Guide and Frequently Asked Questions on
Capital Gains
Any profit or gain arising from sale or transfer of a Capital Asset is chargeable to tax under the head ''Capital Gains''. The income under this head is deemed to be the income of the year in which the transfer takes place.
Capital gains are chargeable to tax on accrual basis whether the consideration is received or not, especially in the case of gains from sale of shares and securities.
Capital gains are of two kinds, namely:
l Short term Capital gains, if the assets like shares and securities, are held by the assessee for a period not exceeding 12 months or 36 months in the case of other assets.
2. Long term Capital gains, if the assets like shares and securities, are held by the assessee for a period exceeding 12 months or 36 months in the case of other assets. Units of UTI and specified mutual funds will now be eligible for treatment as long term capital assets if they are held for a period exceeding 12 months.
Long term Capital gains are computed by deducting from the full value of consideration for the transfer of a capital asset the following :
- Expenditure connected exclusively with the transfer;
- The indexed cost of acquisition of the asset, and
- The indexed cost of improvement, if any, of that asset.
In the case of shares, expenditure in connection with the transfer includes the stock broker's commission but the salary of an employee is not deducted in computing capital gains though the employee may have helped in the transfer of the shares.
Cost of acquisition, in such cases includes the price-paid, cost of share transfer stamps, cost of postage for sending the shares for transfer to the transfer-agents of the company, legal expenses etc.
'Indexed cost of acquisition' means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee.
Frequently Asked Questions
I have sold a house for Rs.5 lakh, which had been purchased by me 5 years ago for Rs.2 lakh. Am I required to pay any tax on the profit of Rs.3 lakh earned by me?
Yes. This profit, which is called capital gain, is taxable subject to certain conditions.
Sale of what kind of assets attracts capital gains?
All transfer of capital assets attracts capital gains. Capital assets are those properties that have an enduring value and they are not consumable.
What does transfer mean?
Transfer means giving up your right on an asset. It includes sale, exchange, compulsory acquisition under any law, relinquishment etc.
Does the capital gain tax differ according to period of holding an asset?
Yes. If assets are held for more than 36 continuous calendar months prior to transfer they are called long-term assets and their transfer results in long-term capital gain that is taxed at the rate of 20%. The only exception to this general rule is in respect of securities for which the period of holding prior to transfer is 12 months to be considered as long-term capital asset and the rate of tax is nil, provided securities transaction tax has been paid. Any transfer of assets held for lesser than these periods would result in short-term capital gain. This is taxed at normal rates in respect of all assets except securities. For securities the rate of tax is 10% along with payment of securities transaction tax.
Can I get any benefit for erosion in the value of money over the years while calculating my gain on sale of asset?
Yes. To neutralize the erosion of value of money over the years the cost index for the year of sale is factored in while calculating the cost of investment so that the impact of inflation is neutralized and only the actual gain to the seller is brought to tax.
I have sold a property and made profit. If the sale amount is reinvested in purchase of a site, is my profit exempt from tax?
No. For getting exemption the nature of property sold is relevant. If you have sold a residential property, the gain received on sale should be reinvested in another residential property [which may include land and building] to qualify for exemption [section 54]. Even if you have sold a property other than a residential property, you will qualify for exemption only if the net consideration is reinvested in a residential property which may include land and building [section 54F].
If I sell my land will I be taxed?
Gain from sale of non-agriculture land is taxable as capital gain. Gain from sale of agriculture land is taxable only if it is located within 8 kilometers from the urban limits.
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