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Capital Gains Tax in India: Know Everything About It Research Team | Posted On Tuesday, December 03,2019, 03:14 PM

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Capital Gains Tax in India: Know Everything About It



What is Capital Gains Tax?

To understand capital gains tax, we first need to know what capital gains are:

A capital gain is a profit that is received by an individual through the sale of capital assets. The profit made comes under the category of income and is thus taxed under the income tax act, 1961. The act states that income received from the sale of any type of assets like a commercial space or homes, land, equities, debentures, jewelry, machinery, trademarks, patents, vehicles, and leaseholds, etc. will be assessed under capital gains tax. So after the sale of such assets the individual needs to pay capital gains tax for either long-term capital gain or short-term capital gain at 10% and 15% respectively. Under this category of taxes, capital gains tax needs to be paid for inherited property that is not sold. However, capital gains tax cannot be levied on certain items like stock in trade, agricultural land, and certain specific bonds.

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Types of Capital Assets:

Capital assets can also be divided into two categories which are summarized as follows:

Short-Term Capital Assets: Assets held for the tenure of fewer than 3 years falls under the category of short-term capital assets. The tenure for immovable property such as land, building, and the house is specified as 24 months.

Long-term Capital Assets: Assets sold after possession of 36 months can be categorized as long-term capital assets.

See Also: 4 Reasons To Tax Capital Gains On Shares

Capital Gains Tax Exemption:

The tax exemption on capital gains can be availed under sections 54, section 54F and section 54EC.

Section 54: Tax Benefits On The Sale of a House on Purchase of Another House Property:

 You can claim tax exemption under section 54 when the capital gains from the sale of one property are reinvested to buy or construct another house property. You can avail a maximum of 2 exemptions throughout your life under this provision provided the capital gains do not exceed 2 crores. However, the rule has certain conditions for availing the exemption.

Section 54F: Tax Deductions on Capital Gains Due to the Sale of Any Asset Other Than a House Property:

Under this provision, you can get tax exemptions for capital gains due to sale off long term assets other than a house property. Tax benefits can be availed under section 54F when the entire sale proceeds are invested to purchase a new property and not only the capital gain. The exemption is eligible for properties purchased one year before the sale of assets or 2 years after the sale of the property. You can also get exemptions under this provision if you use the capital gains to construct a property provided it should be completed 3 years post the date of sale.

See Also: Will Long-Term Capital Gains on Equity Be Taxed?

Section 54EC: Tax Benefits on the Sale of House Property for Reinvestment in Specific Bonds:  

Exemption under section 54EC can be claimed when capital gains from the sale of first property are used to buy specific bonds which are as follows:

  • To purchase bonds issued by NHAI (National Highway Authority of India) or REC (Rural Electrification Corporation). The investment amount is capped at Rs. 50 Lakh.
  • The taxpayer has to reinvest the capital gains in bonds within six months.
  • The invested capital can be redeemed after 3 years but cannot be sold before the lapse of 3 years from the date of sale.

Capital Gain Tax Calculations:

The calculation of capital gains tax is determined by considering certain factors. However, you must keep some important points in mind while calculating capital gains tax:

Cost of improvement: Additional expenses incurred for the improvement of the property or renovation by the seller should be considered while calculating capital tax gains.

See Also: How To Save Long Term Capital Gains Tax on Sale of House?

Acquisition Cost: The Money Spent on Acquiring the Property.

Full Value Consideration: The amount of money the seller is liable to get due to the transfer of the property. Capital gains will be charged from the year the transfer will be made legally even if the money is paid later.

Procedure to Calculate Long-Term Capital Gains:

  • Estimate the total value of your assets
  • After this you need to make the following deductions:
  • The cost incurred due to transfer

Money spent on acquisition

Amount invested to carry out renovation or improvement.

  • From the amount extracted after the above deductions, you may again make deductions for exemptions under Section 54B, 54F, 54EC, and 54.

Procedure to Calculate Short-Term Capital Gains:

  • Estimate the full value of your property
  • After this step, carry out the following deductions:
  • The cost incurred due to the transfer of the property

Money spent on the acquisition of it

Amount invested to carry out renovation or improvement.

  • The amount extracted after all the above-mentioned deduction is known as short-term capital gains.

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