Your guide to understanding capital gains in India [Part 1]

If you are planning to sell that old house your parents left you, you will be taxed.

Your guide to understanding capital gains in India [Part 1]

Finance Minister Nirmala Sitharaman has provided a leg-up to entrepreneurs in search of business capital by extending the cut-off time for certain tax benefits offered under the Income Tax Act.

Over the next two years, entrepreneurs will not have to pay capital gains tax on funds raised from selling property, including houses, for the purpose of financing projects. The provision, introduced in 2013, ran out on March 31, 2019. It will now run till March 31, 2021, with retrospective effect.

The Finance Minister announced other measures relating to the same clause under the Income Tax Act as well. But for the purpose of this discussion, we will focus on capital gains tax: What is it? How does one calculate it? And what are capital gains and capital assets?

Capital Assets

Capital Asset is defined as any kind of property that you hold, which may or may not be connected with your business or profession. Any property you might own like an apartment or a car will be deemed a capital asset, even if you are a housewife or a working woman and not an entrepreneur.

However, certain items are excluded from the definition of a capital asset while calculating income tax. These include movable property and personal effects that have been held for personal use by the taxpayer or any dependent family member. The movable property will consist of furniture and certain specified types of bonds, while personal effects would be apparel.

In addition, there is one particular type of property that is not considered a capital asset. This is agricultural land in rural areas.  

Similarly, if you are an entrepreneur and run a business – even a small one like a tailoring unit or a fashion wear boutique, you will enjoy exemptions on any stock-in-trade, consumable stores or raw materials held for the purpose of your business or profession.

Again, certain movable property and personal effects will qualify as capital assets for income tax purposes. These would be: 

  • Jewellery.
  • Archaeological collections.
  • Any work of art like sketches, paintings and sculptures.

Asset Types

There are two main types of capital assets:

1. Short-term capital assets

2. Long-term capital assets.

These depend on the number of months they have been held and whether the asset is moveable or not. 

Short-term capital asset 

An asset will be considered a short-term capital asset if it has not been held for over 36 months. However, in the case of immovable properties such as land, building and house property, the holding period has been reduced to 24 months from fiscal 2017-18.

Thus, any income arising from the sale of a house after it has been owned for 24 months will be deemed a long-term capital gain, provided that property is sold after March 31, 2017.

Long-term capital asset 

An asset is deemed a long-term capital asset if it is held for more than 36 months. 

However, a specific set of assets will be considered short-term capital assets if held for 12 months or less, provided the date of transfer is after July 10, 2014 (irrespective of what the date of purchase was). But if held for more than 12 months, they will be deemed long-term assets. These assets are:

  • Equity or preference shares in a company listed on a recognised stock exchange in India.
  • Securities like debentures, bond securities etc., listed on a recognised stock exchange in India.
  • Units of UTI.
  • Units of the equity-oriented mutual fund.
  • Zero-coupon bonds.

In the case of assets inherited, left in a will or acquired as a gift, the period for which the previous owner held the asset is also included to ascertain whether it is a short-term or a long-term capital asset. 

Similarly, in the case of bonus shares or rights shares, the period of holding is determined from their dates.

Related: Savvy millennials betting big on Mutual Funds 

Capital Gains and Tax

Capital gains are the profit earned from any capital asset. For example, any profit you make from selling your ancestral jewellery would be capital gain. However, if you make a quick buck on an old sofa set, it would not be considered a capital gain. Capital gains are also either short-term or long-term.

With regards to capital gains tax, all financial gain from the sale of a capital asset is subject to income tax. This is called capital gains tax.

Tax Calculation 

The tax levied on long-term, and short-term gains start from 10% and 15%, respectively, and they are calculated differently.

Short-term capital gains tax

In the case of short-term asset sale (i.e. if the property is sold within 36 months of purchase), capital gains are added to your income, and you will have to pay income tax as per your slab. For instance, if you fall under the 20% tax slab, your short-term capital gains will be taxed at 20%. 

There are no indexation benefits available for short-term capital gains. Indexation is used to adjust income payments by way of a price index, in order to maintain the purchasing power of the public after inflation.

The formula can calculate short-term capital gains:

Short Term Capital Gain = Sale Consideration - Cost of Acquisition + The Cost of Improvement + Cost of the Transfer.

Related: Capital gains vs. dividend income: What's the difference?

Long-term capital gains tax

For long-term capital gains, you can take the benefit of cost of inflation index.

The capital gains can be calculated by the formula:

Long Term Capital Gain = Sale Consideration - The Indexed Cost of Acquisition + The Indexed Cost of Improvement + Cost of Transfer + Exemptions.

Various exemptions are also available under sections 54, 54A, 54B, 54D, 54EC54F, 54G and 54GA.The tax amount should be calculated after deducting the total deductions you are eligible under these sections.

The capital gains amount can be kept in a capital gains account scheme available at all major public sector banks till the time it is invested.

Related: Here's how you can file tax returns on your capital gains. 

Mutual Fund Gains

As stated earlier, any sale of stocks, mutual funds (debt and equity), real estate, gold, etc., are deemed capital gains. These gains are taxable and have to be reported in your income tax returns for the financial year when you made the sale. 

To assess your tax liability and file your tax returns correctly, you need to know the capital gains you earned during the financial year for equity, and debt mutual funds, you can find this in the capital gains statements.

Registrars such as KARVY, CAMS, FTAMIL and SBFS have provided investors with the convenience of allowing them to see a consolidated view of their portfolio as a mail-back statement, provided they have registered an email address in their folios across funds serviced by them. 

For instance, if you are registered with CAMS, instead of manually entering the details you can simply upload a realised gain statement that is a consolidation of your investment performance, capital gains and income for the current and last financial years across CAMS serviced funds.

Related: Investing in Money markets vs capital markets

The following part explains how this is done:

  • Go to www.camsonline.com,
  • Click on ‘Investor Services’ on the top menu,
  • Select ‘Mailback Services’ from the menu on the left,
  • Click on ‘Consolidated Realised Gain Statement’.
  • Then enter your registered email address, and a password, which may not be your actual password, but just one that CAMS will use to encrypt the file or statement they will send within an hour. You are to use the password provided to open the statement.

This will only get generated if you have any recent redemptions or switch in a particular year. Take a look at this beginner’s guide to capital markets to gain more knowledge about the same.  

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