This article has been written by Oishika Banerji of Amity Law School, Kolkata. It discusses the concept of capital gains tax which is tax on profits received on the sale of a non-inventory asset.

This article has been published by Sneha Mahawar. 

Introduction

The profit that an investor makes when they sell an investment is subject to the capital gains tax. It must be paid in the tax year when the investment is sold. Depending on the filer’s income, the long-term capital gains tax rates for the 2021 and 2022 tax years are 0%, 15%, or 20% of the profit. Every year, the income rates are modified. Any investment that is owned for more than a year will result in a long-term capital gains tax obligation for the investor. A short-term capital gains tax is imposed if the investor owns the investment for six months or less. The taxpayer’s typical income band affects the short-term rate. That is a higher tax rate than the capital gains rate for everyone who saves their best income. This article discusses the concept of capital gains tax with respect to India. 

What is capital gains tax 

The capital gains, or profits, are said to have been “realised” when stock shares or any other taxable investment assets are sold. Unsold investments and “unrealized capital gains” are exempted from getting taxed. No matter how long they are held or how much their value rises, stock shares will not be taxed until they are sold. The majority of taxpayers pay a greater rate on their income than any potential long-term capital gains. 

The term ‘capital gain tax’ refers to the tax imposed on this capital gain. For the sale that occurred the previous year, this tax is assessed under the heading of capital gains. You must pay the capital gain tax if and when:

1. A capital asset that you have for sale falls within this category.
2. The sale has given you a profit.
3. The transaction took place the prior year (the year immediately before the assessment year). 

Thus, they have a financial incentive to hang onto investments for at least a year in order to benefit from the lower profit tax. Any profits made from buying and selling assets held for less than a year are not only taxed but they are also taxed at a higher rate than profits made from holding assets for a longer period of time. Day traders and other individuals who benefit from the simplicity and speed of online trading should be aware of this.

Depending on how long the asset has been in your hands, the gain from a capital asset can be divided into two categories, namely, short-term capital gains and long-term capital gains. One of the most popular investments is purchasing real estate. The main motivation is to own a home, while other people invest in order to profit from the sale of their immovable property. For taxation reasons, a residential property counts as a capital asset. You can deduct the gain or loss from the sale of a residential property on your income tax return. Similar to this, sales of various kinds of capital assets may result in capital profits or losses.

Capital gains tax in India

Simply explained, a capital gain is any profit or gain that results from the sale of a “capital asset.” Due to the fact that this gain or profit falls under the category of “income,” you must pay tax on it in the year that the capital asset is transferred. As there is no sale and only a transfer of ownership, capital gains are not taxable on inherited property. Assets obtained as gifts through inheritance or will are expressly exempt under the Income Tax Act, 1961. However, capital gains tax will be charged if the asset’s new owner decides to sell it. 

Capital gains tax calculator

Finding the difference between the price you paid for your asset or piece of property and the price you received for it at the sale is the foundation of a capital gain computation. The steps involved in calculating capital gains tax have been listed hereunder:

1. Establish your foundation first. The purchase price plus any commissions or fees paid often constitutes this foundation. Dividends on equities that are reinvested, among other things, may also raise the basis.
2. Calculate the amount you realised.
3. To calculate the difference, deduct your basis (the price you paid) from the realised amount (the price you received when you sold it).

• You get a capital gain if you sell your assets for more money than you bought for them.
• You incur a capital loss if you sold your assets for less than you paid for them.

4. Find out how to use capital losses to reduce your capital gains tax.
5. To determine the tax rate that might be applicable to your capital gains, read the descriptions in the section below.

The structure of the capital gains tax calculator can be viewed here. 

What is a capital asset 

By definition, a capital asset includes:

1. Any type of property that an assessee owns, whether or not it is related to their line of work or place of business.
2. Any securities held by a Foreign Institutional Investor (FII) that invested in them in compliance with the Securities and Exchange Board of India Act (SEBI), 1992.
3. Any Unit Linked Insurance Plans (ULIP) to which Section 10(10D) of the Act’s exemption is inapplicable due to the application of its fourth and fifth provisos.

Let us take, for example, that Mr. Kumar bought a residence in January 2021 for Rs. 8,400,000. In April 2022, he sold the residence for Rs. 90,000,000. Mr. Kumar’s residential property is a capital asset in this case; as a result, the gain of Rs. 6,00,000 from the sale of the residential property would be considered as capital gains and subject to taxation under the “capital gains” heading.

