The government takes more tax from those who earn money above a threshold. It is believed that people who invest money in equity and equity mutual funds have good income and savings after spending all the expenses. In such a situation, the government also collects tax on the income earned from such investments. This tax is called capital gains tax. There are two types of capital gains tax, short term and long term. The tax rates on these also vary.
The government had included the stock market in long term capital gains tax only last year. In the Union Budget 2023, Finance Minister Nirmala Sitharaman announced the deduction limit on long-term capital gain tax at Rs 10 crore. The new limit came into effect from April 1, 2023. Deduction for reinvestment in residential properties is allowed under sections 54 and 54F of the Income Tax Act. The Capital Gain Account scheme facilitates you to accumulate long term capital gains which can later be reinvested in property under Section 54 and Section 54F. Capital gains account schemes are available in major public sector banks.
Sections 54 and 54F of the Income Tax Act provide for claiming long-term capital gains on sale of property and other capital assets. This also includes reinvestment of money while purchasing residential properties.
Finance Minister Nirmala Sitharaman announced, "For better targeting of tax concessions and exemptions, I propose to limit the deduction from capital gains on investment in residential houses under sections 54 and 54F to Rs 10 crore."
A document released by the ministry noted, “The primary objective of Section 54 and Section 54F of the Act was to address housing shortage and to encourage housing construction activity. However, it has been observed that huge deductions are being claimed by high net worth taxpayers by purchasing very expensive residential houses under these provisions. This proposal will defeat the very purpose of these sections."
If you buy a share or invest money in a mutual fund and sell it within a year, then 15 percent tax will be levied on the income earned from it. No matter what your tax slab is. Whether you fall in the zero tax or 30 percent tax slab, you will have to pay 15 percent tax on the income from shares or mutual funds.
Definition of Capital Assets
Capital asset is any property owned by a person such as land, buildings, jewellery, vehicles, trademarks, patents, leasehold rights and machinery. Management rights or any other legal rights are considered capital assets.
Exceptions to Capital Assets
The following are not considered capital assets:-
Any stock for trading purpose
Consumables or raw materials for business or profession
Clothes or furniture are not considered capital assets
Agricultural land in rural areas of India
Any type of Gold Bond 1977, 1980, Special Bearer Bond and National Defense Gold Bond
What are the types of capital assets?
1. Short Term Capital Assets (STCA): STCA are assets that are held for a period of 36 months or less. However, when it comes to immovable assets like buildings, houses or land, the period of 36 months has been reduced to 24 months in FY 2017-18. Therefore, if you sell your property after holding it for a period of 24 months, the proceeds will be considered as Short Term Capital Gain.
2. Long Term Capital Assets (LTCA): LTCA are assets that are held for a period of more than 36 months. Therefore, if you sell your property after holding it for more than 36 months, the income from it will be considered as Long Term Capital Gain.
How are STCA and LTCA determined?
As mentioned above, there are two types of capital gains: STCA and LTCA. Investments that generate profits in the long term are called long-term capital gains, while investments that generate profits in the short term are called short-term capital gains.
Below are some examples -
Investments considered short term capital gains: If an asset owner sells his asset (movable or immovable) before the completion of 36 months, the profit received from it will be considered as STCG.
Investments considered long term capital gains
Sale of asset: When a seller sells his asset after holding it for more than 36 months, the profit earned on it can be treated as LTCG.
Investment in Mutual Funds: Profit earned from mutual fund investments for more than one year can be treated as LTCG.
Stocks: Since stocks are typically held for a much longer period, investments in them are also considered long-term capital gains.
Short Term Capital Gains Tax on Property:
If you sell a property after keeping it for less than 3 years, then the profit made from it is counted as Short Term Capital Gain and Short term Capital Gains Tax is levied on it. From the financial year 2017-18, deals made within 2 years of immovable properties were included in the short term limit. In case of shares, the profit earned on selling them within 1 year will be considered as Short Term Capital Gain. The tax levied on this will be called Short term Capital Gains Tax.
Short term capital gains tax rate
Let us tell you that the government does not declare any separate rate for tax on Short Term Capital Gain. It is added to the total income like other income. Then the tax paid on the total income also has to be paid as per the tax slab. But if you have bought shares in the equity market, then short term capital gains tax at the rate of 15 percent has to be paid on the income earned from buying and selling shares in the stock market within one year.
Formula for calculating short term capital gain
Short Term Capital Gain is calculated as follows:
Short Term Capital Gain = Final Sale Price – (Cost of Acquisition + Home Improvement Cost + Cost of Transfer)
Long Term Capital Gains Tax
Earlier long term capital tax was very easy. In this, if you do not sell anything for 1 year then nothing will be taxed. But since 2018, the government has made some changes in it. Now the government has also included the earnings from the stock market in this.
Before the stock market, the government had been charging capital gains tax on profits made from the sale of house, property, jewellery, car, bank FD, NPS and bonds etc. Now if you have earned a profit of Rs 1 lakh in the first year, then no tax will be levied, but 10 percent tax will have to be paid on the profit of more than Rs 1 lakh.
The tax levied on long-term profits on any movable or immovable property is called long-term capital gains tax. It is already present in the country. It is listed on the stock market for the first time since 2018. Before this, it was imposed on many things including property. Long term calculations differ according to different segments.
Formula for calculating long term capital gain
Long term capital gain is calculated as follows:
Long Term Capital Gain = Final Sale Price – (Indexed Cost of Acquisition + Indexed Cost of Improvement + Cost of Transfer), where:
Indexed cost of acquisition = Cost of acquisition x Cost inflation index of the year of transfer/Cost inflation index of the year of acquisition
Indexed cost of reform = Cost of reform x Cost inflation index of the year of transfer/Inflation index cost of the year of reform.
How to get exemption from paying capital gains tax?
If you want to avoid paying Capital Gains Tax, here are some options:
You can buy a new house with the benefit of transaction, and you will not have to pay tax. However, you must purchase a new home within that year before you file your income taxes.
You can also invest your long term capital gain in bonds of Rural Electrification Corporation Limited and National Highway Authority of India for 3 years. However, please note that you can invest a maximum of Rs 50 lakh in these bonds in a financial year.
Even if you don't want to buy another property immediately, you can still save tax on capital gains. All you have to do is deposit the profit in the Capital Gain Account Scheme (CGAS) in any public sector bank, and you can keep the money there for 2 to 3 years. However, by the end of the term, you need to ensure that the money is invested in the property, otherwise it will be treated as capital gain and you will have to pay tax on it. If you are buying a ready-made property then the investment should be made within 2 years, but if you choose an under-construction property then you get 3 years to make the purchase.
If the builder of the new property does not hand over the property within 3 years of purchase, your tax will be waived.
Stamp duty and registration fee are considered for calculating capital gain.
