A guide to Capital gains and its tax implications

An individual invests in different types of assets including mutual funds and shares. The capital gain or loss arises when an asset is sold. In this article,  we will cover capital gains and it’s  tax treatment for different assets

Capital gain tax in India

The first thing to remember is the following conditions that lead to a capital tax chargeable to tax.

1. The transaction should be of a capital asset. On the date of transfer, the asset must be a capital asset
2. The transfer must be made by the taxpayer. The transfer must be made during the previous year.
3. There must be a gain or loss and must be as a result of the transfer.

What is a capital asset?

A capital asset is any asset that a taxpayer holds. It may or may not be related to his business or profession or held for personal use. It includes assets that are tangible or intangible, movable or immovable, and fixed or circulating.

For example house property, land, shares and stocks, mutual funds, bonds, jewelry, vehicles, patents, and trademarks.

Under the Income Tax Act 1961, the below however is not included in the definition of a capital asset;

1. The stock-in-trade, raw materials, and consumable stores that a taxpayer hold for its business or profession
2. The movable property a taxpayer holds for his or on behalf of his family for personal use. 
3. Special bearer bonds and specific gold bonds
4. The deposit certificates that are issued under the scheme of Gold Monetization
5. The agricultural land in India.

However, if the agricultural land fulfills any of the below requirements, it is a capital asset.

Condition-1

• Firstly, it is situated with the jurisdiction of either:

1. A municipality 
2. A notified area committee
3. A town area committee
4. A cantonment board 

• Secondly, the population of the above is more than 10000

Condition-2

1. It falls with a distance limit from a municipality or containment board
2. It falls with the specific population range

Distance from the local limits of municipality or containment board	Population of municipality or containment board
2 Km	Greater than 10000 and less than 1 lakh
6 Km	Greater than 1 lakh and less than 10 lakh
8 Km	Greater than 10 lakh

What is the holding period and why is it important?

The holding period of any asset is the duration for which the asset is held by the person owning the asset. It is the time difference between the date of purchase and the date of sale of the asset.

The holding period of an asset is essential because the type of capital gain or loss is dependent on it. Basis of the holding period, an asset will have long term or short term capital gain. The rate of tax and treatment is different for both the type of gains. Hence it becomes very important to calculate it accurately.

While calculating the holding period, the period for which the previous owner held the asset is also considered. This is only the taxpayer acquires an asset by inheritance, succession, or gift.

The holding period is counted from the date of allotment in case of bonus shares and right shares

Types of a capital assets

Short term capital asset

A capital asset that is held for less than 36 months is considered as a short term capital asset. The period of 36 months has been reduced to 24 months for any immovable property such as a land, house, etc from FY 2017-18. 

The period is 12 months for a few intangible assets such as listed shares, equity mutual fund, units of, etc 

Long term capital asset

A capital asset that is held for more than 36 months is considered to be a long term capital asset. The period of 36 months is not the same across all the capital assets. For a few assets its 24 months as well as 12 months.

The following table shows the capital asset, its holding period and capital asset type

Capital Asset	Short Term Capital Asset	Long Term Capital Asset
Listed Equity or Preference Shares	Holding Period < 12 months	Holding Period > 12 months
Units of Equity Oriented Mutual Funds
Units of UTI
Zero-Coupon Bond
Other Listed Securities
Unlisted Shares	Holding Period < 24 months	Holding Period < 24 months
Debt Oriented Mutual Funds	Holding Period < 36 months	Holding Period < 36 months
Immovable Property	Holding Period < 24 months	Holding Period < 24 months
Other Capital Asset	Holding Period < 36 months	Holding Period < 36 months

Types of capital gains

Short term capital gain

On transfer or sale of a short term capital asset, a short term capital gain arises.

Long term capital gain

On transfer or sale of a long term capital asset, a long term capital gain arises.

A transfer under capital gain includes the following:

1. sale, exchange or relinquishment of the asset
2. Extinguishment of rights that is related to an asset
3. A compulsory acquisition an asset
4. A capital asset converted to a stock-in-trade
5. A redemption or maturity of zero-coupon bond
6. Any transaction that leads to transfer of an immovable property
7.  A possession transferred to a buyer if an immovable property. This transfer is in part performance of the any contract

You can use Scripbox’s Capital gain calculator to calculate the LTCG/ STCG and tax payable. Additionally, use Scripbox’s income tax calculator to estimate the final tax payable including the tax under capital gains.  Above all, the income tax calculator is a ready to use, simple online tool

