What are capital gains?
As per the provisions of Section 45 of Income Tax Act 1961 any profits or gains arising from transfer of a capital asset will be chargeable to income tax under ‘Capital Gains’. Such capital gain will be deemed to be the income of the year in which the transfer took place. Here the term profit or gains means if sales price of asset is more than its purchase price.
The term transfer is defined under section 2(47). There are certain transactions which are not to be regarded as transfer for the purposes of capital gains like redemption of sovereign gold bonds by individual, conversion of bonds r debentures etc. into shares or debentures, transfer of capital asset as a gift or will or irrevocable trust other than shares, debentures or warrants, Distributions of capital assets on the total or partial partition of a HUF and conversion of preference shares into equity shares etc.
Capital gains tax arise on transfer of capital asset only. As per section 2(14) capital asset means property of any kind held by assessee, whether or not connected with his business or profession. Jewellery, archaeological collections, urban agricultural land, Gold utensils, car used in business any securities held by Foreign Institutional Investors etc. are few examples of capital asset.
Following are not included in capital asset:
- Stock-in-trade, consumable stores or raw material held for the purpose of the business or profession.
- Any movable property held for personal use such as car, mobile, T.V etc.
- Rural agricultural land in India.
- Specified Gold Bonds issued by central government such as 6½ % Gold Bonds, 1977, or 7% Gold Bonds, 1980, or National Defence Gold Bonds, 1980.
- Special Bearer Bonds, 1991 issued by the central government.
- Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under the Gold Monetization Scheme, 2015 issue by the central government.
- Gold Monetization Scheme, 2018 issued by the central government.
Types of capital asset
Short term capital asset means asset held for not more than 36 months. However, w.e.f 23.07.2024, a capital asset will be short term capital asset if it is held for not more than 24 months.
Long term capital asset means a capital asset which is not a short term capital asset.
Types of capital gains
There are two types of capital gains: –
Short term capital gain
Any gain realised on transfer of Short term capital asset is Short term capital gain. These gains are deemed as income and it is taxable at different rates as per nature of asset.
Long term capital gain
Any gain realised on transfer of Long term capital asset is Long term capital gain.
Capital gain is classified as short term or long term on the basis of period of holding as follows:
| Capital Asset | Period of Holding | ||
| Long term capital gain | Short term capital gain | ||
| I | · Listed securities | Held for more than 1 year | Held upto 1 year |
| · Unit of UTI | |||
| · Unit of Equity oriented Mutual Fund | |||
| · Zero Coupon Bond | |||
| II | · Unlisted shares | Held for more than 2 year | Held upto 2 year |
| · Immovable Property | |||
| III | · Any other asset | Held for more than 3 year | Held upto 3 year |
Calculation of capital gains
Capital gains calculated on the basis of nature of capital assets. For calculation of capital gain some terms is used in the formula given following:
- Full value of consideration/ sales consideration: The amount received or occurred from transfer of capital asset. For example, in case of Land and Building higher of Stamp Duty value or Sale price is considered as full value of consideration.
- Cost of Acquisition (COA): Any amount paid for purchasing a property is its cost of acquisition.
- Cost of Improvement (COI): Any expenditure of capital nature incurred on improvement of capital asset after 01.04.2001 is cost of improvement.
- Transfer Expenses: At the time of transfer of capital asset, expenses incurred by the assessee such as brokerage, legal fee etc.
- Index Cost of Acquisition and improvement: For calculation of Long term capital gain assessee has the option to take benefit of capital gains indexation. Indexation is giving the impact of inflation using the Cost Inflation Index (CII).
Formula to calculate Index Cost of Acquisition/Improvement: –
= Cost of acquisition or improvement / Index for year in which asset is first held or improvement year * Index for asset transfer year
If assets are purchased before 01.04.2001, then the index for first held year/purchase year is of year 2001-02 i.e. 100.
Example of short term capital gain
Ram purchased building for ₹5,00,000 in July 2021 and sold the same building for ₹7,50,000 in January 2023. Transfer expenses was ₹20,000.
Solution: Ram held building for less than 2 years, asset held is termed as short term capital asset. The amount received from selling the building, after deducting the purchase price and transfer expenses, will result in short term capital gain. Capital gain will be ₹2,30,000 {₹7,50,000 – (₹5,00,000 + ₹20,000)}.
Example of Long term capital gain
Ram purchased building for ₹10,00,000 in July 2010 and sold the same building for ₹25,50,000 in January 2023. Cost Inflation Index (CII) in 2010 = 167 and in 2023 = 348.
Solution: In this case, the assets was held for more than 2 years. Since it is an immovable property, it qualifies as Long term capital asset.
Long term capital gain = Sales price – Indexed cost of Acquisition*
₹25,00,000 – ₹20,83,832 = ₹4,16,168
{*Indexed cost of acquisition = ₹10,00,000/167*348 = ₹20,83,832}
Rates of capital gain
Short term capital gain tax (section 111A)
Section 111A provide concessional rate of tax on the short term capital gain on transfer of equity shares, unit of equity oriented fund on which security transaction tax is paid (STT) and a unit of business trust.
Short term capital gains tax rate if transfer of capital asset take place before 23.07.2024 was 15% and it was amended in budget 2024, transfer of capital asset after 23.07.2024 will attract 20% rate of tax.
If transfer of capital asset take place other than mention in section 111A then it is taxable at Normal rate.
Long term capital gain tax (section 112A)
Long term capital gain on equity share, unit of equity oriented fund (on which STT paid) and unit of business trust is exempt if the gain is upto ₹1,25,000. However, long term capital gain tax rate is if the gains exceed ₹1,25,000, they are taxed @12.5% before 23.07.2024 rate was 10%. Under section 112A benefit of indexation is not available.
Long term capital gain tax (section 112)
Gain on capital asset of assessee other than mentioned in section 112A are taxable at different after rates as follow:
Where transfer of asset took place before 23.07.2024
| Long-term capital asset | Rate of tax |
| I. Gain on listed securities and Zero-coupon bond | – 10% without indexation
– 20% with indexation benefit |
| II. Gain on unlisted securities or shares | – 10% |
Where transfer of asset took place after 23.07.2024
| I. Land or building or both acquired before 23.7.2024 | – Individual or HUF, being a resident– 12.5% without indexation or 20% with indexation
– Other assessee – 12.5% without indexation |
| II. Land or building or both if acquired on or after 23.07.2024
Or Other asset
|
– 12.5% without indexation |