Capital Gains Tax under Income Tax

What is a Capital Asset :

​As per Section 2(14) of the Income Tax Act, the Capital Asset is defined as :

​Capital Assets means all kinds of property held by a person both movable and immovable and includes land, buildings, jewelry, vehicles, shares and securities, machinery, trademarks, patents, etc. whether the same is connected to his business or not.

​However, some properties are excluded from the definition of Capital Assets such as:

​1. Stock in trade of Business

​2. Any personal effect including wearing apparel and furniture held by a person for his personal use but it excludes jewelry, archaeological collections, drawings, paintings, sculptures, or any art of work.

​3. Agriculture land is excluded but the following agricultural land is subject to capital gains tax :

(a) Any agricultural land situated within a municipal or town area having a population of not less than 10,000

(b) Any agricultural land situated within a distance of :

(i) 2 Km aerial distance from the municipality/town area having a population of more than 10000 but less than 100,000

(ii) 6 Km aerial distance from the municipality/town area having a population of more than 100000 but less than 1000000

(iii) 8 Km aerial distance from the municipality/town area having a population of more than 1000000

​4. 6 percent Gold Bonds, 1977, or 7 percent Gold Bonds, 1980, or National Defence Gold Bonds, 1980, issued by the Central Government;

​5. Special Bearer Bonds, 1991, issued by the Central Government ;

6. Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under the Gold Monetisation Scheme, 2015 notified by the Central Government.

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Capital Assets has been divided into two categories :

1. Short-term Term Capital Assets

2. Long-Term Capital Assets

Now we look at the definition of both Short Term Capital Assets and Long Term Capital Assets.

​Short Term Capital Assets are defined in section 2(42A) of the Income Tax Act which reads as :

1. "short-term capital asset" means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer :

2. In the case of a security (other than a unit) listed in a recognized stock exchange in India or a unit of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963) or a unit of an equity oriented fund or a zero coupon bond, if the same is held for a period of 12 months

3. In the case of unlisted shares and any Immovable Property, the period of holding should be less than 24 months to qualify for short-term capital gain.

Long Term Capital Asset is defined in Income Tax Section 2(29A) & 2(29B) as :

"long-term capital asset" means a capital asset which is not a short-term capital asset.

Tax Rates of Capital Gains

There are different tax rates for different types of Capital Gains - both short-term and long-term.

1. Normal Short-Term Capital Gains - As per the tax slab of the taxpayer i.e. included in total income

2. In the case of Shares/Equity Mutual Funds on which STT is paid - 15%

3. Normal Long Term Capital Gain - 20%

4. Long-Term Capital Gains on Shares/ - 10% (up to 1 lac LTCG there is no Equity Mutual Fund on which STT is paid tax)

​Please note that debt mutual funds will qualify for Long Term Capital Gain only if they are sold after 3 years from the date of purchase i.e. three-year qualifying period will apply for Debt Mutual Funds.

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​EXEMPTIONS FROM CAPITAL GAIN TAX

​1. CAPITAL GAIN ON SALE OF HOUSE PROPERTY

​When an Individual or HUF sells a House property that is a long-term capital gain, then he/she has the following options available to save capital gains tax u/s 54 of the Income Tax Act.

​The taxpayer should purchase a residential house one year or two years from the date of sale and the whole of capital gain should be invested in the same. He can also construct a residential house within three years from the date of sale. However if his capital gain is less than 2 crores, he can construct or purchase two residential houses instead of one.

However, if the amount of capital gain has not been utilized for the purchase or construction of the house as above, the balance should be invested in the capital gains scheme account with Scheduled Bank on or before the due date of filing of return for the relevant year.

If the amount is not utilized by the taxpayer within three years from the amount deposited in the capital gain scheme, the same will be charged to tax as a long-term capital gain after the end of three years from the date of sale.

​2. CAPITAL GAIN ON SALE OF AGRICULTURE LAND

​Where any taxpayer sells agricultural land that was used as agricultural land by himself or his parents or HUF for the last two years, and after selling a new agricultural land is purchased within a period of 2 two years from the date of sale of agriculture land, then the whole of the long term capital gain arising from sale will be exempt from tax.

​In this case, also, the amount should have been utilized till the due date for filing of the Income Tax return. If the same is not done, the amount should be invested in the Capital gain account scheme of any scheduled bank and should be utilized for the purchase of new agricultural land within two years.

​If the amount invested in the capital gain scheme is not utilized within 2 years, the long-term capital gain will be taxed during the year in which the period of two years has ended.

​3. CAPITAL GAIN EXEMPTION IN CASE OF INVESTMENTS IN LTCG BONDS

​As per Section 54EC of the Income Tax Act, where the long-term capital gain arises on the sale of any land or building, the taxpayer has an option of investing the same in Notified long-term capital gains Bonds and saving the capital gain.

However, there are some conditions to it.

They are :

​1. The maximum amount that can be invested in Notified Bonds is Rs.50 lacs per transaction.

​2. The amount should be invested within six months from the sale of land or building.

​3. In the case of the sale of a residential house, only the long-term capital gain amount is to be invested whereas in the case of the sale of other assets, the full value of consideration is to be invested.

​4. No loan or premature withdrawal is allowed. If the same is done, the LTCG will be charged in the year of withdrawal or loan taken.

​5. The investment has a lock-in period of 5 years.

​6. The notified bonds are the National Highway Authority of India Capital Gains Bond and Rural Electrification of India Capital Gains Bond.

​4. EXEMPTION OF LONG-TERM CAPITAL GAIN IN CASE OF SALE OF ANY ASSET OTHER THAN RESIDENTIAL HOUSE [SECTION 54F]

​In case any Individual or HUF sells any capital asset other than a residential house, an exemption to long-term capital gain is available provided he fulfills the following conditions :

​1. The total sale consideration of the asset sold should be invested in the purchase or construction of a new residential house. The purchase of a residential house can be one year before or two years after the date of sale of the asset. In the case of construction, the same should be done within 3 years from the date of the sale of the asset.

​2. If the amount is not invested till the due date of filing of the return, the same should be kept in the capital gains scheme in any scheduled bank and can be utilized up to 3 years from the date of sale.

​3. The assessee/taxpayers should not have more than one residential house on the date of sale and should not also purchase or construct any residential house within 1 year or 3 years other than the new asset respectively.

​4. If the above conditions are breached, the whole of the long-term capital gain would be chargeable to tax in the year in which the violation takes place.

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