Capital gains tax rate

Capital Gain	On a sale of	Capital gains tax rate
Long Term Capital Gain Tax	On a transfer of: Listed equity shares Units equity-oriented funds Units of a business trust	Capital Gain < 1 lakh. Tax-Exempt Capital Gain > 1 lakh. Tax rate- 10%
Long Term Capital Gain Tax	Any asset other than mentioned above	Tax rate – 20%
Short Term Capital Gain Tax	On a transfer of: Listed equity shares Units equity-oriented funds Units of a business trust	Tax rate – 15%. If STT paid
Short Term Capital Gain Tax	Any asset other than mentioned above	The capital gain to be added to the gross total income. Taxed at normal slab rate

Tax on mutual fund

Fund	Short term capital gain tax	Long term capital gain tax
Equity-oriented funds	Tax rate- 15%	Capital gain < 1 lakh- Tax Exempt Capital gain > 1 lakh- Tax rate- 10%
Debt-oriented funds	Applicable tax income tax rates	20% with indexation

Capital Gain Calculation Terms

Full value of consideration

The full value of consideration is the total value that a taxpayer receives or will receive for the transfer of the asset. This value can be in cash or kind. In case of the value being in kind, the fair market value or FMV can be the full value of consideration

Cost of acquisition

The cost of acquisition is the price the buyer pays to acquire or buy the capital asset. Additionally, it includes all the expenses incurred to acquire the capital asset. 

Cost of improvement

The cost of improvement is the cost incurred by the taxpayer or previous owner to make additions or alterations to the asset. These expenses must be capital expenditure. The Income Tax Act 1961 does not consider any expenses belonging prior to 01-04-2001

Indexation

 Indexation is a benefit of inflation that passes to the taxpayer. The intent is to adjust the purchase price of an asset w.r.t. inflation over the years of holding an asset. Due to indexation, the purchase price increases leading to a decrease in gain. The indexation is available on a long term capital gain.

 Indexation benefit is not available to the following assets:

1. Listed equity shares, units equity-oriented funds and units of a business trust
2. Bonds or debentures
3. Unlisted shares transferred by an NRI
4. Depreciable asset

Indexed cost of acquisition

The indexation is done by applying the cost inflation index or CII to the cost of acquisition

Indexed cost of acquisition =  

Cost of acquisition. * (CII for the year of transfer or sale / CII for the year of acquisition or purchase or FY 2001-2002 whichever is later)

Indexed cost of improvement

The cost of improvement is indexed by applying the cost inflation index or CII to it.

Indexed cost of improvement =  

Cost of improvement * (CII for the year of transfer or sale / CII for the year of acquisition or purchase)

Capital gain tax calculation- STCG

Particulars

Full value of the consideration received

Less: Cost of acquisition

Less: Cost of improvement

Less: Expense related to the sale or transfer

Short Term Capital Gain

Capital gain tax calculation- LTCG

Particulars

Full value of the consideration received

Less: Indexed cost of acquisition

Less: Indexed cost of improvement

Less: Expense related to the sale or transfer

Long Term Capital Gain

Capital Gains Exemption

Section-54 Capital gain on a residential house property

• Eligible- Individual taxpayer and HUF
• LTCG is eligible for the exemption
• A capital gain is arising from sale or transfer of a residential property
• Another residential property must be purchased with the sales proceeds.
• The new residential property must be purchased either 1 year before the sale of the old property. Otherwise 2 years after the sale. Whichever is later

• In case of construction, it must be completed within 3 years of the sale of the old property
• The exemption amount will be the investment amount or capital gain whichever is lower
• The exemption will be withdrawn if the new property is sold within 3 years of purchase date
• Additionally, the option to deposit the proceeds in capital gains account scheme is available

Section-54B Capital gain on an agricultural land

• Eligible- Individual taxpayer and HUF
• Long term or short term capital gain is eligible for the exemption
• A capital gain is arising from the sale or transfer of agricultural land. The agricultural land must be used by the taxpayer, his parents, or HUF. The land must be used in the last 2 years before its transfer for agricultural purposes.
• Another agricultural land must be purchased with the sales proceeds. The agricultural land may be in a rural or urban area.
• The new residential property must be purchased within 2 years after the sale 

• The exemption amount will be the investment amount in the new land or capital gain whichever is lower
• The exemption will be withdrawn if the new property is sold within 3 years of purchase date
• The proceeds can be deposited in the CGAS account so as to secure the exemption

Section-54D Capital gain on compulsory acquisition of land or building

• Eligible- Any taxpayer 
• Long term or short term capital gain is eligible for the exemption
• A capital gain is arising from the compulsory acquisition of land or building forming part of an industrial undertaking. The land or building must be used in the last 2 years before its transfer for industrial purposes.
• Another land or building must be purchased with the sales proceeds. The land or building must be used to reestablish the said undertaking
• The new land or building must be purchased in order to claim exemption. Additionally, the purchase must be within 3 years after receiving the compensation

• The exemption amount will be the investment amount or capital gain whichever is lower
• The exemption will be withdrawn if the new property is sold within 3 years of purchase date
• In this case, the option to deposit the proceeds in CGAS account is available

Section-54EC Capital gains on long term asset being land or building or both

• Eligible- Any taxpayer 
• Long term capital gain is eligible for the exemption
• A capital gain is arising from the sale or transfer of land or building or both
• The proceeds must be invested in bonds. These bonds are issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC).
• In order to claim exemption, the bonds must be purchased. Also, bonds must be purchased within 6 months after from the date of transfer.

• The exemption amount will be the investment amount or capital gain whichever is lower. But up to a maximum limit of Rs 50 lakh
• The exemption will be withdrawn if the bond is sold or converted into money or served as a security against a loan. The time period here is 5 years from the date of investment
• In this case, the option to deposit the proceeds in capital gains account scheme is NOT available

Section-54EE Capital gains on long term capital asset

• Eligible – Any taxpayer 
• Long term capital gain is eligible for the exemption
• A capital gain is arising from the sale of any long term capital asset
• The proceeds must be invested in units of funds to finance startups. These funds are notified by the Central Government 
• The units must be purchased within 6 months from the date of transfer in order to claim exemption.

• The exemption amount will be the investment amount or capital gain whichever is lower. But up to a maximum limit of Rs 50 lakh
• If the units are sold or converted into money or served as security against a loan, exemption will be withdrawn The time period here is 3 years from the date of investment.
• The option to deposit the proceeds in CGAS account is NOT available in this case.

Section-54F Capital gain on any long term asset

• Eligible- Individual taxpayer and HUF
• Long term capital gain is eligible for the exemption
• A capital gain is arising from the sale or transfer of any long term capital asset. This asset must not be a residential property in order to claim exemption.
• The taxpayer must hold only one residential property on the date or transfer (except the new one)
• Another residential property must be purchased with the sales proceeds
• The new residential property must be purchased either 
• 1 year before the sale of the old property. Otherwise, 2 years after the sale. Whichever is later

• The construction must be completed within 3 years of the sale of the old property. This is when the new house is being constructed
• The exemption amount will be the {investment amount * (capital gain / net consideration)}
• The proceeds can be deposited in capital gains account scheme in this case

The exemption will be withdrawn if any of the following transactions are made:

• the new property is sold within 3 years of purchase date
• Another residential property is purchased within 2 years of transfer of the original property
• Otherwise, another residential property is constructed. The construction is completed within 3 years of transfer of the original property

Capital gain account scheme

For any taxpayer, it is difficult to find a potential buyer, get the paperwork , arranging the funds, and so on. A taxpayer could end up paying taxes only due to a delay in arranging a deal of selling and buying.

Hence, the income tax department introduced a capital gain account scheme. A taxpayer can open this account with a branch of a nationalized bank with capital gain account scheme

A taxpayer can deposit the sales proceeds in this account. While at the same time arrange everything to buy the new asset. The deposit must be made before the date of filing of the income tax return.

A depositor can open the account by submitting the documents like pan card and aadhar card along. There are 2 types of account, CAGS Saving Account and CGAS Term Deposit. 

It generally, becomes easier to open a CAGS account if the taxpayer already has a saving account with the bank. The documents like pan card and aadhar is generally required for both the type of account

Set-off and carry forward of capital loss

A capital loss cannot be a set-off with any other gain or income under other income heads. A short-term capital loss can be set-off against a long term capital gain or a short term capital gain. Whereas a long term capital loss can only be set-off against a long term capital gain.

A taxpayer can carry forward a short term or long term capital loss for up to 8 assessment years. However, a taxpayer must file the income tax return on the due date to carry forward such losses.

Is it mandatory to file income tax return to carry forward losses?

Yes, it is mandatory to file income tax return by the taxpayer. The taxpayer must file the return before the tax filing due date. The ITR forms are different for every taxpayer. The applicability of  ITR forms varies w.r.t. source of income as well as a type of taxpayer. Similarly the applicable tax slab is different for every taxpayer. Moreover, the tax slab depends on the total income.