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    Categories: Income Tax

Capital Gains – When and to what extent they are exempted from Tax

Indian tax structure has orderly defined “How different income sources of an individual are taxed?” Specified under different heads, government has designed a proper hierarchy to know which part of your income is taxable and which is not. One such head is here we are to going to define throughout this article to help you to simplify what exemptions and benefits this section comprises for you.

“Taxing of Income from Capital Gains”

What is a Capital Gain?

Capital gain is a profit that is received by an individual on sale of any capital asset for a value higher than cost. It is taxable under the head “Income from capital gains”. These are chargeable to tax in the same year in which transaction of sale happens and does not include transfer or gains incurred from any inherited property.

To know the concept of capital gain more clearly, a basic associated term naming “capital asset” need to be discussed.

What is a Capital Asset? How tax reforms relate to these assets?

As per Income Tax law Capital Asset is a term which is branched into several types including investment in property, securities (bonds, shares), precious metals (gold, silver etc), drawings, paintings etc or any asset whether related to business or not .As defined above, transactions which relate to capital assets generate some profits and losses to their owners ,hence they also attract some tax obligations in terms of capital gains.

Capital gains are taxed as per following norms:

  • Classification of capital gain on assets depends upon their minimum holding period which distinguishes them to be taxable as short term or long term. Government has presented a duration criteria including profits arisen from assets which are sold within 36 months (which will be amended to 24 months period for land and building deals from 1st April, 2017 as proposed in Budget 2017) are to be taxed as short term while above that are to be considered as long term gains.
  • Also, separate provisions have been defined for listed and unlisted securities, i.e. for short term taxability, former is limited by duration of 12 months while above that are to be considered as long term gains.
  • Asset in transfer of inheritance has been omitted from definition of capital gain as such transfer does not include any “sale contract”, but if the inherited owner transfer it to some other person and receives gain on sale proceedings the same would be taxed.
  • It is also specified that value received by sale of any capital asset would be taxed in the same year in which transaction was held provided that it doesn’t matter whether the consideration has been actually received or not.

How Capital gains are calculated?

To calculate taxable capital gains the following expressions are used:

  • Short Term Gain: Sale Amount Received –Net acquisition cost( including all overhead expenses like brokerage, commission paid during sale, improvements cost etc)
  • Long Term Gain: Sale Amount Received Net acquisition cost – Indexed Cost – Exemptions available.

About Index Cost:

For basic calculation of gains raised out of long term holdings, Finance Bill has postulated a Cost inflation index value which is used for calculating both sale year and purchase year index while determining taxable gains. Up till now, the year 1981 was used as the index year, but being older than 3 decades it has been proposed to get changed to 2001 w.e.f from 1st April, 2018.

What exemptions are available to an assessee for Capital Gain tax?

As an aid to tax assessees, government has liberated some exemptions to capital gains under different sections of IT Act, some of them include:

  • Section 10(37): For transfer of any land area being used for agriculture purposes, any individual or HUF can claim an exemption of gain arising from such transfer , provided that the land is to be used by tax payer for agro purpose only for 2 yrs prior to date of transfer.
  • Section 10(33): Gain being short term or long term received from sale proceeds of any unit purchased under UNIT SCHEME, 1964 are to be exempted.
  • Section 54: Proceeds received from sale of any residential property ((whether rented or not) by any individual or HUF, if invested in any other residential property (within 2 yr from transfer) or used for construction of a residential house property (within 3 yrs of transfer) are subjected to be exempted. Further provided that the property purchased should not be resold before 3 yrs of its acquisition).
  • Section 54(EC): If the gain proceeds received are invested further in assets or schemes as determined by NHAI or REC (Rural electrification corp.) or CGAS (Capital Gain Account Scheme) within 6 months of sale of asset , the gain amount invested would be exempted and will subject to get locked in investment for 3 yrs as determined by IT norms.
  • Section 54(B): Amount of gain received if invested in an agricultural land is exempted ( exemption available for short term and long term both)
  • Section 54(F): Amount received as a gain from sale of assets excluding residential property and if invested in any other residential property (within 2 yr from transfer) or used for construction of a residential house property (within 3 yrs of transfer) are subjected to be exempted. Further provided that the property purchased should not be resold before 3 yrs of its acquisition and cost of new house should not be less than the gain amount).

This article includes some basic information about capital gain and exemptions that are available to an assessee for taxing purposes. Hope! the required content gained you some beneficial knowledge.

Team TaxReturnWala: