Any profit or gain that arises from the sale of a ‘capital asset’ is known ‘income from capital gains’. Such capital gains are taxable in the year in which the transfer of the capital asset takes place. This is called capital gains tax. There are two types of Capital Gains: short-term capital gains (STCG) and long-term capital gains(LTCG).
What is Capital Gains Tax In India?
Investment in a house property is one of the most sought out investments primarily because you get to own a house. While others may invest with the intention of earning a profit upon selling the property in the future. It is important to note that a house property is regarded as a capital asset for income tax purposes. Consequently, any gain or loss incurred from the sale of a house property may be subject to tax under the ‘Capital Gains’ head. Similarly, capital gains or losses may arise from sale of different types of capital assets.
Defining Capital Assets
Land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewellery are a few examples of capital assets. This includes having rights in or in relation to an Indian company. It also includes the rights of management or control or any other legal right.
The following do not come under the category of capital asset:
a. Any stock, consumables or raw material, held for the purpose of business or profession
b. Personal goods such as clothes and furniture held for personal use
c. Agricultural land in rural(*) India
d. 6½% gold bonds (1977) or 7% gold bonds (1980) or National Defence gold bonds (1980) issued by the central government
e. Special bearer bonds (1991)
f. Gold deposit bond issued under the gold deposit scheme (1999) or deposit certificates issued under the Gold Monetisation Scheme, 2015
*Definition of rural area (effective from AY 2014-15) – Any area which is outside the jurisdiction of a municipality or cantonment board, having a population of 10,000 or more is considered a rural area. Also, it should not fall within a distance given below
| Distance (to be measured aerially) | Population (as per the last census). |
| 2 kms from local limit of municipality or cantonment board | If the population of the municipality/cantonment board is more than 10,000 but not more than 1 lakh |
| 6 kms from local limit of municipality or cantonment board | If the population of the municipality/cantonment board is more than 1 lakh but not more than 10 lakh |
| 8 kms from local limit of municipality or cantonment board | If the population of the municipality/cantonment board is more than 10 lakh |
Types of Capital Assets
1. STCA ( Short-term capital asset ) An asset held for a period of 36 months or less is a short-term capital asset.
The criteria is 24 months for immovable properties such as land, building and house property from FY 2017-18. For instance, if you sell house property after holding it for a period of 24 months, any income arising will be treated as a long-term capital gain, provided that property is sold after 31st March 2017.
The reduced period of the aforementioned 24 months is not applicable to movable property such as jewellery, debt-oriented mutual funds etc.
Some assets are considered short-term capital assets when these are held for 12 months or less. This rule is applicable if the date of transfer is after 10th July 2014 (irrespective of what the date of purchase is). These assets are:
- Equity or preference shares in a company listed on a recognized stock exchange in India
- Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India
- Units of UTI, whether quoted or not
- Units of equity oriented mutual fund, whether quoted or not
- Zero coupon bonds, whether quoted or not
2. LTCA ( Long-term capital asset ): An asset held for more than 36 months is a long-term capital asset. They will be classified as a long-term capital asset if held for more than 36 months as earlier.
Capital assets such as land, building and house property shall be considered as long-term capital asset if the owner holds it for a period of 24 months or more (from FY 2017-18).
Whereas, below-listed assets if held for a period of more than 12 months, shall be considered as long-term capital asset.
- Equity or preference shares in a company listed on a recognized stock exchange in India
- Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India
- Units of UTI, whether quoted or not
- Units of equity oriented mutual fund, whether quoted or not
- Zero coupon bonds, whether quoted or not
Classification of Inherited Capital Asset
In case an asset is acquired by gift, will, succession or inheritance, the period for which the asset was held by the previous owner is also included when determining whether it’s a short term or a long-term capital asset. In the case of bonus shares or rights shares, the period of holding is counted from the date of allotment of bonus shares or rights shares respectively.
Tax Rates – Long-Term Capital Gains and Short-Term Capital Gains
| Tax Type | Condition | Applicable Tax |
| Long-term capital gains tax (LTCG) | Sale of: – Equity shares – units of equity oriented mutual fund | 10% over and above Rs 1 lakh |
| Others | 20% | |
| Short-term capital gains tax (STCG) | When Securities Transaction Tax (STT) is not applicable | Normal slab rates |
| When STT is applicable | 15%. |
Tax on Equity and Debt Mutual Funds- Gains made on the sale of debt funds and equity funds are treated differently. Any fund that invests heavily in equities (more than 65% of their total portfolio) is called an equity fund.
| Funds | On or before 1 April 2023 | Effective 1 April 2023 | ||
| Short-Term Gains | Long-Term Gains | Short-Term Gains | Long-Term Gains | |
| Debt Funds | At tax slab rates of the individual | 10% without indexation or 20% with indexation whichever is lower | At tax slab rates of the individual | At tax slab rates of the individual |
| Equity Funds | 15% | 10% over and above Rs 1 lakh without indexation | 15% | 10% over and above Rs 1 lakh without indexation |
Tax Rules for Debt Mutual Funds- Recently in amendment to Finance Bill 2023, gains from debt mutual funds will now be taxed at slab rates and they will be considered as short-term irrespective of the holding period. Which means you will lose out the indexation benefit. Prior to 1st April 2023, debt mutual funds had to be held for more than 36 months to qualify as a long-term capital asset. It means you need to remain invested in these funds for at least three years to get the benefit of long-term capital gains tax. If redeemed within three years, the capital gains will be added to your income and will be taxed as per your income tax slab rate.
