All That You Need To Know About Capital Gains Tax
All That You Need To Know About Capital Gains Tax
So, you have a property that you want to sell? Of course you can make a good profit out of it, if the market is strong. But then did you know you also have to pay hefty tax on those gains?
One of the best investment options in Bengaluru today is real estate. Many people buy and sell real estate properties, with a pure intention to gain from capital appreciation. But then, they are the ones who pay the highest amount of capital gains tax.
What is capital gains tax?
When you sell a real estate property or any non-inventory asset of value for more than what you have purchased it for, you will have to pay a fee to the government. This fee is termed as capital gains tax.
For instance, if you have bought a property for Rs.25,00,000 and then sold it for Rs.40,00,000 after five years, you will have to pay a percentage of the profit of Rs.15,00,000 (Rs.40,00,000 – Rs.25,00,000) that you make, as capital gains tax to the government.
Short-term vs Long-term Capital Gains Tax
Capital gains tax can be short term or long term. FY 2017/18 reads Short term capital gains refer to profits that you make by selling a property within two years of its purchase. You will have to pay higher taxes on them and they are taxed in the same way as your ordinary income. If you have held on to your property for more than a period of 24 months starting from the date of its transfer, you get to pay long-term capital gains tax when you sell it. This is usually much lower than short-term capital gains.
Assets such as shares, equity-oriented mutual fund units, UTI units, Zero Coupon Bonds, and listed securities are considered long term capital assets if the period of holding is 12 months. Unlisted shares should be held for 24 months to classify as long term capital assets.
Computation of Capital Gains
The process of computation for short term capital gains is as follows:
Any expenditure that is incurred, exclusively and wholly in connection with the transfer of the short-term capital asset is first deducted from the sale value of the asset to estimate the Net Sale Consideration.
The purchase price of the asset or the cost of acquisition as well as the cost of improvement, if any, are to be deducted from the net sale consideration to arrive at the short-term capital gain.
To compute long term capital gains you have to deduct the indexed cost of acquisition and indexed cost of improvement, if any, from the Net Sale Consideration. Indexed cost is calculated by multiplying the cost of acquisition (or improvement) with the cost inflation index of the year of transfer of the capital asset. The benefits of indexation apply only to long-term capital assets.
What Does Capital Gains Tax Apply To?
The government charges capital gains tax on any non-inventory asset that you sell for a profit. This includes cars and investments such as stocks and bonds. It is charged on the profit that you make from selling the asset. However, the following are not defined as “capital assets”:
Any consumable stores, raw materials, or stock-in-trade that is held by a person as inventory for his business or profession. For instance, gold for a jewelry merchant and motor car for a motor car dealer are not categorized as capital assets since those are their stock-in-trade.
Personal effects such as apparels or furniture that are used by a person or his dependent family members. However, paintings, sculptures, archeological collections, jewelry, and works of art are not taken as personal effects.
Agricultural land that is not situated within the jurisdiction of notified area committee, cantonment board, municipality, or town area committee with population of 10,000 or more.
Gold bonds (1980), Special bearer bonds (1991), Gold deposit bonds (1999), and deposit certificates (2015) issued by the Central Government.
Capital Gains for assets transferred by gift or will
If you receive a capital asset as a gift or through a will, it doesn’t attract any capital gain. However, they will arise when you transfer these assets subsequently. In that case the cost of acquisition will be taken as the cost of acquisition to the previous owner.
Exemptions to Capital Gains
There is a list of incomes under Section 10 of the Income Tax Act, which are exempt from capital gain tax. These include:
Short-term or long-term capital gains from transfer of US 64 units, provided such transfer has taken place on or after 1st of April 2002
Capital gain from the transfer (via compulsory acquisition) of agricultural land that is located in an urban area, provided the taxpayer was using the land for agricultural periods for at least two years before the date of transfer. This applies to transactions completed after 1st of April 2004 only.
Capital gain from transfer of land, building, or both, under the AP Capital City Land Pooling Scheme, provided the taxpayer was the owner of such building or land as on 2nd June 2014.
Capital gain from transferring equity shares, equity-oriented mutual fund units, or units of a business trust. Nevertheless, there are certain conditions that need to be satisfied for this exemption:
The units should not be allotted by the trust in exchange against shares of a special purpose vehicle as per section 47(xvii) of the Income Tax Act
STT or Securities Transaction Tax should be duly paid at the time of transfer
The asset has to be a long-term capital asset
The transfer should have taken place on or after the date
Transfer should take place on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004, comes into effect.
Long-term capital gains that arise from transactions carried out at a recognized stock exchange would be exempted from tax, provided the considerations for such transactions are paid in foreign currency. This exemption holds well even if STT hasn’t been paid on these transactions.
