What are Capital Gains Tax: Types, Rates and Exemption
Gains or profit that you receive by selling a capital asset is termed capital gains. The amount is taxed under the ‘Income from Capital Gains’ head and is known as capital gains tax. How much tax do you have to pay? What are the tax rates and how to calculate capital gains tax? This post provides all the information on capital gains tax. Keep reading!
What are Capital Gains?
Capital gains are the net profits that investors earn after selling their capital assets at a price higher than the cost of acquisition. The earnings from the sale of capital assets will be taxable. To qualify for taxation in a fiscal year, the capital asset transfer must take place during the last financial year.
A financial gain through the sale of a capital asset isn’t applicable to an inherited property. As per the IT Act, 1961, assets by way of inheritance or gifts are exempted in income computation for a taxpayer.
Capital assets can be jewellery, vehicles, houses, lands, and buildings. Besides, legal rights or management rights over an entity will be eligible as capital assets.
Capital assets do not include the following:
- Gold deposit bonds that were issued under the Gold Deposit Scheme, 1999
- Deposit certificates that were issued under the Gold Monetisation Scheme, 2015
- Gold bonuses that the Central Government has issued such as defence gold bonus (1980), a 7% gold bonus (1980) and a 6.5% gold bonus (1977)
- Special bearer bonds (1991)
- Agricultural land in the rural parts of India
- Commodities for personal use, such as furniture or clothes
- Any raw materials, consumables or stock held for professional or business purposes
Types of Capital Gains Tax
There are two types of capital gains tax based on the types of capital assets that you earn from. These are as follows:
1. Long-Term Capital Gains Tax (LTCG Tax)
The tax that you need to pay for any profit that you earn from a long-term capital asset is known as long-term capital gains tax. Long-term capital assets are those that you hold for a period of more than 36 months before selling.
However, some assets will be considered long-term assets if you hold them for more than 12 months. These include the following:
- Various securities such as bonds, debentures, and government securities on a recognised stock exchange of the country
- Shares of a company listed on any recognised stock exchange
- Zero coupon bonds, regardless of being quoted or not
- Units of different equity-oriented mutual funds
- Units of UTI, irrespective of being quoted or not
2. Short-Term Capital Gains Tax (STCG Tax)
Any asset that you hold for less than 36 months is a short-term capital asset. The taxation on the income earned from the sale of a short-term capital asset is called short-term capital gains tax (STCG tax).
However, since the financial year 2017-2018, this holding period of 36 months has been reduced to 24 months for immovable assets such as land or house property. For instance, if you own land for more than 24 months before selling, the income will be long-term capital gains. This has been applicable for the sale of an asset after March 31, 2017.
If you receive an asset in the form of succession, inheritance or will, then the period for which the previous owner held the asset will also be considered in determining the type of asset it is.
How to Calculate Capital Gains?
The following is a brief explanation of how one can calculate gains on capital:
1. Short-Term Capital Gains
In order to calculate the short-term gains, one must use the following formula:
Short-term capital gain = full value consideration – (cost of acquisition + cost of transfer + cost of improvement)
Given below is a description of the various terms used to calculate gains on short term capital:
Let’s assume Mrs. Sharma bought a house for Rs.30 lakh and is selling it at Rs.55 lakh. The brokerage fees and commissions stand at Rs.30,000. So, the net sale consideration stands at Rs.54,70,000.
She spent Rs. 3 lakh on its improvement. So, the gross short term capital gains would be:
Rs. 54,70,000 – (Rs. 30,00,000 + Rs.3,00,000) = Rs.21,70,000
STCG tax = 30% of Rs. 21,70,000 = Rs. 6,51,000
2. Long-Term Capital Gains
Individuals need to use the following formula to calculate long-term gains tax:
Long-term capital gain = full value of the consideration received or accruing – (indexed cost of improvement + indexed cost of acquisition + cost of transfer)
Given below is a description of the various terms used to calculate gains on long term capital:
As per the following sections, an individual can claim tax exemption on the capital earned from different assets:
- 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.
- Cost Inflation Index (CII): CII refers to an index that the government declares every year, and it remains fixed throughout the year. This index is used to adjust for the effects of inflation on goods and services.