A few examples of capital assets are real estate, buildings, houses, cars, jewellery, patents, trademarks, and leasehold rights. This includes having stakes in or ties to Indian businesses. It also includes any other legal rights, such as those related to management or control. A list of things that do not come under the heading of “capital assets” has been provided hereunder: 

1. Any inventory, supplies, or raw materials kept for commercial or professional purposes.
2. Items held for personal use, such as clothing and furniture.
3. Agricultural land in rural India.
4. Deposit certificates or gold deposit bonds issued under the Gold Monetization Scheme, 2015, or the Gold Deposit Scheme, 1999, respectively.
5. 6½% gold bonds (1977) or 7% gold bonds (1980) or National Defence gold bonds (1980) issued by the Central Government.
6. Special Bearer Bonds (1991) is an Act to provide for certain immunities to holders of Special Bearer Bonds, 1991 and for certain exemptions from direct taxes in relation to such bonds and for matters connected therewith

The capital asset’s relationship to the taxpayer’s trade or profession may or may not exist. For instance, a bus used to convey passengers by a person involved in the passenger transport industry will be considered his capital asset.

The SEBI Act of 1992 stipulates that any securities held by an FII that made an investment in those securities in accordance with those regulations will always be regarded as capital assets; as a result, those securities cannot be regarded as stock-in-trade.

Short-term capital assets

A short-term capital asset is one that is held for 36 months or less. For immovable items, including land, buildings, and houses, starting in FY 2017–18, the requirement is 24 months. For instance, if you sell a house after owning it for 24 months, any income will be considered a long-term capital gain as long as the sale occurs after March 31, 2017. Movable items like jewellery, debt-oriented mutual funds, and other similar items are not covered by the shorter 24-month term described above. When some assets are held for 12 months or less, they are regarded as short-term capital assets. If the date of transfer is after July 10, 2014, this rule will apply (irrespective of what the date of purchase is). A list of short-term capital assets are:

1. Equity or preferred shares in a business listed on a reputable Indian stock exchange.
2. Government securities, debentures, bonds, and other securities are listed on an established stock exchange in India.
3. UTI units, whether or not quoted.
4. Equity-oriented mutual fund units, whether or not they are quoted.
5. Zero coupon bonds, whether or not they are quoted. 

When owning shares of a corporation that is not publicly traded or an immovable asset like a piece of land, a building, or both, the holding period will be reduced from 36 to 24 months. The same applies to long-term assets as well. 

Long-term capital assets

Long-term capital assets are those that have been held for longer than 36 months. If retained for a period of time greater than 36 months, they will be categorised as long-term capital assets. If the owner keeps an asset for 24 months or longer, such as land, a building, or a house, it is termed a long-term capital asset.

When evaluating whether an asset is a short-term or long-term capital asset, it is also taken into account how long the previous owner owned the asset if it was acquired by gift, bequest, succession, or inheritance. When it comes to bonus shares or rights shares, the holding term is measured starting from the date of allotment, as appropriate.

Types of capital gains tax

A capital gain occurs when you sell a capital asset for more money than you paid for it at first. Stocks, bonds, precious metals, jewellery, and real estate are examples of capital assets. Depending on how long you had the asset before selling it, you will either pay tax on the capital gain or not. Long-term and short-term capital gains are categorised and taxed differently. 

Short-term capital gains are those that result from the sale of short-term assets, whereas long-term capital gains are those that result from the transfer of long-term assets. There are a few exceptions to this generalisation, such as the fact that gains on depreciable assets are always subject to short-term capital gains tax.

When selling an asset, it’s crucial to consider capital gains taxes, especially if you occasionally engage in online day trading. First, you must pay taxes on whatever gains you make. Second, despite what you may have heard, capital gains are not always treated more favourably than other forms of income. It depends on how long you possessed such assets before you sold them, as was already explained.  

Assets that are held for more than a year before being sold generate long-term capital gains. Long-term capital gains are subject to taxation at graduated rates of 0%, 15%, or 20% of taxable income. Most taxpayers who declare long-term capital gains pay 15% or less in taxes. Your ordinary income and short-term capital gains are both subject to taxation. In 2022, depending on your tax bracket, that may amount to 37%.

The nature of the gain, or whether it is short-term or long-term, determines whether capital gains are taxable. Therefore, capital gains must be divided into short-term and long-term categories in order to establish their taxability. In other words, there is a difference in the tax rates for long-term and short-term capital gains.

Short-term capital gains tax 

The sale of an asset that has been owned for less than a year results in a short-term capital gain. Short-term gains do not benefit from any special tax rates, despite the fact that long-term capital gains are often taxed more favourably than salaries or wages. They are liable for ordinary income taxes. Like regular income, short-term gains are taxable in accordance with your marginal income tax bracket. 

Based on your adjusted basis in an asset, net capital gains are computed. This is the purchase price of the asset, plus any fees associated with selling the asset as well as the cost of any upgrades you made. You inherit the donor’s basis if an asset is provided to you as a gift. Section 111A of the Income Tax Act, 1961, provides that short-term capital gains are subject to a 15% tax, excluding surcharge and cess. Short-term capital gains that are not covered by Section 111A are subject to tax at a rate based on the individual’s total taxable income.

