What is Capital Asset :
As per Section 2(14) of the Income Tax Act, the Capital Asset is defined as :
Capital Assets means all kind of property held by a person both movable and immovable and includes land, building, jewelry, vehicles, shares and securities, machinery, trademark, 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 jewellery, archaeological collections, drawings, painting, sculptures or any art of work.
3. Agriculture land is excluded but the following agriculture land is subject to capital gains tax :
(a) Any agriculture land situated within a municipal or town area having a population not less than 10,000
(b) Any agriculture land situated within a distance of :
(i) 2 Km arial distance from the municipality/town area having population of more than 10000 but less than 100000
(ii) 6 Km arial distance from the municipality/town area having population of more than 100000 but less than
(iii) 8 Km arial distance from the municipality/town area having population of more than 1000000
4. 6 per cent Gold Bonds, 1977, or 7 per cent 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.
Capital Assets has been divided into two categories :
1. Short 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 is 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 case of unlisted shares and any Immovable Property, the period of holding should be less than 24 months so as 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 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% (upto 1 lac LTCG there is no tax for the year)
Equity Mutual Fund on which STT is paid
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 Fund.
EXEMPTIONS FROM CAPITAL GAIN TAX
1. CAPITAL GAIN ON SALE OF HOUSE PROPERTY
When an Individual or HUF sale a House property which is a long term capital gain, then he/it has the following options available to save capital gains tax u/s 54 of the Income Tax Act.
1. The taxpayer should purchase a residential house before one year or after 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 utilised for purchase or construction of house as above, the balance should be invested in 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 utilised by the taxpayer within three years from the amount deposited in capital gain scheme, the same will be charged to tax as 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 taxpayers sells agriculture land which was used as agriculture land by himself or his parents or HUF for last two years, and after selling a new agriculture 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 utilised till the due date for filing of Income Tax return. If the same is not done, the amount should be invested in Capital gain account scheme of any scheduled bank and should be utilised for purchase of new agriculture land within two years.
If the amount invested in capital gain scheme is not utilised 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 sale of any land or building, the taxpayer has a option of investing the same in Notified Long Term capital gains Bonds and save 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 case of sale of residential house, only the long term capital gain amount is to be invested whereas in case of sale of other assets, 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 is having a lock in period of 5 years.
6.The notified bonds are 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 ANY ASSET OTHER THAN RESIDENTIAL HOUSE [SECTION 54F]
In case any Individual or HUF sells any capital asset other than a residential house, exemption to long term capital gain is available provides he fulfills following conditions :
1. The total sale consideration of the asset sold should be invested in purchase or construction of a new residential house . The purchase of residential house can be one year before or two year after the date of sale of asset. In case of construction, the same should be done within a period of 3 years from the date of sale of asset.
2. If the amount is not invested till the due date of filing of return, the same should be kept in capital gains scheme in any scheduled bank and can be utilised upto a period of 3 years from the date of sale.
3. The assessee/taxpayers should not be having more than one residential house on the date of sale and should not also purchase or construct any residential house within a period of 1 year or 3 year 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 voilation takes place.