Any long-term capital gains from the transfer of shares are exempt from tax if the transaction of acquisition is carried out on or after 1st October 2004. Such acquisition however should not be notified by the Central Government. These transactions do not attract STT.
Re-investing Capital Gains
By re-investing capital gains to purchase other capital assets, you can claim exemption from tax on capital gains to a certain extent.
For instance, capital gains arising from the transfer of residential property can be re-invested to construct or purchase another residential property, anywhere in India (Sec 54).
If you have earned capital gains (long-term or short-term) by transferring agriculture land, you can claim exemption by re-investing the same in the purchase of another piece of agricultural land, either in a rural or an urban area. However, the transferred land should have been used for agricultural purposes by you, your parents, or your family members, for at least two years before such transfer (Sec 54B).
If you have made capital gains by transferring any long-term capital assets before the assessment year 2018-19, you can re-invest the same in the purchase of bonds as specified in section 54EC, to claim exemption from tax (Sec 54EC).
Capital gains from transfer of long-term capital assets are to be re-invested in specified long-term assets, as notified by the Central Government, to finance start-ups (Sec 54EE).
If you have earned capital gains by transferring capital assets other than residential house properties, you can re-invest your net sale consideration in construction or purchase of one residential house property, anywhere in India. However, on the date of such a transfer, you should not own more than one residential house property (Sec 54F).
Any short-term or long-term capital gains made from transferring land or building belonging to an industrial undertaking can be re-invested in acquiring building or land for industrial purposes. However, such land or building should have been compulsorily acquired by the Government and should have been used for industrial purposes for at least two years before the date of such transfer (Sec 54D).
In case you are selling your urban industrial land, building, plant or machinery, so as to shift to a new industrial undertaking to a rural area, you will have to re-invest the proceeds to acquire land, building, plant or machinery in that rural area. It has to be for an industrial undertaking (Sec 54G).
Similarly, if you are shifting your industrial undertaking from an urban area to a special economic zone, the capital gains that you earn by transferring your land, building, plant or machinery should be re-invested in acquiring land, building, plant or machinery, in that special economic zone. You have to use it for industrial purposes only (Sec 54GA).
If you have transferred your residential property (house or plot of land) during the period from 1st April 2012 to 31st March 2017 you can re-invest the net sale consideration to acquire the equity shares of an “eligible company.”
These are some of the ways to get exemption from capital gains tax. However, you have to make sure you satisfy the conditions that are specified in the respective sections. Such re-investment has to be done within the specified period, as mentioned in those sections.
The Capital Gains Account Scheme
Every taxpayer gets about 3 years to re-invest the capital gains that he earns from the transfer of specified instruments. Nevertheless, in certain cases, the due date for filing income tax returns might fall before the end of such specified period. In such cases, it is best for the taxpayer to deposit the amount of capital gains in a capital gains account scheme temporarily. Such deposit has to be made before the due date of filing the income tax returns. The amount can be withdrawn whenever he is ready to re-invest it in the specified instrument.
There are two types of Capital Gains Account: the Savings Account and the Term Deposit Account. The Savings Account is just like any other normal savings account that attracts similar rate of interest. You get a pass book that will contain all details about the deposits, withdrawals, and interest accumulations. This would be an ideal option for you, if you were to re-invest the capital gains in the construction of a house, as you would be requiring money every now and then.
The Capital Gains Term Deposit Account, on the other hand, is like a fixed deposit account where in you deposit the amount for a specified period of time. The interest rate here is higher than that of the Savings Account. Here you get a deposit receipt with details about the amount deposited, the date, and the date of maturity of such deposit. Any withdrawal made before the expiry of the specified period will attract a penalty for pre-mature withdrawal.
The Capital Gains Term Deposit Account is of two types: Cumulative and Non-Cumulative. In case of a cumulative term deposit account, the interest that is earned on the amount would be re-invested. You get the total amount (principal plus interest) at the end of the specified period or at withdrawal, whichever is early. In the non-cumulative option, the interest is paid in regular intervals, which is usually quarterly. You need to pay tax on the interest that you so earn, as per the Income Tax Slab Rates.
To withdraw amount from your Capital Gains Account, you will have to fill up a Form C. Care should be taken to use the amount for the specified purpose, within 60 days of such withdrawal. Unutilized amount, if any, should be deposited back into the Capital Gains Account with immediate effect. Subsequent withdrawals would require the submission of Form D that requires you to describe the way in which you used the previous withdrawals. No cheque books are issued for Capital Gains Accounts.
To close a capital gains account, you will have to submit Form G with the endorsement of the authorized offer on it. You will also have to submit your passbook (in case you have a Capital Gains Savings Account- Type A) or your deposit receipt (in case of Capital Gains Term Deposit Account – Type B) to the deposit office.
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