What is Capital Gains Tax in India: Types, Tax Rates, Calculation, Exemptions & Tax Saving.
Capital gains tax in India is a significant aspect of the income tax system, affecting both individuals and businesses. This comprehensive guide will delve into the nuances of capital gains tax, including its types, tax rates, calculation methods, exemptions, tax-saving strategies, and planning tips. We will also use real-life examples to illustrate these concepts.
- Introduction to Capital Gains Tax
Capital gains tax is levied on the profit or gain derived from the sale of a capital asset. According to Section 45 of the Income Tax Act, 1961, any profit or gain arising from the transfer of a capital asset during the previous year is chargeable to tax under the head ‘Capital Gains’.
Definition of Capital Asset
As per Section 2(14) of the Income Tax Act, a capital asset includes:
- Property of any kind held by an assessee, whether or not connected with their business or profession.
- Securities held by a Foreign Institutional Investor as per SEBI regulations.
- Unit Linked Insurance Policies (ULIPs) issued on or after February 1, 2021, where the premium exceeds certain thresholds.
Exclusions:
- Stock-in-trade, consumable stores, or raw materials held for business or profession.
- Personal effects such as movable property (excluding jewellery, archaeological collections, drawings, paintings, sculptures, or any work of art).
- Rural agricultural land.
- Certain specified bonds and gold schemes.
- Types of Capital Gains
Capital gains are classified into two types based on the holding period of the asset and be explained in with help of following contrasting table:
| Feature | Short-Term Capital Gains (STCG) | Long-Term Capital Gains (LTCG) |
| Holding Period | Not more than 36 months | More than 36 months |
| For Listed Securities | Not more than 12 months | More than 12 months |
| For Unlisted Shares and Immovable Property | Not more than 24 months | More than 24 months |
| Tax Rate | As per income tax slab rates
(15% for equity-oriented funds) |
20% with indexation
(10% without indexation for equity-oriented funds above ₹1 lakh) |
| Indexation Benefit | Not available | Available for most assets
(excluding equity-oriented funds) |
| Applicability | All types of assets, including property, shares, and bonds | All types of assets, including property, shares, and bonds |
| Comparative Analysis: – | ||
| Parameter | STCG (March 30, 2021) | LTCG (April 2, 2021) |
| Holding Period | 35 months | 36 months + 1 day |
| Type of Gain | Short-Term | Long-Term |
| Sale Price | ₹75,00,000 | ₹75,00,000 |
| Cost of Acquisition | ₹50,00,000 | ₹50,00,000 |
| Indexed Cost of Acquisition | Not Applicable | ₹56,60,714 |
| Expenditure on Transfer | ₹2,00,000 | ₹2,00,000 |
| Capital Gain | ₹23,00,000 | ₹16,39,286 |
| Tax Rate | 30% (assumed highest tax slab) | 20% (with indexation) |
| Tax Payable | ₹6,90,000 | ₹3,27,857 |
Summary of Holding Periods:
| Asset Type | STCG Holding Period | LTCG Holding Period |
| Listed securities, units of equity-oriented funds, zero-coupon bonds | ≤ 12 months | > 12 months |
| Unlisted shares, immovable property | ≤ 24 months | > 24 months |
| Other assets | ≤ 36 months | > 36 months |
- Tax Rates for Capital Gains
Short-Term Capital Gains Tax Rates
- Equity-oriented investments: STCG on sale of equity shares or units of equity-oriented mutual funds (where STT is paid) is taxed at 15%.
- Other assets: STCG on other assets is taxed as per the normal income tax slab rates applicable to the assessee.
Long-Term Capital Gains Tax Rates
- Equity-oriented investments: LTCG on sale of equity shares or units of equity-oriented mutual funds (where STT is paid) exceeding ₹1 lakh is taxed at 10% without the benefit of indexation.
- Other assets: LTCG on other assets is taxed at 20% with the benefit of indexation.
Tax Rates Summary
| Asset Type | STCG Tax Rate | LTCG Tax Rate |
| Equity-oriented investments | 15% | 10% (above ₹1 lakh) |
| Other assets | As per income slab | 20% (with indexation) |
- Calculation of Capital Gains
The calculation of capital gains involves determining the cost of acquisition, cost of improvement, and the sale consideration. For long-term capital gains, the indexed cost of acquisition and improvement is used to account for inflation.
Short-Term Capital Gains Calculation
Formula:
Short-Term Capital Gain = Full Value of Consideration − Cost of Acquisition − Cost of Improvement − Expenditure on Transfer
Long-Term Capital Gains Calculation
Formula:
Long-Term Capital Gain = Full Value of Consideration − Indexed Cost of Acquisition − Indexed Cost of Improvement − Expenditure on Transfer
Indexation Formula:
Calculation
Consider an individual who bought a property in 2010 for ₹50 lakhs and sold it in 2020 for ₹1.5 crores. Assume the CII for 2010 is 167 and for 2020 is 301.
Indexed Cost of Acquisition: Indexed Cost = ₹ 50,00,000 × 301 / 167 = ₹ 90,11,976
Long-Term Capital Gain: LTCG = ₹ 1,50,00,000 – ₹ 90,11,976 = ₹ 59,88,024
Tax Payable: Tax = ₹ 59,88,024×20% = ₹ 11,97,605
- Exemptions and Tax Savings
The Income Tax Act provides several exemptions to minimize the burden of capital gains tax. Some key exemptions include:
Section 54: Exemption on Sale of Residential Property
- Applicable to individuals and HUFs.
