1. Back to HA Learn
  2. »
  3. Taxation
  4. »
  5. Income from Capital Gains:..
Capital gains source of income

Income from Capital Gains: Rates, Calculation, Exemptions

Jun 10, 2022

Official HA Logo

HA TAX

World’s Best Accounts Outsourcing Platform

Know More

Income from Capital Gains

Profit or gain which arises from the transfer of the capital asset is held as investments are liable under the head Income from Capital Gains. It can be treated as short and long-term gains. If any capital asset is transferred then capital gain happens and in case the asset is not transferred then it is not considered to be a capital asset. This will not be covered under the head of Capital Gains. Whereas profits or gains which happened in the last year and for which transfer took place will be considered as income from that year and tax will be charged accordingly under the Capital Gains head. Additionally, indexation will apply accordingly if applicable.

Capital Asset

In simple terms it is the property that is held by the income tax assessee excluding the following points: 

  • Under the head profits and gains of business or profession are taxed. Items which are used by the person for business or profession such as Stock, ready, goods and raw material.
  • Land from which agricultural items are produced and the income which is derived from it is called Agricultural Income. Another consideration for Agricultural land is any land that is not situated in the urban area and is around 8 KM from the urban area & population is less than 10,000.

As already mentioned Capital Assets is of two types that are, Short-term Capital Asset and Long-term capital asset. The detailed descriptions of these two are as follows:

Short-term capital asset

Assets termed as short-term are those which are not held more than 36 months (immediately preceding the date of transfer). Some of the assets such as Equity or Preference shares which are held in a company, security listed on a recognized stock exchange of India, Zero-coupon bonds, and equity mutual funds. And in the case of immovable property the 36 months period is substituted with 24 months.

Long-term capital asset

The asset which is held for more than 36 months/ 24 months/ 12 months (as the scenario may be) is considered to be long-term. Whereas transfer of the asset is defined as the sale of the asset where one surrenders all the rights/ forcefully taken by law or when the maturity of the asset takes place.

An exception case is when someone transfers capital assets under the will.

Another long-term asset is when stocks and a part of a diversified mutual fund are held for more than a year. For the real estate, if capital gains are held for more than 2 years (Note: Previously under the Finance Act 2017, real estate was considered to be a long term capital asset is its help for more than 3 years)

 

From Business Registrations to Tax filings, HA Experts will take care of all your compliances.
Call: 7788993390
Email: letstalk@hafintax.com

When does Income from Capital Gains arise

The profits or gains which arise from the transfer of the capital asset which happened in the previous year are deemed to be chargeable under the head Capital Gains under Income Tax. Some of the examples are land, flats/ apartments, mutual funds, shares, gold, and other similar things. 

Just like there are two types of Assets, there are two types of capital gain too that are:

Short-term capital gain: When capital gain arises on the transfer of short-term capital assets.

Long-term capital gain: When the capital gain happens on the transfer of long-term capital assets.

With respect to taxation some of the conditions that have to be taken care of are:

  1. The capital asset must be owned by the assessee 
  2. A capital asset must be transferred in the previous year by the assessee

Capital gains can be taxed subject to the following conditions:

The assessee must have owned a capital asset.

The assessee must have transferred the capital asset in the previous year.

Note: The profit and gain must be there as a result of such transfer.

HA Courses
HA Practical Training Courses.
          Online Live/ In-Office

HA TAX offers Online live or in-office practical training courses for those who are looking to learn Accounting & Taxation courses. These courses are aimed at students, working professionals and business owners who are looking forward to practising on their own.

How to Calculate Income from Capital Gains

The calculation with respect to capital gain happens with respect to whether the assets are categorized as Long-term or Short-term.

Before getting on to the calculation aspect there are a few basic terms which have to know are-

Full value Consideration

As a result of the transfer of the capital assets, the consideration has to be received or to be received by the seller. If no consideration has been received the capital gains are chargeable in the transfer of year.

Cost of Acquisition

It is the value for which the capital asset was acquired by the seller.

Cost of Improvement

These are the expenses that are of a capital nature incurred in making any additions or alterations to the capital asset by the seller.

The improvements made before April 1st, 2001 are not taken into examination.

When the capital assets change into the property of the taxpayer otherwise than by an outright purchase by the taxpayer, the cost of acquisition and cost of improvement incurred by the previous owner would also be included

Calculation of Capital Gains

Short-term

With the help of some of the basic steps, Short-term capital gains can be easily calculated.

