Capital gains and its taxability

Capital gains are the amount of net profits (gains) that the investor makes from selling of any capital assets over the purchase price of that assets. The entire consideration which an investor get over the property is considered as taxable income.

CONDITION TO BE FULFILLED FOR GETTING TAXE UNDER CAPITAL GAINS

To be eligible to get taxed under capital gains following criteria needs to be fulfilled

1. There should be a complete transfer of ownership of assets with some amount of consideration (except under inheritance or gift)
2. The transfer has taken place in previous fiscal year.

TYPES OF CAPITAL GAINS

The capital gains have basically been categorized into two types

Long term capital gains

The profits earned by selling an asset that is in holdings for more than 36 months is Long term capital gains. However, if the following assets are held for 12 months or more it will be considered as LTCG.

• Equity or preference shares in a company are listed on a recognized stock exchange in India.
• Securities (like debentures, bonds, government securities etc) listed on a recognized stock exchanges
• Units of UTI
• Units of equity oriented mutual funds
• Zero Coupon bonds

Short term capital gains

If the assets are sold within 36 months of holding is known as short term capital gains. However, if the following assets are sold within a period less than 12 months it will be considered as STCG.

• Equity or preference shares in a company are listed on a recognized stock exchange in India.
• Securities (like debentures, bonds, government securities etc.) listed on a recognized stock exchanges
• Units of UTI
• Units of equity oriented mutual funds
• Zero Coupon bonds

INDEXED COST OF ACQUISITION

The cost of acquisition is calculated on present terms by applying Cost Inflation Index. The indexed cost of acquisition can be estimated as the ratio of CII of years when an assets was sold by a seller with that of property acquired in year 2001 - 2002, which is later multiplied by cost of acquisition.

INDEXED COST OF IMPROVEMENTS

The Indexed cost of improvements is calculated by multiplying the associated cost of improvements by CII of the year of transfer divided by CII of year in which improvement has taken place.

EXEMPTIONS UNDER CAPITAL GAINS

• Section 54: Under Section 54 of the Income Tax Act, an individual or HUF selling a residential property can avail tax exemptions from Capital Gains if the capital gains are invested in purchase or construction of residential property. The exemption for investment made, by way of purchase or construction, in two residential house properties shall be available if the amount of long term capital gains does not exceed Rs. 2crores. If assesse exercises this option, he shall not be entitled to exercise this option again for the same or any other assessment year.
• Section 54F: Under Section 54F of the Income Tax Act, an individual or HUF selling a residential property can avail tax exemptions from Capital Gains if net consideration on sale of any asset other than house property is invested to buy new residential property in one year before the transfer date or within two years after the transfer date. The net consideration is re-invested in constructing 1 residential property in India in three years from the transfer date.
• Section 54EC: if the profit made on sale of a long-term capital asset - whether an immovable property or shares and stocks - is invested by the taxpayer in 'long-term specified assets' within 6 months of the sale, then the capital gains are exempt from taxation. However, you cannot invest more than Rs. 50 lakhs in these bonds in total.

The 'long-term specified assets' referred to here are government notified bonds and securities, such as those released by the National Highways Authority of India (NHAI) and Rural Electrification Corporation (REC).

Authored by Adv. Shivam Kumar