Capital Gains Tax: What Is Capital Gains?

There are many basic taxes in India that people should be familiar with. Irrespective of whether you are a big business owner or an employee of a large organization, it is a must for all to have a basic understanding of taxes. One of these basic taxes is known as the Capital Gains tax.

In the times of selling your properties for shares, the most vital thing that can be very daunting is the impact of the capital gain tax. This kind of tax in India has been imposed on the profits you earn when you sell an asset. This taxation area has always required more clarity in the heads of common users.

Sometimes, our family and friends ask us if the capital gain tax applies to all capital assets. Or how are capital gains calculated? Fear not, as in this blog, we will take a deep dive to understand the types of Capital gain.

What is Capital Gains Tax?

Under the Income Tax Act, capital gains tax in India is not required to be paid in the scenario of individuals inheriting the property, and there is no kind of sale. However, if the individual who has previously inherited the property now wants to sell it, the tax will need to be paid on the income that is generated from the sale. A few examples of capital gains are trademarks, jewelry, patents, machinery, land, and many more.

Capital gain can be defined as any profit that is obtained through the sale of a ‘capital asset.’ The profit that has been gotten falls under the category of income. Therefore, a tax is required to be paid on the income which is received. The tax which is paid is known as the capital gains tax rate. And it can either be long-term or short-term. The tax which is levied on long-term and short-term gains begins from 10% and 15%, respectively.

Capital Gains Taxation Types

Generally, there are two types of capital gain:

• Long-term capital gains taxAny asset held over 36 months or 3 years is known as a long-term asset. The profits that have come through the sales of such an asset will be treated as long-term capital gain or LTCG, and it will attract tax accordingly. Assets such as preference shares, equity-based mutual funds, equities, securities, UTI units, and zero coupon bonds are also known as LTCG if they are held over a year.

  The LTCG tax is applicable at around 20% except during the sale of equity shares and the equity-oriented units of funds. These kinds of gains are 10% over and above INR 1 Lakhs on the sales of equity shares and equity-oriented units of funds.

• Short-term capital gains taxAny asset held for less than 36 months or 3 years is acknowledged as a short-term asset. In the circumstances of immovable properties, the time period is around 24 months or two years. The profits that are generated through sales of such assets would be treated as short-term capital gains or STCG, and they will be taxed accordingly.

  The short-term capital gain tax is around 15% when the security tax transaction is applicable. In the circumstances when the security tax is not applicable, the short-term capital gains tax will be evaluated depending on the income of the taxpayers and will be added to the ITR automatically of the taxpayer and will be charged normal slab rates.

Terms That are a Must-Know

Before we move on to see how the capital gains tax is calculated, let us take a look at a few terms that you need to know first;

• Cost of Acquisition
  It is the value for which the seller acquired the capital asset.
• Full Value Consideration
  The consideration that the seller already receives or will receive as a result of the transfer of their capital assets is known as Full Value Consideration. The Capital gains are certainly chargeable to tax in the year of transfer, even if no such consideration has been received.
• Cost of Improvement
  The expenses of a capital nature, which are incurred in making any kind of alteration or addition to the capital asset by the seller, are known as the cost of the improvement.

How are Capital Gains Calculated?

Evaluating the capital gains depends on the kind of capital gain that you are earning. The long-term capital gains are calculated differently than the short-term ones. However, prior to calculating the different kinds of capital gains, you should strongly consider understanding the concept of full value consideration as it forms the basis of capital gains calculation.

For short-term capital gains:

Let us consider that you have bought a house on the 1st January 2021 for INR 60 Lakhs. One month after the purchase, you spent INR 8 Lakhs on enhancing and improving the house. On 1st November 2022, you sold the house for INR 75 Lakhs. Since you have held the asset for 22 months, it will be considered as a

short-term capital gain. Here is how it is calculated:

The full value of consideration	INR 75 Lakhs
Less: cost of acquisition	INR 60 Lakhs
Less: cost of improvement	INR 8 Lakhs
Short term capital gains	INR 7 Lakhs

For long-term capital gains:

Speaking of long-term capital gains, you would need to be familiar with these three terms:

• Expenses deducted from the full value of consideration
• Indexed cost of acquisition
• Indexed cost of improvement

Here is the table for the calculation of long-term capital gains:

Full value of consideration	X amount
Less: expenses incurred in transferring the asset	X amount
Less: indexed cost of acquisition	X amount
Less: indexed cost of the improvement	X amount
Less: expenses allowed to be deducted from the full value of the consideration	X amount
Less: exemptions available under Sections 54, 54EC, 54B and 54F, etc	X amount
Long term capital gains	X amount

How to Avoid Capital Gains Taxes?

