Irrespective of the amount gained or lost, one must disclose capital gains or losses while filing Income Tax Return (ITR).
The Capital gains are the profits accrued through the sale of capital assets. The 2 types of capital gains are long-term and short-term. Long-term capital assets are those held for 36 months or more, while short-term assets are held for a shorter duration.
Capital gains arise when you sell a capital asset for an amount that is more than what you paid for it. Capital assets are any investment products like mutual funds, stocks, or any real estate product like land, house, etc. An increase in the value of any of these when you sell them is termed as a capital gain. Similarly, a capital loss is suffered in case there is a decrease in the value of an asset for its purchase price.
A realized capital gain occurs only when you sell the asset at a higher price than its original purchase price.
In the case of short term capital gains the formula used is Short-term capital gain= full value consideration – (cost of acquisition + cost of improvement + cost of transfer).
To calculate the long-term capital gains tax payable, the formula is to be used namely Long-term capital gain = full value of 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 rate at which capital gains is calculated varies from year to year. In the case of long-term capital gains, individuals are taxed at 20.6% (including education cess). There are no deductions that can be availed under capital gains tax.
Short-term capital gains tax is levied at the tax slab under which the individual falls under.
Gains made from transfer of immovable property (land, house, apartment) within two years of purchase are considered short-term capital gains (STCG); after two years, they become long-term capital gains (LTCG). The LTCG rate is 20% with indexation, while STCG is taxed at the slab rate.
Jewellery or bullion are chargeable to capital gains tax, irrespective of the method of acquisition—self-purchased, gifted or inherited. If sold before three years from the date of purchase, gains are considered STCG, else LTCG. STCG from sale of gold is taxed at the slab rate, and LTCG at 20% with indexation.
Gains from transfer of shares and equity oriented mutual funds within a year of purchase are considered STCG; after a year, they are considered LTCG.
Government provides a number of exemptions which can be claimed on capital profits made. Here is a list of all the exemptions that can be claimed with respect to gains from capital assets.
Section 54 of the Income Tax Act entitles a person to tax exemption on profit earned if that entire profit amount is used to buy another house. The seller can buy a new house within 2 years from the date of sale of his previous property or construct a new house within 3 years from the date of sale.
Section 54 EC entitles an individual for tax exemption if the entire capital profit is invested in bonds issued by NHAI that is National Highway Authority of India or REC which is Rural Electrification Corporation. There is a limit to exemption under Section 54 EC and is Rs.50 lakh.
In case you can’t find the right property to buy and you are unable to come up with a concrete plan in 2-3 years, you still can save tax on the capital profit earned. This can be achieved by investing gains in the Capital Gains Accounts Scheme (CGAS) in any public sector bank. This amount can then be claimed for tax exemption. However, you are required to invest this money within the period stated by the bank else the deposit is treated as capital gain and tax is deducted on it.
In case you sell agricultural land which is not within the limits of a civic body then tax is not levied on capital gain arising out of it.
Capital gains is not applicable to sale of property if the entire amount is invested to set up a small scale or a medium scale industry. However, to avail tax exemption, the tools and machinery for manufacturing should be bought within 6 months from date of sale.
For tax computations, capital losses can be used to offset the effect of tax on capital gains. However, long-term capital losses can be set off against long-term gains only. Short-term capital losses can be set off against short-term as well as long-term capital gains.
Support our journalism by subscribing to Taxscan AdFree. Follow us on Telegram for quick updates.