Short-term capital gains are simpler to compute; to find them, simply deduct the cost of an asset’s acquisition from its sale price.

Short-term capital gains = sale cost of the asset – (expenditure incurred on the asset) – (cost of acquisition/improvement).

Application of Section 111A of the Income Tax Act, 1961

When a Securities Transaction Tax (STT) is due as a result of the transfer of equity shares, units of equity-oriented mutual funds or units of business trusts through a recognised stock exchange on or after January 10, 2004, Section 111A applies.

A mutual fund is considered equity oriented if it meets the requirements of Section 10(23D) of the Act of 1961 and invests at least 65% of its investible funds in the equity shares of domestic companies.

STCG is covered under Section 111A if the requirements of that Section are met as stated above. Such a gain is subject to tax at a rate of 15% (plus any applicable surcharge and cess).

With effect from Assessment Year 2017–18, even in cases where STT is not paid, the 15% concessional tax rate will be accessible.

1. If the transaction is carried out on a recognised stock exchange housed in an IFSC.
2. The consideration is received or payable in a foreign currency.

Illustrations

1. Mr. Ghosh works for a salary. He bought 100 equity shares in X Ltd. in December 2021 from the Bombay Stock Exchange for Rs. 1,400 each share. At a price of Rs. 2,000 per share, these shares were sold on the BSE in August 2022 (securities transaction tax was paid at the time of sale). What kind of financial gain will there be in this situation?

Shares were bought in December 2021 and sold in August 2022, meaning they were sold after being held for less than a year. As a result, the gain is a short-term capital gain. When STCG arises from the transfer of equity shares, units of equity-oriented mutual funds, or units of business trusts through a recognised stock exchange on or after January 10, 2004, and such a transaction is subject to securities transaction tax, Section 111A applies. 

Shares were sold in the aforementioned example after being held for less than a year through a recognised stock exchange, and the transaction was subject to STT; as a result, the STCG can be referred to as STCG covered by Section 111A. Such STCG will be subject to a 15% tax (plus surcharge and cess as applicable).

2. Mr. Saurabh works for a salary. He bought 100 units of the ABC Mutual Fund in December 2021 for Rs. 100 each. An equity-oriented mutual fund is the one in question. These units were offered for sale on the BSE in August 2022 for Rs. 125 each (securities transaction tax was paid at the time of sale). What kind of financial gain will there be in this situation?

Units were bought in December 2021 and sold in August 2022, meaning they were sold after being held for less than a year. As a result, the gain is a short-term capital gain. When STCG results from the transfer of equity shares, units of an equity-oriented mutual fund, or units of a business trust through a recognised stock exchange on or after January 10, 2004, and such a transaction was subject to the securities transaction tax, Section 111A applies. The STCG is referred to as the STCG covered by Section 111A if the prerequisites of that section are met. Such a gain is subject to tax at a rate of 15% (plus any applicable surcharge and cess).

Given that the mutual fund in the example is an equity-oriented mutual fund, units are sold after less than a year of ownership, they are sold through a recognised stock exchange, and the transaction is subject to STT, the STCG can be referred to as the STCG covered by Section 111A. Such STCG will be subject to tax at 15% (with the relevant surcharge and cess).

Long-term capital gains tax

When compared to selling the identical asset and realising the gain in less than a year, the tax on a long-term capital gain is virtually always cheaper. You can reduce your capital gains tax by holding onto assets for a year or more because long-term capital gains are often taxed at a more favourable rate than short-term capital gains. 

20% of long-term capital gains are typically subject to tax, cess, and surcharge, excluding capital gains tax. If certain qualifying requirements are met by taxpayers, this tax rate decreases to 10% and is applied to assets listed on a reputable stock market, UTI/mutual funds, and zero coupon bonds. Long-term capital gain is computed using the indexed cost of acquisition/improvement and is calculated as follows:

(Cost of acquisition x cost inflation index of the year of transfer of a capital asset)/(Cost inflation index of the year of acquisition)

Long-term capital gains = cost of selling a property – the indexed cost of acquisition.

Long-term capital gains arising from the sale of listed securities

With effect from Assessment Year 2019–20, a new Section 112A is included in the Finance Act, 2018. According to the new provision, capital gains from the transfer of a long-term capital asset that is an equity share in a company, a unit of an equity-oriented fund, or a unit of a business trust are subject to tax at a rate of 10% of such capital gains that exceed Rs. 100,000. This 10% concessional rate will be applicable if:

1. Securities Transaction Tax (STT) was paid on the purchase and transfer of an equity stake in a corporation, if applicable; and
2. If STT was paid on the transfer of a capital asset, such as a unit of an equity-oriented fund or a unit of a business trust.

Before February 1, 2018, the taxpayer’s cost of acquiring a listed equity share should be judged to be the greater of the following:

1. The asset’s actual acquisition cost; or
2. Lowest of the following:

1. The shares’ fair market value as of January 31, 2018; or
2. The actual sales compensation becomes due upon the transfer.

