Capital Gains (India)

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Overview of capital gains tax

A capital gain is income derived from the sale of an investment. A capital investment can be a home, a farm, a ranch, a family business, or a work of art, for instance. In most years slightly less than half of taxable capital gains are realized on the sale of corporate stock. The capital gain is the difference between the money received from selling the asset and the price paid for it.


Profits or gains arising from the transfer of a capital asset made in a previous year is taxable as capital gains under the head "Capital Gains". The important ingredients for capital gains are, therefore, existence of a capital asset, transfer of such capital asset and profits or gains that arise from such transfer.

Capital asset

Capital asset means property of any kind except the following :

  • Stock-in-trade, consumable stores or raw-materials held for the purpose of business or profession.
  • Personal effects like wearing apparel, furniture, motor vehicles etc., held for personal use of the tax payer or any member of his family. However, jewellery, even if it is for personal use, is a capital asset.
  • Agricultural land in India other than the following:

Land situated in any area within the jurisdiction of muni-cipality, municipal corporation, notified area committee, town area committee, town committee, or a cantonment board which has a population of not less than 10,000 according to the figures published before the first day of the previous year based on the last preceding census. Land situated in any area around the above referred bodies upto a distance of 8 kilometers from the local limits of such bodies as notified by the Central Government (Please see Annexure 'A' for the notification).

  • 6 1/2 per cent Gold Bonds, 1977, 7 per cent Gold Bonds, 1980, National Defence Gold Bonds, 1980 and Special Bearer Bonds, 1991 issued by the Central Government.
  • Gold deposit bonds issued under the Gold Deposit Scheme 1999 notified by the Central Government.


Though there is no definition of "property" in the Income-tax Act, it has been judicially held that a property is a bundle of rights which the owner can lawfully exercise to the exclusion of all others and is entitled to use and enjoy as he pleases provided he does not infringe any law of the State. It can be either corporeal or incorporeal. Once something is determined as property it becomes a capital asset unless it figures in the exceptions mentioned above. Something is determined as property it becomes a capital asset unless it figures in the exceptions mentioned above.


Transfer

Transfer includes:

  • Sale, exchange or relinquishement of a capital asset
  • Extinguishment of any rights in a capital asset
  • Compulsory acquisition of the capital asset under any law
  • Conversion of a capital asset into stock-in-trade * Part performance of a contract of sale
  • Transfer of rights in immovable properties through the medium of co-operative societies, companies etc.
  • Transfer by a person to a firm or other or Body of a person to a Association of Persons (AOP) Individuals (BOI)
  • Distribution of capital assets on Dissolution
  • Distribution of money or other assets by a Company on liquidation


Long-term capital gains tax

Long term is defined as 3 years for some assets (gold, real estate, for instance) and one year for others (Mutual funds, shares). There is no capital gains tax after a holding period of more than one year for equities.


Many other capital investment ( home, buildings, real estate, bank deposits) are considered long term if the holding period is 3 or more years.


Long term capital gains arising out of sale of shares in recognised stock exchanges and mutual fund units, is exempt from tax. Shares / equities are considered long term capital, if the holding period is one year or more. Long term capital gains are taxed either at 10% of earnings or 30% of (earnings - deduction based on inflation index).


Stock options are only taxed at the time of exercise. For companies listed in Indian stock exchanges, the tax is calculated as regular capital gains with the rules above; purchase dates and prices are as per the time of grant. For companies abroad, the tax liability is 20% of such gains (since STT is not paid). The effect of indexation is also allowed.


Long-term capital gains is computed by deducting

from the full value of the consideration,

  • the expenditure incurred in connection with the transfer,
  • the indexed cost of acquisition,
  • and the indexed cost of improvement.


If the house owned by an individual is held for a minimum of 36 months from date of purchase, long-term capital gains tax is applicable. Longterm capital gains are taxed at a flat rate of 20% irrespective of your income slab. Long term capital gains tax stands at 20% (for gold, real estate and such) with indexation benefits provided for inflation.


Tax benefits are available under Section 54 of the IT Act

This tax can be avoided by re-investing the profits in another residential property if either of these conditions are satisfied - a fully constructed residential property is purchased within a period of one year before the sale or two years after the sale, or if you construct a residential property on your own within a period of three years after the sale. Only the profits earned from the sale proceeds need to be re-invested .


