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How-to-calculate-income-tax-on-capital-gain

 

How to calculate income tax on capital gain

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Introduction-

Income Tax on Capital Gain- If any capital assets are sold at a price above the cost price or indexed price (as the case may be) called capital gain or if any capital assets are sold at a price below the cost price or indexed price (as the case may be) called capital loss. Capital gain or Capital loss may be Long term or Short term.

   
Long term capital assets-

W.e.f. financial year 2017-18, Immovable property being land, building, and house property, is held at least for a period of 24 months (earlier it was 36 months) will be considered as long-term capital assets.

However, Movable assets, such as Jewellery, Debt Oriented Mutual funds etc., they will be classified as a Long-term capital

The following assets are held for more than 12 months, they will also be considered as long-term capital assets-

  • Units of UTI, Units of equity oriented mutual fund or zero-coupon bonds, whether quoted or not
  • Shares or Securities listed in a recognized stock exchange in India, like Equity shares, Preference shares, Debentures, Bonds or Government securities etc.
   
Short term capital assets-

W.e.f. financial year 2017-18, Immovable property being land, building, and house property, is held for less than 24 months (earlier it was 36 months) will be considered as Short-term capital assets.

However, Movable assets, such as Jewellery, Debt Oriented Mutual funds etc., they will be classified as a short-term capital asset if held for less than 36 months as earlier.

The following assets are held for less than 12 months, they will also be considered as short-term capital assets-

  • Units of UTI, Units of equity oriented mutual fund or zero-coupon bonds, whether quoted or not
  • Shares or Securities listed in a recognized stock exchange in India, like Equity shares, Preference shares, Debentures, Bonds or Government securities etc.

In Short, Capital gain is simply calculated as the difference between investment amount and current market value of your investments. From a taxation perspective, equity mutual fund units held for more than 12 months are considered as long term and for debt mutual funds, units held for more than 36 months are considered as long term. Holding period of less than 12 months for equity mutual funds and less than 36 months for debt mutual funds are considered as short term.

   

How to calculate capital gain (short term or long term)-

Short-term capital gain= full value consideration – (cost of acquisition + cost of improvement + cost of transfer).
 
Long-term capital gain = full value of consideration received or accruing – (indexed cost of acquisition* + indexed cost of improvement** + cost of transfer), where-

*Indexed cost of acquisition = cost of acquisition x cost inflation index of the year of transfer/cost inflation index of the year of acquisition.

**Indexed cost of improvement = cost of improvement x cost inflation index of the year of transfer/cost inflation index of the year of improvement.

   
Tax Rate Implication-
Long Term Capital Gain-
  • Income Tax will be charged @ 20% on sale of property.
  • Debt-oriented mutual funds and preference shares are subject to general long-term capital gains tax rules, they have to pay a 20% tax for no-equity assets after inflation indexation and 10% tax without indexation.
  • Equity shares, equity-oriented mutual-funds, and units of business trust are subject to tax, if the amount of capital gain exceeds Rs.1 lakh, all the capital gains that are more than Rs.1 lakh, will be charged at 10% tax rate without any inflation indexation benefit. However, the gains made on and before 31st January 2018 will be exempted from this new rule.
  Short Term Capital Gain-
  • Income Tax will be charged as per normal income tax slabs of an individual on sale of property.
  • Debt-oriented mutual funds and preference shares do not fall under the purview of Section 111A. In this case, the income from the sale of shares or funds will be taxed as per normal income tax slabs of an individual.
  • Equity shares, equity-oriented mutual-funds, and units of business trust are subject to tax, will be charged @ 15% tax rate, that fall under Section 111A of the Income Tax Act.
   
Tax Exemptions on Capital Gains-

However, tax on long term capital gain can be saved, through exemptions u/s 54-

  • Exemption u/s 54: Long term Capital Gain on Transfer of Residential House Property- Section 54 gives relief to a taxpayer for long term assets, if he sells his residential house and from the sale proceeds he acquires another residential house. The assessee has to invest the full amount of capital gains, not the entire sale proceeds, to claim the full exemption otherwise it will be allowed proportionately to the extent of amount invested.
  • Exemption u/s 54F: Long term Capital assets other than residential house- Section 54F gives relief to a taxpayer for long term assets, if he sells assets (other than residential house) and from the sale proceeds he acquires another residential house property. If the assessee has invested the amount of entire sale proceeds, can claim the full exemption otherwise it will be allowed proportionately to the extent of amount invested.
  • Exemption u/s 54EC: Long term Capital Gain on Sale/Transfer of Land or Building or both- Section 54EC gives relief to a taxpayer for long term assets i.e. land/building, if he sells the said assets, the capital gain arise on sale of land/building, can invest into long term bonds, maximum up to Rs. 50.00 lakhs, having lock in period of 5 years w.e.f 01.04.2018, within 6 months from the date of transfer/sale of assets.

We can invest the long-term capital gain amount, in the bonds which are issued by the following entities-

  1. National Highway Authority of India (NHAI)
  2. Indian Railway Finance Corporation Limited (IRFC)
  3. Power Finance Corporation Limited (PFC)
   
Capital Gains Account scheme-

If the asset is sold in the Previous Year, and the seller intends to, but is yet to purchase the new house property as the time limit of 2 years or 3 years has not yet expired, then the assessee is required to deposit the amount of gains in the Capital gains account scheme (in any branch of public sector, bank) before the due date for filing income tax returns.

The amount already incurred towards purchase/construction along with the amount deposited in the capital gains account scheme can be claimed as cost while claiming the deduction.

However, if the amount deposited in the Capital Gains Account Scheme is not utilized within the time limit mentioned, then it shall be treated as income of the previous year in which 3 years expire (from the date of transfer of the original asset).

 
See the related posts : Which Income tax return to be filed

Long-term capital losses can be set off against long-term gains only. Short-term capital losses can be set off against short-term as well as long-term capital gains.

However, Long-term capital losses can be carried forward to a maximum of 8 years and set off against long-term capital gains




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