Your guide to understanding capital gains in India [Part 2]

If you own agricultural land in the countryside, you can sell it and not be charged capital gains tax.

Your guide to understanding capital gains in India [Part 2]

In part 1 of this article, we talked about how you can upload a consolidated realised gain statement for the current and last financial years across CAMS serviced funds. In part 2, we will talk about folios serviced by Karvy.

For obtaining the consolidated realised gain statement from Karvy, you could visit their consolidated account statement online and key in your registered email address along with PAN and a password to self-secure the document with.

Similar to the CAMS procedure, you are required to provide the password to open and view the statement. You can directly request a password protected statement which will be delivered to your email address. 

You have to select the correct statement type – A detailed statement will provide you with a transaction listing, and the summary will provide only the balance as of the date selected.

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

LTCG Exemptions

Sale of long-term capital assets usually reap large gains, but the resultant long-term gains tax can be big amounts.

However, the government has provided the option of claiming exemptions if the gains are reinvested in specified forms of investments. This has been allowed under various subsections of Section 54 in the Income Tax Act. We touched upon the issue in part 1, but we will take a more detailed look here.

Under certain sections of the Income Tax Act, we can save tax on long-term capital gains from real estate. There are several ways:

  • Buy or Construct a Residential House

Here again, there are two ways to save tax, both involving house purchase. In the first case, the capital gain is from the sale of another house. In the second case, it involves the sale of any long-term asset other than a residential one.

Section 54 of the Income Tax Act allows an exemption on capital gains arising from the sale of residential property on the purchase of another residential property. Basically, it is reinvesting in another property, where the old asset is residential property, and the new asset is also residential property.

The exemption will be of the same amount gain if invested in either of two scenarios or both:

  • Purchase of a residential house between one to two years after the date of the transfer of the property concerned.
  • Construction of residential property within three years of the transfer date.

Similarly, Section 54F provides an exemption on capital gains on the sale of any long-term asset other than a house property, if the entire gain is reinvested in residential property. The conditions would be the same as above.

  • Capital Gain Bonds

The second broad avenue of saving on capital gains tax is if the reinvestment is in specific bonds.

Section 54EC provides for exemption on LTCG tax if the amount is invested in the bonds of Rural Electrification Corporation (REC), the National Highways Authority of India (NHAI), Power Finance Corporation Ltd (PFC) and the Indian Railways Finance Corp (IRFC). 

The investment must be made within six months of the sale of the property, and you can invest up to Rs. 50 lakh in these bonds, which have tenures of three years. However, 5.75% of the interest earned on these bonds is not tax-free.

  • Capital Gains Account Scheme

This is a temporary way to save on capital gains. It provides you with a time cushion of three years until you figure out how to reinvest your capital gains.

This cushion is important because although Section 54 and its sub-sections allow you up to three years to acquire a residential property, your income from the asset sale becomes taxable in the same year it has been sold. This means you have to take a decision on how to reinvest the capital gain. 

Moreover, it may be possible that for some reason, you have not been able to get possession of the new property, or could not manage to get it constructed before the due date of filing your returns for that year.

If that is the case, you can always deposit the amount sought to be invested in a capital gains account with any authorised bank - generally, most PSU banks offer this scheme. The deposited amount will be eligible for exemption as if it has been utilised for the purchase or construction of a new residential house property for a period of three years.

However, if any amount deposited remains unutilised at the end of three years from the date of transfer, it will be taxed.

Related: 6 Income sources that do not attract tax

Agricultural Land

As far as agricultural land is concerned, if the property is in the rural area, it is out of the scope of a capital asset under Section 2(14) of the Income Tax Act. This means that any gains you make from the sale of such land are not taxable. 

However, if the land under consideration is situated in an urban area, you can claim an exemption if the following conditions are satisfied:

  • The land should have been cultivated or used by the taxpayer or his parents for agricultural purpose in the two years before the date of sale.
  • The taxpayer has invested the long-term capital gains for the purchase of another plot of agricultural land within two years from the date of sale of the original land.
  • In case the land is not purchased by the due date of filing of the income tax return, the capital gains would have to be deposited in a capital gains account with specified banks.
  • The money deposited in the capital gains account is used within the original period of two years for the purchase of agricultural land.

Gains from the sale of urban agricultural land are exempted under another condition. If the gains were compensation received for a government project like an airport such exemption is granted under Section 10(37) of the Income Tax Act.

Capital gains are also exempted if your business requires to buy and sell such land – i.e. if the agricultural land is your stock-in-trade.

FAQs

  • Is the benefit of indexation available for calculating gains from short-term capital asset sale?

Indexation applies only to assets held for long-term, as it would be unfair to determine gains by merely reducing the purchase price from the sale price without giving any weightage to the inflation.

  • Are all assets held for less than 36 months deemed short-term and those held for more than 36 months considered long-term capital assets?

Different assets have different periods of holding to be called short-term and long- term. Below is a ready-reckoner:

  • Immovable property: short-term if less than 24 months, long-term if more.
  • Listed equity shares: short-term if less than 12 months, long-term if more.
  • Unlisted equity shares: short-term if less than 24 months, long-term if more.
  • Equity mutual funds: short-term if less than 12 months, long-term if more.
  • Debt mutual funds: short-term if less than 36 months, long-term if more.
  • Other Assets: short-term if less than 36 months, long-term if more.

Should an NRI pay tax on gains made on the sale of property in India?

Property sold in India is generally subject to a tax deduction, which in this case will be at the rate applicable to the NRI’s income slab. Taxes should be deducted on the gains made and not on the sale proceeds. A jurisdictional assessing officer will determine the gains.

  • Can I set off my short-term capital loss against any other head of income?

Capital losses can be set off only against capital gains. So short-term losses can be set off against any income under capital gains, be it short-term or long-term. But long-term capital losses can be set off only against long-term capital gains.

  • What is the rate of tax on long-term capital gains on the sale of house property?

A flat rate of 20% on the gains made.

Take a look at these at how taxpayers can heave a sigh of relief with higher tax deduction limit.

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