Capital Gains Tax India

Capital gain is one of the five heads of income which is taxable under the Income Tax Act 1961. Therefore, it is very important to understand the different provisions of capital gain, such as chargeability conditions, definition and meaning of capital gain, types of capital gain, etc. In this guide, we have covered the concept of “income from capital gains” and the criteria for considering an income to be capital gain.

What is Capital Gain?

Profits or gains resulting from the sale of a ‘capital asset’ are capital gains. Capital gains arise when you sell a capital asset for an amount, which is higher than its acquisition value. Similarly, in case there is a decrease in the value of an asset with respect to its purchase price, a capital loss is suffered.

A realised capital gain occurs only when you essentially sell the asset at a higher price than its original purchase price.

Criteria for Income to be Considered Capital Gain

• Capital gains are chargeable to tax in the year in which the transfer or sale of the capital asset takes place.
• There will not be any capital gains applicable when an asset is inherited. This is because there is no actual ‘sale’, it is only a transfer.
• However, if this asset is sold by the person who inherits it, capital gains tax will be applicable on account of actual ‘sale’.
• The Income Tax Act has explicitly exempted assets received as gifts by means of inheritance or will.

What is a Capital Asset?

In simple words, capital asset means property of any kind held by the assessee, viz. any real estate product like land, house or any investment products like jewellery, mutual funds, stocks, and others.

In legal words, it has been defined under Section 2 (14) of the Income Tax Act 1961 as:

• property of any kind held by an assessee, whether or not connected with his business or profession;
• any securities held by a Foreign Institutional Investor which has invested in such securities by the regulations made under the Securities and Exchange Board of India Act, 1992; but does not include:
  (i) any stock-in-trade, other than the securities referred to in sub-clause (b), consumable stores or raw materials held for the purposes of his business or profession;
  (ii) personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, but excludes:
  (a) jewellery;
  (b) archaeological collections;
  (c) drawings;
  (d) paintings;
  (e) sculptures; or
  (f) any work of art.

Which type of Capital Asset is considered Jewellery?

Jewellery, in the context of a capital asset, includes:

1. ornaments made of platinum, gold, silver, or any other precious metal or any alloy having one or more of such precious metals, whether or not having any precious or semi-precious stone, and whether or not included or stitched into any garment or apparel; and
2. precious or semi-precious stones, whether or not fixed in any utensil, furniture, or other article or included or stitched into any garment or apparel.

Under the head of capital gains, according to the Income Tax Act 1961, capital asset mainly distinguishes the business assets from other assets for taxation.

Difference between Long Term and Short Term Capital Assets

* Note: From FY 2017-18 onwards, the criteria of holding period needs to be at least 24 months instead of 36 months for immovable properties like land, building, and house property to be considered as long-term capital assets.
For example, if an assessee sells a 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.
However, this 24 months clause 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.

** Note: Assets that are recognised as short-term capital assets when held for 12 months or less, are:

• Units of UTI, whether quoted or not
• Equity or preference shares in a company listed on a recognised stock exchange in India
• Units of equity oriented mutual fund, whether quoted or not
• Securities (like debentures, bonds, government securities etc.) listed on a recognised stock exchange in India
• Zero coupon bonds, whether quoted or not

If these assets are held for more than 12 months, they will be considered as long-term capital assets. This rule is valid if the date of transfer is after 10th July 2014, regardless of the date of purchase.

In case an asset is acquired by gift, will, succession or inheritance, the period this asset was possessed/held by the previous owner is also included in calculating holding period for determining whether it’s a short-term or a long-term capital asset. In case of bonus shares or rights shares, the holding period is computed from the date of allotment of bonus shares or rights shares respectively.

How to Calculate Long Term Capital Gain (without Indexation)

How to Calculate Short Term Capital Gain

Here, indexed cost is computed using cost inflation index (CII)

Indexed cost of acquisition = Cost of acquisition x CII of the year of transfer/ CII of the year of acquisition

Indexed cost of improvement = Cost of improvement x CII of the year of transfer/ CII of the year of improvement

Cost of Transfer = Cost of advertising + Brokerage paid + Legal expenses incurred

Concept of Cost Inflation Index (CII)

• Cost Inflation Index (CII) is an indexation declared every year by the government for calculating capital gains on long-term assets.
• Indexation is the procedure of adjusting prices based on a standard index to factor in the inflation rate also while calculating profits earned on the sale of assets.
• Indexation considers inflation and gives us a more reasonable figure for long-term capital gains.
• Budget 2017 has revised the base year for indexation from 1981 to 2001 and new index will be notified in due course.

Cost Inflation Index (CII) Table

Tax on Capital Gains:

The process of calculating capital gains based on its type, that is whether it is short term capital gain or a long term capital gain, is very important.

Tax on Short Term Capital Gains

Tax on Long Term Capital Gain

*Note: Long-term capital gain on listed equity shares and equity oriented mutual funds are exempt u/s 10(38) if such sell transaction is subjected to STT. Starting the 1st April 2017, this exemption will apply only if the STT was paid even at the time of purchase of the security being sold subject to certain notified exceptions. 

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