How to Calculate Short-Term Capital Gains?
Step 1: Start with the full value of consideration
Step 2: Deduct the following:
- Expenditure incurred wholly and exclusively in connection with such transfer
- Cost of acquisition
- Cost of improvement
Step 3: This amount is a short-term capital gain
| Short-term capital gain = | Full value consideration Less: Expenses incurred exclusively for such transfer Less: Cost of acquisition Less: Cost of improvement |
How to Calculate Long-Term Capital Gains?
Step 1: Start with the full value of consideration
Step 2: Deduct the following:
- Expenditure incurred wholly and exclusively in connection with such transfer
- Indexed cost of acquisition
- Indexed cost of improvement
Step 3: From this resulting number, deduct exemptions provided under sections 54, 54EC, 54F, and 54B
| Long-term capital gain= | Full value consideration Less : Expenses incurred exclusively for such transfer Less: Indexed cost of acquisition Less: Indexed cost of improvement Less: Expenses that can be deducted from full value for consideration* |
(*Expenses from sale proceeds from a capital asset, that wholly and directly relate to the sale or transfer of the capital asset are allowed to be deducted. These are the expenses which are necessary for the transfer to take place.)
Exception: As per Budget 2018, long-term capital gains on the sale of equity shares/ units of equity oriented fund, realised after 31st March 2018, will remain exempt up to Rs. 1 lakh per annum. Moreover, tax at @ 10% will be levied only on LTCG on shares/units of equity oriented fund exceeding Rs 1 lakh in one financial year without the benefit of indexation.
Deductible Expenses
A. Sale of house property: These expenses are deductible from the total sale price:
- Brokerage or commission paid for securing a purchaser
- Cost of stamp papers
- Travelling expenses in connection with the transfer – these may be incurred after the transfer has been affected
- Where property has been inherited, expenditure incurred with respect to procedures associated with the will and inheritance, obtaining succession certificate, costs of the executor, may also be allowed in some cases
B. Sale of shares: You may be allowed to deduct these expenses:
- a. Broker’s commission related to the shares sold
- STT or securities transaction tax is not allowedas a deductible expense
C. Where jewellery is sold: In case of sale of broker’s jewellery and where a broker’s services were involved in securing a buyer, the cost of these services can be deducted.
Indexed Cost of Acquisition/Improvement
The indexed cost of acquisition is calculated as:
| Indexed cost of acquisition = | (Cost of acquisition X CII of the year in which the asset is transferred ) / CII of the year in which the asset was first held by the seller or FY 2001-02, whichever is later |
The cost of acquisition of the assets acquired before 1st April 2001 should be actual cost or FMV as on 1st April 2001, as per taxpayer’s option.
The indexed cost of improvement is calculated as:
| Indexed cost of improvement = | Cost of improvement x CII (year of asset transfer) / CII (year of asset improvement) |
Exemption on Capital Gains
Example: Meera bought a house in July 2004 for Rs.50 lakh, and the full value of consideration received in FY 2016-17 is Rs.1.8 crore.
Capital asset type: Since this property has been held for over 3 years, this would be a long-term capital asset.
Cost of acquisition: The cost price is adjusted for inflation and indexed cost of acquisition is taken. Using the indexed cost of acquisition formula, the adjusted cost of the house is Rs 1.17 crore.
Capital gain: Hence, the net capital gain is Rs 63, 00,000.
Tax: Long-term capital gains on sale of house property are taxed at 20%. For a net capital gain of Rs 63, 00,000, the total tax outgo will be Rs.12,97,800.
This is a significant amount of money to be paid out in taxes. This can be lowered by taking benefit of exemptions provided by the Income Tax Act on capital gains when profit from the sale is reinvested into buying another asset.
Section 54: Exemption on Sale of House Property on Purchase of Another House Property
Budget 2019 announcement!
Capital gains exemption under Section 54: Taxpayers can get an exemption from long-term capital gain from the sale of house property by investing in up to two house properties against the earlier provision of one house property with same conditions. However, the capital gain on the sale of house property must not exceed Rs 2 crores.
