Investment in a house property is one of the most sought-after investments primarily because you get to own a house. While others may invest with the intention of earning a profit upon selling the property in the future. It is important to note that a house property is regarded as a capital asset for income tax purposes. Consequently, any gain or loss incurred from the sale of a house property may be subject to tax under the 'Capital Gains' head. Similarly, capital gains or losses may arise from sale of different types of capital assets such as stocks, mutual funds, bonds and other investments.

What is Capital Gains Tax In India ?

Any profit or gain that arises from the sale of a ‘capital asset’ is known as ‘income from capital gains’. Such capital gains are taxable in the year in which the transfer of the capital asset takes place. This is called capital gains tax. There are two types of Capital Gains: short-term capital gains(STCG) and long-term capital gains(LTCG).

Capital gains tax is a tax imposed on the profits realized from the sale of assets such as stocks, bonds, real estate, and other investments. It is the tax applied to the difference between an asset's purchase price (or "cost basis") and its selling price.

When you sell an asset for more than you paid for it, you have a capital gain. Conversely, if you sell an asset for less than you paid for it, you have a capital loss. Capital gains tax is typically only applied to capital gains, not to the total amount received from the sale.

What are the Different Types of Capital Gain Tax ?

Now that you have understood what capital assets are and their types, it’s time to understand the types of capital gains. Capital gains are divided into short-term capital gains and long-term capital gains –

Short-term Capital Gain Tax :-

Short-term capital gains (STCG) are the profits you earn when you sell off your capital assets within one year of holding them. Note that the holding period varies as per the capital asset.

• When the security transaction tax is applicable: Short-term capital gain tax is 15%
• When a security transaction tax is not applicable, the short-term capital gain tax will be calculated based on the taxpayers' income and will be automatically added to the taxpayer's ITR and charged at normal slab rates.

Long-term Capital Gain Tax :-

Long-term capital gain tax (LTCG) are the profits you earn when you sell off your capital assets after one year. Note that the period of holding for different assets to be claimed as long-term assets varies according to the asset.

• Long-term capital gain tax is applicable at 20% except on the sale of equity shares and the units of equity-oriented funds.
• Long-term capital gains are 10% over and above Rs 1 lakh on the sales of equity shares and units of equity-oriented funds.

What are Capital Assets?

Capital assets are the property you own and can be transferred, like land, buildings, shares, patents, trademarks, jewelry, leasehold rights, machinery, vehicles, etc.
Here is a list of assets that do not fall under the category of capital assets:–

• The stock of consumables or raw materials held for use in business or profession.
• Personal belongings meant for personal use like clothes, furniture, etc.
• A piece of agricultural land is located in a rural area.
• Special bearer bonds, 6.5% gold bonds (1977), 7% gold bonds (1980), or national defense gold bonds (1980) which the Central Government has issued.
• Gold deposit bond (1999), issued under the gold deposit scheme or deposit certificate issued under the Gold Monetisation Scheme, 2015, notified by the Central Government.

What are the Different Types of Capital Assets?

Capital assets are divided into two types based on the period after which they are sold. The types of capital assets are as follows –

• Short-term Capital Assets
• Long-term Capital Assets

1. STCA ( Short-term capital asset )An asset held for a period of 36 months or less is a short-term capital asset. So, if you sell the asset within a period of 36 months of purchasing, then it would be called as a short-term capital asset. However, in some of the assets, the holding period is reduced to 24 months and 12 months. 

The criteria is 24 months for unlisted shares (those shares which are not listed in a recognized stock exchange in India) and immovable properties such as land, building and house property from FY 2017-18. For instance, if you sell house property after holding it for a period of 24 months, any income arising will be treated as a long-term capital gain, provided that property is sold after 31st March 2017. The reduced period of the aforementioned 24 months is not applicable to movable property such as jewellery, debt-oriented mutual funds etc.

