What is a Capital Gain?
Any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain. This gain or profit falls under the category of ‘income’, and hence an individual is required to pay tax for that amount in the year in which the transfer of the capital asset occurs. This is known as capital gains tax, which could be short-term or long-term.
Capital gains are not applicable to an inherited property as there is no sale, only a transfer of ownership. The Income Tax Act has specially exempted assets received as gifts by means of an inheritance or will. Though, if the individual who inherited the asset decides for selling it, capital gains tax would be applicable.
Long-Term and Short-Term Capital Assets
Short-term Capital Asset
An asset which is held for not beyond 36 months or less is a short-term capital asset.
Long-term Capital Asset
An asset that is held for beyond 36 months is a long-term capital asset.
From Financial Year 2017-18 onwards – The criteria of 36 months was reduced to 24 months in the case of fixed assets being land, building, and house property.
Securities are short term capital assets if it is held for 12 months or less.
The assets are:
• Equity or preference shares in a corporation listed on a recognized stock exchange in India
• Securities listed on a recognized stock exchange in India
• Units of UTI, whether quoted or not
• Units of equity-oriented mutual fund, whether quoted or not
• Zero-coupon bonds, whether quoted or not
Tax on Equity and Debt Mutual Funds
The profits made on the sale of debt as well as equity funds are treated differently. Funds that invest heavily in equities, commonly exceeding 65% of their total portfolio are known as an equity fund.
Change in Tax Rules for Debt Mutual Funds
Debt mutual funds have to be held for above 36 months to qualify as a long-term capital asset. This change, in effect from last year’s Budget, implies that investors will have to remain invested in these funds for at least 3 years to take the benefit of long-term capital gains tax.
If redeemed within 3 years, the capital gains would be added to one’s income and would be taxed under the income tax slab.
Capital gain long term tax rate
Long-term capital gains are those an individual earns on assets and held for more than a year. The current capital gains tax rates under the new 2018 tax law are 0%, 15% and 20%, reliant on an individual’s income. However, that rate does not apply to all assets. The differences are;
• Short-term capital gains tax is a tax usually applied to profits from selling an asset you have held for below a year. Short-term capital gains taxes are pegged towards your federal tax brackets, so you will pay them at the same rate you had paid your ordinary taxes.
• Long-term capital gains tax is a tax applied towards assets held for more than a year. The long-term capital gains tax rates are 0%, 15% and 20%, and they are typically much lower than the ordinary income tax rate.
• Property sale tax: Home sales are a very particular form of capital gains, and are governed through their own set of rules.
Long term capital gains are taxed at the rate of 20.6 % with indexation. Indexation is mainly a technique towards adjusting the cost of the asset consistent with the inflation index. It would increase your cost and lessen your gains and thereby tax liability. Thus under long term capital asset, the benefit of indexation is available plus the individual who falls in the tax bracket of 30% also receive the advantage of paying the lower tax rate of 20%.
Capital gain tax on property
Short Term Capital Gains Tax
Short Term Capital Gain on property is considered as a gain from selling a property which was held by an individual for less than 36 months. As a taxpayer, individuals are liable towards paying tax on short term capital gain on property according to the applicable marginal income tax slab.
Some major points to remember:
• Individuals are allowed to adjust/ reduce the sale consideration for any brokerage, commission they had paid at the time of property sale
• Individuals are allowed to deduct any expenditure on construction as well as home improvement incurred during the period the individual held/owned the asset
• Benefit of indexation, that is adjustment for Inflation is not permitted on a property transaction classified under short term capital gain
• No exemption or savings is permitted on short term capital gain tax under section 54 that is by re-investment in property or buying capital gains bond issued through REC or NHAI
• Liability under Short Term Capital Gains could be significantly high if an individual fall in the higher income tax slab. It is advisable to plan towards selling the sale of the property after 3 years of holding, in order to shift it to the category of Long Term Capital Gains.
Long Term Capital Gain Tax
When individuals sell the property that is owned by them for more than 3 years, any gain arising from such sale would be considered as long term capital gain. Long term capital gain is calculated as the difference amid net sales consideration and indexed cost of property. The benefit of indexation is permitted to set off the impact of inflation from the gains made on the sale of the property so that the actual gains on property would be taxed. This is dependent on the reason that value of money falls constantly because of inflation and henceforth, it is unfair to tax a long term property holder for the nominal gains accruing towards him only because of inflation.
The main points to remember:
• Present Long Term Capital Gains rate of tax is 20%
• Individuals are allowed to adjust their sale consideration for any brokerage, commission they had paid at the time of property sale
• Individuals are allowed to deduct any expenses on construction and home improvement incurred during the period you held/owned the asset. Similar to the indexation benefit obtainable on the purchase cost, any house improvement expenses are also permitted towards being adjusted in accordance with the Cost Inflation Index published through Reserve Bank of India.
• An individual could get the loan term capital gains tax reduced/exempted under section 54 that is through investing the gain in residential property or buying capital gains bonds issued by REC or NHAI
Capital gain tax rate
Capital gains under Income Tax are applicable when an individual or organization sells capital assets as well as derives a profit. The profit on sale of capital assets is considered as income from capital gains. Capital gains are divided into 2 types under the Income Tax Act, namely long-term capital gains and short-term capital gains.
Capital Gains Rate for Land and Building
The period of holding of the asset and the kind of asset determine if capital gains are long term or short term. In case of land, building, apartment or additional types of immovable assets, if an individual sells it after holding it for 36 months (3 Years), then the resultant gain shall be called as long-term capital gains. Long-term capital gains rate for land, building as well as apartment is taxable at a reduced rate of 20%. Furthermore, the cost inflation index could also be used towards reducing tax liability when capital gains are long-term in nature.
Capital Gains Rate for Gold and Jewellery
If an individual holds gold, diamond, jewellery and precious stones for 36 months prior towards selling, then the gain from the sale could be treated as long-term capital gains. The capital gains rate applicable for gold as well as jeweller is 20%.
Capital Gains Rate for Mutual Funds as well as Shares, and Financial Securities
The holding period for fiscal assets like shares, mutual funds and financial securities are different from that of immovable assets as well as jewellery. When any shares, debentures or financial securities are sold through an assessee after holding it for a minimum period of above 12 months, the resultant profit would be treated as long-term capital gain.
Furthermore, long-term capital gains on equity shares and units of equity-oriented mutual funds are exempted from long-term capital gains, providing the sale is chargeable towards Securities Transaction Tax (STT). Therefore, long-term capital gains on selling listed securities as well as equity-oriented mutual funds which attracted securities transaction tax remain totally tax-free.
Short Term Capital Gains on Equity Shares
Short-term capital gains on equity shares as well as equity-oriented mutual funds are taxable under income tax subjected towards income-tax of just 15% if it was subjected to Securities Transaction Tax. If sales of financial securities were outside of a recognised tax exchange, then the individual would be charged long-term capital gains or short-term capital gains depends on the period of the holding of the said securities.
Long Term Capital Gains on Equity Shares
Long-term capital gains are taxed at 20% after adjusting the inflation through indexing the cost of acquisition. For listed securities, the individual has an option towards paying tax on long-term capital gains at 10% but without indexation. For foreign Institutional Investors (FIIs), the long-term capital gains as well as short-term capital gains are taxed at 10% (without indexation) and 30% individually.
Capital Gains Set-Off
Presently, it is not possible towards setting-off long-term capital loss against the short-term capital gains and therefore the long-term capital loss arising towards taxpayers would have to be set-off only against the long-term capital gain arising towards such taxpayers. Furthermore, capital loss cannot be adjusted against any additional income of the assessee for the year. Though, loss from long-term or short-term capital loss could be carried forward for 8 years.
FAQ
What is Capital Asset?
A Capital Asset consists of any type of property held through an assessee. The asset might or might not be related to their profession or business or not.
What is the reason for distinguishing gains as long-term and short-term?
Capital gains are taxed depending on their nature that is if they are long-term or short-term. To determine how much tax is charged towards again, they are classified into long-term and short-term.
How does an individual calculate long-term capital gain?
To calculate long-term capital gains from a particular asset, an individual would have to take the overall value of consideration (the asset’s sales consideration) as well as subtracted from it the expenses incurred completely and exclusively regarding the transfer of a capital asset (commission, brokerage, etc.). The figure that an individual receives from this calculation is known as the net sale consideration, from which an individual would have to subtract the indexed cost of acquisition and the indexed cost of improvement, if any, and an individual would get the long-term capital gain amount.
How does an individual calculate short-term capital gain?
For calculating short-term capital gain, an individual would have to take the overall value of consideration (the asset’s sales consideration) and subtracted from it the expenses incurred entirely and exclusively regarding the transfer of a capital asset (commission, brokerage, etc.). The figure that an individual gets from this calculation is known as the net sale consideration, from which an individual would have to subtract the cost of acquisition and the cost of improvement and an individual would get the short-term capital gain amount.
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