Tax on Capital Gain: Definition, Types and Tax Rates

 


CAPITAL GAIN TAX IN INDIA

 

DEFINITION, TYPES AND TAX RATES

 

Capital Gains Tax

Capital gain can be defined as any profit or gain that is arises from the sale of a ‘capital asset.’ The gain or profit that is received comes under the ‘income’ category. Therefore, a tax needs to be paid on the income that is on transfer of a capital asset. The tax that is paid is called capital gains tax, which can either be long term or short term.

As per Income Tax Act, capital gains tax is not applicable in case the individual inherits the property as there is only transfer of ownership and no sale of property. Any capital asset received on inheritance or will is not taxable. However, if the person who has inherited the property decides to sell it, tax will have to be paid on the income that has been generated from the sale.

Profits or gains arising in the previous year in which the transfer took place shall be considered as income of the previous year which is chargeable to income tax under the head Capital Gains.

Thus, Capital gains can be taxed subject to the following conditions:

Ø  The assessee must have owned a capital asset;

Ø  The assessee must have transferred the capital asset in the previous year;

Ø  There must have been profit or gains as a result of such transfer.


Capital Assets

Land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewellery are a few examples of capital assets. This includes having rights in or in relation to an Indian company. It also includes the rights of management or control or any other legal right. The following do not come under the category of capital asset:

a. Any stock, consumables or raw material, held for the purpose of business or profession

b. Personal goods such as clothes and furniture held for personal use

c. Agricultural land in rural India

d. 6½% gold bonds (1977) or 7% gold bonds (1980) or national defence gold bonds (1980) issued by the central government

e. Special bearer bonds (1991)

f. Gold deposit bond issued under the gold deposit scheme (1999) or deposit certificates issued under the Gold Monetisation Scheme, 2015

Definition of rural area (from AY 2014-15) – Any area which is outside the jurisdiction of a municipality or cantonment board, having a population of 10,000 or more is considered a rural area. Also, it should not fall within a distance (to be measured aerially) given below – (population is as per the last census).

Distance from local limit of municipality or cantonment board

Population of the municipality/cantonment board

2 km

If the population is more than 10,000 but not more than 1 lakh

6 km

If the population is more than 1 lakh but not more than 10 lakh

8 km

If the population is more than 10 lakh


Types of Capital Assets

The two types of capital assets are mentioned below:

1. Long Term Capital Asset:

In case individuals own an asset for a duration of more than 36 months, the asset is a long term capital asset. Debt-oriented mutual funds, jewellery, etc., that are held for a duration of more than 36 months will come under this category. The criteria of 36 months have been reduced to 24 months for immovable properties such as land, building and house property from FY 2017-18.

The below-mentioned assets are considered as long term assets if they are held for a duration of more than 12 months:

Ø  Zero coupon bonds (not dependent on whether they are quoted or not);

Ø  Unit Trust of India (UTI) units (not dependent on whether they are quoted or not);

Ø  Equity-based mutual funds units (not dependent on whether they are quoted or not);

Ø  Securities that are listed on a stock exchange that is recognised in India. Examples of such securities are government securities, bonds, and debentures.

Ø  Preference shares or equities that are held in a company that is listed on a stock exchange that is recognised in India.

2. Short Term Capital Asset:

This is an asset that is held for not more than 36 months immediately preceding the date of its transfer. In case of immovable property, the period of 36 months is substituted by 24 months. Therefore, if an individual wish to sell a land or house after holding it for a duration of 24 months, the profit that the individual makes from it comes under long term capital gain. In case the property has been inherited or given as a gift, the amount of time the property was held by the previous owner is also considered while determining whether it’s a short term asset or a long term capital asset.

This period of 36 months is substituted to 12 months in case of certain assets like equity or preference shares held in a company, any other security listed on a recognised stock exchange of India, Units of specific equity mutual funds and Zero coupon bonds. The date on which the bonus shares or right share were allotted is considered when determining the period of holding.

Tax rates on Short-Term and Long-Term Capital Gains

 

Tax Type

Condition

Tax applicable

Long-term capital gains

Except on sale of equity shares/ units of equity oriented fund

20%

Long-term capital gains

On sale of Equity shares/ units of equity oriented fund

10% over and above Rs.1,00,000

Short-term capital gains

When securities transaction tax is not applicable

The short-term capital gain is added to your income tax return and the taxpayer is taxed according to his income tax slab.

Short-term capital gains

When securities transaction tax is applicable

15%.

Check this article to gain knowledge on:
Tax on Capital Gain : Calculation and Indexation

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