The highest price a listed equity share was quoted on the stock exchange as of January 31, 2018, is considered to be its fair market value. However, if there is no trading in those shares on January 31, 2018, the highest price at which that share was traded on a day immediately before January 31 will be considered the share’s fair market value.

Long-term capital gains arising from the transfer of specified asset

A taxpayer who has long-term capital gains through the transfer of any listed security, any unit of UTI, or any mutual fund (whether or not listed), and who is not otherwise exempt from Section 112A, as well as Zero Coupon Bonds, has two choices:

1. Take advantage of the indexation benefit; the capital gains so calculated will be subject to tax at the standard rate of 20%. (plus surcharge and cess as applicable).
2. Do not take advantage of the indexation benefit; the capital gain so calculated is subject to a 10% tax (plus surcharge and cess as applicable).

Calculating the tax liabilities of both alternatives is required before choosing one, and the option with the smaller tax liability should be chosen.

Illustrations

1. Mr. Janak works for a salary. He bought 100 shares of X Ltd. in January 2016 from the Bombay Stock Exchange for Rs. 1,400 each share. In April 2022, these shares were sold on the BSE for Rs. 2,600 each. On January 31, 2018, X Ltd. shares were valued at a high of Rs. 1,800 per share on the stock exchange. What kind of financial gain will there be in this situation?

Shares were bought in January 2016 and sold in April 2020, meaning they were held for more than three years; as a result, the gain is a Long-term Capital Gain (LTCG). In the described situation, shares are sold after being held for more than a year, through a reputable stock exchange, and the transaction is subject to STT. As a result, Section 112A is relevant in this situation.

The cost of acquisition of X Ltd. shares shall be higher of:

1. Cost of acquisition i.e., 1,40,000 (1,400 × 100);
2. Lower of:

• Highest price quoted as on 31-1-2018 i.e., 1,80,000 (1,800 × 100);
• Sales consideration i.e., 2,60,000 (2,600 × 100).

The price to purchase the shares will therefore be Rs. 180,000. As a result, Mr. Janak would have long-term capital gains of Rs. 80,000. (i.e., 2,60,000 – 1,80,000). Since Mr. Janak’s long-term capital gains do not exceed Rs. 1,000,000, there is no tax due.

2. Mr. Saurabh works for a salary. He bought 100 shares of XYZ Ltd. in the month of July 2017 from the Bombay Stock Exchange for Rs. 2,000 per share. In June 2022, these shares were sold on the NSE for Rs. 4,900 each. On January 31, 2018, XYX Ltd. shares reached their highest quoted price of Rs. 3,800 per share on the stock exchange. What kind of financial gain will there be in this situation?

As a result of the foregoing, the price to purchase the shares will be Rs. 3,80,000. Accordingly, Mr. Saurabh would be required to pay Rs. 1,10,000 in taxes on long-term capital gains (i.e., 4,90,000 – 3,80,000). Long-term capital gains are covered by Section 112A because they exceed Rs. 1,000,000. Mr. Saurabh will be responsible for paying 10% of any gains over $1,000 that exceed Rs. 10,000. 

The cost of acquisition of X Ltd. shares shall be higher of:

1. Cost of acquisition i.e., 2,00,000 (2,000 × 100).
2. Lower of:

• Highest quoted price as on 31-1-218 i.e., 3,80,000 (3,800 × 100);
• Sales consideration i.e., 4,90,000 (4,900 × 100)

Shares were bought in July 2017 and sold in June 2022, meaning they were held for more than a year; as a result, the gain is an LTCG. In the described situation, shares are sold after being held for more than a year, through a reputable stock exchange, and the transaction is subject to STT. As a result, Section 112A is relevant in this situation.

Tax rates (Long-term capital gains and short-term capital gains)

Long-term capital gains tax (LTCG)

Long-term capital gains are typically subject to tax at a rate of 20% (with appropriate surcharge and cess), but in some rare circumstances, the gain may be (at the taxpayer’s discretion) subject to tax at a rate of 10% (plus surcharge and cess as applicable). Only in the following circumstances is the benefit of taxing long-term capital gains at 10% applicable:

1. Long-term capital gains exceeding Rs. 1,000,000 from the disposal of listed stocks (Section 112A);
2. Long-term capital gains from the sale of any of the assets listed below:

• Any security listed on an established Indian stock exchange;
• Any UTI or mutual fund unit, whether or not they are listed (This option is only applicable to units that were sold on or before October 7, 2014); and
• Bonds with no coupon. 

According to Section 2(h) of the Securities Contracts (Regulation) Act, 1956, the definition of “securities” typically covers government securities, other financial instruments that the Central Government may declare to be securities, rights or interests in securities, as well as shares, scrips, stocks, bonds, debentures, debenture stocks, and other marketable securities of a like nature in or of any incorporated company or other body corporate. 

Adjustment of LTCG against the basic exemption limit

The basic exemption limit is the amount of income below which a person is exempt from paying any taxes. For the fiscal year 2022–2023, each individual is entitled to the following fundamental exemptions:

1. The exemption cap for residents who are 80 years of age or more is Rs. 5,000,000.
2. The exemption cap for residents who are 60 years of age or older but under 80 is Rs. 3,000,000.
3. The exemption threshold for residents under 60 years of age is Rs. 2,50,000.
4. No matter the individual’s age, the non-exemption resident’s is limited to Rs. 2,50,000.
5. The exemption threshold for HUF is Rs. 2,50,000.

Short-term capital gains tax (STCG)

Section 111A covers STCG, which is subject to tax at 15% (plus any relevant surcharge and cess). Standard STCG, or STCG not covered by Section 111A, is subject to tax at the normal rate of tax, which is calculated based on the taxpayer’s total taxable income. On the short-term capital gains mentioned in Section 111A, no deduction is permitted under Sections 80C to 80U. Such deductions, however, may be made from STCG in addition to those not covered by Section 111A. For the purpose of determining the tax rate, short-term capital gains are classified as follows :

1. Short-term capital gains covered under Section 111A:

1. Equity shares listed on a recognised stock exchange that are sold for STCG are chargeable to STT.
2. Units of equity-oriented mutual funds traded through a recognised stock exchange may incur STCG that is subject to STT. STCG resulting from the sale of a business trust’s units
3. When equity shares, units of an equity-oriented mutual fund, or units of a business trust are sold through a recognised stock exchange housed in an IFSC and the consideration is paid or payable in a foreign currency, even if the sale itself is not subject to securities transaction tax, STCG may result.
4. Short-term capital gains other than those covered under Section 111A:

1. STCG results from selling equity shares outside of a recognised stock exchange.
2. STCG on the sale of assets other than shares or units, such as gold, silver, or real estate.
3. STCG on government securities, bonds, and debentures.
4. STCG results from the sale of units of mutual funds that are debt-oriented rather than equity-oriented.
5. STCG that results from the selling of non-equity shares of stock.

Adjustment of STCG against the basic exemption limit

The basic exemption limit is the amount of income below which a person is exempt from paying any taxes. The following describes the fundamental exemption threshold that applies to an individual for the financial year 2021–2022:

1. For resident individuals of the age of 80 years or above, the exemption limit is Rs. 5,00,000.
2. For resident individuals of the age of 60 years or above but below 80 years, the exemption limit is Rs. 3,00,000.
3. For HUF, the exemption limit is Rs. 2,50,000.
4. For resident individuals of the age below 60 years, the exemption limit is Rs. 2,50,000.
5. For non-resident individuals irrespective of their age, the exemption limit is Rs. 2,50,000.

Capital gain tax on the sale of property

1. In the event that you decide to sell your home, you will be required to pay capital gains tax on the profit that was made after accounting for inflation and the indexed cost of acquisition. The capital gain tax on the sale of the property can, however, be avoided in a number of different ways.
2. The process of selling a home is a massive and tiresome one in and of itself, but when you include in the fact that you will be taxed on your capital gains, you have the makings of a headache. The money you make when you sell a piece of real estate in India is referred to as capital gains.
3. The decision to invest the earnings from the sale within the allotted time period and avoid capital gains taxation is entirely up to the person receiving the benefits of the sale.
4. You must deduct the cost of purchasing (and maintaining/improving) the asset from its sale value in order to calculate your profit (capital gains), which is the amount you receive. These gains can be categorised as either short-term or long-term gains.
5. Selling your land, house, or another property within three years of buying it is seen as a short-term capital gain. If you sell it after three years, you will be said to have made a long-term capital gain. The distinction between short-term and long-term capital gains is crucial because taxes are applied differently to each. When these two types of gains are reinvested, different tax rates and tax advantages apply.
6. If certain requirements are met, long-term capital gains on real estate sales are taxed at 20% plus a 3% cess. You will still be responsible for paying capital gains tax on any property you sell that was given to you or that you inherited. Here, the cost of acquisition is computed using the cost to the prior owner and is adjusted for the year of acquisition.

How to calculate capital gains tax on the sale of land

You must pay capital gains tax on whatever property you sell, including real estate. LTCG applies to properties held for more than 36 months, while STCG applies to properties held for less than 36 months.

In the case of STCG, the earnings made from selling land are included in the owner’s taxable income, and they must pay taxes in accordance with the income tax bracket they are in at the time. The current tax rate for LTCG is 20%.

STCG- capital gains tax

You must subtract the acquisition cost, improvement cost (if any), and sale-related costs from the sale price if you are selling the land within 36 months of when you bought it. Your STCG will be this.

