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Capital Gains Tax in India- Types, Calculation, Exemption, and Recent Changes

Capital gains tax is a tax on the profit earned from the sale of a capital asset like property, stocks, or bonds. Understand the recent changes made by the government to the capital gain tax here.
authorImageRahul Jaiswal31 Jul, 2024
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Capital Gains Tax in India

Capital gains tax affects individuals and businesses who gain profit from selling capital assets like property, stocks, bonds, and mutual funds. This tax is categorized into short-term and long-term, depending on the holding period, with different rates for each. The recent changes introduced in India's Budget 2024 aim to simplify and rationalize the capital gains tax structure. This blog explains the essential aspects of capital gains tax, including its types, calculation methods, exemptions, and the recent amendments brought about by the 2024 budget.

What is Capital Gains Tax?

Capital gains tax is levied on the profit generated from the sale of a capital asset. This profit, classified as income, is subject to taxation. Capital assets include properties, securities, jewellery, and other investment instruments. The taxation on these gains is bifurcated into short-term and long-term capital gains based on the asset's holding period.

Types of Capital Gains Tax

There are two types of Capital Gains Tax (CGT), namely,
  • Short-term capital gains(STCG) and
  • Long-term capital gains(LTCG
Let’s understand both types of CGT in brief below:

Short-term Capital Gains (STCG)

Short-term capital gains are realized from selling assets held for a relatively short duration. According to the current regulations:
  • Assets Held for Less Than 36 Months: Most assets, including jewellery, machinery, and non-equity mutual funds, fall under this category. The profit is considered short-term capital gains if these assets are sold within 36 months of acquisition.
  • Immovable Properties: For real estate properties, the threshold is 24 months. Hence, the gains are short-term if a house or land is sold within 24 months.
Short-term capital gains are typically taxed at the individual's applicable income tax slab rates, with some exceptions. For instance, gains from equity shares or equity-oriented mutual funds are taxed at 15% if sold within a year, provided Securities Transaction Tax (STT) is paid.

Long-term Capital Gains (LTCG)

Long-term capital gains arise from the sale of assets held for an extended period. The holding period varies:
  • Assets Held for More Than 36 Months: Gains from capital assets held longer than 36 months qualify as long-term capital gains.
  • Specific Securities and Bonds: Equity shares, units of equity-oriented mutual funds, zero-coupon bonds, and specified securities are considered long-term if held for over 12 months.
Long-term capital gains are taxed at a lower rate compared to short-term gains. For instance, gains from the sale of equity shares and equity-oriented mutual funds exceeding Rs. 1 lakh are taxed at 10% without indexation benefits.

How do you Calculate Capital Gain Tax?

The way capital gains are computed is influenced by whether the asset is short-term or long-term. We will outline the steps for each in the next section.
  • Short-Term Capital Gains (STCG): Assets held for less than 36 months (for immovable property) or 12 months (for equity shares and mutual funds).
  • Long-Term Capital Gains (LTCG): Assets held for more than 36 months (for immovable property) or 12 months (for equity shares and mutual funds).

Step 2:  Applying the Formula

Short-Term Capital Gain (STCG): STCG = Sale Price−(Purchase Price + Expenses) Long-Term Capital Gain (LTCG): LTCG = Sale Price−(Indexed Purchase Price+Expenses) Indexed Purchase Price is adjusted for inflation using the Cost Inflation Index (CII).

Step 3: Apply the Tax Rate

  • STCG Tax Rate: Depends on the taxpayer’s income slab (for equity shares and equity mutual funds, it's 15%).
  • LTCG Tax Rate: For equity shares and mutual funds, it's 10% without indexation benefit for gains exceeding ₹1 lakh. For other assets, it's 20% with indexation.
Let’s now understand the above steps with an example below:

Short-Term Capital Gain (STCG) Example

  • Purchase Price: ₹2,00,000
  • Sale Price: ₹3,00,000
  • Expenses: ₹10,000
STCG= ₹3,00,000−(₹2,00,000+₹10,000)= ₹90,00 If the taxpayer is in the 20% tax bracket, the tax on STCG would be: Tax = ₹90,000 × 20% = ₹18,000

Long-Term Capital Gain (LTCG) Example

  • Purchase Price: ₹2,00,000
  • Sale Price: ₹5,00,000
  • Expenses: ₹10,000
  • CII at the time of purchase: 200
  • CII at the time of sale: 300
Indexed Purchase Price = ₹ 2,00,000 × 300/200 = ₹3,00,000 LTCG = ₹5,00,000−(₹3,00,000+₹10,000)= ₹1,90,000 For equity shares and mutual funds, when gains go beyond ₹1 lakh, the LTCG tax rate will be Tax = ₹90,000 × 10%= ₹9,000 This example provides a simplified calculation method for capital gains tax. Consulting a tax professional or using detailed tax software is recommended for precise calculations.

Exemptions on Capital Gains Tax

Several sections under the Income Tax Act provide exemptions that can reduce the tax burden on capital gains: Section 54: Exemption on long-term capital gains from the sale of residential property if the proceeds are reinvested in another residential property within a specified period. Conditions include:
  • Purchase within 1 year before or 2 years after the sale.
  • Construction within 3 years after the sale.
  • To qualify, the new property must be maintained for a minimum of 3 years.

Section 54F: Exemption on long-term capital gains from selling any asset other than a residential property, provided the proceeds are invested in purchasing a residential property. Conditions are similar to Section 54.

Section 54EC: Under this section , you can claim an exemption on long-term capital gains by investing the proceeds in specified bonds within six months of selling the asset. Section 54B: Exemption on gains from selling agricultural land if the proceeds are reinvested in purchasing new farming land.

Recent Changes in Capital Gains Tax

The 2024 Budget introduced significant changes to India's capital gains tax regime, impacting both short-term and long-term investors. Here is an overview f recent modifications made in CGT:

Increased Tax Rates for Short-term and Long-term Gains

  • Short-term Capital Gains (STCG) : The tax rate on short-term capital gains for listed equity has been increased from 15% to 20%. This change will increase the tax burden on investors who frequently trade stocks within a year.
  • Long-term Capital Gains (LTCG) : The tax rate on long-term capital gains for listed equity and equity-oriented mutual funds has been raised from 10% to 12.5%. This adjustment means higher taxes for investors holding these assets for over a year.
Higher Exemption Limit for Long-term Capital Gains : The exemption limit for long-term capital gains on listed equity and equity-oriented mutual funds has been increased from ₹1 lakh to ₹1.25 lakh per year. This change relieves small investors by providing a higher threshold before taxes apply. Changes in Holding Periods : The holding period for classifying listed equity shares and units of equity-oriented mutual funds as long-term assets remains at 12 months. However, the holding period for unlisted and non-financial financial assets has been standardized to 24 months. Impact on Securities Transactions Tax (STT) : The rate of STT on derivative transactions has been increased. For options, the STT rate has been hiked from 0.0625% to 0.1%, and for futures, it has been raised from 0.0125% to 0.02%. This will increase the transaction costs for traders in the derivatives market. Taxation of Buyback of Shares : The existing scheme, where the company pays tax on buybacks, has been replaced. Now, the amount received by shareholders from buybacks will be treated as dividends and taxed at the applicable slab rates. This change could significantly increase the tax liability for shareholders, particularly those in higher tax brackets.

How Will Recent Changes in Capital Gains Affect Taxpayers?

In an effort to simplify and rationalize the tax structure, India's Budget 2024 has brought changes to the capital gains tax regime. These changes will have a significant impact on taxpayers. Below is an overview of its impact on taxpayers: Property and Gold Investors : The reduction in long-term capital gains tax from 20% to 12.5%, coupled with the removal of indexation, could result in mixed outcomes. Investors with significant appreciation in property or gold since 2001 may face higher taxable gains, but the lower tax rate may still provide net savings. Equity Investors : The increase in the exemption limit and the standardized tax rate will generally benefit equity investors, especially those with gains exceeding the previous exemption limit. Compliance and Ease of Filing : The simplification of holding periods and tax rates is likely to make compliance easier and reduce the administrative burden for taxpayers. The use of technology and better data availability will further enhance compliance. Understanding and managing capital gains tax is essential for effective financial planning. By leveraging exemptions, adopting strategic investment decisions, and staying updated with the latest tax regulations, taxpayers can optimise their capital gains and minimise their tax liabilities. Need more clarification on this topic for your next CS Executive exam? Join PW CS online classes and learn from top faculties who will conduct classes with the latest syllabus, provide solutions and solve doubts instantly during classes.
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Capital Gains Tax in India FAQ

Should an NRI pay taxes on gains made from selling property in India? 

Yes, NRIs must pay taxes on gains from selling property in India, with tax rates depending on whether the property is a short-term or long-term asset.

Are agricultural lands considered capital assets?

Agricultural lands in rural areas are not considered capital assets and, hence, are exempt from capital gains tax.

How can one save tax on capital gains from the sale of property? 

Investing in specified bonds, purchasing another residential property, or using the Capital Gains Account Scheme can help save tax on capital gains.

What is the Capital Gains Account Scheme (CGAS)? 

CGAS allows taxpayers to deposit their capital gains in a designated account and postpone tax payments until the funds are reinvested in specified assets within a stipulated time frame.
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