Capital Gains Tax in India: Meaning, Rates and When to Pay?

How much tax do you have to pay if you sell property? Is there a capital gains tax on the sale of gold jewellery? And is there any way to save these taxes?

While some returns incur short-term and long-term capital gains tax rates, others are added as ‘income from other sources’. The type of income declared also determines the tax rate in India. These nuances make taxes on investments comprehensive but complex at the same time.

Let’s break them down.

What is Capital Gains Tax?

Any revenue derived from the sale of capital assets is referred to as capital gain . Capital asset, here, could be anything ranging from a house to stocks.

Now, the question is what all items fall under the category of Capital Assets. Examples of capital assets are real estate, stocks of listed companies, debt securities, commodities like gold and silver and mutual funds. The type of capital gains tax also differs for different asset classes.

However, these asset classes can be classified into five for tax calculation. These are immovable assets, movable assets, listed equity holdings, equity-based mutual funds and debt-based mutual funds.

What are the Types of Capital Gains Tax?

For taxation, capital gains can be classified into two categories. These are short-term capital gains (STCG) and long-term capital gains (LTCG).

The duration of holding assets for STCG and LTCG differs for different assets. For example, the time of holding for applying STCG tax is one year or less for equities and equity-based mutual funds. But this period is three years or less on redeeming physical gold assets.

Let’s look at this applicable duration in detail through this table:

When do you Pay Capital Gains Tax?

You only have to pay capital gains tax on the sale or redemption of assets. Since your profits are accrued and not realised profits, there are no capital gains applicable when you are holding assets.

How to Pay Capital Gains Tax?

To pay capital gains tax, you can first calculate the applicable tax on your profits by selling or redeeming assets.

You can follow these steps for calculation.

1) Identify your long-term and short-term capital gains separately (because they are taxed in different ways)

2) Add together all of your short-term capital gains and consider deductibles to calculate your net gains or losses.

3) Add your long-term capital gains together, and consider indexation, deductibles and exemptions to determine your net gain or loss.

4) To get assistance in calculating your tax liability, you can use tax preparation software or seek professional help.

Formula for STCG and LTCG Taxes

The formula to calculate your LTCG tax would be as follows:

LTCG = FVC − [(Indexed TC + Indexed AC + Indexed IC + Cost on availing exemptions (if any)]

To calculate indexation, you can consider the Cost Inflation Index (CII) for the year of redemption.

How to Reduce your Capital Gains Taxes?

Wherever there are applicable taxes, there are provisions to reduce the tax burden. There are various financial strategies to lower your capital gains tax obligation, and time is a key component. Let’s look at these strategies to reduce your capital gains tax liability

1. Make tax-saving investments

Whenever returns are added to your income as ‘income from other sources’, you can reduce your taxable income by making tax-saving investments. You can invest in instruments like the Equity linked Savings Scheme (ELSS), Public Provident Fund (PPF), five-year fixed deposits or National Savings Certificate (NSC) to get tax exemptions under Section 80C. With these investments, you can save taxes on up to ₹1.5 lakhs in a financial year.

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2. Investing in line with your financial goals

You can make investments based on your financial goals. For example, you can invest in a certain asset, say equity mutual funds, for a longer period than 12 months, not to get indexation benefits, but to nullify the impact of market volatility through long-term gains.

3. Considering deductibles

Some costs can be tax deductible depending on your security. These deductibles are expenses incurred on the acquisition, transfer and maintenance of the asset. For example, if you have invested in a plot of land, your brokerage cost while selling, renovation cost, and other transfer charges like stamp duties can be deducted from your actual sale value.

You can keep track of these tax-deductible items to deduct from your STCG and LTCG.

4. Looking for exemptions

For real estate and other assets, separate exemptions are listed in Sections 54, 54B, 54EC and 54F. These exemptions are applicable for capital gains up to a certain amount and can only be availed within a specified time frame.

Staying invested to benefit through indexation

For assets like equity and equity-based mutual funds, the return potential can be higher in the long term. Also, the indexation benefit in LTCG can reduce your tax implications on their redemption to some extent. Therefore, investing long-term if your financial goal horizon permits can be better.

To Conclude

Taxes on capital gains are based on a comprehensive approach. Your capital gains tax liability differs for different types of securities and even for different investment horizons for the same security. The tax implications for investments like mutual funds vary for different types of mutual funds. With these inclusions, there can also be benefits from deductibles, exemptions and indexation. Therefore, it is important to consider all these aspects to get the best out of your investments.

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Frequently Asked Questions

1. Do I have to pay capital gains tax immediately?

If a person in India inherits property and there is no sale of it, no capital gains tax is due under the Income Tax Act. However, if the inheritor chooses to sell the property, the tax will need to be paid on the profit made from the sale. This also applies to investments in other assets like equities, gold and mutual funds. You need to pay applicable taxes on your capital gains in the financial year of their redemption.

2. Do you pay capital gains when you sell or at tax time? 
 

You owe the tax on capital gains for the year you realise the gain. For example, if you redeem your equity investments anytime between 1 April 2022 to 31 March 2023. Then your taxes for the gains can be filed for the financial year 2022-23.

3. At what price do you have to pay capital gains tax?

Refer to the tables above for STCG and LTCG tax rates for different types of securities.