Definition of Capital Gains
Capital Asset: A capital asset includes property of any kind held by an individual, such as land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewellery. It also encompasses rights in relation to an Indian company, including rights of management or control or any other legal right.
Capital Gain: Capital gain is the profit or gain that arises from the transfer of a capital asset. This profit is considered income and is liable to be taxed in the year in which the transfer of the capital asset takes place.
Types of Capital Assets
Short-term Capital Asset:
- Held for 36 months or less (reduced to 24 months for immovable property like land, building, and house property from FY 2017-18 onwards).
- Certain assets like equity shares or units of equity-oriented mutual funds are considered short-term if held for 12 months or less (from 10th July 2014).
Long-term Capital Asset:
- Held for more than 36 months (24 months for immovable property like land, building, and house property).
Taxation of Capital Gains
Short-term Capital Gains:
- Taxed at applicable slab rates of income tax.
- If Securities Transaction Tax (STT) is applicable, taxed at a rate of 15%.
Long-term Capital Gains:
- Taxed at a flat rate of 20%.
- However, for gains from equity shares or equity-oriented mutual funds realized after 31st March 2018, gains up to Rs. 1 lakh per annum are exempt from tax, and gains above Rs. 1 lakh are taxed at 10% without indexation.
Calculation of Capital Gains
Short-term Capital Gains:
Short-term Capital Gain = Full Value Consideration
−Expenses incurred exclusively for transfer
−Cost of Acquisition−Cost of Improvement
Long-term Capital Gains:
Long-term Capital Gain = Full Value Consideration
−Expenses incurred exclusively for transfer
−Indexed Cost of Acquisition
−Indexed Cost of Improvement
−Exemptions under relevant sections (e.g., 54, 54EC)
- Full Value Consideration: This is the consideration received or to be received by the seller as a result of the transfer of the capital asset.
- Cost of Acquisition: The price for which the capital asset was acquired by the seller.
- Cost of Improvement: Expenses of a capital nature incurred in making any additions or alterations to the capital asset by the seller, excluding improvements made before April 1, 2001.
- Indexed Cost: Adjusted cost of acquisition and improvement to account for inflation using the Cost Inflation Index (CII) notified by the government.
Exempted Assets
- Assets received through inheritance or will.
- Certain government bonds (like 6½% gold bonds, 7% gold bonds, and national defence gold bonds) and specific assets like agricultural land in rural areas are exempt from capital gains tax.
Deductions from Sale Proceeds
- Expenses directly related to the transfer, such as brokerage fees, commission, and stamp duty.
- Notional expenses related to the transfer process, like legal fees for inheritance procedures.
Important Points
- Indexation: Adjusting the purchase price of the asset for inflation to calculate long-term capital gains.
- Exemptions: Certain sections of the Income Tax Act provide exemptions from capital gains tax if proceeds are reinvested in specified assets like residential property (under sections 54, 54EC, 54F, etc.).
- Tax Treatment: Different tax rates apply based on the nature of the asset (e.g., equity vs. debt funds) and the duration of holding (short-term vs. long-term).
Understanding these concepts is crucial for individuals and businesses to comply with tax regulations when calculating and reporting income from capital gains in India. Properly assessing and planning for capital gains tax can significantly impact financial decisions related to investments and asset transfers.