Capital gain tax demystified
Get a simplified understanding of capital gain tax before taking investment decisions.
Do I have assets that qualify for capital gain tax?
Assets like properties, investments in securities, ornaments made of precious metals, any work of art, etc are called ‘Capital Assets’. The profits that you make from selling these capital assets are called ‘Capital Gains’. This gain is classified under two broad categories, namely, Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG) on the basis of the period of time an asset is held. For example, profits from selling listed shares any time after 12 months of purchase will be taxed as LTCG. Whereas unlisted shares and immovable properties become long-term assets, only when, you hold them for more than 36 months.
How much do I have to pay as capital gain tax on sale of property in India?
If the capital gain is short term then, this gain is added to your income and taxed as per the income tax slab. In case of LTCG, tax calculation involves what is known as indexation. What is indexation? It is a process by which the cost of acquiring and improving a long term asset is adjusted against inflationary rise in the value of the said asset, before arriving at the taxable gain. Central Government provides the cost inflation index for different years. After indexation, a flat rate of 20% capital gain tax on property is applicable (plus surcharge and cess).
What other capital gain tax rates apply?
If there is a LTCG on listed securities, units of UTI or mutual fund (whether listed or not) and zero coupon bonds, it is taxed at 10%. Listed shares which are transferred off market either have a tax rate of 20% with indexation or 10% without indexation. Whereas for unlisted shares, after considering the benefit of indexation, tax on LTCG is applicable at 20%. Also, STCG on listed securities (on which is STT is paid) have a tax rate of 15%.
Are there any tax exemptions on long term capital gains in India?
Long term gains on listed securities are exempt, provided Securities Transaction Tax (STT) has been paid. Exemption can also be claimed by re-investing the capital gain into specified asset. For example, LTCG arising from sale of a residential house property can be re-invested in purchase or construction of another residential house property. But it is important to remember that you should not own more than one house, besides the house you are re-investing in. LTCG or STCG arising from sale of agricultural land can be exempt from taxation if re-invested towards the purchase of agricultural land.
Another way to get tax exemption on capital gain in India is to invest the entire amount of LTCG in capital gains bonds, issued by NHAI and REC, which have an upper limit of Rs.50 lakh. These bonds have a lock-in period of three years after which the money can be withdrawn. If you are looking for liquidity without the hassles of capital gain tax or asset liquidation, Bajaj Finserv provide Loan against Shares, enabling you to borrow funds against listed securities such as shares, mutual funds, insurance and bonds, which can be approved instantly online.
Any tax exemption on short term capital gains in India?
When short term capital assets like unlisted shares, debentures, Government bonds etc fall under the lowest bracket of the tax slab, that STCG is exempt from tax. Also, STCG arising on sale of units of Unit Scheme, 1964 (US 64) (transferred on or after 1-4-2002) are exempt from taxation.
Equipped with this basic understanding of capital gain tax, you can take informed financial decisions that work best for you, opening up good re-investment options and maximum returns.