Capital Gains Tax India - Definitions ,Exemptions & Tax saving

Ca Sunil Sakral
Mar 1, 2021
4 min read

1.Capital Gains Tax In India.

Any profit or gain that arises from the sale of a capital asset is a capital gain. This gain or profit comes under the category ‘income’, and one needs to pay tax for that amount in the year in which the transfer of the capital asset takes place. Capital gains are not applicable to an inherited property as there is no sale, only a transfer of ownership. The Income Tax Act has specifically exempted assets received as gifts by way of an inheritance or will. If a person who inherited the asset decides to sell it, capital gains tax will be applicable.

2. Definition Capital Assets

Land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewellery are a few examples of capital assets. This includes having rights in or in relation to an Indian company. It also includes the rights of management or control or any other legal right.

The following do not come under the category of capital asset:

a. Any stock, consumables or raw material, held for the purpose of business or profession

b. Personal goods such as clothes and furniture held for personal use

c. Agricultural land in rural India

d. 6½% gold bonds (1977) or 7% gold bonds (1980) or national defence gold bonds (1980) issued by the central government

e. Special bearer bonds (1991)

f. Gold deposit bond issued under the gold deposit scheme (1999) or deposit certificates issued under the Gold Monetisation Scheme, 2015

Definition of rural area:

Any area which is outside the jurisdiction of a municipality or cantonment board, having a population of 10,000 or more is considered a rural area. Also, it should not fall within a distance (to be measured aerially) given below –

(population is as per the last census).

Distance & Population

-2 kms from local limit of municipality or cantonment board and If the population of the municipality/cantonment board is more than 10,000 but not more than 1 lakh

-6 kms from local limit of municipality or cantonment board and If the population of the municipality/cantonment board is more than 1 lakh but not more than 10 lakh

-8 kms from local limit of municipality or cantonment board if the population of the municipality/cantonment board is more than 10 lakh

Short-term & Long - term capital asset

An asset held for a period of 24 months or less is a short-term capital asset. The criteria of 36 months have been reduced to 24 months for immovable properties such as land, building and house property from FY 2017-18.

Asset held for more than 24 months is treated as long term capital assets.

Following assets are considered short-term capital assets when these are held for 12 months or less:

a. Equity or preference shares in a company listed on a recognized stock exchange in India

b. Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India

c. Units of UTI, whether quoted or not

d. Units of the equity-oriented mutual fund, whether quoted or not

e. Zero-coupon bonds, whether quoted or not

When the above-listed assets are held for a period of more than 12 months, they are considered as a long-term capital asset. In case an asset is acquired by gift, will, succession or inheritance, the period for which the asset was held by the previous owner is also included when determining whether it’s a short term or a long-term capital asset. In the case of bonus shares or rights shares, the period of holding is counted from the date of allotment of bonus shares or rights shares respectively.

Tax on Short-Term and Long-Term Capital Gains

1. Long-term capital gains tax (Except on sale of equity shares/ units of equity oriented fund) - 20%

2. Long-term capital gains tax (On sale of Equity shares/ units of equity oriented fund) - 10% over One lac Rupees.

3. Short-term capital gains tax (When securities transaction tax is not applicable) - The short-term capital gain is added to income and the taxpayer is taxed according to his income tax slab.

4. Short-term capital gains tax (When securities transaction tax is applicable) - 15%.

Tax on Equity and Debt Mutual Funds

Debt Funds - Short term - At tax slab of the individual

- Long term - 20% with indexation

Equity Funds- Short term- 15%

- Long term - 10 % over one lac

Debt funds needs to be held for more than 36 months to consider long term if not sold before profit will be added to income and to be taxed as per slab rate.

Indexed Cost of Acquisition/Improvement

Cost of acquisition and improvement is indexed by applying CII (cost inflation index). It is done to adjust for inflation over the years of holding of the asset. This increases one’s cost base and lowers capital gains.

Indexed cost of the improvement is calculated as:
Indexed cost of acquisition = Cost of acquisition * Cost Inflation Index (CII) of the year in which the asset is transferred / Cost inflation index (CII) of the year in which asset was first held by the seller or 2001-02 whichever is later. Indexed cost of improvement = Cost of improvement * Cost inflation index of the year in which the asset is transferred / Cost inflation index of the year in which improvement took place

For any help with respect to saving capital gain tax we can be contacted.

Compiled by team

Team Ca Sunil sakral