Tax Implications on your Capital Gains Income

1. When and how taxability arises under this head?

If you sell any specified asset to another person, then the profits arising from such sale are taxable under this head. Some of the specified assets can be outlined as below:

• Property [e.g. House, plot, building etc.]
• Jewellery, archaeological collections, drawings, paintings, sculptures & any work of art
• Agricultural land situated in urban area
• Shares and securities

Stock is not covered under the list of assets. So don't worry; no capital gains arise on transfer of stock-in-trade. There are different tax implications on long term assets and short term assets.

2. What are long-term and short-term assets?

Period of holding is bifurcated in long term and short term. If listed shares are held for 12 months or less, they are short term assets, else long term assets; Other assets if held for 36 months or less are short term assets else long term assets.

3. How are Capital Gains calculated?

• Calculation of Short Term Capital Gains
  If you have incurred any short term capital gain, it can be calculated as follows:
  • Calculate the Full Value Consideration (it is the total sale value of asset usually mentioned in the sale deed subject to some other provisions of income tax law);
  • Reduce sale expenses from the full value consideration;
  • The resultant value is net consideration;
  • Reduce cost of acquisition and cost of improvement from net consideration;
  • Resultant value is Short Term Capital Gains;
  • Reduce the exemptions (if any) from STCG;
  • Resultant value is Taxable Short Term Capital Gains; calculate the tax on it.
• Calculation of Long Term Capital Gains
  If you have incurred any long term capital gain, it can be calculated as follows:
  • Calculate the full value consideration (it is the total sale value of asset usually mentioned in the sale deed subject to some other provisions of income tax law);
  • Reduce sale expenses from the full value consideration;
  • The resultant value is net consideration;
  • Reduce indexed cost of acquisition and indexed cost of improvement from net consideration;
  • Resultant value is Long Term Capital Gains;
  • Reduce the exemptions (if any) from LTCG;
  • Resultant value is Taxable Long Term Capital Gains; calculate the tax on it.
• Remember the following points:
  If you have incurred any long term capital gain, it can be calculated as follows:
  • Securities Transaction Tax paid is not allowed as deduction;
  • Indexed Cost of Acquisition = (Cost of acquisition x Cost inflation index of year of sale) / cost inflation index of year in which asset is first held/purchased.
  • Indexed Cost of Improvement = (Cost of Improvement x Cost inflation index of year of sale) / cost inflation index of year of improvement;
  • Cost Inflation index for each year is different;
  • If asset is acquired before 1-Apr-1981, cost of acquisition is Fair Market Value as on 1-Apr-1981 or the original cost of acquiring asset whichever is higher;
  • Expenses on any improvement done before 1-Apr-1981 is not deducted from the net consideration.
  • Indexation benefit is provided to adjust the cost of acquisition and improvement according to inflation raised during the period. Cost Inflation Index (CII) is used for calculating the indexation benefit.
  
  Expert advice: Benefit of indexation is not available for bonds/debentures other than capital indexed bonds issued by Government.
• Tax Rates on Short Term Capital Gains
  Tax rates on STCG is calculated as per the rates given below:
  • On transfer of Equity shares on which Securities Transaction Tax (STT) has been charged = 15% x Short Term Capital Gains.
  • In case of other STCG, slab rates are applicable.
• Tax Rates on Long Term Capital Gains
  Tax rates on LTCG is calculated at the rate of 20% of LTCG in all cases except those mentioned below:
  
  • If you transfer any equity shares and LTCG arises on it, then no tax is charged on such LTCG if Securities Transaction tax is paid;
  • Tax on LTCG arising on listed shares (in case of STT not paid) shall be calculated at the rate of 10% of Capital Gains (Net Consideration (minus) cost of acquisition without indexation) or 20% of Capital Gains (Net Consideration (minus) Indexed Cost of acquisition) whichever is lower.

Let's understand the concept of sale of shares with the help of an illustration:
Ritu purchased shares of Punj Lloyd through National Stock Exchange on 30-Jun-1995 for 20,000. On 1.1.2016 she transferred those shares to Puneet for 1,30,000. STT wasn't paid on the shares.

Period of holding = 30-6-1995 to 31.12.2015 (Long Term)
Since STT is not paid on transfer of shares, hence LTCG shall be chargeable to tax as follows:

4. What are the Tax Implications in case of sale of assets acquiried in inhertiance/will?

Tax rates on LTCG is calculated at the rate of 20% of LTCG in all cases except those mentioned below:

• Cost of acquisition for the seller = purchase price of asset plus improvement expenses incurred by the person from whom asset is inherited;
• Indexation benefit for cost of acquisition and improvement is provided for the year in which original owner acquired the asset.