Let’s take, for example, 2015, when Mr. Ansari purchased land. He bought it for 10 lakh rupees. In 2016, he received Rs. 15 lakh for selling the land. In this instance, Mr. Ansari’s total income will be increased by a profit of Rs. 5 lakh. According to the tax bracket he falls within, tax will be assessed. The STCG tax calculation is simpler. The land sale’s profit is added to the household’s overall income. According to the slab rates, the income is taxed.

LTCG- capital gains tax

The indexed acquisition and improvement costs can be subtracted from the sale price in LTCG. As the expense of acquisition or upgrade increases, this assists in lowering your capital gains. The cost inflation index is a crucial factor to take into account when calculating long-term capital gains. Every year, the government releases this indicator. A key component in calculating the indexed cost of acquisition and improvement is CII. The cost inflation index is equal to the product of the index for the transfer and the index for the acquisition.

Reduction of tax by indexation

The property’s purchase price can be increased by the seller through indexation, depending on the cost inflation index. It allows the owner to adjust the property’s cost for inflation. As a result, when the purchase price is raised, the increase is subtracted from the sale price to determine long-term capital gains. As a result, it reduces taxable gains.

Let us take for example, in the year 2005, Mr. Singh spent Rs. 10 lakhs on a property. In 2015, he sold that house for Rs. 30 lakh. In the years 2005 and 2015, CII was 480 and 1024, respectively.

CII = 1024/480. CII is, therefore, 2.13.

Indexed cost of acquisition = Cost inflation index x Acquisition cost. 2.13 x 1000 000 is that.

The indexed cost of acquisition is therefore Rs. 21,30,000.

Indexed cost – Sale price equals LTCG. 3000000 – 2130000= 870000.

The LTCG tax rate is 20%.

In this case, the tax will be calculated as 20% of 8,70,000. The amount of capital gains tax due on the sale of land is Rs. 174,000. As a result, Mr. Singh is required to pay Rs. 1,74,000 in LTCG tax.

How to save capital gains on your property

1. Setting off all of your capital gain losses is one of the best strategies to reduce your capital gains tax. You can balance your capital gains profits and losses, but you need to remember that your losses must trace back in time. Additionally, you can only put your long-term losses against long-term gains and your short-term losses solely against short-term gains. If you agree to carry the loss forward for eight years, you can file long-term losses against long-term gains. However, before the deadline, you must also submit your income tax return on time.
2. Investing in the Capital Gains Account Scheme (CGAS) is one approach to reducing your capital gains tax. This plan is appropriate for people who are unable to purchase a new property before submitting their income tax returns. The investment period for this plan is three years. This enables you to save money in order to buy a home of your own. However, sign up for this programme before submitting your tax returns. You should be aware that only a select group of Indian banks are authorised to let their clients invest in CGAS.
3. Bond investments made within six months of selling a home and generating gains are one strategy to reduce capital gains tax. In accordance with Section 54EC of the Income Tax Act of 1961, you are free from paying taxes on bond investments. You must keep in mind, though, that you must hold onto your investment in these bonds for at least three years. It is advised not to invest for longer than three years because you won’t receive any interest and won’t be able to transfer these bonds to anybody else.

Ways to save on capital gains tax while selling your property

According to Section 54 of the Income Tax Act of 1961, long-term capital gains on the sale of a home are excluded from taxation for individuals and Hindu Undivided Families if:

1. The capital profits are put toward buying or building a new home.
2. The old house is sold and the new one is bought either one or two years later.
3. Three years after the sale of the old house, the new house was built.
4. There is only one extra dwelling property bought/built.
5. The property is being purchased or developed inside the boundaries of India.
6. Three years pass after you take ownership of the new residence before you sell it.
7. The exemption only applies proportionately if the cost of the new property is less than the proceeds from the sale. In less than six months, the leftover funds may be reinvested pursuant to Section 54EC.

Exemptions of the application of capital gains tax 

Capital gains from the sale of capital assets may result, and under the Income Tax Act, of 1961, these gains may be subject to tax. There are a few capital gains exemptions and deductions available to reduce the tax due on these capital gains. As a result, one must plan benefits while taking into account any legal relief. Allowing deductions is intended to encourage investors to invest their capital gains within a certain time frame in a new capital asset. Subject to a few restrictions, the deduction is possible in relation to the investment made in a new capital asset. In this regard, we shall examine the section-by-section deductions made possible by the Act and the different requirements that must be met in order to make a claim or qualify for the same.

Section 54 (Old asset: Residential Property, New Asset: Residential Property Capital Gains Account Scheme)

Any long-term capital gain from the sale of a residential property, whether it is for personal use or is rented out, is exempt under Section 54 to the degree that it is invested in:

1. The acquisition of a second residential property during a period of one year or two years following the transfer of the sold property, and/or
2. Within three years of the property’s transfer or sale, a residential building must be constructed.