  1. Take the full value into consideration
  2. Deduce incurred expenditures that have a connection with such transfer, acquisition cost, and improvement cost
  3. Short-term capital gain is equivalent to full value consideration subtracting the expenses which are incurred exclusively for the transfer Less cost of acquisition Less cost of the improvement.

Long-term

  1. Take the full value into consideration

Deduct, the expenditure which has a connection with expenditure, Indexed cost of acquisition, and Indexed cost of the improvement.

In numerical expression,

Long-term capital gain = Full value consideration – (Expenses incurred for transfer + Indexed Acquisition cost + Indexed Improvement + Expenses deducted from 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.)

According to the Budget 2018, long-term capital gains which are registered after 31st March 2018 are exempted up to Rs. 1 Lakh/ annum. Tax, which is levied at @10% on LTCG is put on shares/equity-oriented funds exceeding Rs 1 lakh in one financial year without the benefit of indexation.

House-Property sale

The subtraction which has to be deducted from the total sale price is represented in the following formula.

House property sale price – (Commission cost + Stamp paper cost + Travelling expenses)

Note: In case the property has inherited the expenditure which has been incurred with respect to the procedures which is lined with the will and inheritance, executor cost, obtaining succession certificate all may also be allowed in some of the cases.

Sale of Shares

One is allowed to deduct expenses such as:

  • Broker’s commission
  • A securities transaction tax is not allowed

 

Selling of Jewellery

  • The broker’s services are involved in securing buyer, that is, the cost of services be deducted.
  • One of the important points that are to be considered is that the expenses which are deducted from the sale price of valuables used for calculating the capital gains are not allowed as deduction (but is in another head and can be claimed only once)

 

Indexed Cost of Acquisition or Improvement

  • This cost is indexed by applying Cost Inflation Index to adjust the inflation.
  • With respect to the financial year the Cost Inflation Index by the Central Government is stated as:

 

Financial Year CII
2014- 15 1024
2013-14 939
2012-13 852
2011-12 785
2010-11 711
2009-10 632
2008-09 582
2007-08 551
2006-07 519
2005-06 497
2004-05 480
2003-04 463
2002-03 447
2001-02 426
2000-01 406
1999-00 389
1998-99 351
1997-98 331
1996-97 305
1995-96 281
1994-95 259
1993-94 244
1992-93 223
1991-92 199
1990-91 182
1989-90 172
1988-89 161
1987-88 150
1986-87 140
1985-86 133
1984-85 125
1983-84 116
1982-83 109
1981-82 100

 

The mathematical representation is

  1. Indexed Cost of Acquisition = Acquisition cost * CII (for a particular financial year)

Cost inflation index (CII) of the year in which asset was first held by the seller or 2001-02 whichever is later.

  1. Indexed cost of improvement = Improvement Cost *CII (for a particular financial year)

 

Income from capital gains calculation

Tax Rates on Income from Capital Gains

The tax rates for short and long term capital gains are stated in the respective table as:

Short –term

Condition Tax Rate
Transaction on Securities 15%
Non-Securities based Transaction The gain is included in the income tax returns and according to the tax slabs suitable charges are made

 

Long-term

Condition Tax Rate
Equity Shares If the amount is more than Rs. 1 Lakh then 10% is charged
Non-equity share-based transactions 20%

 

Capital Gain Exemptions

The exemptions are divided into different sub-headings and they are as follows:

Section 54: Exemption on Sale of House Property on Purchase of Another House Property

Under this exemption when the capital gains happen from the sales of house property and are again re-invested in buying or constructing another (2) house properties. Given the condition that the capital gain does not exceed Rs. 2 crores this exemption is allowed once in the lifetime. The individual taxpayer doesn’t need to mention the entire sale process but has to invest the amount of the capital gains.

Given the scenario that, the purchase price of the new property is higher than the amount of the capital gains then the exemption will be limited to the capital gain on the sale.

Some of the important conditions which has to be taken into consideration while availing the benefits are:

  1. Purchase of the new property should be either one year before the sale or two years after the sale of the property
  2. The gain which happens can be invested in the construction of the property (but given the condition that condition must be completed within 3 years from the date of the sale)
  3. In the budget (2014-15), it has been mentioned that only one house property can be purchased/ constructed from the capital gain to claim the exemption
  4. In case the new property is sold within 3 years of purchase/completion then exemption can be taken back.

 

Section 54F: Exemption on capital gains on the sale of any asset other than a house property

When the capital gains happen from the sale of any long-term asset (other than house property) then exemption under this Section 54F is implemented. One must invest the entire sale consideration (not only Capital Gain) to buy new residential house property to claim the desirable exemption.

