Investment...Every one of us is trying to save as much as we can, in variety of investments to get possible higher returns. But my choice of transaction is "right time investment in immovable property and selling of the same".
In these property transactions, we will come across capital gains. So, in this article, lets learn a few things about this.
What is a Capital Gain?
Simply put, any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain. This gain or profit is considered as income and hence charged to tax in the year in which the transfer of the capital asset takes place. This is called capital gains tax, which can be short-term or long-term. Capital gains are not applicable when an asset is inherited because there is no sale, only a transfer. However, if this asset is sold by the person who inherits it, capital gains tax will be applicable. The Income Tax Act has specifically exempted assets received as gifts by way of an inheritance or will.
What are Capital Assets?
Here are some examples of capital assets: land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewellery. This includes having rights in or in relation to an Indian company. It also includes rights of management or control or any other legal right. The following are not considered capital asset:
* Any stock, consumables or raw material, held for the purpose of business or profession
* Personal goods such as clothes and furniture held for personal use
* Agricultural land in rural India
* 6½% gold bonds (1977) or 7% gold bonds (1980) or national defence gold bonds (1980) issued by the central government
* Special bearer bonds (1991)
* Gold deposit bond issued under the gold deposit scheme (1999)
Definition of rural area (from AY 2014-15) – Any area which is outside the jurisdiction of a municipality or cantonment board, having a population of 10,000 or more is considered a rural area. Also, it should not fall within a distance (to be measured aerially) given below – (population is as per the last census).
a. 2 kms from local limit of municipality or cantonment board If the population of the municipality/cantonment board is more than 10,000 but not more than 1 lakh.
b. 6 kms from local limit of municipality or cantonment board If the population of the municipality/cantonment board is more than 1 lakh but not more than 10 lakh.
c. 8 kms from local limit of municipality or cantonment board If the population of the municipality/cantonment board is more than 10 lakh.
Types of Capital Assets:
Short-term capital asset: An asset which is held for not more than 36 months or less is a short-term capital asset. The criteria of 36 months have been reduced to 24 months in the case of immovable property being land, building, and house property, from FY 2017-18. For instance, if you sell house property after holding it for a period of 24 months, any income arising will be treated as long-term capital gain provided that property is sold after 31st March 2017.
Long-term capital asset: An asset that is held for more than 36 months is a long-term capital asset. The reduced period of the aforementioned 24 months is not applicable to movable property such as jewellery, debt-oriented mutual funds etc. They will be classified as a long-term capital asset if held for more than 36 months as earlier. Some assets are considered short-term capital assets when these are held for 12 months or less. This rule is applicable if the date of transfer is after 10th July 2014 (irrespective of what the date of purchase is).
The assets are:
Long-term capital asset: An asset that is held for more than 36 months is a long-term capital asset. The reduced period of the aforementioned 24 months is not applicable to movable property such as jewellery, debt-oriented mutual funds etc. They will be classified as a long-term capital asset if held for more than 36 months as earlier. Some assets are considered short-term capital assets when these are held for 12 months or less. This rule is applicable if the date of transfer is after 10th July 2014 (irrespective of what the date of purchase is).
The assets are:
a. Equity or preference shares in a company listed on a recognized stock exchange in India
b. Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India
c. Units of UTI, whether quoted or not
d. Units of equity oriented mutual fund, whether quoted or not
e. Zero coupon bonds, whether quoted or not
When the above-listed assets are held for a period of more than 12 months, they are considered as long-term capital asset. In case an asset is acquired by gift, will, succession or inheritance, the period this asset was held by the previous owner is also included when determining whether it’s a short term or a long-term capital asset. In the case of bonus shares or rights shares, the period of holding is counted from the date of allotment of bonus shares or rights shares respectively.
Read also: Income tax slab rates
Read also: Income tax slab rates
Tax on Short-Term and Long-Term Capital Gains:
Tax on long-term capital gain: The Long-term capital gain is taxable at 20%.
Tax on short-term capital gain when securities transaction tax is not applicable: If securities transaction tax is not applicable, the short-term capital gain is added to your income tax return and the taxpayer is taxed according to his income tax slab.
Tax on short-term capital gain if securities transaction tax is applicable: If securities transaction tax is applicable, the short-term capital gain is taxable at the rate of 15%.
Tax on short-term capital gain when securities transaction tax is not applicable: If securities transaction tax is not applicable, the short-term capital gain is added to your income tax return and the taxpayer is taxed according to his income tax slab.
Tax on short-term capital gain if securities transaction tax is applicable: If securities transaction tax is applicable, the short-term capital gain is taxable at the rate of 15%.
Tax on Equity and Debt Mutual Funds:
Gains made on the sale of debt funds and equity funds are treated differently. Funds that invest heavily in equities, usually exceeding 65% of their total portfolio, is called an equity fund.