Let's understand the concept with the help of an illustration:

Rahul sold a land on 12-Dec-2015 for Rs. 51 lacs. He inherited the land from his grandfather Mr. Kundan Lal on 10-May-2010. Mr. Kundan Lal acquired the plot on 15-Mar-1981 for Rs. 70000. Mr. Kundan Lal incurred improvement expenses of 66,000 on 05-06-2003. Rahul also incurred improvement expenses of 1,00,000 on 14-Nov-2010. Expenses incurred on transfer is 2% of sale price. FMV of plot on 01-Apr-1981 was 35,000. (CII index for 1981-82 = 100, 2003-04 = 463 and 2010-11 = 711).

5. What if Capital Loss arise on the sale of an asset?

At the time of sale of asset, if capital loss arises, it can be set-off against income from capital gain or it can be carried forward to next years.

Long term capital loss can be set-off only against long term capital gains arising from sale of another asset. But short term capital loss can be set-off against both short term and long term capital gains.

6. What are some tax implications related to purchase or sale of House Property?

If you are going to purchase a house property of Rs. 50,00,000 or more, then you are required to deduct tax at the time of making payment(s) to the seller.

You have to deduct TDS @ 1% of the payment made to seller under Section 194-IA.

You should follow the procedure given below:

• Make the payment to party and deduct TDS @ 1% of the payment made;
• Pay the tax to government;
• File the return in Form-26QB;
• Download the form 16B (Certificate of TDS deducted) and give it to seller for his records.

Following expenses are deductible from sale amount of house property at the time of computing capital gains:

• Brokerage or Commission paid;
• Stamp Paper expense;
• Expenses attached with events related to inheritance/gift/will.

If you have sold an asset (house property/other asset) and then purchased the new house property, claim the exemption in Capital Gains. Exemption has been mentioned in the (7) point of this guide.

When you sell a property, remember that if sale amount is less than stamp duty value calculated by Stamp Valuation Authority, then stamp duty value shall be deemed to be Full Value Consideration."Let's under the concept with the help of an illustration:"

• Sale price of the land = Rs. 7,00,000
• Land was acquired on 01-10-1997 for Rs. 1,50,000
• Valuation as per Stamp Valuation Authority = Rs. 13,00,000

Avoid cash transactions. Whether you receive money or pay it, do it via account payee cheque or account payee bank draft.

6. What are some of the exemptions on Capital Gains?

• Claim exemption on Sale of House Property
  Capital gains arising on sale of house property is not chargeable to tax if:
  • A property held for more than 3 years (i.e. a long term house property) is sold;
  • A new house is purchased 1 year before or within 2 years of sale of house property;You can also construct a new house but same should be constructed within 3 years of sale;
  • Don't sell the new house property till 3 years from date of purchase.
  • Quantum of Exemption: Amount of Capital Gains or amount invested in new house property whichever is less.

  Expert Advice: If you can't utilise the sale amount for purchase/ construction of house property till the date of filing ITR, then deposit the unutilised amount in Capital Gains Deposit Account Scheme
  Let's understand the concept with the help of an illustration:
  Shikha acquired a residential house in March, 2000 for 10,00,000 and made some improvements by way of additional construction to the house, incurring expenditure of 2,00,000 in December 2004. She sold the house property in November, 2015 for 75,00,000. She acquired residential house in February, 2015 for 25,00,000.
  

  Full Value of Consideration	Rs. 75,00,000
  Less: Indexed Cost of acquisition (100000-1081-389)	Rs. 27,78,920
  Less:Indexed Cost of Improvement (200000-1081-480)	Rs. 4,50,417
  Long Term Capital Gains	Rs. 42,70,663
  Less: Exemption u/s 54*	Rs. 25,00,000
  Taxable Long Term Capital Gains	Rs. 17,70,663

  
  *Since residential house has been purchased within 1 year before sale of the house property, hence exemption u/s 54 is allowed of amount invested or the amount of capital gains whichever is lower i.e. 25,00,000.

• Claim exemption on sale of assets other than House Property
  If you sell a long term asset (other than house property) and purchase a new house property within 1 year before or after 2 years from date of sale of asset, then exemption of capital gains is calculated as follows:
  Exempted Capital Gains = (Amount Invested in New AssetנCapital gains)/Net Sales Consideration*
  Expert Advice: Ensure that you own only 1 house (other than the new house to be bought) as on date of sale.
  *Net Sale consideration means [Total Sale value expenses on sale]
  For detailed implications on taxability of capital gains, feel free to reach us. Our experts shall always guide in a manner that reduces your tax liability.