This calculation can be explained through the following example:
Mr. Ray purchased an apartment for Rs.10 lakh in 2005, after 10 years, he sold the apartment for Rs.30 lakh.
The CII= Index for FY 2014-15/Index for FY 2005-2006 = 1024/480 = 2.13
Indexed cost of purchase = CII x Purchase Price = 2.13 x 10,00,000 = Rs.21,30,000
Long-term capital gain = Selling Price – Indexed cost = 30,00,000 – 21,30,000 = Rs.8,70,000
LTCG = 20% of Rs.8,70,000 = Rs.1,74,000
Capital Gains Tax Rates
The rate at which capital gains taxation takes place is displayed through the following presentation:
| Tax Type | Rate of Taxation | Condition |
| LTCG | 20% | Except in the case of selling equity shares or units of any equity-oriented mutual fund |
| LTCG | 10% LTCG tax for gains exceeding Rs. 1 lakh in one financial year | For the sale of equity shares or units of any equity-oriented mutual fund |
| STCG | 15% | When STT (Securities and Transaction Tax) is applicable |
| STCG | The short-term capital gains will be added to your ITR and then taxed as per the respective income tax slab rate | When STT is not applicable |
Also Read: Capital Gains Tax on Sale of Property: Meaning, Calculation And Tips To Get Tax Exemption
Tax Exemptions for Capital Gains
1. Section 54EC
Often, a taxpayer submits his/her gain on capital statement for investments towards certain bonds. In this case, the income has been earned through the sale of a property. As per Section 54EC, taxpayers can claim tax exemption for such capital gains.
2. Section 54F
When an individual fetches capital gains through the sale of long-term assets (except for residential property), tax exemptions are applicable under Section 54F. However, such an exemption becomes invalid in case a taxpayer sells this new capital asset within three years post-construction or purchase.
Note that an individual should buy a new property within 24 months of earning capital gains. Further, if individuals construct a house, it should be finished within 36 months from the day of sale.
3. Section 54
Many times, a taxpayer invests an income from the sale of a residential property to buy another property. The capital gains earned through this ownership transfer are tax-exempt. However, deductions will be applicable after satisfying the following conditions:
- The new property should be in India.
- An individual cannot sell this new property within 36 months of purchase.
- If a property is under construction, then an individual should buy a second property within 36 months of the first property’s ownership transfer.
- An individual should buy the second property within 24 months of sale or one year prior to ownership transfer.
Also Read: Section 54EC: Applicable Exemptions, Capital Assets, And Bonds
Final Word
If you receive income from capital assets, then make sure to learn about the capital gains tax rate. You can refer to the above-mentioned guide to get a clear knowledge of capital gains tax and how to calculate it. This will help you to file income tax returns accordingly.
FAQs on Capital Gains Tax
Capital assets include houses, Land, buildings, Financial securities, Vehicle, Machinery, Jewellery and Patents. However, there are certain entities that are not included under the category of capital assets. These include rural land, gold bonds, gold deposit scheme, personal items, special bearer bonds, and others.
If the property is a short-term capital asset, then taxation will take place as per the tax slab rate. However, if the property is a long-term capital asset, it will attract an LTCG tax of 20%.
You can set off the short-term capital losses against incomes under both short-term and long-term capital gains. However, keep in mind that you are allowed to set off long-term capital losses against long-term capital gains only.
Here are some of the exemptions on capital gains:
Capital gains tax is not applicable for the sale of agricultural land in rural areas.
You do not need to pay capital gains tax if you invest in CGAS (Capital Gains Account Scheme).
You can avail of tax benefits under Section 54F, provided you meet certain requirements.
If your income falls under the category of capital gains, note that you should not be filing ITR 1. Instead, you will have to report all the details of such income by filing ITR 2.
Yes, calculations of capital gains involve an asset’s full value of consideration and its improvement cost. Full value consideration is an amount that a seller receives in exchange for an asset. The improvement cost refers to those expenses that a seller incurs for making any alterations or additions to an asset.
Examples of capital assets are houses, cars, investment property, inventory, bonds, etc.
Short-term capital gains = Full value of consideration – (Improvement cost – Total expenses incurred at the time of ownership transfer – Cost of acquisition)
Long-term capital gains = Full value of consideration accruing or received – (Cost of transfer + Indexed improvement cost + Indexed acquisition cost)
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
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