Capital Gain tax in India is imposed upon the profits earned on selling a capital asset. When you sell a capital asset at a higher price than the cost at which you acquired it, you make a profit. This profit is called Capital Gain Income. The income is chargeable to tax & the tax calculated on capital gains is called capital gain tax.
1. Definition of Capital Assets:
Capital asset is defined to include the following 3 things:
(A) Any kind of property held by an assessee, whether or not connected with the business or profession of the assessee.
(B) Any securities held by an FII as per regulations made under the SEBI Act, 1992.
(C) Any ULIP to which exemption under section 10(10D) does not apply.
However, the following items are excluded from the definition of “capital asset”:
(1). Any stock-in-trade, consumable stores or raw materials held for the purposes of business or profession. (However, securities held by FII shall never be considered as STOCK).
(2). Personal effects, that is, movable property (including wearing apparel and furniture) held for personal use by the taxpayer or any member of his family dependent on him.
But, these following 6 items shall always be considered as Capital Assets even if its being used as personal effects:
(a) jewellery;
(b) archaeological collections;
(c) drawings;
(d) paintings;
(e) sculptures; or
(f) any work of art.
(3). Agricultural Land in India shall also not be considered Capital Assets and no capital gain tax would be charged on that.
However, if agriculture should is situated within these ranges then it will also be considered a Capital Asset, and capital gains tax shall be charged.
- Within the jurisdiction of a municipality/cantonment board etc. having a population of not less than 10,000;
- Within the range of the following distance measured aerially from the local limits of any municipality or cantonment board:(a). not being more than 2 KMs, if the population (as per the last census) of such area is more than 10,000 but not more than 1 lakh;
(b). not being more than 6 KMs; if the population (as per the last census) of such area is more than 1 lakh but not more than 10 lakhs; or(c). not being more than 8 KMs; if the population (as per the last census) of such area is more than 10 lakhs.
(4). 6.5% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government;
(5). Special Bearer Bonds, 1991;
(6). Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999, or deposit certificates issued under the Gold Monetisation Scheme, 2015.
The following points should be kept in mind:
- The property, being a capital asset, may or may not be connected with the business or profession of the taxpayer. For example, Bus used to carry passengers by a person engaged in the business of passenger transport will be his capital asset.
- Any securities held by a Foreign Institutional Investor (FII) who has invested in such securities as per regulations made under the SEBI Act, 1992 will always be treated as a capital asset, hence, such securities cannot be treated as stock-in-trade.
2. Types of capital gain?
There are two types of capital gain:-
(I). Long-Term Capital Gain (LTCG) – Capital Gain is considered long-term if the asset is held for greater than a specified period. The period is as follows: –
- 2 years for Immovable Property & Unlisted Shares of Company.
- 3 years for debt mutual fund, gold investment & any other assets.
- 1 year for stocks, equity-oriented mutual funds, listed debentures or government securities, zero coupon bonds & units of business trust.
(II). Short-Term Capital Gain (STCG) – Capital Gain is considered short-term if the asset is held for less than a specified period. The period is as follows: –
- Less than 2 Years for Immovable Property & Unlisted Shares of Company.
- Less than 3 years for debt mutual fund, gold investment & any other assets.
- Less than 1 year for stocks, equity-oriented mutual funds, listed debentures or government securities, zero coupon bonds & units of business trust.
3. What are the rates at which capital gains are calculated?
The calculation of capital gain tax is done as per the nature of capital gain viz. Long Term or Short Term. Here are the calculations:
(I). Taxation of Long-Term Capital Gains (LTCG) as follows:-
a). On Immovable Property & Unlisted Shares of Company – LTCG @ 20% with indexation benefit u/s 112 plus Surcharge (If Applicable) plus 4% Cess.
b). On debt mutual fund, gold investment & any other assets – LTCG @ 20% with indexation benefit other than u/s 112 plus Surcharge (If Applicable) plus 4% Cess.
c). Long-term capital gains arising from the transfer of “specified asset” – A taxpayer who has earned long-term capital gains from the transfer of any listed security or any unit of UTI or mutual fund (whether listed or not), not being covered under Section 112A, and zero-coupon bonds shall have the following two options:
- Avail of the benefit of indexation; the capital gains so computed will be charged to tax at normal rate of 20% (plus surcharge and 4% cess.
- Do not avail of the benefit of indexation; the capital gain so computed is charged to tax @ 10% (plus surcharge and cess as applicable). The selection of the option is to be done by computing the tax liability under both options, and the option with lower tax liability is to be selected.
d). The Finance Act, 2018 inserted a new section 112A from Assessment Year 2019-20. As per the new section, the capital gain arising from the transfer of a long-term capital asset being an equity share in a company, equity-oriented mutual funds, or units of business trust shall be taxed @ 10% exceeding Rs 1,00,000 u/s 112A.
Here, the Grandfathering Value concept will apply to give a higher exemption from the cost of acquisition if shares or mutual fund is purchased before February 1, 2018.
The Cost of Acquisition of a listed equity share or mutual fund purchased by the taxpayer before February 1, 2018, shall be deemed to be higher of the following:-
- Actual cost of acquisition of the asset, or
- Lower of the following two:
– Fair Market Value* of such shares as on January 31, 2018; or
– Actual sales consideration accruing on its transfer.
* What is Fair Market Value?
For Shares: The Fair market value of the listed equity share shall mean its highest price quoted on the stock exchange as on January 31, 2018.
However, if there is no trading in such shares on January 31, 2018, the highest price of such share on a date immediately preceding January 31, 2018 on which trading happens in that share shall be deemed as its fair market value.
For Units: In case of units that are not listed on a recognized stock exchange, the net asset value of such units as on January 31, 2018, shall be deemed to be its FMV.