Some assets are considered short-term capital assets when these are held for 12 months or less. This rule is applicable if the date of transfer is after 10th July 2014 (irrespective of what the date of purchase is). These assets are:

• Equity or preference shares in a company listed on a recognized stock exchange in India
• Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India
• Units of UTI, whether quoted or not
• Units of equity oriented mutual fund, whether quoted or not
• Zero coupon bonds, whether quoted or not

2. LTCA ( Long-term capital asset ):An asset held for more than 36 months is a long-term capital asset. They will be classified as a long-term capital asset if held for more than 36 months as earlier. So, if you sell the asset after a period of 36 months of purchasing, then it would be called as a long-term capital asset. However, in some of the assets, the applicable holding period is 24 months and 12 months. 

Capital assets such as land, building and house property shall be considered as long-term capital asset if the owner holds it for a period of 24 months or more (from FY 2017-18).

Whereas, below-listed assets if held for a period of more than 12 months, shall be considered as long-term capital asset.

1. Equity or preference shares in a company listed on a recognized stock exchange in India
2. Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India
3. Units of UTI, whether quoted or not
4. Units of equity oriented mutual fund, whether quoted or not
5. Zero coupon bonds, whether quoted or not

Note: Capital gains from the sale of units of a specified mutual fund acquired on or after April 1, 2023, and market-linked debentures will always be treated as short-term capital gains, regardless of how long they have been held.

Note: With effect from FY 2024-25, For classifying assets into long-term and short-term, there will only be two holding periods: 12 months and 24 months. The 36-month holding period has been removed. The holding period for all listed securities is 12 months. All listed securities with a holding period exceeding 12 months are considered Long-Term. The holding period for all other assets is 24 months.

Section 87A Rebate on Capital Gains :-

Rebate on LTCG from Unlisted Equity Shares and Mutual Funds

If an individual's total income has any long-term capital gain under section 112A from the sale of equity shares or equity-based mutual funds. Such an individual will not be eligible for a section 87A rebate on such income in both the old and the new regimes.

As per section 112A of the Income Tax Act, the gains from the sale of listed equity shares or equity mutual funds are taxed at 10% if the amount exceeds Rs. 1 lakh in a financial year.

For example, if a person's net taxable salary is Rs 3.3 lakh per year and they have LTCG from the sale of equity shares worth Rs 1.10 lakh, they must pay 10% tax on the LTCG, which is Rs 10,000, plus 4% cess, totaling Rs 1,040. Since the tax payable on the net taxable salary is Rs 4,000, which is below the Section 87A threshold, they can claim a rebate u/s 87A. Therefore, they only need to pay the Rs 1,040 as tax on the LTCG.

Rebate Under Other Capital Gains

In the case of long-term capital gains from other assets such as real estate, unlisted shares, or short-term capital gains from equity mutual funds or equity shares. Rebate u/s 87A can be claimed on other capital gains.

Rebate Under STCG from Equity Shares and Mutual Funds

There is no restriction on claiming rebate u/s 87A on STCG arising from the sale of equity shares and mutual funds. Therefore, you can claim a section 87A rebate on your short-term capital gains on equity shares and mutual funds.

Tax Rates – Long-Term Capital Gains and Short-Term Capital Gains

According to the amendment in Budget 2024, with effect from 23rd July 2024 tax on long term and short term Capital Gains are to be taxed as follows 

Tax Exemption on Capital Gain :-

Because capital gains tax tends to erode a significant portion of earnings, it becomes critical for individuals to utilize tax-saving strategies to help them reduce their tax liability. To assist individuals in minimizing their capital gains tax liability, the government provides a list of exemptions under capital gains. These tax exemptions are known as capital gains exemptions.

Exemption Under Section 54: Sale of House Property on Purchase of Another House Property

The exemption on two house properties shall be available once in a lifetime to a taxpayer, provided the capital gains do not exceed Rs. 2 crores.

The taxpayer is only required to invest the number of capital gains, not the complete sale proceeds.

The exemption under Section 54 will be limited to the total capital gain on sale if the purchase price of the new property is higher than the number of capital gains.

