Executive Summary: Gains which arise on the sale of assets is known as capital gains, which can be short term or long term in nature, depending on the period of holding. Tax paid on capital gains is known as capital gains tax. Capital gains tax rate is different for short term and long term capital gains. The tax rate also differs depending on the asset category. One can reduce or eliminate the capital gains tax burden by investing in certain specified assets under various provisions of the Income Tax Act.
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Capital Gains can be quite a tricky subject to deal with. When one sells an asset at a price which is higher than the purchase price, capital gains is said to have arisen. Logically, the converse (sale price being lower than the purchase price) results in capital loss. Capital gains usually occur in the case of sale of shares, mutual funds and property. When there is a capital gain, it is required to be taxed, and this is known as capital gains tax.
The treatment of capital gains tax under Indian laws is different for shares / equity mutual funds compared to other assets. Not only are the tax rates different, but also the classification of the gain as short term or long term differs for shares / equity mutual funds and other assets. Capital gains can either be short term capital gains or long term capital gains. The classification is as below:
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Capital Gains can be quite a tricky subject to deal with. When one sells an asset at a price which is higher than the purchase price, capital gains is said to have arisen. Logically, the converse (sale price being lower than the purchase price) results in capital loss. Capital gains usually occur in the case of sale of shares, mutual funds and property. When there is a capital gain, it is required to be taxed, and this is known as capital gains tax.
The treatment of capital gains tax under Indian laws is different for shares / equity mutual funds compared to other assets. Not only are the tax rates different, but also the classification of the gain as short term or long term differs for shares / equity mutual funds and other assets. Capital gains can either be short term capital gains or long term capital gains. The classification is as below:
Capital GainShort Term Long Term | Shares & Equity MFAsset held for less than 12 months Assets held for more than 12 months | Debt & Other AssetsAssets held for less than 36 months Assets held for more than 36 months |
Computation of Capital Gains: Capital Gains are calculated by comparing the sale consideration received with the purchase price of the asset. In addition, one is allowed to deduct any expenditure incurred for the sale of the asset and the cost of improvement of the asset (if any). If one is eligible to claim an exemption under any of the sections available under the Income Tax Act, this can be further deducted from the gross capital gains. This amount of net capital gains will then be subject to capital gains tax.
Indexation: If the asset is a long term capital asset, one is allowed to use the ‘indexed’ value of the asset while computing the cost of acquisition (purchase price) of the asset. So what is meant by indexation? Indexation means the cost inflation index is adjusted to reflect the increase in price of asset from the date of purchase to the date of sale. This cost inflation index is issued by the Government. Using indexed value of the asset reduces the capital gains incurred, as the cost of purchase is increased to reflect inflation. Note that this option is available only for long term capital assets. Again, this is just an option. If one does not wish to use indexed values, the tax rate intuitively becomes lower in this case.
Tax Rate applicable on different asset categories: As mentioned earlier, the tax rates are different for different assets and also depending on the nature of capital gains (short term or long term). The table below gives an account of the different capital gains tax rates and the necessary conditions:
Indexation: If the asset is a long term capital asset, one is allowed to use the ‘indexed’ value of the asset while computing the cost of acquisition (purchase price) of the asset. So what is meant by indexation? Indexation means the cost inflation index is adjusted to reflect the increase in price of asset from the date of purchase to the date of sale. This cost inflation index is issued by the Government. Using indexed value of the asset reduces the capital gains incurred, as the cost of purchase is increased to reflect inflation. Note that this option is available only for long term capital assets. Again, this is just an option. If one does not wish to use indexed values, the tax rate intuitively becomes lower in this case.
Tax Rate applicable on different asset categories: As mentioned earlier, the tax rates are different for different assets and also depending on the nature of capital gains (short term or long term). The table below gives an account of the different capital gains tax rates and the necessary conditions:
Particulars | Equity shares and equity MFs | Debt Mutual Funds | Other Assets |
| Long Term Capital Gains Tax Rate | Nil | 20% with indexation | 20% with indexation 10% without indexation |
| Short Term Capital Gains Tax Rate | 15% | Tax rate based on the tax slab of the assessee | Tax rate based on the tax slab of the assessee |
(1) Transaction should be entered on or after 1st Oct 2004 and subject to Securities Transaction Tax
Exemption from Long Term Capital Gains Tax: The amount of long term capital gains tax to be paid usually works out to be quite substantial. The Government has allowed the assessee to claim exemption in the long term capital gains, provided the gain amount is invested in certain avenues. Various sections of the Income Tax Act such as Section 54, 54B, 54D, 54EC, 54F, 54G and 54GA deal with such exemptions. Each section comes with its own set of conditions to be satisfied in order to claim exemption. In case the new asset is not acquired before the due date of filing returns, the amount of capital gains should be temporarily invested in a special account known as the Capital Gains Account Scheme, which can be either a Savings Account or a Deposit Account. When one wishes to invest in the new asset to claim exemption, the amount can be withdrawn from this account and invested. Any unutilised amount is chargeable to capital gains tax.
Tracking Capital Gains: The tax to be paid on the capital gains earned is not deducted at source. This should be declared and paid by the assessee himself. Therefore it is important to record and keep a track of the short term and long term gains earned. One can keep a track of this by maintaining a simple excel sheet in which the records of assets sold and other details can be recorded. There are online calculators which can help one to determine the amount of tax to be paid on various categories of capital gains. If capital gains are to be paid on sale of mutual fund units, one can get these details by contacting the respective fund house or on websites of Registrars like Karvy and CAMS. If these sources do not provide this information, one can also contact his/her brokerage house for this information. It is always better to have an idea of how much one earns as gains and the tax to be paid on these gains, before the transaction is made. Also, keeping a track on a regular basis helps in keeping a control on the amount paid as tax.
It is recommended that investors should consult a qualified chartered accountant to understand the prevalent tax rates and tax implications. This analysis is valid only on the date being published.
The author can be reached at smitha@gettingyourich.com
Exemption from Long Term Capital Gains Tax: The amount of long term capital gains tax to be paid usually works out to be quite substantial. The Government has allowed the assessee to claim exemption in the long term capital gains, provided the gain amount is invested in certain avenues. Various sections of the Income Tax Act such as Section 54, 54B, 54D, 54EC, 54F, 54G and 54GA deal with such exemptions. Each section comes with its own set of conditions to be satisfied in order to claim exemption. In case the new asset is not acquired before the due date of filing returns, the amount of capital gains should be temporarily invested in a special account known as the Capital Gains Account Scheme, which can be either a Savings Account or a Deposit Account. When one wishes to invest in the new asset to claim exemption, the amount can be withdrawn from this account and invested. Any unutilised amount is chargeable to capital gains tax.
Tracking Capital Gains: The tax to be paid on the capital gains earned is not deducted at source. This should be declared and paid by the assessee himself. Therefore it is important to record and keep a track of the short term and long term gains earned. One can keep a track of this by maintaining a simple excel sheet in which the records of assets sold and other details can be recorded. There are online calculators which can help one to determine the amount of tax to be paid on various categories of capital gains. If capital gains are to be paid on sale of mutual fund units, one can get these details by contacting the respective fund house or on websites of Registrars like Karvy and CAMS. If these sources do not provide this information, one can also contact his/her brokerage house for this information. It is always better to have an idea of how much one earns as gains and the tax to be paid on these gains, before the transaction is made. Also, keeping a track on a regular basis helps in keeping a control on the amount paid as tax.
It is recommended that investors should consult a qualified chartered accountant to understand the prevalent tax rates and tax implications. This analysis is valid only on the date being published.
The author can be reached at smitha@gettingyourich.com
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