of gain in the investment schemes of government and other methods specified by CBDT
Q- Is advance tax paid on Capital Gain & Casual Income? If yes, then how would the amount would be calculated?
Ans. Advance tax should be paid on capital gain income and casual incomes. The amount is calculated by adding the capital gain with total income and tax is calculated.
Q- What is the capital gains tax rate for listed, unlisted bonds, and debentures in India for FY 16–17 (AY 17–18)?
Ans. If the capital gains are short term , then rate for both listed and unlisted bonds and debentures is 30% and gains are long-term , then rate for listed bonds is 10% and for unlisted 20%
Q- Why do sold machinery attract short-term capital gains tax and not long-term capital gain tax?
Ans. capital assets on which depreciation is charged is sold is attract short term capital gain. Cost of acquisition is taken in this case is WDV of the assets.
Q- Do I have to pay short term capital gains tax if I am in the 10% ordinary income tax bracket?
Ans. Short term capital gains are taxed at slab rates of assessee. So assessee have to pay the tax on short term capital gain at its tax brackets.
Q- Are profits generated by high frequency trading algorithms taxes as capital gain or income?
Ans. It depends on the nature of the business of the assessee.. If the trading of shares is business of the assessee , then it will be taxed under business income otherwise under capital gain.
Q- Can you avoid capital gains taxes if you move to another country?
No,it cannot be avoided. The tax on capital gain is required to be paid irrespective of the residential status of the person.
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