As long as the newly acquired or built residential property is not transferred within three years of the date of acquisition. The cost of acquisition of this home property shall be reduced by the amount of capital gain exempt under Section 54 previously if the new property is sold within three years of the date of acquisition for the purpose of computing the capital gains on this transfer. This transfer’s capital gain will always be a short-term capital gain.

As was observed in the case of CIT v T.N. Aravinda Reddy (1979), to reiterate, it is irrelevant how many homes an individual has already purchased in order to claim an exemption under Section 54. By reinvesting the capital gains from the sale of the home in another residential property, he can still make the exemption claim. 

Quantum of deduction available under Section 54 

To the degree that capital gains are used to fund the purchase and/or building of another home, i.e.

1. The entire capital gain shall be excluded if the capital gains amount is equal to or less than the cost of the new house.
2. The cost of the new home shall be considered an exemption if the amount of capital gain exceeds the cost of the new home.

The possible number of the purchased house under the exemption provided by Section 54

1. As was introduced by the Finance Act of 2014, the capital gains exemption is only valid if it is used to fund the building or purchase of a single residential home. Based on how many homes a person already owns, if he utilises the capital gain to build or buy a single residential home, he qualifies for a capital gains exemption.
2. As an exception to the aforementioned regulation, the capital gains exemption would be permitted even if the investment was made in the acquisition or building of two residential homes in circumstances where the amount of capital gains does not exceed Rs. 2 Crores. However, you may only use this exemption once if you buy two residences for residential use. Once this exemption has been used, it cannot be used again in any other year. Investments should only be used to build or acquire one residential home throughout the remaining years (initiated pursuant to the Finance Act of 2019).
3. It will be assumed that the property has been purchased by the release when more than one person owns a property and another co-owner or co-owners releases his or her or their respective share or interest in the property in favour of the other co-owner(s). This release also satisfies the requirement of Section 54 with regard to purchasing.

Capital gains account scheme

The capital gains on the transfer of the original house property are taxable in the year in which it was sold, even though Section 54 gives the assessee two years to buy the house property or three years to build the house property. The applicable assessment year’s income tax return for that year must be submitted on or before the deadline for submitting the return. Therefore, the assessee must make a decision regarding the purchase or construction of the residential property by the due date for filing an income tax return, or the capital gain will be taxed.

The Income Tax Act, 1961, offers a substitute in the form of a deposit under the capital gains account scheme to avoid the aforementioned circumstance. Before the due date for filing the income tax return, the assessee must deposit any capital gain funds under the capital gains account scheme that were not used for the purchase or construction of a new home. When claiming the capital gains exemption, the income tax return must include the deposit data, including the date of deposit and the amount deposited. In this scenario, the assessee will be eligible for an exemption on the money previously used for the purchase or construction of the new home.

If the assessee deposits money in the capital gains account scheme but does not use it to buy or build a home within the required time frame, the money will be charged as capital gains for the financial year in which the required three years have passed since the original asset was sold. This will be a long-term capital gain.

Section 54EC (old asset: any asset, new asset: specified bonds)

1. If the assessee invests the capital gain within six months of the transfer’s due date in long-term specified bonds as announced by the government for a minimum of three years, the gain from the transfer of any long-term capital asset is exempt under Section 54EC.
2. In the event that the long-term specified asset is transferred or converted into money within three years of the date of acquisition, the amount of capital gain exempt under Section 54EC will be regarded to be the long-term capital gain of the year before the transfer or conversion.
3. The long-term designated asset will be considered to have been turned into money on the date that the loan or advance was taken by the assessee if he even accepts a loan or advance against it.
4. The interest rate provided on these specified contracts, which are typically issued by Rural Electrification Corporation Limited (REC) and National Highways Authority of India (NHAI), is approximately 5.25%. Since the interest is not tax-free, tax must also be paid on the interest generated. These bonds aren’t tax-free bonds; they are capital gain bonds. After the lock-in period, the invested principal is no longer subject to taxation, but the interest is still taxable.
5. The advantage of Section 54EC is only accessible on the sale of land or buildings as of the Financial Year 2018–19 (whether residential or non-residential). Previously, it applied to all assets, but it is now only relevant to land or buildings. Additionally, these bonds must be held for a minimum of 5 years starting in the Financial Year 2018–19.

Quantum of deduction under Section 54EC

1. If capital gains are invested in the long-term defined assets within six months of the transfer date (up to a maximum of Rs. 50 lakhs), they would be free from tax.
2. The budget for 2014 additionally included a change to Section 54EC, which states that starting in the following financial year, or AY 15-16, an assessee’s investment in a long-term defined asset made from capital gains from the transfer of one or more original assets cannot exceed Rs. 50 lakhs.

Section 54F (old asset: any asset, new asset: residential house)

If the entire net sales consideration is invested in, any gain that an individual or Hindu Undivided Family (HUF) may realise from the sale of any long-term asset other than the residential property will be completely excluded,

1. Purchase of one residential property within one year of the transfer date or two years after that date.
2. Within three years of the transfer date, build one residential home.

