What is Capital Gain?
Any profit or gain that arises from the sale of a ‘capital asset’ is a Capital gain. This gain or profit is charged to tax in the year in which the transfer of the capital asset takes place.
Capital gains are not applicable when an asset is inherited because there is no sale, only a transfer. However, if this asset is sold by the person who inherits it, capital gains tax will be applicable. The Income Tax Act has specifically exempted assets received as gifts by way of an inheritance or will.
This is how the screen will look in our application by accessing the path Transactions------>Capital Gain
This screen helps you to compute the capital gain for various capital assets and features such as Show cost inflation Index , Import from excel, Import from Depreciation, Fill exemption details, View summary, Deemed Capital gain are available for the user.
What is a Capital Asset?
Capital assets are those assets which includes any kind of property held by an assessee irrespective whether the same is associated with the business or profession of assesse or not. For eg: - Land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewellery.
The following are not considered capital assets:
Any stock, consumables or raw material held for the purpose of business or profession.
Personal goods such as clothes and furniture held for personal use.
Agricultural land in rural India.
6½% gold bonds (1977) or 7% gold bonds (1980) or national defence gold bonds (1980) issued by the central government.
Special bearer bonds (1991).
Gold deposit bond issued under the gold deposit scheme (1999).
Definition of Rural Area
From AY 2014-15, rural area is defined as any area which is outside the jurisdiction of a municipality or cantonment board, having a population of 10,000 or more is considered rural area. Also, if it does not fall within a distance (to be measured aerially) given below and in this case population is as per the last census.
2 kms from local limit of municipality or cantonment board
If the population of the municipality/cantonment board is more than 10,000 but not more than 1 lakh
6 kms from local limit of municipality or cantonment board
If the population of the municipality/cantonment board is more than 1 lakh but not more than 10 lakh
8 kms from local limit of municipality or cantonment board
If the population of the municipality/cantonment board is more than 10 lakh
NOTE:-If the land falls beyond the above mentioned limits and then that rural land qualifies for taxability in the category as Capital Assets
Applicability of Capital Gains in Income Tax returns: - This head of income will be covered in ITR-2, ITR-3, ITR-4, ITR-5, ITR-6, ITR-7. Capital gain income is not covered in ITR-1. Capital gain income is taxable in hands of every person irrespective of their status.
What are Long-Term and Short-Term Capital Assets?
Short-term capital asset – An asset which is held for not more than 36 months or less is a short-term capital asset.
Long-term capital asset – An asset that is held for more than 36 months is a long-term capital asset.
From FY 2017-18 onwards – The criteria of 36 months has been reduced to 24 months in the case of immovable property such as land, building, and house property.
For instance, if you sell house property after holding it for a period of 24 months, any income arising will be treated as long-term capital gain provided that property is sold after 31st March, 2017.
But this change is not applicable to movable property such as jewellery, debt oriented mutual funds, etc. They will be classified as a long-term capital asset if held for more than 36 months as earlier.
Some assets such as equity share or preference shares are considered short-term capital assets when these are held for 12 months or less. This rule is applicable if the date of transfer is after 10th July, 2014 (irrespective of what the date of purchase is).
The assets are:
Equity or preference shares in a company listed on a recognized stock exchange in India.
Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India
Units of UTI, whether quoted or not
Units of equity oriented mutual fund, whether quoted or not
Zero coupon bonds, whether quoted or not
→When the above listed assets are held for a period of more than 12 months, they are considered long-term capital asset.
In case an asset is acquired by gift, will, succession or inheritance, the period this asset was held by the previous owner is also included when determining whether it’s a short term or a long-term capital asset. In the case of bonus shares or rights shares, the period of holding is counted from the date of allotment of bonus shares or rights shares respectively.
Tax on Equity and Debt Mutual Funds
Gains made on the sale of debt funds and equity funds are treated differently. Funds that invest heavily in equities, usually exceeding 65% of their total portfolio, is called an equity fund.
Effective 11 July, 2014
On or before 10 July, 2014
At tax slab rates of the individual
At 20% with indexation
At tax slab rates of the individual
10% without indexation or 20% with indexation whichever is lower
Change in Tax Rules for Debt Mutual Funds
Debt mutual funds have to be held for more than 36 months to qualify as a long-term capital asset. This change, in effect from last year’s Budget, means that investors would have to remain invested in these funds for at least three years to take the benefit of long-term capital gains tax.
If redeemed within three years, the capital gains will be added to one’s income and will be taxed as per one’s income tax slab.
Calculating Capital Gains
Capital gains are calculated differently for assets held for a longer period and for those held over a shorter period. The list of assets as per our software is given below for your reference:-
Terms You Need to Know for reference:
a) Full value consideration
The consideration received or to be received by the seller in exchange for his assets, which he has transferred. Capital gains are chargeable to tax in the year of transfer, even if no consideration has been received.
b) Cost of acquisition
The cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be.
c) Cost of improvement
Expenses incurred to make improvements to the capital asset by the seller such as making additions or alterations. Note that improvements made before April 1, 1981, is never taken into consideration. It is deducted from the total cost of asset.
d) Cost inflation index means is an index used to factor in the effect of inflation in the prices of Capital Assets. CII is used while calculating long term capital gains. Inflation reduces the asset value over a period of time. Indexation helps us to counter the erosion in the value of our assets over time. You can increase the purchase price of the asset using the inflation index. This reflects the inflation-adjusted price in the year the asset is being sold. The capital gain indexation before and after the amendments in Finance Act, 2017 as on date April 1st, 2017 is given below:-
e) Slump sale: - It means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. (As per software it is explained below)
How to Calculate Short-Term Capital Gains?
Flow of computation
Start with the full value of consideration
Deduct the following:
Expenditure incurred wholly and exclusively in connection with such transfer
Cost of acquisition
Cost of improvement
This amount is a short-term capital gain
Short term capital gain = Full value consideration Less expenses incurred exclusively for such transfer Less cost of acquisition Less cost of improvement. (Full value of consideration-Expenses-Cost of acquisition)
Tax on short-term capital gain when securities transaction tax is not applicable: If securities transaction tax is not applicable, the short-term capital gain is added to your income tax return and the taxpayer is taxed according to his income tax slab.
Tax on short-term capital gain if securities transaction tax is applicable: If securities transaction tax is applicable, the short-term capital gain is taxable at the rate of 15% +surcharge and education cess.
How to Calculate Long-Term Capital Gains?
Flow of computation
Start with the full value of consideration
Deduct the following:
Expenditure incurred wholly and exclusively in connection with such transfer
Indexed cost of acquisition
Indexed cost of improvement
From this resulting number, deduct exemptions provided are under sections 54, 54EC, 54F, and 54B
This amount is a long-term capital gain
Long-term capital gain = Full value consideration Less expenses incurred exclusively for such transfer Less indexed cost of acquisition Less indexed cost of improvement Less expenses that can be deducted from full value for consideration* (Full value of consideration-Expenses- Indexed Cost of acquisition-Indexed cost of Improvement- Any other Transfer expenses)
(*Expenses from sale proceeds from a capital asset, that wholly and directly relate to the sale or transfer of the capital asset are allowed to be deducted. These are the expenses which are necessary for the transfer to take place.)
Tax on long-term capital gain
Further, as per Budget 2018 long term capital gains on sale of Equity shares / units of equity oriented fund if more than Rs 1 lakh will be taxed at @ 10% without the benefit of indexation.
Until 31st March 2018, investors had a relief to exempt amount of capital gains up to 31 Jan 2018. The amount of Gains made thereafter the cut-off date will be taxed.
For Example, Mr A purchased shares for Rs. 100 on 30th September 2017 and sold them on 31st December 2018 at Rs 120. The Value of the Stock was Rs. 110 as on 31st January 2018. Out of the capital gains of Rs. 20 (i.e 120-100), Rs. 10 (i.e 110-100) is not taxable. Rest Rs. 10 is taxable as Capital gains @ 10% without indexation.
In the case of sale of house property, these expenses are deductible from the total sale price:
Brokerage or commission paid for securing a purchaser
Cost of stamp papers
Travelling expenses in connection with transfer – these may be incurred after the transfer has been affected.
Where property has been inherited, expenditure incurred with respect to procedures associated with the will and inheritance, obtaining succession certificate, costs of the executor, may also be allowed in some cases.
In the case of sale of shares, you may be allowed to deduct these expenses:
Broker’s commission related to the shares sold
STT or securities transaction tax is not allowed as a deductible expense
Where jewelry is sold, and a broker’s services were involved in securing a buyer, the cost of these services can be deducted.
Note that expenses deducted from the sale price of assets for calculating capital gains are not allowed as a deduction under any other head of the income tax return, and these can be claimed only once.