Long-term capital gains on sale of a house can be deposited under a Capital Gains Scheme of any authorised bank before the due date for filing of return of income. This may not be relevant for sellers who have already invested the entire capital gains in another house. The amount deposited here is considered to have been used for the purchase or construction of the new house. If the amount you have deposited is not used for buying a new house within a period of three years, the amount will be treated as long-term capital gains of the previous year.


Q and A

PLOT OF LAND PURCHASED: HOW WILL IT BE TREATED FOR CAPITAL GAINS. PLOT OF LAND PURCHASED & LETTER OF ALLOTMENT ISSUED IN APRIL-04 - POSSESSION OF PLOT NOT RECD FROM DEVELOPER AS IT WILL TAKE SOME TIME. IF I SELL THE PLOT IN MAY-07 AFTER 3 YRS FROM LETTER OF ALLOTMENT , WILL THIS BE A LONG TERM CAPITAL GAINS OR NOT OR CAPITAL GAIN IS COMPUTED FROM POSSESSON DATE ?

Answer: Yes this will be treated as Long Term Capital Gain. The period is to be calculated from the date of allotment provided money has been paid.

Short-term capital gains

Short term capital gains are taxed just as any other income and they can be negated against short term capital loss from the same business. All short term gains are clubbed with income in the year the gains occur.

Short Term Capital Gains is computed as below

Computation of short - term Capital Gains

  • Find out full value of consideration
  • Deduct the following :
    • expenditure incurred wholly and exclusively in connection with such transfer
    • cost of acquisition; and
    • cost of improvement
  • From the resulting sum deduct the exemption provided by sections 54B, 54D, 54G
  • The balancing amount is short-term capital gain


10% income tax is applied on short term capital gains arising out of sale of shares in recognised stock exchanges and mutual fund units (less than 1 year of holding). To qualify for these lower taxes on sale of shares, a Securities Transaction Tax (STT) must have been paid on the sale transaction. STT has been applied on all stock market transactions since October 2004 but does not apply to off-market transactions and company buybacks; therefore, the higher capital gains taxes will apply to such transactions where STT is not paid.


If the house owned by an individual is sold within 36 months of purchase, short-term capital gains tax is applicable. When computing shortterm capital gains tax, the gains are added to the total taxable income of the individual. The gain in this case is the difference between the cost of purchase and the sale value of the asset. It is then taxed at the relevant tax slabs.

Securities Transaction Tax

As per the provisions of Section 48 '( last proviso ) of the Income Tax Act, no deduction shall be allowed in comoputing the income chargeable under the head "Capital Gains" in respect of the sum paid on account of Securities Transaction Tax but while calculating tax on short term capital gains in accordance with the provisions of Section 111A, STT paid shall be given the treatment.


Q and A

Adjust the interest on the borrowed loan against Short term profit I have borrowed Rs. one lakh from the bank and invested in the stock market. I have booked enough Short term Profit. Can I adjust the interest on the borrowed loan against the profit ?

Answer : Yes. You can adjust the interest on the borrowed loan against profit ?


Can I show these share gains as short-term capital gains ?

I buy and sell shares in India and show these under the head of capital gains in my returns. On purchase of certain shares for investment deliveries did not come, and these were auctioned by the stock exchange(resulting in gain to me)and the proceeds were credited to my account without charging brokerage or STT. Can I show these gains as short-term capital gains?

Answer: If you are trading on daily basis without taking delivery of shares then it is a regular business and can also be treated as speculative income. Since you have not paid any STT it is to be treated as speculative income or business income. You can contact our CA on ssunderagarwal@sify.com.


A friend of mine has sold his residential property? Q: A friend of mine has sold his Residential Property,in 2/2007, which was purchased by him in 12/2003 & was subsequently renovated i.e Additions & aletration were made in 7/2004. Now my query is 1. Property purchased in 12/2003 & sold in 2/2007, the price paid can be endexed & profit made, is definately long term Capital gains but what about the indexation of the Improvements made in 7/2004,whether the expenditure incured for improvements in 7/2004, is to be treated as Long term or short term gain, as the period in between Improvements & sale is less than 36 months. 2. The sale price also includes the amount spent by him in fixing of furniture & fixtures,in 7/2004, some items of which were detachable & some permanently fixed in the property & as such how to calculate its gain.& whether fixed & detachable fixtures can be subject to indexation or not. In nutshell, Please enlighten as to how the, Income Tax be calculated in this case, where the Immovable reisential property is Improved & sold including furniture in sale price.


