Comprehensive Guide to Capital Gain Taxation in India

In this article we will learn about 

What is Capital Gain

Definition of Capital Assets

Short Term Capital Assets

Long Term Capital Assets

Capital Gain Exemptions

Case Study

FAQ

What is Capital Gain ?

Any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain. 

On this gain or profit from sale of capital assets you will need to pay tax for that amount in the year in which the transfer of the capital asset takes place. This is called capital gains tax, which can be short-term if you sell Short Term Capital Assets or long-term if you sell long term capital assets 

Capital gains are not applicable to an inherited property as there is no sale and it is mere  transfer of ownership of assets. However, if the person who inherited the asset decides to sell it, capital gains tax will be applicable and tax should be paid on the same.

Definition of Capital Assets

Any asset such as immovable property, vehicles, leasehold earning, jewellery, machinery or intellectual property such as patents and trademarks is termed a capital asset. 

However following assets are not treated as Capital Assets

• Any stock-in-trade, consumable stores or raw materials held for the purposes of business or profession;
• Personal effects, namely, movable property (including apparel and furniture held for personal use 
• Agricultural land in India, subject to certain conditions;
• Gold Bonds, Special Bearer Bonds & Gold Deposit Bonds issued by Government of India.

Short Term Capital Assets

If a Capital Asset is held by the assessee for more than 36 months, then it is a Long Term Capital Asset. 

Short Term Capital Asset means the asset held by an assessee for not more than 36 months

However, in the following cases, the assets will be considered Short Term if they are held for 12 months or less instead of 36 months:

• ​Equity or Preference shares
• ​Debentures or Government securities
• Units of UTI
• Units of the equity-oriented mutual fund
• Zero-coupon bonds

If the above-mentioned assets are held for more than 12 months, they will be considered as Long Term Capital Assets.

Holding Period helps in determining nature type of capital gains and tax rate will be applicable accordingly

Important Terms Before Calculating Taxes

Full value consideration 

It is the amount received or to be received by the seller as a result of transfer of his capital assets. Capital gains are chargeable to tax in the year of transfer, even if no consideration has been received.

Cost of acquisition 

Purchase price at which the capital asset was acquired by the seller.

Cost of improvement 

Expenses of a capital nature incurred in making any additions or alterations to the capital asset by the seller. Improvements Cost made before April 1, 2001, is never taken into consideration.

Indexation

It is derived with the help of the Cost Inflation Index. This concept takes into account the effect of inflation to reduce your tax liability. It is calculated using CII, an index maintained by the Income Tax Department.

How to Calculate Short Term Capital Gains

Step 1: Start with the full value of consideration

Step 2: Deduct the following:

Expenditure incurred wholly and exclusively in connection with such transfer

Cost of acquisition

Cost of improvement

Step 3: This amount is a short-term capital gain

How to Calculate Long Term Capital Gains

Step 1: Start with the full value of Sale consideration

Step 2: Deduct the following:

Expenditure incurred in connection with such transfer

Indexed cost of acquisition

Indexed cost of improvement

Step 3: From this number, deduct exemptions provided under sections 54, 54EC, 54F, and 54B

Tax Rates for Long Terms and Short Term Capital Gains

For long-term capital gains –

Tax Type	Circumstance	Rate of tax
Long-term capital gains Tax	In the case of sale except for equity-oriented funds or shares.	20% without adjusting for indexation.
Long-term capital gains Tax	In the case of sale of equity-oriented funds or shares.	Over 10% on and above Rs. 1 Lakh.

For short-term capital gains –

Short-term capital gains Tax	In the case when the securities transaction tax is not liable.	The short-term gain is added to the income tax returns and taxed accordingly.
Short-term capital gains Tax	In the case when securities transaction tax is liable.	15%

Treatment of equity and Mutual Funds capital gains tax

Taxability of gains from the sale of Equity and Debt mutual funds are different. Funds with more than 65% of the portfolio consisting of equities are called Equity Funds.

Funds	Short-term Gains	Long-term Gains
Equity Funds	15%	Nil
Debt Funds	As per the income tax slab.	20% with indexation.

Note: Debt funds have to be held for more than 36 months to qualify as Long Term Capital Assets.

Capital Gain Exemption

Capital Gain Taxes 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. Below Table shows conditions for the same and type of Investment

Section	Type of Asset Sold	Type of Asset Purchased	Taxpayer Type
54	House Property (LTCA)	House Property	Individual/HUF
54F	Any asset other than House Property (LTCA)	House Property	Individual/HUF
54EC	Land or Building or both (LTCA)	Bonds of NHAI/REC	Any Taxpayer
54B	Agricultural Land (LTCA/STCA)	Agricultural Land	Individual/HUF

Case Study :

Mr. Jorden purchased a house for Rs. 50 Lakh in July 2004. The full value of consideration in the financial year of 2018-2019 stood at Rs. 1.8 Crore. The said property was held for over 36 months and was, therefore, deemed as a long-term capital asset.

After taking into consideration the inflation, the cost price was adjusted, and the indexed cost of acquisition was also taken into account.

The adjusted cost of the property was then settled at Rs. 1.17 Crore, which means Mr. Jorden accrued a net capital gain worth Rs. 63 Lakh. After a long-term capital gains tax rate of 20% was levied on the net capital gain, the tax liability that was to be paid by Mr. Jorden arrived at a total of Rs. 12,97,800.

FAQ’s

Can I set off my short term capital loss against any other head of income?

First and foremost, capital losses can be set off only against capital gains. Accordingly, short term capital losses can be set off against any income under capital gains be it short term or long term. However, long term capital losses can be set off only against long term capital gains.

What is the rate of tax on long term capital gains on sale of house property?

Long Term Capital Gains on sale of house property is taxable at the rate of 20% flat on the quantum of gains made

Which ITR Form should I file if I have only Income from Capital Gain?

There are different ITR forms based on the type and amount of income. “Individuals with income from salary and capital gains or only Capital Gains are required to fill ITR-2 on Income Tax Portal”