Capital Gains Tax
Capital gains refer to the profits that an individual accrues through the sale of capital assets. It means that the capital assets were sold for a higher price than what it was initially bought for. There are two types of capital gains – long term capital gains (LTCG) and short term capital gains (STCG). Long-term capital gains are assets that are held for a minimum period of 36 months or longer, whereas short term capital gains are held for a period under 36 months.
There are many capital gains tax calculators available online that an individual can use to calculate the profits they receive from sales and figure out the tax that is to be paid. The capital gains tax calculator will ask for inputs such as purchase price, sale price, etc. and based on this, it will determine the amount an individual is expected to receive in terms of capital gains and the tax required to be paid.
Because capital gains refer to profits accrued from the sale of a capital asset, they are liable to be taxed. Under Union Budget 2018, long term gains on the sale of listed securities above Rs. 1,00,000 are taxed at 10% while short term gains are taxed at 15%. In case of debt mutual funds, both long term and short term gains are taxed.
The profit earned from a short term capital gain from a debt fund is added to the income of the individual taxpayer and is taxed according to the income tax slab rate for that particular individual. In the case of long term capital gains, it is taxed at 20% with indexation and 10% without indexation. Indexation refers to the adjustment of the purchase value due to inflation. Higher indexation increases purchase cost, thereby lowering the profits earned from its sale. There are many capital gains tax calculators available to calculate how much tax is to be paid based on the type of asset and other inputs.
In case of the sale of a property, under section 54 of the 2019 Union Budget, if an individual earns up to 2 Crore, then that amount can be reinvested into two other properties within 1-2 years of the sale of the previous property. This facility can be availed only once in a lifetime. If an individual wants to construct a house from the profits accrued from the sale of a property, it must be done within three years of the sale to avoid capital gains tax.
What is Capital Gains Tax?
Capital gains occur when a capital asset is sold at a higher price than what it was purchased for, thereby providing some sort of profit to the individual. Capital assets can be of several types, including investment products such as mutual funds, stocks, or any real estate’s products like land or house, etc. If there is a decrease in the value of the products when it is sold, an individual will suffer a capital loss.
When filing for income tax, one needs to declare the profit that is accrued from selling such assets under "Income from Capital Gain." Capital gains tax does not apply to the inherited property as it is just a change of ownership and not a sale. If an individual who has inherited a property decides to sell it and makes a profit, then capital gains tax would be applicable. Similarly, any asset which is received as a gift is not liable to be taxed under capital gains.
What are Capital Assets?
Capital assets can be immovable property like house, building, etc. and movable property like vehicles, trademark, leasehold rights, patents, machinery, jewellery, and gold. Any legal rights and rights of management and control are considered capital rights. However, there are certain things which are not considered capital assets:
- Rural Agricultural Land.
Stock on Trade
Personal use items such as clothes and furniture.
Raw materials and consumables for profession or business.
Gold deposit scheme gold bonds
6.5% gold bonds, special bearer bonds, and national defence gold bonds.
Types of Capital Gains Tax
Capital gains tax refers to the tax that is due to be paid by an individual because of profit arising from the sale of a capital asset. There are two types of capital gains taxes based on duration – Long term Capital Gains Tax and Short-term Capital Gains Tax.
Long-Term Capital Gains Tax
An asset that is held for longer than 36 months by an individual before its sale is considered a long-term capital asset. There are also certain other assets which if held for 12 months or more, are considered a long term capital asset. The tax for long-term capital gains is levied at the rate of 20% (plus 4% education cess for FY 2018-2019/ AY 2019-2020).
No deductions can be claimed under Chapter VI-A, for example, deductions such as Section 80C, Section 80D, etc., from such gains. If any amount has been invested into tax-saving instruments, then the individual has to claim that sum from gross income, excluding long-term capital gains. If the taxable comes, after claiming all deductions, it is below the taxable slab rate, which is currently Rs. 2,50,000, then the difference between Rs. 2,50,000, and the taxable income (not including these gains) will be allowed as a deduction, and the individual will have to pay only 20% of the remaining sum.
One of the best ways to save on Long-term Capital Gains tax applicable on the property is by reinvesting the amount accrued into another property, such as a residential one within the specified period. If one does not want to reinvest in property, it is possible to invest the amount into certain government bonds notified under Section 54EC.
Short-term Capital Gains Tax
Short-term capital gains are assets that are held by individuals for 36 months or less from the date of its transfer or purchase. Certain short-term capital gains assets are held for 12 months or less. These assets include:
- Life cover with return of premiums at maturity
- Option for coverage against disability
- Avail tax benefits u/s 80(c), 10 10(d)
- Affordable premium and higher life coverage
The amount of tax to be paid on the profit accrued from selling short-term capital assets boils down to which income tax slab rate an individual falls under. For example, income between Rs. 2,50,000 – Rs. 5,00,000: tax rate is 5%; income between Rs. 5,00,000 and Rs. 10,00,000: tax rate is 20%; income more than Rs. 10,00,000: tax rate is 30%. All deductions under Chapter VI A can be claimed for short-term capital gains. However, one cannot claim any exemptions or savings under Section 54 of the Income Tax Act, 1961, as this benefit is the only application in case of long-term capital gains.
The tax rate on long-term capital gains and short-term capital gains
Type of Tax
Long-term capital gains tax
Except on sale of equity-oriented fund units or equity shares
Long-term capital gains tax
10% over and above Rs. 1,00,000
On the sale of equity-oriented fund units or equity shares
Short-term capital gains tax
short-term capital gains tax is added to the taxpayer’s income and is calculated as based on the income slab rate
When securities transaction tax is not applicable
Short-term capital gains tax
When securities transaction tax is levied
Indexation or Impact of Cost Inflation on Capital Gains
Indexation or the Cost inflation index (CII) is an essential element to consider while calculating inflation-indexed long term capital gains. It is useful in estimating the increase in the price of property or shares due to inflation based on a standard index. Indexation is essential because prices generally do not stay the same and tend to fluctuate with time. Therefore, while calculating long-term capital gains, computing profits based on the original price of an asset is not an accurate measurement of profit.
Certain long-term capital assets like property are recorded at cost price. Even with constant rising inflation, these assets exist at cost price and cannot be revalued. Therefore, when a property, for example, is sold, the gains are very high, and therefore the tax will also be very high. For benefiting taxpayers, CII is applied to long-term capital gains, which accounts for an increase in the purchase price and therefore reflects the current market value accurately. This helps to bring down profits arising from the sale of long-term assets and lowers the applicable taxes. It is essential to know the CII for the year of purchase and year of sale when using a capital gains tax calculator.
How to Calculate Capital Gain?
As mentioned above, capital gains taxes are calculated differently for assets that are held for a longer period as compared to those held for a shorter period. Let us take a look at how a capital gains calculator can help us compute capital gains tax.
Calculating Long-Term Capital Gains Tax
There are several simple steps to follow to calculate long-term capital gains tax:
- An individual should begin with a complete value of consideration of what has been accrued or received
- Securities such bonds, debentures, government securities, etc. recognized by SEBI
- UTI units, units of equity-oriented mutual funds (whether quoted or not)
- Zero-coupon bond