All About Capital Gains Tax in India

When you make investment decisions, at what stage do you think about the capital gains tax in India? Do you factor it in before investing or do you think about it later? 

If you plan to consider it later, these taxes on your investments might come as a surprise, sometimes an unpleasant one.

To avoid such surprises, let us understand what capital gains tax is in detail.

What is capital gains tax?

When you redeem an investment, be it stocks, debt, mutual funds or gold, you make capital gains. These gains add to your income and attract a tax called capital gains tax.

You will be required to pay this tax during the financial year in which the investment was redeemed. 

What is the classification of capital gains taxes? 

Capital gains tax can be classified as

• Short-term capital gains tax
• Long-term capital gains tax

Criteria for short and long term as per asset class -

The criteria for short and long-term depends on the type of the capital asset.

• For land, property and similar assets: 24 months

• If sold before 24 months from the date of purchase, it is called short-term capital gain. 
• If sold after 24 months from the date of purchase, it is called long-term capital gain.

• For equity, bond, gold and mutual fund, capital gains tax on holding these asset classes and similar assets: 12 months

• If sold before 12 months from the date of purchase, it is called short-term capital gain. 
• If sold after 12 months from the date of purchase, it is called long-term capital gain.

• For debt-oriented assets like bonds and mutual funds holding these asset classes and similar assets: 36 months

• If sold before 36 months from the date of purchase, it is called short-term capital gain. 
• If sold after 36 months from the date of purchase, it is called long-term capital gain.

Criteria for inherited securities

If an asset is acquired through a gift, will, succession or inheritance, the period for which the asset was held by the previous owner is also counted to determine whether it is a short-term or a long-term capital asset. For bonus shares or rights issues, the period is counted from the date of allotment of the bonus shares or rights issues.

Capital gains tax rates as per asset class

Capital gains tax rates also differ per asset class.

Look at the table below: 

Calculating capital gains taxes in India

Before we go into the details of the calculations, let us understand a few terms used for the calculation:

• Capital Assets

Capital assets include land, house, property, building, trademark, vehicles, leasehold rights, machinery, patents, and jewellery. 

• Full Value Consideration

The consideration to be received or received by the seller as a result of the transfer of the capital asset is known as the full value consideration. Capital gains tax applies in the year of transfer, even if the seller receives no consideration in that year.

• Cost of Acquisition

The cost of acquisition is the sum the seller paid to acquire the capital asset in the first place.

• Cost of Improvement

An expense incurred by the seller for making any alteration or additions to the capital asset is known as the cost of the improvement. 

How to calculate capital gains tax?

Capital gains tax is calculated differently for different periods on different capital asset classes.

• Start with the full value of consideration.
• Deduct the indexed cost of acquisition + indexed cost of transfer + indexed cost of improvement

Let us define the terms used in the above formula:

• Indexed cost of acquisition 

= (cost of acquisition x by the cost of inflation index of the acquisition year)/(cost of inflation index of the transfer year)

• Indexed cost of transfer
•  = (brokerage paid for arranging the deal, legal and other expenses x cost of inflation index of the improvement year)/(cost of inflation index of the transfer year)

• Indexed cost of the improvement 
• = (cost of improvement x cost of inflation index of the improvement year)/(cost of inflation index of the transfer year)

• Long-term Capital Gains Tax 
• = (Full Value Consideration) - (indexed cost of acquisition) + (transfer) + (indexed cost of improvement)

• Short Term Capital Gains Tax

• Start with the full value of consideration.
• Deduct the cost of acquisition + cost of transfer + cost of improvement.
• The final amount will be short-term capital gain.
• Short-term capital gain = full value consideration - (cost of acquisition + cost of transfer + cost of improvement).

What are the different tax rates for different asset types?

• The long-term capital gains on stocks and equity mutual funds are taxed at 10%. 
• If the gains on the sale of listed securities exceed ₹1 lakh, the short-term gains are taxed at 15 per cent. 
• The short-term capital gains debt mutual funds are added to the taxpayer’s income. They are taxed according to the individual’s income tax slab. 
• The long-term capital gains on debt mutual funds are taxable at 20% with indexation and 10 % without indexation. 

Let us look at each of these assets and their taxes in detail: 

Capital gains tax on bonds

A capital gain bond is a type of bond where you can invest within six months of selling your asset.

You can invest in specific bonds like the National Highway Authority of India and Rural Electrification Limited and get tax exemption under Section 54EC of the Income Tax Act. 

Capital gains in this case cannot be redeemed before three years. The individual can earn a guaranteed rate of interest on the bond. During a financial year, one can invest up to a maximum of ₹50,00,000 in capital gain bonds. This benefit is only available for long-term capital bonds.

Capital gains tax on house property

The following expenses are deducted from the total sale price:

• Commission or brokerage paid for securing the purchaser.
• Stamp paper cost.
• Expenses related to travel along with the transfer.
• The place of property inheritance, expenses incurred concerning the process associated with the inheritance and the will, gaining the certificate of succession, in some cases, the cost of the executor is also applicable.

