Gains and taxes go hand in hand when investing in the capital market. While calculating gains, we often tend to forget to calculate the tax implications on them. And that’s why you need to know the implications of capital gains tax in India.

You have to pay capital gains tax on gains from assets like stocks, bonds, commodities like gold and silver, and residential and commercial real estate property. The capital gains tax is divided into the short-term capital gains tax and the long-term capital gains tax. 

The duration you hold your asset determines whether you would be paying short-term capital gains or long-term capital gains tax. 

Let’s learn about these taxes and how they apply to our investment gains. 

What is short-term capital gains tax in India? 

Let’s examine the following example to understand the two types of capital gains tax. 

Imagine that you invested money in an ultra-short debt fund to go on a vacation to Goa. You regularly invested in the debt fund through SIP. You redeemed your investments when you planned to make arrangements like buying tickets and booking a hotel. 

Now, your entire principal, along with the returns, got transferred to your bank account. You had invested ₹2 Lakhs in total and received ₹2.20 lakhs (including returns). 

Since you invested less than 36 months, you will have to pay STCG tax on your profit, i.e. ₹20,000. However, if you had invested this amount in stocks, you would have incurred a long-term capital gains tax. Wondering how? 

The following assets listed below, if transferred before 10th July 2014, will attract STCG tax only if held for one year or less: 

• Shares of stock exchange registered companies in India
• Other assets registered by the Indian stock exchanges like government securities, bonds and debentures 
• Quoted and non-quoted units of UTI and equity mutual funds 
• Zero coupon bonds

Consider the following table:

How is STCG calculated? 

You can calculate STCG tax with the following steps:

1. Take the entire asset value under consideration
2. Compute variables like expenditure on the transfer of the asset and cost of acquisition and improvement
3. Deduct the figure obtained in step two from the step one figure 

The STCG tax = total asset value − Variables on transfer, acquisition and improvement

Now, let us look at the LTCG tax. 

What is the long-term capital gains tax in India? 

Here’s an example to understand LTCG tax better. 

Consider that you had invested in a tax-saving instrument, say, ELSS (Equity Linked Savings Scheme). You made a lump sum investment of ₹1.5 Lakhs in July 2019 which matured in July 2022. Now, the value of your purchased mutual fund units has increased. So, you now have units worth ₹2 Lakhs available for redemption. 

Since the mutual fund was held for more than 12 months, you will incur LTCG. Therefore, your profit from the investment, i.e. ₹50,000, will be taxed. 

But, what is the long-term capital gains tax in India? 

Look at the following table: 

How is LTCG tax calculated? 

You can calculate the LTCG tax by following these steps: 

1. Note the total asset value in consideration
2. Calculate the total indexed cost of variables incurred on the transfer, acquisition and improvement of the asset
3. Deduct the figure obtained in step two from that in step one 
4. From the figure computed in step three, deduct exemptions under Section 54, 54 F, 54 EC, and 54B

The final number calculated in step four is your long-term capital gains tax on the asset. 

So, does this method apply to selling or transferring real estate property in India? 

Let’s discuss its applicability to real estate instruments. 

What is the capital gain tax on property in India? 

The current long-term capital gains tax on property sales is 20.8%, adding cess and surcharge. This LTCG tax rate applies to all property sales after 1st April 2017. 

So, will you be charged this rate in case of your ancestral property? If you have received an ancestral property as a gift from your family or through inheritance, you will not be taxed unless you sell the property. On selling such property, you will have to pay long-term capital gains tax on the profit derived through this sale. 

Here are a few important points to consider while calculating LTCG tax on property: 

• It is essential to deduct the expenses incurred on transfer, acquisition, brokerage, and commission on the property sales from its price.
• You can also deduct expenses that might be incurred on the renovation or improvement of the property before the sale.
• There are tax exemptions on property sales under Section 54, 54EC, and 54B. You can consider them while calculating your final tax implications. 

What is capital gains tax in India on property sales with exemptions?

A tax of more than 20% on LTCG might eat out a lot of your capital gains through a property sale. However, exemptions to this rule can give you a sigh of relief. These exemptions are as follows: 

Exemptions under Section 54

Under this section, you can avail yourself of a tax benefit on the property sale if you use this amount to purchase another property(s) (up to two properties). 

To avail of this benefit, you must comply with the following conditions: 

1. You should complete the new property purchase one year before your current property's sale or within two years of its sale. 
2. You can also avail of this benefit if you have used the capital gains to construct a property within three years of your current property sale. 
3. You cannot sell the new property within three years of its construction or purchase. 

Exemptions under Section 54EC 

You can avail of tax benefits if you re-invest the capital gains amount in specific bonds. Here are the conditions you need to comply with: 

1. You can re-invest the capital gains in capital gain bonds offered by institutions like REC and NHAI. 
2. If you have invested in these securities in or after the financial year 2018-19, you cannot redeem them five years from the date of investing. 
3. You must make these investments within six months of the property sale or before their tax-filing deadline for the year, whichever is earlier. 

Exemptions under Section 54B

You can also avail of tax benefits if you have invested your capital gains to purchase agricultural land. You can make this purchase within two years from selling your property. 

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To conclude

With gains come taxes. There are various short-term and long-term capital gains taxes incurred on your investments. However, their burden can be relieved to some extent with exemptions. So, it is crucial to not just look for gains but manage your taxes on time. Effective tax planning is also a part of informed investing. 

Frequently asked questions

1. What is capital gains tax in simple terms?

Capital gains tax is a tax on capital assets like stocks, debt, mutual funds, gold and property. These taxes can be STCG or LTCG and apply to the redemption or sale of these assets. 

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2. How can I avoid capital gains tax in India?

You cannot completely avoid capital gains tax in India. However, for assets like real estate properties, you can avail of tax benefits by complying with Section 54, Section 54B and Section 54EC exemptions. Even for these exemptions, there are limitations in terms of the capital gains amount and the period for ensuring compliance. 

3. What is the capital gains tax in India on property sales? 

Currently, the LTCG tax on the property is 20%, plus surcharge and cess. This makes the tax rate 20.8%. These taxes also apply on the sale of inherited property or one received as a gift from family. For every property sale occurring after 2017, this rate will be applicable.

4. How do you calculate capital gains tax on a property sale?

To calculate capital gains tax on property sale in India:

1. Determine the cost of acquisition and improvement of the property
2. Determine the sales consideration received for the property
3. Subtract the cost of acquisition and improvement from the sales consideration to calculate the capital gain
4. Classify the capital gain as short-term or long-term based on the holding period
5. Short-term capital gain is taxed at the normal tax rate of the individual
6. Long-term capital gain is taxed at 20% after indexation benefits.

5. How much capital gain is tax free in India?

Some basic exemptions for long-term capital gains for the year 2021-2022 are:

• Resident individuals below the age of 60 years with an annual income of Rs. 2.5 lakhs
• Resident individuals who are 60 years and above with an annual income of Rs. 3 lakhs
• Resident individuals who are 80 years with an annual income of Rs. 5 lakhs
• Non-resident individuals with an annual income of Rs. 2.5 lakhs
• HUF with an annual limit of Rs. 2.5 lakhs
• No capital gain applies to the sale of agricultural land in rural areas of India and agricultural land in rural areas is not considered a capital asset.
• In case an individual uses the entire sale proceeds of the capital asset to purchase the house property they will not be taxed.