- Exemption on LTCG from the sale of residential property if it is reinvested in another residential property within 2 years or constructed within 3 years.
Section 54F: Exemption on Sale of Any Asset Other than Residential Property
- Applicable to individuals and HUFs.
- Exemption on LTCG from the sale of any long-term asset if the net consideration is reinvested in a residential property.
Section 54EC: Exemption on Sale of Long-Term Capital Assets
- Applicable to any assessee.
- Exemption on LTCG from the sale of long-term capital assets if the gains are reinvested in specified bonds within 6 months.
Summary of Exemptions
| Section | Eligible Assessee | Type of Asset | Condition |
| 54 | Individual/HUF | Residential property | Reinvestment in residential property within specified period |
| 54F | Individual/HUF | Any long-term asset | Reinvestment of net consideration in residential property |
| 54EC | Any assessee | Long-term capital asset | Reinvestment in specified bonds within 6 months |
Case Study:
Consider an individual who sells a residential property for ₹2 crores, resulting in an LTCG of ₹1 crore (approx.). The individual reinvests ₹1.5 crores in another residential property within the stipulated period.
Tax Calculation without Exemption: LTCG Tax = ₹ 1,00,00,000 × 20% = ₹ 20,00,000
Tax Calculation with Exemption under Section 54:
- Reinvested amount exceeds LTCG, hence full exemption.
- LTCG Tax = ₹ 0
- Planning to Minimize Capital Gains Tax
Effective planning can significantly reduce your capital gains tax liability. Here are some strategies:
6.1. Timing of Sale
- Long-term vs. Short-term: Holding an asset for a longer period can reduce the tax rate. Aim to classify your gains as long-term to benefit from lower tax rates and indexation.
6.2. Utilizing Exemptions
- Section 54 and 54F: Reinvest your gains in residential property to claim exemptions. Ensure compliance with timeframes for reinvestment.
6.3. Investment in Capital Gains Bonds
- Section 54EC: Invest in specified bonds to defer the tax liability. The maximum investment limit is ₹50 lakhs.
6.4. Setting Off Capital Losses
- Offset Gains: Use capital losses to offset gains. Short-term losses can offset both short-term and long-term gains, while long-term losses can only offset long-term gains.
6.5. Gifting Assets
- Transfer to Relatives: Transferring assets to family members in lower tax brackets before selling can reduce the overall tax liability.
6.6. Using Indexation Benefits
- Indexed Cost Calculation: For long-term assets, calculate gains after considering the indexed cost to account for inflation.
6.7. Availing Deductions under Other Sections
- Section 80C: Invest in specified instruments to claim deductions, reducing the overall taxable income.
6.8. Strategic Sale of Shares
- Set Off with Exemptions: Utilize the ₹1 lakh exemption on long-term capital gains from equities strategically to minimize tax.
Example of Strategic Tax Planning
Consider an individual who has long-term capital gains of ₹1 crore from the sale of property and ₹10 lakhs from the sale of equity shares. By reinvesting ₹1 crore in a new property (Section 54) and using the ₹1 lakh exemption on equity gains, the individual can significantly reduce the tax liability.
Tax Calculation without Planning:
Property: ₹1 crore at 20% = ₹20 lakhs
Equity: ₹10 lakhs at 10% = ₹1 lakh
Total Tax = ₹ 21 lakhs
Tax Calculation with Planning:
Property: Reinvested, hence no tax.
Equity: ₹10 lakhs – ₹1 lakh exemption = ₹9 lakhs at 10% = ₹90,000
Total Tax = ₹90,000
- Capital Gains Tax Worldwide and Post-COVID Trends in India
Globally, capital gains tax systems vary widely, with different rates and exemptions. In India, the trend towards remote working post-COVID has impacted real estate markets and investment strategies, influencing capital gains.
Global Perspective
- USA: Progressive tax rates on capital gains, with various exemptions.
- UK: Different rates for residential property and other assets.
- Australia: 50% discount on LTCG for assets held over a year.
Post-COVID Trends in India
The pandemic has accelerated remote working, leading to a shift in real estate investments. Urban-to-rural migration has altered property values, impacting capital gains calculations and tax liabilities.
- Conclusion
Capital gains tax in India is a multifaceted component of the tax system, affecting both individual and corporate taxpayers. Understanding the types, rates, calculation methods, exemptions, and strategic planning options is crucial for effective tax planning and compliance. By leveraging exemptions, strategic investment approaches, and timing the sale of assets, taxpayers can significantly reduce their capital gains tax liability.
In the post-COVID era, with the rise of remote working and changing real estate dynamics, these strategies become even more pertinent. By staying informed and proactive, both individuals and businesses can navigate the complexities of capital gains tax, optimizing their financial outcomes and achieving a win-win situation.
In conclusion, thoughtful planning and a clear understanding of capital gains tax provisions can lead to substantial tax savings. These savings can then be reinvested to further grow wealth, making the process of managing capital gains tax not just a compliance task but A strategic financial maneuver.
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