One should plan to purchase new property either one year before the sale or 2 years after the sale of the property. Additionally one can also gain to invest in the construction of a property (Given the condition that the construction must be completed within 3 years from the date of the sale).

In the budget 2014-15 it has been stated that only one house can be purchased or constructed from the sale as to claim the exemption (and in case the new property is sold within 3 years of its purchase the exemptions can be taken back). And in the scenario, if the entire sale proceeds are invested towards the new house purchase then the entire capital gain will be exempted from the taxes if one meets the above-stated conditions. However, if one invests a portion of the sales, the capital gains will be exempted with the proportion of the invested amount of the sales price.

Then the sales price will be calculated as capital gains multiplied by the cost of the new house/ net consideration

Section 54EC: Exemption on Sale of House Property on Reinvesting in specific bonds

This exemption is available under Section 54EC when a capital gain from the sale of the first property is re-invested into the specific bonds.

If one is not thinking to re-invest in profit from the sale of one’s first property into the other one then in that case one can invest then in bonds for up to Rs. 50 Lakhs which is issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC). The money which is invested can be redeemed after 5 years but given the aspect that they cannot be sold before the lapse of three years from the date of the sale. One gets 6 months’ time to invest the profit in these bonds. (As to claim this one has to invest before the tax filing deadline).

 

Investment in Capital Gains Account Scheme?

Finding a suitable seller, arranging the requisite funds, and getting the paperwork in place for a new property is one time-consuming process. The Income Tax Department of India completely agrees with the limitations. If in the given condition when the capital gains have not been invested until the date of return filing which is usually 31st July (of the financial year) in which the property has been sold, then the gain can be deposited in the Public Sector Unit bank or another bank according to the Capital Gain Account Scheme (1988). The deposit here can be claimed as an exemption from the capital gains and for that, no tax has to be paid on it.

In case the money is not invested, all the deposits shall be considered as short-term capital gains in the year for which the specified period lapses.

 

Saving Tax on Sale of Agricultural Land

According to some of the previous cases, the capital gain which is made from the sale of agricultural land can be made entirely exempt from the income tax or it may not be taxed under the heading of Capital Gains.

Some of the note points are:

  1. The agricultural land in the rural area in India is not considered to be called a Capital Asset, so the gain from the sale is not taxed chargeable.
  2. If one holds agricultural land in Stock-in-trade and if one is into buying and selling the land regularly or in the course of one’s business. Then in that case any gain which happens from the sale come is taxable and comes under Business and Profession.
  3. The compensation which is received from the capital gains which is for the compulsory acquisition of urban agricultural land under Section 10(37) is exempted from the tax under the Income Tax Act.
  4. In case the agricultural land is not sold in any of such cases then one can seek exemptions under Section 54B.

 

Section 54B: Exemption on Capital Gains From Transfer of Land Used for Agricultural Purpose

When one makes short and long-term capital gains which are from the transfer of land used for the agricultural purposed either by an individual’s parent/ self/ HUF for 2 years before the sale then the exemption is available under Section 54B.

The amount which is exempted is then invested in a new asset or capital gain (whichever is lower in this case). One must plan to reinvest in a new agricultural land within 2 years from the date of transfer. The agricultural land which is bought to claim the capital gain for exemption purposes is not supposed to be sold within a period of 3 years from the date of its purchase. And if case one is not able to purchase agricultural land before the filing of return date in the deposit account in any of the brands (except the rural branch) of a public sector bank or IDBI Bank according to the Capital Gains Account Scheme, 1988.

The exemptions can be claimed for the amount which is deposited. If the deposited amount is not used as per the Capital Gain Account Scheme it is supposed to be treated as a Capital gain of the year in which the period of 2 years from the date of sale of land expires.

To know more details about the investment, contact HA. With HA’s age-old experienced expert complicated things are made simpler.

HA TAX
Join HA TAX. The perfect destination for all your needs.

HA TAX takes care of a wide range of services ranging from accounting, taxation, payroll, audit support, business registrations, food licenses, trade licenses, and much more. Get connected with experts at a price that is affordable like never before.

About

HITAKSH LLP is a service-providing platform aimed at modernizing the way financial services are provided. Our mission is to provide taxation & accounting services at an affordable price and with the utmost integrity. With the same level of dedication & effort, we tend to the needs of individuals, businesses, companies, and enterprises. HA TAX App is a product of HITAKSH LLP. Use our Chat-based Mobile and desktop application for processing, tracking, and chatting with your Dedicated CA right from your mobile or laptop. HITAKSH is now providing country specific accounting needs to over 10 countries.

Join HA TAX.