Capital Gains Tax, Types, Tax Rates, Calculation, Exemptions & Tax Saving

Capital Gains Tax, Types, Tax Rates, Calculation, Exemptions & Tax Saving

When you have sold an asset like property, shares, or gold and make a profit in the assessment periods, this profit is called a "capital gain.", the government taxes on the profit under income head "Capital Gains Tax." Let’s clear out with simpler terms and understand the details, including updates from the Budget 2024.

Defining Capital Assets

 A capital asset refers to any kind of property owned by you. It can be tangible nature, such as Urbon Land or Rural Land, house, or jewelry, or intangible nature, like patents or trademarks. Even shares, mutual funds, or bonds are included in this category. Some assets, though, are not capital assets for tax purposes, such as personal items like your car or furniture and agricultural land in rural areas.

The definition of capital asset is given under Section 2(14) of the Income Tax Act 1961. Inclusion and exclusion criteria have been defined precisely by following.

Exclusions from the definition of Capital Asset: 

1. Stock-in-trade, consumables, or raw materials used for business or profession, excluding securities held by an FII. 

2. Personal effects (movable property for personal use) except for: 

• - Jewellery
• - Archaeological collections
• - Drawings
• - Paintings
• - Sculptures
• - Any other work of art

Definition of Jewellery: 

(Jewellery includes: Ornaments made from precious metals (e.g., gold, silver, platinum) or alloys, with or without precious or semi-precious stones, whether part of wearing apparel or not. 

- Precious or semi-precious stones, even if incorporated into furniture, utensils, or clothing.)

 Types of Capital Assets

The tax is categorized into Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) based on the holding period of the asset and more information about taxation is given below.

 1. Short-Term Capital Assets (STCA)

   - Held for a short duration before being sold.

   - For example:

     - Listed shares: if you held for up to 12 months.

     - Real estate: if you held for up to 24 months.

   - Notification No. 6/2016 clarifies the holding period for equity-oriented mutual funds.

 2. Long-Term Capital Assets (LTCA)

   - If you held for a longer duration before being sold.

   - For example:

     - Listed shares: if you held for more than 12 months.

     - Real estate: if you held for more than 24 months.

Tax Rates for Capital Gains

Capital Gains Tax depends on whether the gain is short-term or long-term on sales on Assets:

1. Short-Term Capital Gains Tax (STCG)

   - If securities transaction tax (STT) is paid (like for listed shares): 15%. You may refer to Section 111A for detailed provisions.

   - For other assets: Tax lived as per your income tax slab for the relevant Assessment Year.

2. Long-Term Capital Gains Tax (LTCG)

   - For listed shares and equity mutual funds (above Rs. 1 lakh): 10%. Refer to Section 112A for rules on equity-oriented investments.

   - For other assets like real estate: 20% (with indexation benefits) under Section 112.

 Budget 2024 Update                         

The Budget 2024 was introduced the following changes:

- Real Estate: A cap on the maximum exemption under Section 54 and Section 54F at Rs. 10 crore.

- Debt Mutual Funds: Gains are now taxed as short-term, removing indexation benefits. This change was introduced through Finance Act 2024.

 

Calculation of Capital Gains (Section 48)

Short-Term Capital Gains Formula

Short Term Capital Gains can be calculated as follows 

STCG = Sale Price  – (Cost of Acquisition + Cost of Improvement + Transfer Expenses)

The cost of acquiring an asset is the original price paid by the assessee to buy it. This includes any capital expenses related to the purchase or securing ownership of the property. However, in certain cases, the cost of acquisition is calculated based on estimated values.

 The cost of improvement refers to the capital expenditure incurred by an assessee for making any additions or improvements to a capital asset. It also includes any expenses incurred to protect or secure the ownership title of the asset.

 To calculate capital gains, different costs and expenses are subtracted from the sale price or the total value received. These include the indexed cost, cost of improvements, and other capital expenses. The cost of acquisition is the amount the seller originally paid to buy the capital asset.

 Long-Term Capital Gains Formula

LTCG = Sale Price – (Indexed Cost of Acquisition + Indexed Cost of Improvement + Transfer Expenses)

Indexation adjusts the purchase price to account for inflation, which reduces tax payable on your taxable gain. The Cost Inflation Index (CII) has been notified by the government under Notification No. 62/2023 is used for this purpose.

Example:

- You bought a house for Rs. 50 lakh in 1 st April 2001 and sold it for Rs. 2 crore in 2024.

- Adjusted cost using indexation: Rs. 75 lakh.

- LTCG: Rs. 2.00 crore – Rs. 75 lakh = Rs. 1.25 Crore.

 Exemptions and Tax-Saving Options

• Section 54: Exemption on gains from selling a house if you buy or construct another residential property within the specified time. The limit is capped at Rs. 10 crore after Budget 2024.
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• Section 54F: Exemption for selling other assets (like gold or shares) if you invest in a residential property.
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• Section 54EC: Invest in specified bonds (like NHAI or REC) within six months of the sale to claim exemption. These bonds have a maximum investment limit of Rs. 50 lakh.

Circular No. 3/2023 provides detailed clarification on timeframes and eligibility for these exemptions.

 Additional Tips to Save Tax

•  You can invest through systematic investment plans (SIPs) in mutual funds.
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• You may utilize your basic exemption limit if your total income is below taxable thresholds.
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• You have option to transfer assets to family members in lower tax payable.

Classification of Inherited Capital Assets

Inherited property or assets are not taxed at the time of inheritance. However, when you sell the assets, they will consider under long-term or short-term based on when the original owner acquired them. The cost of acquisition is considered the same as what the original owner paid.

Example:

- If you have any inherit a property which was purchased in April 1991 by your father, and you have sold it in March 2024, it’s will be consider as a long-term capital asset.

Notification No. 17/2022 clear out rules for determining the holding period of inherited assets.

 Conclusion

Knowing the capital gains tax can help you save and make better planning to save maximum and correct tax payable on it. Budget 2024 updates, like changes in real estate exemptions and debt mutual fund taxation, need more awareness of the same. You can use exemptions under Sections 54, 54F, and 54EC to optimize your tax discharge by keeping abreast of government notifications and circulars. 

The above information may deeply clear about "Capital Gains Tax, Types, Tax Rates, Calculation, Exemptions & Tax Saving"

Disclaimer 

The contents of above are intended solely for informational purposes. It aims to provide the public with quick and easy access to information and is not intended to serve as a legal document.  

Viewers are advised to cross-check the information with official Government Acts, Rules, Notifications, etc.