Indexed cost of acquisition is calculated as:
Cost of acquisition / Cost inflation index (CII) for the year in which the asset was first held by the seller, or 1981-82, whichever is later X cost inflation index for the year in which the asset is transferred.
Indexed cost of improvement is calculated as:
Indexed cost of acquisition = Cost of acquisition * Cost inflation Index (CII) of the year in which the asset is transferred
Cost inflation index (CII) of the year in which asset was first held by the seller or 1981-82 whichever is later
Indexed cost of improvement = Cost of improvement *Cost inflation index of the year in which the asset is transferred
Cost inflation index of the year in which improvement took place
(Note: From FY 2017-18, the base year of 2001-02 will be considered instead of 1981-82)
Why is cost of acquisition and improvement indexed? Indexation, done by applying CII (cost inflation index), is made to adjust for inflation over the years. This increases one’s cost base and lowers the capital gains.
EXAMPLE FOR YOUR UNDERSTANDING:
Manya bought a house in July, 2004 for Rs. 50 lakh, and the full value of consideration received in FY 2016-17 is Rs. 1.8 crore. Since this property has been held for over 3 years, this would be a long-term capital asset. The cost price is adjusted for inflation and indexed cost of acquisition is taken.
Using the indexed cost of acquisition formula, the adjusted cost of the house is Rs. 1.17crore. The net capital gain is Rs.63, 00,000.
Long-term capital gains are taxed at 20%. For a net capital gain of Rs. 63, 00,000, the total tax outgo will be Rs.12, 97,800. This is a significant amount of money to be paid out in taxes.
This can be lowered by taking benefit of exemptions provided by the Income Tax Act on capital gains when profit from the sale is reinvested into buying another asset.
EXEMPTIONS AVAILABLE under CAPITAL GAINS
Section 54: Exemption on Sale of House Property on Purchase of another House Property
Exemption under Section 54 is available when the capital gains from the sale of house property is reinvested into buying another house property.
The taxpayer has to invest the amount of capital gains and not the entire sale proceeds. If the purchase price of the new property is higher than the amount of capital gains, the exemption shall be limited to the total capital gain on sale.
The new property can be purchased either 1 year before the sale or 2 years after the sale of the property. The gains can also be invested in the construction of a property, but construction must be completed within three years from the date of sale.
In the Budget for 2014-15, it has been clarified that only 1 house property can be purchased or constructed from the capital gains to claim this exemption. It’s important to note that this exemption can be taken back if this new property is sold within 3 years of its purchase/completion of construction.
Section 54F: Exemption on capital gains on sale of any asset other than a house property
Exemption under Section 54F is available, when there is capital gains from sale of a long-term asset other than a house property. Entire sale consideration and not only capital gain should be invested to buy a new residential house property must be purchased to claim this exemption.
The new property can be purchased either one year before the sale or 2 years after the sale of the property. The gains can also be invested in the construction of a property, but construction must be completed within 3 years from the date of sale.
In Budget 2014-15, it has been clarified that only 1 house property can be purchased or constructed from the capital gains to claim this exemption. It’s important to note that this exemption can be taken back if this new property is sold within 3 years of its purchase.
The entire sale proceeds towards the new house will be exempt from taxes if you meet the above-said conditions.
However, if you invest a portion of the sale proceeds, the exemption will be the proportion of the invested amount to the sale price or exemption = cost of new house x capital gains/net consideration.
Section 54EC: Exemption on Sale of House Property on Reinvesting in specific bonds
Exemption is available under Section 54EC when capital gains from sale of the first property is reinvested into specific bonds.
If you are not very keen to reinvest your profit from sale of your first property into another one, then you can invest them in bonds for up to Rs. 50 lakhs issued by National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC).
The money invested can be redeemed after 3 years; but cannot be sold before the lapse of 3 years from the date of sale.
The homeowner has six months’ time to invest the profit in these bonds, although to be able to claim this exemption, you will have to invest before the tax filing deadline.
When can you invest in Capital Gains Account Scheme?
If capital gains have not been invested until the date of filing of return (usually 31st July) of the financial year in which the property is sold, the gains can be deposited in a PSU bank or other banks as per the Capital Gains Account Scheme, 1988. This deposit can then be claimed as an exemption from capital gains, and no tax has to be paid on it. However, if the money is not invested, the deposit shall be treated as short term capital gains in the year in which the specified period lapses.
Saving Tax on Sale of Agricultural Land
In some cases, capital gains made from sale of agricultural land may be entirely exempt from income tax or it may not be taxed under the head capital gains.
Agricultural land in a rural area in India is not considered a capital asset and therefore any gains from its sale are not chargeable to tax. For details on what defines an agricultural land in a rural area, see above.
Do you hold agricultural land as stock-in-trade? If you are into buying and selling land regularly or in the course of your business, in such a case, any gains from its sale are taxable under the head Business and Profession.
Capital gains on compensation received for compulsory acquisition of urban agricultural land is exempt from tax, under Section 10(37) of the Income Tax Act.
If your agricultural land wasn’t sold in any of these cases, you can seek exemption under Section 54B.
Section 54B: Exemption on Capital Gains from Transfer of Land Used for Agricultural Purpose
When short-term or long-term capital gains are made from transfer of land used for agricultural purpose by the taxpayer or his parents for 2 years immediately prior to the sale, exemption is available under Section 54B.
The amount, investment in the new asset or capital gain, whichever is lower, that is reinvested into a new agricultural land within 2 years from the date of transfer is exempt.
The new agricultural land which is purchased to claim capital gains exemption should not be sold within a period of 3 years from the date of its purchase.
In case you are not able to purchase agricultural land before the date of furnishing of your income tax return, the amount of capital gains must be deposited before the date of filing of return in the deposit account in any branch (except rural branch) of a public sector bank or IDBI Bank according to the Capital Gains Account Scheme, 1988. Exemption can be claimed for the amount which is deposited.
If the amount which was deposited as per Capital Gains Account Scheme was not used for purchase of agricultural land, it shall be treated as the capital gain of the year in which the period of 2 years from the date of sale of land expires.
This is the list displayed in software relating to all exemptions.
DEEMED CAPITAL GAIN
Now let us understand from the software the taxability of various capital assets
Common inputs for all assets:- Description, Date of sale, Date of purchase, Year of indexation, Year of acquisition, Sale Consideration, Purchase cost/FMV, Type of capital gain, Transfer expense, Indexed cost, Capital Gain/loss, Loss ignored u/s 94(7)/(8).
1) DEBENTURES:-Debentures are long-term security yielding a fixed rate of interest, issued by a company and secured against assets. In case if these are sold then capital gain/ loss arises. Further, categorized into Listed or unlisted.
After entering the common inputs in the software, it calculates the respective Capital gain/Loss amount
2) DEPRECIABLE ASSETS:- Depreciable assets are those assets on which depreciation is charged and if those assets are sold than gain or lose is taxable under this head. Capital gain or loss on depreciable assets is always be short term capital gain.
3) OTHER ASSETS:- Other assets have been classified into further other assets as shown in the screen below:-
4) Equity Preference shares
5) Equity oriented Mutual fund:- Equity oriented mutual fund are those mutual fund on which long term capital gain is exempt and short term is taxable @15%
6) Units of business trust:- ->Short term capital gain in the hands of unit holder on transfer of a short term capital asset, being units of business trust on sale of which STT is paid is taxable at the rate of fifteen percent as per section 111A.
-> Long term capital gain in the hands of unit holder on transfer of long term capital asset, being units of business trust on sale of which STT is paid is exempt as per section 10(38)
Illustration:- A Business Trust earns following Incomes:
Interest Income from SPV Rs. 10 Lakh, Long term capital gain on sale of real estate properties Rs 20 Lakh, Dividend of Rs. 30 Lakh from SPV on which SPV have paid CDT under section 115-O.
Business Trust distributes Rs. 30 Lakh to its unit holders. One unit holder, Mr. Tarun receives Rs. 30,000 from Business Trust.
Treatment in hands of unit holder, Mr. Tarun –
Solution:-As per section 115UA (1), any income distributed by a business trust to its unit holders shall be deemed to be of the same nature and in the same proportion in the hands of the unit holder as it had been received by, or accrued to, the business trust.
Amount attributable to Business Trust’s Interest Income= 30,000*10, 00,000/60, 00,000= Rs. 5,000.
Such interest income is taxable.
Amount attributable to Business Trust’s Long Term Capital Gain=30,000*20, 00,000/60, 00,000= Rs. 10,000. Such LTCG is exempt as per section 10(23FD).
Amount attributable to Business Trust’s Dividend Income= 30,000*30, 00,000/60, 00,000= Rs. 15,000. Such dividend is exempt as per section 10(23FD).
7) Slump Sale:- In case of slump sale, sale consideration and net worth of the user are asked in order to compute the Capital gain on sale of undertaking.
8) Listed Securities STT not paid