Funds
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Effective 11 July 2014
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On or before 10 July 2014
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||
Short-Term Gains
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Long-Term Gains
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Short-Term Gains
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Long-Term Gains
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|
Debt Funds
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At tax slab rates of the individual
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At 20% with indexation
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At tax slab rates of the individual
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10% without indexation or 20% with
indexation whichever is lower
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Equity Funds
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15%
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Nil
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15%
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Nil
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Change in Tax Rules for Debt Mutual Funds:
Debt mutual funds have to be held for more than 36 months to qualify as a long-term capital asset. This change, in effect from last year’s Budget, means that investors would have to remain invested in these funds for at least three years to take the benefit of long-term capital gains tax. If redeemed within three years, the capital gains will be added to one’s income and will be taxed as per one’s income tax slab.
Calculating Capital Gains:
Capital gains are calculated differently for assets held for a longer period and for those held over a shorter period.
How to Calculate Short-Term Capital Gains?
# Start with the full value of consideration
# Deduct the following:
* Expenditure incurred wholly and exclusively in connection with such transfer
* Cost of acquisition
* Cost of improvement
# This amount is a short-term capital gain
Short term capital gain = Full value consideration Less expenses incurred exclusively for such transfer Less cost of acquisition Less cost of improvement.
How to Calculate Long-Term Capital Gains?
# Start with the full value of consideration
# Deduct the following:
* Expenditure incurred wholly and exclusively in connection with such transfer
* Indexed cost of acquisition
* Indexed cost of improvement
# From this resulting number, deduct exemptions provided under sections 54, 54EC, 54F, and 54B
Long-term capital gain
Full value consideration Less :
Expenses incurred exclusively for such transfer Less:
Indexed cost of acquisition Less: Indexed cost of improvement 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 which are necessary for the transfer to take place.) As per Budget 2018, long term capital gains on the sale of equity shares/ units of equity oriented fund, realized after 31st March 2018, will remain exempt up to Rs. 1 lakh per annum. Moreover, tax at @ 10% will be levied only on LTCG on shares/units of equity oriented fund exceeding Rs 1 lakh in one financial year without the benefit of indexation.
In the case of sale of house property, these expenses are deductible from the total sale price:
Full value consideration Less :
Expenses incurred exclusively for such transfer Less:
Indexed cost of acquisition Less: Indexed cost of improvement 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 which are necessary for the transfer to take place.) As per Budget 2018, long term capital gains on the sale of equity shares/ units of equity oriented fund, realized after 31st March 2018, will remain exempt up to Rs. 1 lakh per annum. Moreover, tax at @ 10% will be levied only on LTCG on shares/units of equity oriented fund exceeding Rs 1 lakh in one financial year without the benefit of indexation.
In the case of sale of house property, these expenses are deductible from the total sale price:
a. Brokerage or commission paid for securing a purchaser
b. Cost of stamp papers
c. Travelling expenses in connection with the transfer – these may be incurred after the transfer has been affected.
d. Where property has been inherited, expenditure incurred with respect to procedures associated with the will and inheritance, obtaining succession certificate, costs of the executor, may also be allowed in some cases.
In the case of sale of shares, you may be allowed to deduct these expenses:
a. Broker’s commission related to the shares sold
b. Securities Transaction Tax (STT) is not allowed as a deductible expense
Where jewellery is sold, and a broker’s services were involved in securing a buyer, the cost of these services can be deducted. Note that expenses deducted from the sale price of assets for calculating capital gains are not allowed as a deduction under any other head of the income tax return, and these can be claimed only once.
Indexed Cost of Acquisition/Improvement:
Cost of acquisition and improvement is indexed by applying CII (cost inflation index). It is done to adjust for inflation over the years. This increases one’s cost base and lowers the capital gains.
Indexed cost of acquisition is calculated as Cost of acquisition / Cost inflation index (CII) for the year in which the asset was first held by the seller, or 2001-02, whichever is later X cost inflation index for the year in which the asset is transferred.
Indexed cost of acquisition is calculated as Cost of acquisition / Cost inflation index (CII) for the year in which the asset was first held by the seller, or 2001-02, whichever is later X cost inflation index for the year in which the asset is transferred.
Indexed cost of improvement is calculated as:
Indexed cost of acquisition = Cost of acquisition * Cost Inflation Index (CII) of the year in which the asset is transferred Cost inflation index (CII) of the year in which asset was first held by the seller or 2001-02 whichever is later.
Indexed cost of improvement = Cost of improvement *Cost inflation index of the year in which the asset is transferred Cost inflation index of the year in which improvement took place
Indexed cost of improvement = Cost of improvement *Cost inflation index of the year in which the asset is transferred Cost inflation index of the year in which improvement took place
I hope, this article gives you a little information about CG. For any query / suggestion, please comment below. You can share your knowledge with friends / needy ones.
Hello, welcome to my blog, Smart Investor. I'm Satyanarayana, a banker & blogger, Investor from Visakha -patnam, India. You can read more about SML here.
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