ANSWER: All immovable properties purchased prior to 36 months are eligible for Long term capitalm gain and any addition shall also be given benefit of Index cost on the basis of number of years. Each Furniture and fixture irrespective of fixed and detachable does not make any difference but each furniture for LTCG must have been purchased 36 moths back. If depreciation is claimed on both building and F.F then LTCG shall not be available.

You must bear in mind that in the sale agreement you must mention the cost of F.F.


I am currently planning to sell my car? I am Sripad, working in a Sofware company in Bangalore. I am currently planning to sell my car. Please let me know if I have to pay tax on the money that I gain from selling the car. It will be very helpful if I can know what documents I need to prepare for this transaction. Sripad.(via email)

ANSWER: IF YOU HAVE NOT CLAIMED ANY DEPRECIATION AND EXPENSES AGAINST YOUR INCOME THEN THIS CAR CAN BE TREATED AS PERSONAL ASSETS AND TAX ON GAINS TO BE CHARGED.


I have a self occupied house? Q: I have a self occupied house. I also had two flats in my name. In October 2006 I got the full amount for my one flat, but registered the flat in buyer’s name on 5th of June 2007 only. In October 2007 I booked a flat (not in my name) & rest money I kept in a saving account. In June 2007, after consulting a tax consultant I opened a Capital gain account in SBI bank put the rest money in this account. 1) Is it possible not to show booking of the flat (not in my name), and put the invested amount in the capital gain account? 2) Can I leave the whole money for three years in the capital gain account and save capital gain tax? Jeewan Prakash(via email)

ANSWER: FOR THE TIME BEING YOU CAN AVOID THE cAPITAL gAINS TAX . However, if yOU DO NOT BUY OR CONSTRUCT WITHIN STIPULATED TIME THEN YOU ARE REQUIRED TO PAY CAPITAL GAINS.


Equity trader / intra-day / capital gains tax ? I am an equity trader in India. I do both intra-day trades and short term delivery trades. Am I eligible for capital gains tax or do I have to show my income as business income?===

Answer: For the first question: Short term Capital Gains - If you take delivery and sale of the goods through stock exchange on which STT is paid, then it shall be treated as Short term and taxable @ 10% tax + 3% cess provided you hold them for less than 12 months.

For the Second Part: If you are doing same-day trading, the same shall be treated as business income and tax as per the tax bracket shall be charged.


Question: Assessee has sold Urban land?

Q: Assessee has sold Urban land for Rs.57,00,000 (Fifty Seven Lakh) according to circle rate this area value comes to 67,00,000. The Plot was sold in October 2006. The index cost of acquisition of plot was Rs. 17,00,000, the sales consideration of Rs.57,00,000 was deposited in assessee saving Bank Account and till date the amount remain in saving Bank Account. The Assessee has not paid any advance tax on the capital gain earned by him. The Assessee wanted to invest the amount in purchase of house property, later for this purpose assessee was about to open Special Capital gain account in bank, so that he deposit the money in special capital gain account 1988 and utilized the same in purchase and construction of residential house within three (3) year. Unfortunately assessee Died on June 15th 2007. Please let’s know that whether assessee legal representative can deposit the money in Special capital gain account 1988 for purchase of residential house and get relief U/S 54 of the Income Tax Act, and what will be liability of legal representative in above transaction.Can investment be made in capital Gain exemption bond.

ANSWER: THE MONEY SHOULD HAVE BEEN DEPOSITED WITHIN 6 MONTHS OF EARNING CAPITAL GAINS. YOU HAVE NOT GIVEN THE DATE OF ACQUSITION. KINDLY CHECK HOW MUCH IS THE CAPITAL GAINS. THE CAPITAL GAIN IS TO BE CALCULATED ON 57 LACS.

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Capital Gains Calculation

See also

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