The following conditions must be met to enjoy the benefit:

• The new property can be purchased either one year before or two years after the previous property has been sold.
• Gains can also be invested in property construction, but construction must be completed within three years of the sale date.
• In the 2014-15 Budget, it was made clear that only one house property could be purchased or built with capital gains to qualify for this exemption.
• Please remember that this exemption can be revoked if the new property is sold within three years of its purchase or completion of construction.

Exemption Under 54B: Transfer of Land Used for Agricultural Purposes

An exemption is available under Section 54B when you make short-term or long-term capital gains from the transfer of land used for agricultural purposes – by an individual, the individual's parents, or a Hindu Undivided Family (HUF) – for two years before the sale.

The lesser of the capital gain on the sale of agricultural land or the investment in new assets is exempt from tax. You must reinvest in new agricultural land within two years of the transfer date.

• The new agricultural land purchased to claim capital gains exemption should not be sold within three years of its purchase date.
• If you cannot purchase agricultural land before the due date for filing your income tax return, the number of capital gains must be deposited in any branch (except rural branches) of a public sector bank or IDBI Bank before the due date.
• Exemptions can be claimed for the amount deposited. If the amount deposited under the Capital Gains Account Scheme was not used to purchase agricultural land, it should be treated as capital gains of the year in which the period of two years from the date of sale of land elapsed.

Exemption Under Sections 54 E, 54EA, and 54EB – Profits from Investments in Certain Securities

This capital gains exemption applies to capital gains derived from the transfer of long-term capital assets. Individuals can take advantage of such long-term capital gain exemptions if they reinvest in securities such as targeted debentures, UTI units, government securities, government bonds, etc.

The following conditions must be met–

• Individuals must reinvest in such new securities within six months of the transfer of capital assets.
• If the individual plans to sell the new securities before 3 years or 36 months, the previously offered exemption would be deducted from the total cost to determine the capital gains.

It is important to note that any loan availed against these securities before 3 years would be treated as a capital gain.

Exemption Under Section 54EC – Profits from the Sale of a Long-term Capital Asset are Exempt from Tax if Reinvested in Specific Long-term Assets.

Long-term capital gains on the sale of long-term assets would be qualified for long-term capital gain exemption. Individuals will be eligible for such exemptions if they reinvest their proceeds in assets of either the Rural Electrification Corporation or the NHAI.

Such capital exemptions are available if and only if the following conditions are met:

• Individuals reinvest the proceeds into specified assets within six months of the asset's sale.
• Capital gains should not exceed the amount invested. If only a portion of the gains were reinvested, the capital gain exemption would apply only to the reinvested amount.
• Specific assets must be held for a minimum of 36 months.

Exemption Under Section 54EE – Profits from a Transfer of Investments.

Capital gains derived from the transfer of long-term capital assets would be eligible for a capital gain exemption if –

• Individuals should reinvest their proceeds within six months of receiving them.
• If individuals sell their new securities before 36 months, the previously offered exemption is subtracted from the cost to calculate capital gains.
• If a loan is taken out against new securities before 36 months, the capital gains are taxed.
• In the current and following fiscal years, such investments should not exceed Rs. 50 lakh.

Exemption Under Section 54F: Capital Gains on the Sale of Any Asset Other Than a Home.

Exemption under Section 54F is available when capital gains are realized from the sale of a long-term asset other than a home. To qualify for this exemption, you must invest the entire sale consideration, not just the capital gain, in purchasing a new residential house property. Purchase the new property either one year before or two years after the previous one. You can also use the profits to fund the construction of a home. The construction, however, must be completed within three years of the date of sale.

In Budget 2014-15, it was stated that only one house property could be purchased or built from the sale consideration to claim this exemption. This exemption can be revoked if the new property is sold within three years of purchase. If you meet the conditions mentioned and invest the sale proceeds in the new house, the entire capital gain will be tax-free.

follow us on - @thetaxfirm.co.in , @thetaxfirm.insider , @thetaxfirm.inhindi

Whatsapp Channel :- https://whatsapp.com/channel/0029VavmAPu7tkjAj6VlYd1g