Capital gains taxes on the sale of shares 

The following expenses are deductible:

• Commission of brokers related to the sold shares.
• Securities transaction tax (STT) is not allowed as a deductible expense.

What is the Income Tax Rate for Income on Sale of Assets?

Income between ₹50 lakh to ₹1 crore attracts an additional surcharge at 10%, and income above ₹1 crore attracts additional surcharge at 15%.

How to save on capital gains tax?

To save on your capital gain tax, you can do the following:

Use the available exemption if you are selling an old house to buy a new house

If you sell your old house to buy a new house, you are exempted from the capital gains tax, if you meet the following conditions:

• You buy a new house one year before the sale of the old house.

• You buy a new house up to two years after the sale of the old house, or you construct a new house up till three years after selling the old house.

• If you sell the new house within three years, the exemption is withdrawn.

• Purchase capital gains bonds

If you are selling a property, but have no interest in purchasing another residential property using the proceeds, then you can invest in capital gains bonds to claim exemption on capital gains tax.

• Invest in capital gains accounts schemes

If purchasing a new residential property may take time, you can invest in capital gains accounts for temporary relief from capital gains tax. These accounts are either from public sector banks or approved private sector banks. The capital gains accounts scheme helps you park your capital gains until you reinvest them in assets. These assets should be the ones specified under Section 54 and 54F of the Income Tax Act.

• Invest for the long term

Hold on to your investments for the long term to be exempt from paying capital gains tax. You only pay Capital Gains Tax when you sell a Capital Asset.

• Use capital losses to offset gains

You may offset Capital Gains in the current financial year against losses from past financial years.

What are the things to be careful about while calculating capital gains tax?

• Capital gains tax comes into play during exit, not entry

You probably have a broad idea about the capital gains tax on investment. However, you may choose to consider it in detail at a later stage. This is because the capital gains tax comes into play only when you exit the investment. You do not pay any capital gains tax when you enter an investment. 

• Enter an investment with an exit strategy and time horizon

When you enter an investment without considering an exit strategy and time horizon, it is like doing only half of the homework. 

Having a clear exit strategy and time horizon frame is important. 

After knowing all the capital gains tax implications, you can ask yourself: 

• Does the investment still match my investment goal? 
• Does it still match my risk appetite (capacity to take risks)? 
• Am I comfortable entering the investment knowing fully well when and how much capital gains tax I will have to pay when I exit?

In the end

When you enter an investment, the potential risk and reward are all that people might tell you to focus on. However, the capital gains tax implications are also an important factor to consider as you make an investment decision. It can determine whether the investment was a profitable or a loss-making one for you.

They say the devil is in the details. Doing your homework on capital gains tax in India can help you plan better from the start of your investment journey. 

Frequently asked questions

How do I avoid capital gains tax?

These are the steps on how to save on capital gains tax:

• Use the available exemption if you are selling an old house to buy a new house

• Purchase Capital Gains Bonds

• Invest in Capital Gains Accounts Scheme
  
  
• Invest for the long term
  
  
• Use capital losses to offset gains

What is the capital gains tax in India on a property sale?

Capital gains tax is chargeable on the profit earned from the sale of house property: 

• If you sell the property within two years of buying, it will be termed short-term capital gain. This will be part of your income for that year. You will be taxed as per the tax bracket you fall under.
• If you sell the property after two years of buying, it will be termed long-term capital gain. Long-term capital gain is taxed at 20.6%.

To what extent is capital gains tax exempt in India?

Capital gains are added to your income. Assuming that you have no other income except capital gains, these are the basic exemption limits on your income.

• The exemption limit is ₹5 lakh for resident individuals aged 80 years or above.
• The exemption limit is ₹3 crore for resident individuals aged 60 years or above but below 80 years.
• The exemption limit is ₹2.5 lakh for resident individuals of the age below 60 years.
• The exemption limit is ₹2.5 lakh for non-resident individuals, regardless of the age of the individual.
• The exemption limit is ₹2.5 lakh for Hindu Undivided Family (HUF).

How to pay advance tax on capital gains?

You can pay your advance tax on capital gains online using Challan 280.

Here are the steps to pay the advance tax: 

• Select Challan 280 from the e-Payment of TIN website and click on the “Proceed” button.
• For individuals, select 0021 Income Tax (Other than Company).
• Next, for advance tax, select (100) Advance Tax.
• Now, select the mode of payment for the advance tax. You can pay using your debit card or through net-banking. 
• Enter your personal details correctly, such as your PAN, address, mobile number and email address. 
• Select the assessment year for which you are paying the advance tax. 
• Proceed to the next step and double-check all your details. 
• Once you have checked that all the details are correct, you can give consent and make the payment. 
• You will be redirected to the bank’s payment page where you can pay your advance tax amount and collect the receipt. 

Your advance tax is successfully paid.