What are Capital Assets: Types, Taxation and Exemptions
Assets are those that provide any economic value to their holders. They help in generating benefits for an organisation or an individual over a particular period. Capital assets are an important asset class that creates or adds value for their owners over a specific holding period. Keep reading to know more about these assets, their types, how they are taxed and Sections under which tax is exempted.
What are Capital Assets?
Any fixed asset that you own for personal or investment purposes constitutes a capital asset. They can be tangible or intangible. All property, stocks, bonds, and machinery owned or held by an organisation or individual are capital assets. Trademarks and goodwill also come under capital assets as they generate value for companies over a long period of time.
Types of Capital Assets
Here are two types of capital assets:
1. Short-term capital asset
All capital assets which are held for 36 months or lesser than that from the date of transfer to their owner are held as short term capital assets. This has been reduced to 24 months from FY2017-18 for immovable properties.
However, there are some assets which classify under short term capital assets if the holding period is less than 12 months. This is only applicable in case the date of transfer is after 10 July 2014. Those having a holding period of fewer than 12 months are given below:
- Equity or preference shares of any listed companies in India
- All other securities listed in India
- Zero coupon bonds
- All units of UTI
- Equity-oriented mutual fund units
Any unlisted shares and all immovable properties, including land, buildings and machinery, will come under short term capital assets if the holding period is not more than 24 months from the date of transfer.
2. Long term capital assets
Assets will come under this category if their holding period is more than 36 months from the transfer date.
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Taxation of Capital Assets
All gains arising from capital assets are subject to taxation. These are termed as long term capital gains tax and short term capital gains tax. Taxation of capital gains as per the Income Tax Act is described in the table below:
| Tax type | Condition | Rate of tax |
| Short term capital gains tax | Whenever STT is not applicable on any securities transaction | Total capital gains are added to taxable income and taxed as per slab rates |
| Short term capital gains tax | Whenever STT is applicable | 15% |
| Short term capital gains tax | Debt funds | Gains are added to taxable income and taxed as per the individual’s slab rate |
| Long term capital gains tax | Except for sale of equity shares or equity oriented mutual funds | 20% |
| Long term capital gains tax | On sale of share and equity based mutual funds | 10% above sale value of Rs. 1,00,000 |
| Long term capital gains tax | Debt funds | 20% with indexation |
Tax Exemptions for Capital Gains
There are several exemptions for gains from capital assets in the Income Tax act. This allows individuals to reduce their tax liability easily. Sections and their applicability have been described below:
1. Section 54E, 54EA and 54EB
Individuals can avail long term capital gains exemption when they reinvest proceeds received from some securities in specific securities like UTI, government bonds and securities etc. However, they need to reinvest within six months in new securities.
2. Section 54EC
Capital gains arising from the sale of long term assets are entitled to exemption only if the proceeds are reinvested in assets of either Rural Electrification Company (REC) or NHAI. Individuals need to reinvest their proceeds within six months of the date of sale of assets, and capital gains must not be more than the initial investment amount.
3. Section 54EE
Proceeds from the sale of some specified funds can also be availed for tax exemptions when these proceeds are reinvested in any units as notified by Central Government. The reinvestment timeline is the same as in earlier sections, and the holder must not sell the new asset within 36 months.
4. Section 54
All gains from the sale of a residential housing property when its proceeds have been reinvested to buy another house will be tax exempted. This exemption is only applicable when the holder purchases a new house within 1 year before or 2 years after the transfer is complete. It is also applicable if a new property is constructed within 36 months of the date of sale of the existing property.
What’s not Included in a Capital Asset?
Capital assets and fixed assets are synonyms for each other. However, some fixed assets are not a part of these assets that are given below:
- Any stock, consumables or raw material held for the purpose of business.
- Goods like clothes and furniture which are for personal use.
- Agricultural land in rural areas of India.
- Special bearer bonds (1991)
- Gold deposit bonds issued under gold deposit scheme (1999) and deposit certificates under Gold Monetisation Scheme 2015.
Final Word
Capital assets can create an immense economic potential for their holders. However, owners need to plan and take advantage of exemptions provided under the IT Act for efficient realisation of proceeds. If you own a capital asset that generates gains, you would be liable to taxation. Make sure to be aware of the tax rates and exemptions to streamline your tax filings.
FAQs
Ans: All government facilities, infrastructure, and equipment that help deliver public services are capital assets for the government. All these are important to improve the economic and social welfare of citizens and improve their standard of life.
Ans: Capital assets are those which generate economic value for their owners over a specific period of time, whereas an enterprise holds current assets for not more than a year. Capital assets do not provide liquidity, and current assets are easily liquid.
Ans: This model describes the relationship between expected returns from security and risks involved in investing in those securities. It will help you to calculate estimated returns from securities after taking into account all factors that affect their return.
Ans: There are several risks associated with tracking capital assets. First, there is always a scope of human error while calculating or recording their value. Loss of value due to depreciation and risks of theft are some additional disadvantages of capital assets.
Ans: The major difference between capital and non-capital assets is based on their end-use. All fixed assets owned by individuals for personal or business that generates value over time come under capital assets. On the other hand, assets meant for business purposes only constitute non-capital assets. Examples of non-capital assets are inventory and all property for business purposes.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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