In a case where the capital asset is an equity share in a company that is not listed on a recognized stock exchange as on 31-1-2018 but listed on the date of transfer, the cost of unlisted shares as increased by cost inflation index for the financial year 2017-18 shall be deemed to be its FMV.
(II). Taxation of Short-Term Capital Gains (STCG) as follows –
a). Short-Term Capital Gains on “specified assets” – STCG arising on the transfer of equity shares or units of equity-oriented mutual funds* or units of business trust, which are transferred through a recognized stock exchange and such transaction is liable to securities transaction tax (STT), then u/s 111A such gain is charged to tax at 15% (plus surcharge and cess as applicable).
*Equity-oriented mutual fund: means a mutual fund specified under section 10(23D) and 65% of its investible funds, out of total proceeds are invested in equity shares of domestic companies.
b). Other Short-Term Capital Assets not covered u/s 111A – Other short-term capital gains shall be taxed at normal slab rates. [i.e. such STCG shall be combined with other incomes of the taxpayer and then it will be taxed as per the slab rates].
4. What are the Set off & Carry Forward rules of LTCG & STCG?
(I) Set off of LTCG and STCG:
(a). Loss from the exempted source of income cannot be adjusted against taxable income – If income from a particular source is exempt from tax, then loss from such source cannot be set off against any other income which is chargeable to tax.
For Example: Agricultural income is exempt from tax, hence, if the taxpayer incurs a loss from agricultural activity, then such loss cannot be adjusted against any other taxable income.
(b). Meaning of intra-head adjustment– If in any year the taxpayer has incurred a loss from any source under a particular head of income, then he is allowed to adjust such loss against income from any other source falling under the same head.
The process of adjustment of loss from a source under a particular head of income against income from other source under the same head of income is called an intra-head adjustment, e.g. Adjustment of loss from business A against profit from business B.
c). Long-term capital loss (LTCL) cannot be set off against any income other than income from long-term capital gain LTCG). However, short-term capital loss (STCL) can be set off against long-term capital gain (LTCG) or short-term capital gain (STCG).
d). Meaning of inter-head adjustment – After making the intra-head adjustment (if any) the next step is to make an inter-head adjustment. If in any year, the taxpayer has incurred a loss under one head of income and is having income under other head of income, then he can adjust the loss from one head [As amended by Finance Act, 2022] against income from other head,
E.g., Loss under the head of house property to be adjusted against salary income.
e). Before making an inter-head adjustment, the taxpayer has to first make an intra-head adjustment. Loss under head “Capital gains” whether Short term capital loss or Long term capital loss cannot be set off against income under other heads of income.
(II) Carry Forward of LTCG and STCG:
If a loss under the head “Capital gains” incurred during a year cannot be adjusted in the same year, then the unadjusted capital loss can be carried forward to the next years.
In the subsequent year(s), such loss can be adjusted only against income chargeable to tax under the head “Capital gains”.
However, a long-term capital loss can be adjusted only against long-term capital gains. While Short-term capital loss can be adjusted against both, long-term capital gains as well as short-term capital gains.
Such loss can be carried forward for 8 years immediately succeeding the year in which the loss is incurred. Such loss can be carried forward only if the return of income/loss of the year in which loss is incurred is furnished on or before the due date of furnishing the return, as prescribed under section 139(1).
5. Adjustment of STCG u/s 111A, LTCG u/s 112A & LTCG u/s 112 against the Basic Exemption Limit:
Only a resident individual and resident HUF can adjust the exemption limit against STCG u/s 111A, LTCG u/s 112A & LTCG u/s 112. Thus, a non-resident individual/HUF cannot adjust the basic exemption limit against STCG u/s 111A, LTCG u/s 112A & LTCG u/s 112.
A resident individual/HUF can adjust the STCG u/s 111A, LTCG u/s 112A & LTCG u/s 112 against the basic exemption limit but such adjustment is possible only after making adjustments of other incomes.
In other words, first income other than STCG u/s 111A, LTCG u/s 112A & LTCG u/s 112 is to be adjusted against the exemption limit and then the remaining limit (if any) can be adjusted against STCG u/s 111A, LTCG u/s 112A & LTCG u/s 112.
6. Deduction under section 80C to 80U under STCG u/s 111A, LTCG u/s 112A & LTCG u/s 112
No deduction under sections 80C to 80U is allowed against STCG u/s 111A, LTCG u/s 112A & LTCG u/s 112. However, such deductions can be claimed from STCG other than covered under section 111A.
7. Maximum Surcharge applicable in case of LTCG u/s 112A, LTCG u/s 112 & LTCG other than u/s 112
- The surcharge on long-term capital gain (LTCG) u/s 112A, LTCG u/s 112 & LTCG other than u/s 112 has been capped at 15%.
- An individual and a HUF have to pay a surcharge calculated on tax liability which is over and above their base tax liability if the taxable income exceeds ₹50 lahks. The rate at which the surcharge is payable is based on the slab of the taxpayer’s income. Higher the income slab higher is the rate of surcharge.
- Presently the surcharge on LTCG on listed shares and equity-oriented units included in your income is capped at a maximum of 15% even if otherwise you are liable to pay the surcharge at a higher rate on other income which may go up to 25% & 37% surcharge if the total income of Individual & HUF exceeds specified income limit.However, this cap of 15% is now been extended to all long-term capital gains i.e., LTCG u/s 112A, LTCG u/s 112 & LTCG other than u/s 112 from 1st April 2022 in Union Budget 2022.
- From FY 22-23, a 15% surcharge cap has now become applicable on LTCG tax on real estate property, physical gold, debt funds, debentures, etc as well.
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