Capital gains are the gain in the capital due to the sale of an asset by the owner to another new owner. For example, you brought a land for about ₹10 lakh rupees. And after some time you are selling the land to another person for a price of ₹50 lakh rupees. Now the difference between the buying and the selling price which is ₹50 lakh – ₹10 lakh = ₹40 lakh rupees. This ₹40 lakh rupee is called as your capital gain. and you are supposed to pay capital gains tax on this profit.
Now the amount of this tax depends on the duration of your holding. Like how much time have you owned the land before selling it to another person.
In detail, the tax that is paid on the capital gains that you are gaining due to the sale of an asset is called capital gains tax. This tax is usually applicable when there is a transfer of an asset between two owners.
There are two different types of capital gains tax, which are called as Long term capital gains tax, and Short term capital gains tax.
In the above example of buying and selling land. Assume that the land was brought in the year 2016. Now after 4 years, the land was sold to another buyer, i.e. the land was sold in the year 2020. Now because the period for which the land is owned is 4 years, in this case, Long term capital gains tax will be applicable, which is around 20%. This tax percentage keeps on changing usually announced by the finance minister in the budget of any changes.
Short Term Capital Gains tax: An asset is owned for less than 36 months before selling it to another owner, then the tax that is applicable to the capital gain is Short term capital gain. Any profit that is accrued by holding the asset for less than 36 months before selling to another owner is called as short term capital gains.
Long Term Capital Gains Tax: An asset is owned for more than 36 months before selling it to another owner, then the tax that applies to the capital gains is long term capital gains tax. Any profit that is accrued by holding the asset for more than 36 months before selling it to another owner is called as Long term capital gains.
This tax is applicable on capital gains on equities, Mutual funds, Bonds, shares and all others where a profit is made by buying and selling.
According to the amendment to section 54, under budget 2019, if an individual earned capital gains up to Rs.2 crore on selling a house property then they can invest the amount in 2 house properties. However, this facility can only be availed once in a lifetime. The purchase should be made in 1-2 year of sale of the property. If the seller wants to construct a new house with the capital gains earned then he/she should do it within 3 years of asset/property sale.
Regulations on Short-Term Gains and Long-Term Gains Taxation
We will discuss the different percentage of taxes that are to be paid in case of long term capital gains or short term capital gains.
According to Section 80c of income tax act
The short term capital gains tax will be 15%. And to be termed as short term capital gains, the investor has to sell the asset with 12 months of buying the asset.
The long term capital gains tax will be 10%. And to be termed as long term capital gains, the investor has to hold the asset for more than 12 months from the date of buying the asset.
The following table shows the different tax scenarios
Long-term capital gains tax
Except on sale of equity oriented fund units/ equity shares
Long-term capital gains tax
on sale of equity oriented fund units/ equity shares
10% over and above Rs.1,00,000
Short-Term capital gains tax
When securities transaction tax is not applicable
The STCGT is added to the ITR of the taxpayer and the individual is taxed as per his income tax slab.
Short-Term capital gains tax
When securities transaction tax is applicable
The above table lists the tax in case of long term capital gain and short term capital gain. But the tax structure is different for Equity and Debt Mutual funds.
The below tax slab is applicable till July 10th 2014.
As per the income tax slab.
20% with indexation or 10% without indexation (which of the two is lower)
The below tax slab is effective from July 10th 2014.
As per the income tax slab.
20% with indexation.
Exceptions on Capital gains
based on certain provisions of the Income-tax Act, individuals can follow certain methods to reduce the capital gains tax burden on them. These include methods such as investing the proceeds of sale in another property and hence eligible for not paying any tax on that amount which is invested to buy another property. The below are few of the sections which will help individuals to save tax.
Section 54: This section explains that individuals can exempt from long term capital gains tax by buying two another property with the proceeds received by selling the property.
As per this section, if you have sold residential property and received capital gains, then this capital gains can be reinvested in another property and avoid paying the taxes. But the exception for this is that the capital gains should not be more than two crore Indian rupees.
If your newly brought property cost is less than your capital gains, then you have to pay tax on the remaining amount.
The above benefit can only be availed by a Tax paying citizen of India.
Section 45F: States exception from sale of a property which is not a residential property.
To avail such an exemption, individuals have to reinvest their sale consideration (inclusive of capital gains) to purchase a new property. Such a purchase should be made 12 months before the sale or at least 24 months post sale.
Section 54EC – States exemptions on gains incurred through sale of an existing residential property and reinvesting its proceeds in particular bonds.
Individuals can avail exemptions under the said Section when they reinvest the proceeds earned through the sale of the first property into specific bonds within six months.
The funds invested in such bonds can be redeemed only after 60 months.
Section B – States exemptions on capital gains incurred through the transfer of land for agricultural purposes.
Individuals can avail exemption under the said section on the short-term or long-term capital gains accrued through the transfer of agricultural lands. The transfer of property has to be 24 months before the sale of the said asset. The exempted amount must be reinvested to purchase a new asset within 36 months from the date of such transfer.
Additionally, the property that is to be bought with the proceeds should not be sold within 36 months of acquisition.
There are several conditions which must be fulfilled to avail these capital gains tax benefits. Individuals must find out which tax benefit is applicable to them and whether they fulfil the pre-required conditions before applying as well. Being aware of such exemptions and how they function under different situation would help individuals reap the best returns.
However, individuals above the age of 60 years and with a minimum annual income of Rs. 3 Lakh are exempted from capital gains tax on their long-term capital gains.
Strategies to Reduce tax burden:
Individuals can use different strategies to reduce the tax they have to pay to the government and thereby increase their profit percentage.
The first important strategy is to hold the asset for a longer period. If the asset is owned for a longer period then the tax that is paid will be a long term capital gains tax. And we know that long term capital gains tax will be more than the short term capital gains tax. If the asset is owned for a shorter period of time, then the individual has to pay short term capital gains tax which will be higher. And hence always see the period of short term and long term capital gains and accordingly plan to sell the asset.
Reinvest the proceeds of the sale of an asset in another asset and they are exempt from paying the taxes. This is according to the law that if the proceeds of a sale are invested in another asset, then in few cases the individual is eligible for tax exception. But this is in accordance with a lot of regulations and rules. Please go through all those conditions and try to gain the exception if your sale is eligible.
Besides these, several tax-saving strategies can be adopted by individuals to lower their capital gains tax in India.
Having a thorough knowledge about such taxes, their exemptions and associated terms and conditions come in handy while availing for a tax exemption on capital gains.