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Understanding capital gains, exemptions and tax implications

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Understanding capital gains, exemptions and tax implications

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If you have sold a residential property, the income of which is chargeable under the head “Income from house property”, or transferred any other capital asset, then you are liable to pay tax on the capital gains.  Let us understand how the capital gains tax works.

Capital Asset means property of any kind (Fixed, Circulating, movable, immovable, tangible or intangible) whether or not connected with business or profession, subject to the following exclusions:

  1. Stock-in-trade

  2. Personal effects of the assessee

  3. 6½% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Bonds, 1980 issued by the Central Government

  4. Agricultural land in a rural area

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

  6. Gold Deposit Bonds issued under Gold Deposit Scheme 1999.

Depending on the period of holding and the asset class, the capital assets are divided into short term and long term capital assets. Both are subject to different tax rates. Lets first look at the definition of these two types of capital assets.

Short term capital asset means a capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer. However, in the following cases, an asset held for not more than twelve months, is treated as short-term capital asset :

  1. Quoted or unquoted equity or preference shares in a company

  2. Quoted Securities

  3. Quoted or unquoted Units of UTI

  4. Quoted or unquoted Units of Mutual Funds specified u/s. 10(23D)

  5. Quoted or unquoted zero coupon bonds

All other capital asset which does not fall into the above short-term capital assets are put in the category of long term capital assets.

For the tax purposes, the computation of both the capital gains are calculated on the following basis:

Computation of Short Term Capital Gains

Computation of Long Term Capital Gains

Full consideration

XXX

Full consideration

XXX

Less: Expenses on Transfer

XX

Less: Expenses on Transfer

XX

Net Consideration

XXX

Net Consideration

XXX

Less: Cost of Acquisition

XX

Less: Indexed Cost of Acquisition

XX

Less: Cost of Improvement

XX

Less: Indexed Cost of Improvement

XX

Short term capital gains

XXX

Long term capital gains

XXX

Less: Exemption u/s 54B/D/G

XX

Less: Exemption u/s 54 to 54GB

XX

Taxable Short term capital gains

NET

Taxable Long term capital gains  NET

 

Indexed Cost of acquisition is calculated on the following basis:

Cost of acquisition * Cost inflation index for the financial year in which the asset is transferred / Cost inflation index for the first financial year in which the asset was held by the assessee or the year beginning on 1.4.1981, whichever is later or the year of Improvement of the asset

However, in case of Bonds, Debentures except capital indexed bonds depreciable assets, and for non-residents even if they are long term capital assets the benefit of indexation is not available.

Capital Gains Tax :

Capital asset

Transactions where STT -“Securities Transaction Tax” is paid

Transactions where STT – “Securities Transaction Tax” is not applicable / paid

Long Term

Short Term

Long-term

Short Term

Without Indexation

With Indexation

Listed Equity Shares

0%

15%

10%

20%

Applicable Tax Slab

Unlisted Equity shares

NA

NA

NA

20%

Applicable Tax Slab

Listed Debentures

NA

NA

10%

NA

Applicable Tax Slab

Unlisted Debentures

NA

NA

20%

NA

Applicable Tax Slab

Equity oriented mutual funds

0%

15%

10%

20%

Applicable Tax Slab

Non – equity oriented mutual funds

NA

NA

10%

20%

Applicable Tax Slab

Immovable Property

NA

NA

NA

20%

Applicable Tax Slab

 

Saving Capital Gains Tax:

Short-term capital gain is necessarily taxable and cannot be avoided. On the other hand, depending upon the asset, tax on long-term capital gain can be saved by making investments in specified instruments and assets. For example, long-term gains from sale of a residential house may be saved by investing the capital gain amount in another residential property, either one year before or within two years of date of sale or  investing the capital gain amount (from any asset, whether residential house property or not) in bonds under sec. 54EC  Lets look at such available exemptions:

Exemption available for long term capital assets:

Depending upon the nature of the capital asset and the manner of utilization of the consideration received on transfer, various exemptions are available u/s 54, 54B, 54D,54EC, 54F, 54G and 54GA of the Income-tax Act. You are allowed to avail exemption from the long term capital gains as per the following provisions:

Long Term Capital Gains
u/s 54 u/s 54EC u/s 54F
i  Assessees Eligible Individual and HUF Any person Individual and HUF
ii Eligible Assets Long Term Capital Assets, being House Property used for residential purpose. This property must be held for a period of not less than 3 yrs. Long Term Capital Asset. Residential property must be held for a period of not less than 3 years. Any Long Term Capital Assets other than a residential  property. However the assesse must not own more than one residential property.
iii Investment in new assets to be made. Residential property Specified bonds of NHAI / REC Residential property
iv Condition for acquiring of the new assets Purchase of a residential property within 2 yrs from the date of transfer, Or within 1 yr prior to the date of transfer, Or construction of a residential house within 3 yrs from the date of transfer Six months from the date of transfer Purchase of a residential property within 2 yrs from the date of transfer, Or within 1 yr prior to the date of transfer, Or construction of a residential house within 3 yrs from the date of transfer
v Amount Exempted Lower of investment made in the new assets or the amount capital gain Amount of investment made in the new assets or capital gain, which ever is lower, subject to a maximum amount of Rs. 50 Lakhs in a financial year Investment in the new asset / Net sale consideration X capital gains. If cost of new house is more than the net consideration of original asset then the whole of such gains are exempted

 

The following points must be kept in consideration :

  1. In case the new asset is transferred before the completion of 3 yrs from the date of purchase or construction, such Capital Gains exempted earlier will become chargeable to tax in the year of transfer of new asset.

  2. In order to avail the exemption, such gains are to be reinvested, w

    ithin six months or before the due date of return (which ever is earlier). If the amount is not so reinvested, it is to be deposited on or before that date in account of specified bank/institution and it should be utilized within specified time limit for purchase/construction of new asset.

    Cost of long term specified asset, which is considered for the exemption under section 54 EC, should not be eligible for deduction u/s 80 C, i.e., investment made in such bonds u/s 54 EC is not eligible for deduction u/s 80 C.

  3. U/s 54F Capital Gains exempted earlier shall be chargeable to tax —

    a) If the assessee purchases within 2 yrs or constructs within 3 yrs any residential house other than the one in which reinvestment is made &

    b) If the new asset is transferred within a period of 3 years from the date of its purchase/construction.

Capital Gains account Scheme :

If your want to buy a new residential house property with sale proceeds of your house property sold, but  are unable to purchase it by the time you file your income tax return, you have to deposit the money in a Capital Gains Scheme Deposit Account (CGSDA), available with most of the public sector banks, in order to claim the benefits of Sec 54.

The amount deposited in a CGSDA has to be utilized for buying a new house within 3 years. If a new house is not purchased within 3 years using this amount, the entire amount is treated as long term capital gain for the previous year. And if only a part of the amount is spent in purchasing a new house, the remaining balance amount is treated as long term capital gains for the previous year.

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