You can reduce capital gains taxes by using a number of different tactics. These are the four main tactics.

• Holding taxable assets for a year or more is the simplest way to take advantage of the long-term capital gains tax rate and reduce capital gains taxes.
• Take note of accounts that offer tax benefits. For instance, keeping stocks in an IRA or 401(k) may restrict your options for taking out money and reduce the liquidity of your investment. You might, however, be better able to purchase and sell stocks without having to pay capital gains taxes.
• Record any qualifying costs you incur when creating or keeping your investment. They will lower the investment’s taxable profit by raising the cost basis of the holding.
• You can contribute investments to charitable organizations if their value has increased since you bought them. You will not pay capital gains tax on the investments you give to the charity, and you will obtain a tax deduction for the actual market value of the investment as of the date of the charitable donation.

Special Capital Gains Tax Exceptions

Different capital-gains tax treatment is applied to some asset categories than to others. They are: –

1. CollectiblesRegardless of your income, capital gain taxes are levied on collectibles such as jewelry, art, antiques, stamp collections, and precious metals at a rate of 28%. You will be taxed at this higher rate even if you are in a lower band than 28%. Your capital gains taxes will only be as high as the 28% rate if you are in a higher tax band.
2. Owner-Occupied Real EstateIn the event that you are selling your primary property, a different standard pertains to capital gains on real estate. This is how it operates: A person’s capital gains from the sale of a house are exempt from taxation up to INR 250,000 (INR 500,000 for married couples filing jointly). As long as the seller has owned and occupied the house for two years or more, this is applicable.

   However, capital losses from the sale of personal property, such as a home, are not deducted from gains in contrast to some other investments. Here’s how it might operate. A single taxpayer made an INR 300,000 profit on the sale of their INR 500,000 residence, which they had originally bought for INR 200,000. This person is required to record a capital gain of INR 50,000, which is the amount liable to capital gains tax, after applying the INR 250,000 exemption.

3. Investment Real EstateReal estate investors are frequently permitted to subtract depreciation from their profits in order to account for the property’s gradual degradation over time. The actual state of the house is deteriorating, not its fluctuating value in the real estate market.

   The amount you are deemed to have paid for the property in the first place is effectively decreased by the depreciation deduction. In turn, if you decide to sell the property, this may raise your taxable capital gain. This is due to the fact that there will be a larger difference between the property’s post-discount valuation and its sale price.

4. Investment Exceptions You can be liable to another tax, the net investment income tax, if your income is high.

   This tax increases your investment income, including capital gains, by 3.8% if your modified adjusted gross income (MAGI), not your taxable income, surpasses specific thresholds.

Wrapping Up

It goes without saying that calculating capital gains tax rate on your own can be daunting as it is a complicated process. Apart from the taxes alone, there are many surcharges that you will need to be mindful of. However, knowing these basics will certainly help you out in the long run.

Frequently Asked Questions

What is LTCG?

Any kind of asset that is held over 36 months or 3 years is known as a long-term asset. The profits that have come through such an asset’s sales are known as long-term capital gain or LTCG.

What is STCG?

If an asset is held for less than 36 months or 3 years, it is acknowledged as a short-term asset. The profits that are generated through sales of such assets are known as short-term capital gains or STCG.

What is Full Value Consideration?

he consideration that is already received or to be received by the seller as a result of the transfer of their capital assets is known as Full Value Consideration. The Capital gains are certainly chargeable to tax in the year of transfer, even if no such consideration has been received.

In what circumstances do you need to pay taxes for your property?

Under the Income Tax Act, capital gains tax in India is not required to be paid in the scenario of individuals inheriting the property and there is no kind of sale. However, if the individual who has previously inherited the property now wants to sell it, the tax will need to be paid on the income that is generated from the sale.