Capital Gain Tax

Simply put, any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain. This
gain or profit is comes under the category ‘income’, and hence 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 or long-term. Capital gains tax is basically levied because it is
an appreciation in the income of the owner of the asset which can be realized and thus this tax
exists.
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. However, if the person who inherited the asset decides to sell it, capital gains
tax will be applicable.
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.

Types of Capital Assets

1. Short-term capital asset An asset held for a period of 36 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.
For instance, if you sell house property after holding it for a period of 24 months, any income
arising will be treated as long-term capital gain provided that property is sold after 31st March
2017.

2. Long-term capital asset An asset that is held for more than 36 months is a long-term capital
asset. The reduced period of the aforementioned 24 months is not applicable to movable property
such as jewellery, debt-oriented mutual funds etc. They will be classified as a long-term capital
asset if held for more than 36 months as earlier.
Some assets are considered short-term capital assets when these are held for 12 months or less.
This rule is applicable if the date of transfer is after 10th July 2014 (irrespective of what the date
of purchase is).
Rate of Tax: Depending on the holding period, capital gains tax can be Long term Capital Gains
Tax (LTCG) or Short term Capital Gains Tax (STCG). LTCG is 10% for stocks and equity
mutual funds and 20% with indexation for real estate, debt mutual funds and other assets. LTCG
on equities/equity mutual fund does not get the benefit of indexation. STCG is levied as per your
slab rate. The holding period for classifying tax as LTCG or STCG changes from asset to asset.
LTCG applies to real estate for a holding period of more than 2 years, to debt funds for a holding
period more than 3 years and to stocks/equity mutual funds for holding period of more than 1
year.

Illustration: For example assume that you buy a debt fund in 2013 for Rs 100 and sell it in 2018
for Rs 150. Since you have sold it after three years, the gain is long term and a tax of 20% with
indexation will apply. The Cost Inflation Index (CII) in FY 13 was 200 and the CII in FY 18
was 272. As a result your purchase price for tax purposes will rise to (272/200)*100 = 136 and
your taxable gain will be 150 – 136 = 14. The tax payable will be 20% of 14 = Rs 2.8. Hence
even though you have made a gain of Rs 50, your actual tax is not 20% of Rs 50 or Rs 10 but
rather only Rs 2.8 after applying indexation
Exemptions: These exemptions mentioned below can be claimed either fully or partially.
1. Section 54: If the sale proceeds of a residential property are further utilized to buy
another residential property, the capital gains on the sale proceeds are exempt. This is
however subject to the following conditions
a) The purchase of property should be done either 1 year prior to selling the property or
within two years of the sale.
b) In case of under construction property, the same should be done within maximum
three years from the transfer date of the earlier property.
c) The newly acquired property cannot be further sold within 3 years of purchase or
construction.
d) The newly acquired property should be located in India.
2. Section 54F: If you sell any other asset like agricultural land within 10 km of a city or
valuable paintings, jewellery, debt funds etc, you can take the benefit of Section 54F.
This section grants deduction for purchase of a house property from the proceeds of the
sale of any capital asset. The following additional conditions apply:
a) The purchase of property should be done either 1 year prior to selling the property or
within two years of the sale.
b) In case of under construction property, the same should be done within maximum 3 years
from the transfer date of the earlier property.
c) The newly acquired property cannot be further sold within 3 years of purchase or
construction.
d) The newly acquired property should be located in India.
e) The person should not have more than one residential property on the date of the transfer.
f) No other property is purchased within 1 year of the transfer or constructed within 3 years
of the transfer
The investor can deposit the sale proceeds in a Capital Gains Account Scheme before the due
date for filing returns in order to take the benefit of the above sections even if he has not
bought/constructed another property. However he must buy/construct the new property
within the time limits specified above and can pay for it by using the money deposited in the
Capital Gains Account Scheme.

3. Section 54EC: Capital Gains Bonds issued by NHAI (National Highways Authority of
India) and REC (Rural Electrification Corporation) are eligible for exemption from
capital gains tax up to Rs 50 lakh. They have a tenure of 5 years and carry a fixed interest
rate (currently 5.25%). The interest on these bonds is taxable. Only capital gains in real
estate are eligible for this deduction. For example, if you buy an asset for Rs 10 lakh and
sell it for Rs 20 lakh investing the entire Rs 20 lakh in NHAI/REC capital gains bonds,
the said transaction would not attract capital gains tax.

Key Takeaways: The forthcoming Union Budget needs to shore up investment with forward-
looking tax design. Specifically, there is a solid case for rationalizing the long-term capital gains
(LTCG) tax regime across asset classes such as securities and immovable property. In particular,
it would make perfect sense to do away with LTCG tax entirely, by bringing all savings under a
scheme of taxation in which saving is exempt from tax ation at the time it is made, exempt when
it grows with accrued returns and taxed when it is withdrawn as income. If the monetized saving
or a part of it is reinvested in an asset, this saving, too, should qualify to be exempt from tax.

Reference:
1. https://cleartax.in/s/capital-gains-income
2. https://www.paisabazaar.com/tax/capital-gains-tax/
3. https://economictimes.indiatimes.com/blogs/et-editorials/case-for-abolishing-capital-
gains-tax/