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CGT or “Capital Gains Tax”, is a tax on individuals’ and corporations’ assets. These assets include stocks, bonds, real estate, and property. There are two types of capital gains tax. Mainly long-term and short-term gains that start from 10% and 15% respectively. In this blog post, we help you understand what is capital gain tax in India, the different types of capital gains tax, exemptions and the capital gain tax rate in India.
What is Capital Gain Tax in India?
In simple words, any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain. This gain or profit comes under the ‘income’ category. Thus you will be liable to pay tax for that amount in the year in which the transfer of the capital asset takes place. This is known as the capital gains tax, which can be either short term or long term.
The exemption to capital gains is inherited property, as there is no sale in this instance. There is only a transfer of ownership. As per the Income Tax Act, any asset which is received as a gift by way of will or inheritance is exempted. However, Capital Gains Tax will be applicable if the individual who inherits the asset decides to sell it.
Now that we have understood what is capital gain tax in India, let us understand the different types of capital gains tax India.
Types of Capital Gains Tax
Capital assets come under two categories – mainly short term capital assets and long term capital assets. Thus there are two types of capital gains tax;
1. Short term capital gains tax India
Short term assets are those that are held by the taxpayers for a time period of 36 months or less from the date of its transfer. Thus the tax charged on the gains from the selling of these type of capital assets is known as short term capital gains tax. The short term capital gain tax rate in India is 15%.
These assets are;
- equity shares in a company registered on a recognised stock exchange in India
- securities such as bonds, debentures, government securities, etc. registered on a recognised stock exchange in India
- UTI units, units of equity oriented mutual fund
- Zero coupon bond
2. Long term capital gains tax India
Long term capital gains tax is taxed on capital gains from the sale of assets held for a period of more than 36 months before the transfer. They are considered long term assets if held for a period of more than 12 months. The long term capital gain tax rate in India is 10%.
Now that we know what is capital gain tax in India and the types of capital gains tax, let us understand capital gain tax on property in India.
Capital Gain Tax on Sale of Property in India
Under the Union Budget 2018, 10% capital gains tax in India is applicable on the long term capital gains on sale of listed securities above Rs. 1 lakh. For short term capital gains, it is taxed at 15%. Apart from this, both long term and short term capital gains are taxable in case of debt mutual funds.
Short term capital gains on shares in India for debt mutual funds are added to the income of the taxpayer and it is taxed as per the individual’s income tax slab rate. It is slightly different for long term capital gains. Long term capital gain tax on shares in India on debt mutual funds is taxed at 20% with indexation and 10% without indexation. In this case, indexation is the adjustment of purchase value for inflation. In case of inflation, indexation rises which results in the increase of purchase cost and reduction in gains.
Under the new Union Budget in 2019, the Government introduced an amendment. As per this amendment to Section 54, if an individual earns capital gains of upto Rs. 2 crore when they sell their house property, then they can invest this amount in 2 new properties. However they are eligible to make use of this facility only once in a lifetime. One should make the purchase of the new properties within 1-2 years of the sale of property. If the seller wants to construct a new house with the capital gains earned, then they must do it within 3 years of the sale of the asset or property.
How to Calculate Capital Gains Tax
Capital gains are calculated differently for assets held for a longer period and for those held over a shorter period. You can also use a capital gains tax India calculator to determine the capital gains tax.
How to Calculate Short-Term Capital Gains?
- Step 1: Start with the full value of consideration
- Step 2: Deduct the following:
-Expenditure incurred wholly and exclusively in connection with such transfer
-Cost of acquisition
-Cost of improvement - Step 3: This amount is a short-term capital gain
Short term capital gain = Full value consideration with fewer expenses incurred exclusively for such transfer and less cost of acquisition with less cost of improvement.
How to Calculate Long-Term Capital Gains?
Step 1: Start with the full value of consideration
Step 2: Deduct the following:
- Expenditure incurred wholly and exclusively in connection with such transfer
- Indexed cost of acquisition
- Indexed cost of improvement
Step 3: From this resulting number, deduct exemptions provided under sections 54, 54EC, 54F, and 54B
Long-term capital gain= Full value consideration with less expenses incurred exclusively for such transfer, less indexed cost of acquisition with less indexed cost of improvement and less expenses that can be deducted from full value for consideration.*
(*Expenses from sale proceeds from a capital asset, that wholly and directly relate to the sale or transfer of the capital asset are allowed to be deducted. These are the expenses that are necessary for the transfer to take place.)
What is capital gain tax in India and how they can save taxes?
We hope this post gave you some insight on what is capital gain tax in India, the different types of capital gains tax, exemptions and how to save tax on capital gains.
FAQs
Any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain. This gain or profit comes under the ‘income’ category. Thus you will be liable to pay tax for that amount in the year in which the transfer of the capital asset takes place. This is known as the capital gains tax, which can be either short term or long term.
There are two types of capital gains tax. Mainly long term and short term gains that start from 10% and 15% respectively.
Long Term Capital Gains on sale of house property is taxable at the rate of 20% flat on the quantum of gains made.
Property sold in India is generally subject to tax deduction. The person buying the property must deduct taxes at the rate applicable to the NRI’s income slab, if the property is a short term asset. If the property is a long term asset, 20% LTCG tax applies. Further, it is important for the NRI to ensure that taxes are deducted on the gains made and not on the sale proceeds. A jurisdictional Assessing Officer can help to determine the gains on which taxes should be deducted by the purchaser.
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