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.
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:
Consider the following table:
You can calculate STCG tax with the following steps:
The STCG tax = total asset value − Variables on transfer, acquisition and improvement
Now, let us look at the LTCG tax.
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:
You can calculate the LTCG tax by following these steps:
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.
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:
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:
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:
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:
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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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.
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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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.
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.
To calculate capital gains tax on property sale in India:
Some basic exemptions for long-term capital gains for the year 2021-2022 are: