Capital Gains India (7)
What is Capital Gains India? Capital gains in India refers to the net profit which a seller receives by selling his capital assets at a price that exceeds the original purchase price. To be eligible for taxation during the current fiscal year, the transfer of the asset sold must have been done in the previous financial year. However, if any loss occurs in the sale of such capital assets, the tax would be exempted. Capital gains tax is not levied on “inherited assets or assets procured through gift or partition of HUF (Hindu Undivided Family) property”. Types of Capital gains in India The Capital gains in India is divided into two types or categories; Short-Term Capital Gains Tax and Long-Term Capital Gains Tax, these two categories are discussed at length as follows: Long-Term Capital Gain Tax To be qualified to be taxed under Long-Term Capital Gains Tax the capital asset must be held for 36 months or more immediately preceding the date of its transfer. However, in case of financial capital assets including; debentures, preference shares, zero-coupon bonds (whether quoted or not), Unit Trust of India units (whether quoted or not), all securities which are listed and recognized by a stock exchange, etc., the time duration is more than 12 months. The tax rate of Long-Term Capital Gains under Income Tax Act, 1961, is fixed at 20% in case of gains earned from Long-Term Capital Assets (except units of equity-oriented funds and equity shares). It is extremely imperative to note that 10% Long-Term Capital Gains Tax is levied on listed securities of more than Rs 1 lakh and the exemption from indexation benefit is applicable on capital gains which are earned after 31st January, 2018, however, the earnings from such capital gains before the mentioned date will remain tax-free. For the unlisted securities the rate applied is 20.8% along with indexation. Short-Term Capital Gains Tax Short-Term Capital Gains Tax is applied to the sale of capital assets which are held by the owner for less than 36 months immediately preceding the date of its transfer, however, there has been a reduction in the time pertinent from the financial year 2017-18 wherein, immovable property like building, land, house, etc which are owned for less than 24 months would be subject to Short-Term Capital Gains Tax, as mentioned before as well. In case of financial capital assets including; debentures, preference shares, zero-coupon bonds (whether quoted or not), Unit Trust of India units(whether quoted or not), all securities which are listed and recognized by a stock exchange, etc., the time to be considered under Short-Term Capital Gains Tax is less than 12 months, while in case they are unlisted, the time is less than 24 months. The Short-Term Capital Gains Tax is payable at a rate of 15% on the capital gains earned from the sale of listed securities on which STT i.e. Securities transaction Tax is already paid. In case where STT is not applicable and Debt Funds, the capital gain is added to the income of the taxpayer and he/she is taxed per their income slab. Exemptions under capital gains tax There are certain exemptions laid down in the Income Tax Act which allow the individuals to pay lower taxes on the income they earn through the sale of capital assets and it thus helps them to safeguard a part of their capital gain by availing benefits given by such exemptions. An individual must be aware of these exemptions to benefit from them. Firstly, to avail certain exemptions under the Long-Term Capital Gains, an individual needs to fulfill some age and income criteria, which are as follows: Individuals who are a resident of India having an annual income of Rs. 5 Lakhs and are of the age of 80 years or above. Individuals who are a resident of India having an annual income of Rs. 2.5 Lakhs and are below the age of 60 years. Individuals who are a resident of India having an annual income of Rs. 3 Lakhs and are of the age of 60 years or above. A Hindu Undivided Family having an annual income of Rs. 2.5 Lakhs. Individuals who are not residents of India having an annual income of Rs. 2.5 Lakhs. Let us understand this concept better with an Illustration: Mr. Raj is a 40-year-old resident of India with an annual income of Rs. 2.5 Lakhs. On selling his old property which he had owned for 9 years, he made a Long-Term Capital Gain of Rs. 3.5 Lakhs. Now, his Long-Term Capital Gains will be adjusted against his income which will give a net result of Rs. 1 Lakh, and now the suitable Long-Term Capital Gains tax rate would be applied to such adjusted amount of Rs. 1 Lakh. Furthermore, there are certain important case-specific exemptions in capital gains tax, which are discussed as follows: Exemption under Section 54 Exemption from the payment of Long-Term Capital Gains Tax under Section 54 of Income Tax Act is related to the sale of Residential Property by an individual or Hindu Undivided Family (HUF), this exemption is subject to certain conditions which are as follows: The residential property for sale must have been held for over 3 years and the new property must have been constructed within 3 years from the transfer or sale of the concerned property. The capital gains from the sale of residential property shall be invested in the purchase of another residential property within 1 year before or 2 years after the transfer of the sold property. The capital gains proceeds shall be equal to or less than the cost of the new house. To avail the benefit of such Capital Gains Exemption, the exempted amount must be invested in the purchase or construction of one residential property only. However, through the Finance Act 2019, an exception was added to this point, which stated that in the case where Capital Gains amount does not exceed Rs. 2 Crores, the exemption from the payment of Capital Gains Tax can still be availed if the exempted amount is invested in the construction or purchase of two residential houses, also, this exemption of purchasing 2 houses can be claimed only once. If before the due date of filing the return of income, the amount received through capital gains is not utilized for any of the above-mentioned purposes, then the benefit of exemption can be availed by depositing it under Capital Gains Deposit Accounts Scheme, 1988. Exemption under Section 54B Exemptions under section 54B of the Income Tax Act can be availed when there is a sale of Agricultural Land and the capital gains received from such sale are reinvested to buy another Agricultural Land by an individual or Hindu Undivided Family (HUF). This section applies to both Short-Term and Long-Term Capital Assets. Certain conditions to avail such exemption are as follows: Such Agricultural Land must be in use by the individual or his parents or a member of the family (in case of HUF) for a minimum duration of 2 years immediately preceding the date of transfer. The exemption will be applicable if the new land is bought within 2 years from the date of transfer of the old land. The exemption will be withdrawn if the taxpayer who claimed the exemption, transfers the new piece of land within 3 years from when it was acquired. If the amount of capital gain is equal to or less than the new asset such capital gain will not be taxed. Exemption under Section 54 EC Exemptions under Section 54 EC of the Income Tax Act can be claimed where the capital gains from the sale of Long-Term Capital Asset is invested into Long-Term Specified Assets of National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC), certain conditions to avail such exemption are as follows: The capital gains received from the sale of Long-Term Capital Assets shall be invested into the above-mentioned Specified Assets within six months of the sale of Long-Term Capital Assets. There shall be no withdrawal of the amount invested in these Specified Assets before the completion of 5 years from the date of investment. These Specified assets shall not be used as a collateral security against any loan. Exemption under Section 54 F Exemption under Section 54 F of Income Tax Act can be claimed by an individual or a Hindu Undivided Family in case of the sale of a Long-Term Capital Asset (other than residential house) when the capital gain proceeds from it are invested in purchasing a residential property. The conditions to avail such exemptions are discussed as follows: The new residential property must have been purchased either 12 months before the sale of a Capital Asset or 24 months after the transfer of the capital asset. In case only a part of the capital gain is invested in buying/constructing a residential property then only the amount which was invested will be exempted from the capital gains tax, the balance will still be taxable. It is essential that on the date of transfer of the capital asset, the assessee shall not own more than one residential property exclusive of the new house purchase. The exemption would not be applicable if the assessee purchases any other new house (apart from the original house purchased) within 12 months or constructs the same within 36 months.