Know Your Taxes | Capital Gains Taxation PART 1

Tax Planning Calculator

On my way to Mumbai this New Year’s Eve, one of the fellow passengers and I got into talking where he got to know that I was a Chartered Accountant and he was all the happier when I told him I belong to the taxation field. A plethora of queries came one after another. However, the most frequent ones revolved around capital gains taxation. Hence, I decided to write a blog on capital gains taxation.

Before we go any further, we need to brush up some of the basics.

What constitutes capital gains?

Capital gains comprises of two words, i.e. Capital, which denotes a capital asset and Gain, which is any profit or gain arising therefrom. Thus, any profit or gain that arises from the transfer or sale of a “capital asset” is a capital gain.

What is a Capital Asset?

Capital asset is defined to include:

Any kind of property held by a taxpayer, whether or not connected with business or profession of the taxpayer.

However, the following items are excluded from the definition of “capital asset”:

  • Stock in trade.
  • Consumable stores or raw materials held for the purpose of business or profession
  • Personal effects that are movable except jewellery, archaeological collections, drawings, paintings, sculptures or any art work held for personal use
  • Agricultural land. The land must not be located within 8 kms from a municipality, Municipal Corporation, notified area committee, town committee or a cantonment board with a minimum population of 10,000
  • 6.5 percent Gold Bonds, National Defense Gold Bonds and Special Bearer Bonds
  • Gold Deposit bonds under Gold Deposit Scheme
Must Read  Common errors that affect Tax Liability

What are the rates of taxes applicable to capital gains?

  1. Short Term Capital Gains
    1. Generally, tax rate as per slab rates is applicable on short-term capital gains
    2. Concessional rate of 15%: Concessional rate of tax (i.e. 15%) on short-term capital gains on transfer of:
      1. an equity share in a company; or
      2. a unit of an equity oriented fund; or
      3. a unit of a business trust

The conditions for availing the benefit of this concessional rate is that such transaction should be chargeable to securities transaction tax (STT). (refer note 1)

  1. Long Term Capital Gains
    1. 20% tax on Long term capital gains (Refer note 1)
    2. Concessional rate of 10% (without indexation benefit or currency fluctuation): Non-residents and foreign companies to be subject to tax at this concessional rate on long-term capital gains arising from transfer of unlisted securities
    3. Exempt i.e. tax rate is NIL: Long-term capital gain arising on transfer of equity share or units of equity oriented mutual fund (*) or units of business trust is not chargeable to tax in the hands of any person, if the transaction of sale is liable to securities transaction tax.

Note 1: Where the total income as reduced by such long-term capital gains/ short term capital gains is below the maximum amount which is not chargeable to income-tax then such long-term capital gains/ short term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such long-term capital gains will be calculated @ 20%/15%. This benefit is only applicable to resident individuals or HUF. Hence, this is not applicable to non-residents.

Must Read  Want to Avail Better Returns and Save Taxes? Choose ELSS and Bolster your Mutual Fund Portfolio

Example: Mr. Anil (age 67 years and resident) is a retired person. He purchased a piece of land in December, 2010 and sold the same in April, 2016. Taxable long-term capital gain on such sale amounted to INR 1,84,000. Apart from gain on sale of land, he is not having any other income. What will be his tax liability for the year 2016-17?

For resident individual of the age of 60 years and above but below 80 years, the basic exemption limit is INR 3,00,000. Further, a resident individual can adjust the basic exemption limit against LTCG. In this case, LTCG of INR 1,84,000 can be adjusted against the basic exemption limit. In other words, Mr. Anil can adjust the LTCG on sale of land against the basic exemption limit.

Considering the above note, the tax liability of Mr. Anil for the year 2016-17 will be nil.

How do you determine if it’s a short-term capital gain or a long-term capital gains?

  • Short term capital asset: A capital asset held by a taxpayer for not more than 36 months immediately preceding the date of its transfer is a short-term capital asset.
  • Long term capital asset: A capital asset held by a taxpayer for more than 36 months immediately preceding the date of its transfer is a long-term capital asset

Equity shares which are listed in a recognised stock exchange, units of equity oriented mutual funds, listed debentures and Government securities, units of UTI and Zero Coupon Bonds’ period of holding will be considered for 12 months instead of 36 months.

Computation:

a. Computation of Short Term Capital Gains

* Exemptions will be discussed later.

b. Computation of Long Term Capital Gains

ParticularsAmount in ₹
Full Value of Considerationxxx
Less: Expenditure incurred wholly and exclusively in connection with such sale/ transferxxx
Less: Indexed Cost of acquisitionxxx
Less: Indexed Cost of improvement, if anyxxx
Gross Long Term Capital Gainsxxx
Less: Exemptions (if any) available under section 54, etc *xx
Net Long Term Capital Gainsxxx

*Exemptions will be discussed later

Cost of improvement includes all capital expenditures incurred in making any additions or alterations to the capital asset by the taxpayer. Routine expenses on repairs & maintenance do not form part of cost of improvement.

Indexation is a process by which the cost of acquisition is adjusted against inflationary rise in the value of asset. For this purpose, Central Government has notified cost inflation index. The benefit of indexation is available only to long-term capital assets.

Hopefully, with the groundwork prepared in terms of learning with the basics of capital gains taxation, we are now in a better position for discussing the exemptions related to capital gains in the forthcoming series.