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.
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:
As the capital gains on assets differ, so does their tax rate for different tenures.
Here are tabular representations of STCG and LTCG tax rates for different asset categories. Let’s look at these tables.
Long Term Capital Gains Tax in India
With the help of the above tables, you can calculate the capital gains tax liability on your returns. But when should 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.
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.
You can use the following formula to calculate your STCG tax:
STCG = FVC − (TC + AC + IC)
FCV = Full Value Consideration of an asset
TC = Transfer Cost of asset
AC = Acquisition Cost
IC = Improvement Cost
Here, the deductibles are the transfer, acquisition and improvement cost of the asset.
The formula to calculate LTCG remains the same, with indexation considered for calculating the deductibles.
Therefore, 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.
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
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.
Do you want to invest in ELSS? You can invest in ELSS at your preferred frequency with the Fi money app. You can even invest in the fund daily with the daily deeds feature. With this, you can instruct the app to deduct, say, ₹200 daily from your account and invest in a scheme of your choice.
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.
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.
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.
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.
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.
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.
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.
Refer to the tables below for STCG and LTCG tax rates for different types of securities.
Long-term Capital Gains Tax in India