Individuals have to pay tax to the government on an annual basis if their income exceeds the set limit of exemption. Likewise, apart from income from salary, one has to pay tax on selling capital assets too. The gains made out arising from the transferring of capital assets be it gold, stocks, house or property is subject to capital gains tax as per the Income Tax Act of 1961. But the government has given a list of certain benefits to give relief to the taxpayers and save tax on capital gains on fulfilling a few conditions.
When it comes to Short Term Capital Gains (STCG) tax, there is a little relief and government has rolled out some provisions to save for Long - Term Capital Gains (LTCG) tax. Before understanding the provisions of the Income Tax for Capital Gains, let's know the meaning and its types in brief.
What is Capital Gains Tax?
The Capital Gains Tax is a tax assessed on the positive difference arising between the original purchase price and the sale price of the asset. These capital gains can be reduced by deducting the capital losses which occurs when a taxable asset is sold for less than the actual purchase price. The total of capital gains minus capital losses will give the net capital gains' (Capital Gains - Capital Losses = Net Capital Gains).
Any kind of profit which arises from the sale of a capital asset is termed as a capital gain. This gain or profit comes under the income from capital gains and hence individuals will have to pay tax for that amount in the financial year in which the transfer of capital asset takes place and this is termed as capital gains tax which will fall either under the short term or long term gains.
The Income Tax Act considers land, building, trademarks, house property, leasehold rights, vehicles, patents, jewellery and machinery as capital assets.
Types of Capital Assets
There are two types of capital assets and they are Short Term Capital Assets and Long Term Capital Assets.
What is a Short Term Capital Gain?
A short term gain arising out of profit realized from the transfer, sale or other disposition of personal or investment property is termed as Short Term Capital Gain and here the asset will be held for one year or even less than that.
What is Long Term Capital Gains?
The Long Term Capital Gains is the gain which arises out of the sale of an asset which has been owned for more than 12 months from the date of purchase. It is the long term capital gains which will give more favourable tax treatment to investors as against the short term ones.
Let's take a look at the provisions which will help taxpayers to save their hard-earned money under the long term capital gains.
The gains which arise out of transfer or sale of the property be it a house or land will attract capital gains tax. If an assessee, sells a house property within 24 months from the date of purchase, then you will attract short term capital gain tax on the gains as per the Income Tax Act based on your income tax slab.
If the same property is sold after 24 months, then you will have to pay long term capital gains tax which will be charged at 20%.
As per Section 54, the assess will get an exemption when capital gains from a property sale are reinvested for purchase or construction of a maximum of two houses. The exemption limit was provided only for one property until the Union Budget 2019, but after that, it was extended to two houses and it can be claimed only once in your lifetime.
Please Note: The capital gains arising from the sale of house property should not exceed Rs 2 crore to claim the exemption for reinvestment in two properties.
- One has to reinvest the entire amount arising from the sale of a capital asset to claim exemption.
- The exempted amount will be reversed if in case, you opt to sell this new property within 3 years from the date of purchase and the capital gains arising from the sale of a new property will be taxed as short term capital gains.
- The said property should be purchased either 1 year before the sale or after 2 years of the sale of the property or one can even go for construction of a new residential property within 3 years of the sale of the property.
If an investor is not able to use the funds from the capital gains to either construct or purchase a new house before the date of filing of returns of income, then they will have to deposit the amount in capital gains account scheme (CGAS) or else their gains will be taxed accordingly. If you have taken a home loan for the purchase of a new property, then the said capital gain exemption will be valid as per Section 54 and also the sale proceeds from the property sale can be used to repay your home loan.
Amount of Exemption under Section 54 for LTCG will be lower of
- Capital Gains arising on transfer of residential house (sale value of capital asset)
- Investment made in purchase or construction of a new residential house property (purchase price of capital asset)
Any balance capital gains (if any) arising even after investing in the new property, the said amount will be taxable.
This section lays down the provisions of the capital gains which are exempt from tax if the long term capital gains are invested in specified investment instruments within a specified period.
Exemptions under this section are only available on gains from sale or transfer of long term capital gains. This section will helps those who want to save the LTCG from the sale of a house or property and are not interested in reinvesting the capital gains in real estate.
The Section 54EC provides an exemption of LTCG on sale of building or land if the capital gains arising from it is reinvested in certain specified bonds.
The unique feature of this section is the exemption is available for both residential and non - residential properties.
The list of specified bonds includes the one issued by the Rural Electrification Corporation (REC), National Highway Authority of India (NHAI).
- The interest rates of both REC and NHAI bonds stands at 5.75% per annum.
- The investor will get up to 6 months to invest in these bonds and the maximum permitted amount of investment is Rs 50,00,000.
- The lock-in facility for these bonds is five years.
- The drawback of these bonds is it does not provide an attractive interest rate
- The interest amount is taxable.
As per Section 54F, the exemption of capital gain is available, if the long term capital assets transfer is made against the purchase of a residential house.
Exemptions under Section 54F includes
- The capital gain which arises from the transfer of long term capital assets other than the residential house.
- Exemption under Section 54F is applicable for individuals and Hindu Undivided Family.
- Net consideration (full value consideration) arising from the transfer of long term capital asset which is either:
- Re-invested to purchase one residential property in 1 year or before the date of transfer of or within 2 years after the transfer
- Sale proceeds are reinvested in construction of 1 residential property in India within 3 years from the transfer date.
Please Note: The exemption will be taken back if the new property is sold within 3 years from the date of purchase.
About the Author
Archana is a Content Writer at GoodReturns. She has been writing articles related to investment planning and personal finance for more than two years.