If only a portion of the sale consideration is invested and not the entire amount, a proportionate exemption will be granted, meaning,

Amount exempt = Capital gain  X   amount invested

                                                   ————————–

                                                   net sale consideration

In which cases exemptions under Section 54F are not applicable

1. On the date of transfer of such asset, the assessee does not hold more than one residential house property, excluding the one he purchased in order to qualify for an exemption under Section 54F. 

(Note: Only if the assessee is requesting an exemption under Section 54F is the restriction on the number of homes already owned applicable. As previously stated, if the assessee is seeking exemption under Section 54, there is no such restriction.)

2. Within a year of the transfer of the old asset, the assessee purchases any residential property aside from the new asset.
3. Within three years of the old asset’s purchase date, the assessee constructs any residential home, except the new asset.
4. A change to Section 54F was also made in Budget 2014, and it took effect in FY 2014–15. Under this change, an investment in a single residential house in India qualifies for the exemption.
5. Investment in two homes would prevent Section 54F exemption from being granted. In Section 54, but not in Section 54F, you have the option to invest in two homes once in your lifetime.
6. Prior to the deadline for filing an income tax return, the assessee may also deposit this sum in the capital gains account scheme described in Section 54 above.

How to avoid paying capital gains tax

1. There are a few methods if you wish to avoid paying capital gains tax. One of the choices is to spend the full profit from the deal to buy a new house. You are not obligated to pay any tax in this situation. However, you have two years to purchase the home. By utilising the gains to build a home within three years, you can also avoid paying taxes. 
2. If you don’t want to put your winnings into another piece of real estate, you may think about putting them into bonds issued by the NHAI and the RECL for a period of three years. However, you must purchase the bonds within six months of selling your house. However, the annual investment limit for these bonds is Rs. 50 lakhs.
3. The long-term loss from the sale of any other asset may likewise be offset against the long-term capital gains. As a result, you can cut back on taxes. The only way to avoid paying taxes on short-term capital gains is also the only one. The short-term loss from the sale of assets like stocks, real estate, and other types of assets can be offset against short-term capital gains.

How to save capital gain tax

Capital gains taxes are levied on the proceeds from the sale of capital assets and are determined by the length of time the asset was owned as well as the actual difference between the asset’s purchase and selling price. This tax assessment applies alone if the asset is traded after a certain period of ownership.

Invest in CGAS (Capital Gains Account Scheme)

Another way to reduce capital gains tax on property sales is to invest in the capital gains account scheme. This programme is ideal for people who can’t purchase a brand-new home before completing their income tax returns. It also offers taxpayers a significant amount of relief. 

You have three years to invest in this CGAS programme, during which time you may use the capital gains to purchase or construct a home on your land. Before completing or registering an income tax return, the deposit in this CGAS account must be made, and this investment in the CGAS must then be noted in the tax return. 

Only the specified banks are permitted to open this CGAS account. Additionally, cooperative banks and regional banks are ineligible to open this account. To reduce taxes on capital gains, the deposit in this account can be made either through monthly instalments or a flat sum.

Investing in bonds

You can make additional investments in certain financial assets if you have just traded in your property and wish to reduce your tax burden. Your investment in such financial assets has the potential to protect your laboriously earned capital gains because Section 54EC of the Indian Income Tax Act, 1961, exempts long-term capital gains from taxation.

Within six months of the transfer of the money and the realisation of profits, you must invest the money gained in bonds in order to qualify for this tax break on capital gains. Additionally, a minimum lock-in period of three years must pass once the money is deposited in these bonds.

You will not earn interest and these capital gain bonds will automatically redeem if you keep your money invested in them for a longer period than the three-year lock-in period. You are also not permitted to assign, contract, or transfer these bonds while investing your capital gains from real estate sales.

Set off all capital losses

Again, this is the best strategy to reduce taxes on capital gains from the sale of your property. It permits you to offset any capital gains or earnings against any prior capital losses. However, a short-term capital loss can only be offset by short-term capital profits, and it must date from the earlier date.

Conclusion

Gains from the sale of an investment, such as stocks, bonds, or real estate, are referred to as capital gains. Because capital gains taxes are lower than regular income taxes, investors have an advantage over wage earners. Profits from the sale of a property are known as capital gains. The fact that your capital gains are taxed at a reduced rate is one of the tax advantages of real estate investing. Furthermore, one’s overall tax liability may occasionally be reduced by capital losses. Thus, to sum up, everything discussed above, the subject matter of capital gains tax holds immense importance.

References

• https://incometaxindia.gov.in/tutorials/14-%20stcg.pdf
• https://incometaxindia.gov.in/tutorials/15-%20ltcg.pdf
• https://incometaxindia.gov.in/tutorials/16.%20exemption%20under%2054.pdf

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