What is Capital Gains Tax?
The taxation system in India is intricate and many a time complex to understand. Capital Gains Tax is an important aspect in Taxation. Here we go through an important part of Indian taxation system on the capital gains. Let us first understand what capital gains is and what the different implications of a tax on it are.
Firstly, Capital Gains is the profit which one earns during the sale of the capital asset. So, Capital gains tax is the tax levied on the profit after the sale of the asset. Capital gains tax is levied in the same year in which the transfer of capital assets takes place.
Capital gains tax is not applicable on assets which are inherited. As per the Income Tax Act of India, assets which are exempted from tax slab include gifts which are inherited or are transferred via will.
What all comes under capital asset?
Some of the common inclusions in the list of capital assets include the following:
- Leasehold rights
The following assets do not fall into the category of capital assets:
- Any kind of stocks, raw material or consumables which are held for business purpose or profession.
- Agricultural land in rural area
- Personal goods like furniture, clothes etc. which are held for personal usage
- The following are not considered capital assets:
- Gold bonds
- Special Bearer Bonds 1991
- Gold Deposit Bond issued under the Gold Deposit Scheme, 1999
What is the difference between long term and short term asset in capital gain taxation. Long-term capital assets are those which are held for a period longer than 36 months whereas the short-term capital assets are held for 36 months or less.
Another important point of consideration that one need to take care of is the holding period which is applicable to the particular assets held by the person. In certain assets, the holding period is more than 12 months but still, they are considered as part of the long-term asset. This rule comes into picture if the asset has been transferred after 10th July 2014 (date of purchase stands irrelevant).
The following assets when held for a period more than 12 months are considered to be long term capital assets:
- Equity or preference share (of company sites in stock exchange of India)
- Units of UTI
- Securities like bonds, government securities, debentures etc.
- Zero coupon code
- Units of equity oriented mutual funds
Calculation of Capital Gains:
Tax on long-term capital gain: It is taxable at 20% + surcharge and education cess.
Tax on short-term capital gain: In the case of securities, transaction tax is applicable, then tax applicable is at the rate of 15%+surcharge and education cess.
Calculation of Capital Gains:
Short-term capital gain = Full value consideration- (cost of acquisition + cost of improvement + cost of transfer)
Long-term capital gain = Full value of the consideration received or accruing – (indexed cost of acquisition + indexed cost of improvement + cost of transfer). Where;
Indexed cost of acquisition = Cost of acquisition X cost inflation index of the year of transfer/ cost inflation index of the year of acquisition
Indexed cost of improvement = cost of improvement X cost inflation index of the year of transfer/cost inflation index of the year of improvement
The cost of transfer is a brokerage paid for arranging the deal, legal expenses incurred, the cost of advertising, etc.
Advantages of capital gain tax
- The tax payments differ till the time assets are sold. Security investor doesn’t have to pay tax on profits earned from bonds and stocks till the time he/she sells the assets.
- Tax rates on long-term capital gains are lesser than normal income tax rate.
- Capital gains rate does not apply to inventory, even if this asset is held by you for more than one year.
- As per the Section 54 and Section 54F of the Income Tax Act, there is a provision wherein long-term capital gains can be used to construct or acquire resin details house property if, conditions like time frame within which the gain must be invested for buying or constructing property, then the person is exempted from capital gain tax.
Loanyantra stands with you if you look for investing your capital gains in a property. It helps you for a easy and hassle-free home loan process and management.
It is always advisable to take expert advice how to invest and where to invest before selling the assets.