The exemption under Section 54 is available when the capital gains from the sale of house property are reinvested into buying or constructing two another house properties (prior to Budget 2019, the exemption of the capital gains was limited to only 1 house property).
The exemption on two house properties will be allowed once in the lifetime of a taxpayer, provided the capital gains do not exceed Rs. 2 crores. The taxpayer has to invest the amount of capital gains and not the entire sale proceeds. If the purchase price of the new property is higher than the amount of capital gains, the exemption shall be limited to the total capital gain on sale.
Conditions for availing this benefit:
- The new property can be purchased either 1 year before the sale or 2 years after the sale of the property.
- The gains can also be invested in the construction of a property, but construction must be completed within three years from the date of sale.
- In the Budget for 2014-15, it has been clarified that only 1 house property can be purchased or constructed from the capital gains to claim this exemption.
- Please note that this exemption can be taken back if this new property is sold within 3 years of its purchase/completion of construction.
- The capital gains tax exemption limit under Section 54 to 54F is restricted to Rs.10 crore. Earlier, there was no threshold.
Section 54F: Exemption on capital gains on sale of any asset other than a house property
Exemption under Section 54F is available when there are capital gains from the sale of a long-term asset other than a house property. You must invest the entire sale consideration and not only capital gain to buy a new residential house property to claim this exemption. Purchase the new property either one year before the sale or 2 years after the sale of the property. You can also use the gains to invest in the construction of a property. However, the construction must be completed within 3 years from the date of sale.
In Budget 2014-15, it has been clarified that only 1 house property can be purchased or constructed from the sale consideration to claim this exemption. This exemption can be taken back, if this new property is sold within 3 years of its purchase. If the entire sale proceeds are invested towards the new house, the entire capital gain will be exempt from taxes if you meet the above-said conditions.
However, if you invest a portion of the sale proceeds, the capital gains exemption will be in the proportion of the invested amount to the sale price LTCG exemption = Capital gains x Cost of new house / Net consideration.
Section 54EC: Exemption on Sale of House Property on Reinvesting in specific bonds
Exemption is available under Section 54EC when capital gains from sale of the first property are reinvested into specific bonds.
- If you are not keen to reinvest your profit from the sale of your first property into another one, then you can invest them in bonds for up to Rs. 50 lakhs issued by National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC).
- The money invested can be redeemed after 5 years, but they cannot be sold before the lapse of 5 years from the date of sale.
- The homeowner has six month’s time to invest the profit in these bonds. But to be able to claim this exemption, you will have to invest before the tax filing deadline.
Saving Tax on Sale of Agricultural Land
In some cases, capital gains made from the sale of agricultural land may be entirely exempt from income tax or it may not be taxed under the head capital gains. See below:
a. Agricultural land in a rural area in India is not considered a capital asset and therefore any gains from its sale are not chargeable to tax. For details on what defines an agricultural land in a rural area, see above.
b. Do you hold agricultural land as stock-in-trade? If you are into buying and selling land regularly or in the course of your business, in such a case, any gains from its sale are taxable under the head Business and Profession.
c. Capital gains on compensation received for compulsory acquisition of urban agricultural land are tax exempt under Section 10(37) of the Income Tax Act.
If your agricultural land wasn’t sold in any of the above cases, you can seek exemption under Section 54B.
Section 54B: Exemption on Capital Gains From Transfer of Land Used for Agricultural Purpose
When you make short-term or long-term capital gains from transfer of land used for agricultural purposes – by an individual or the individual’s parents or Hindu Undivided Family (HUF) – for 2 years before the sale, exemption is available under Section 54B. The exempted amount is the investment in a new asset or capital gain, whichever is lower. You must reinvest into a new agricultural land within 2 years from the date of transfer.
The new agricultural land, which is purchased to claim capital gains exemption, should not be sold within a period of 3 years from the date of its purchase. In case you are not able to purchase agricultural land before the date of furnishing of your income tax return, the amount of capital gains must be deposited before the date of filing of return in the deposit account in any branch (except rural branch) of a public sector bank or IDBI Bank according to the Capital Gains Account Scheme, 1988.
Exemption can be claimed for the amount which is deposited. If the amount which was deposited as per Capital Gains Account Scheme was not used for the purchase of agricultural land, it shall be treated as capital gains of the year in which the period of 2 years from the date of sale of land expires. If you wish to know more about investment choices with good capital gains potential, please invest with ClearTax Invest. Our handpicked plans can help you build a portfolio that is best suited to your financial goals and risk profile.
Q: Is the benefit of indexation available for computing capital gains arising on sale of a short-term capital asset?
Capital gains is determined by reducing the purchase price from the sale price. However, for an asset that has been held for a long time, it would not be appropriate to determine gains by merely reducing purchase price from sale price without giving any effect to the inflation. Hence, the concept of indexing the purchase price has been brought in. This way, the indexed purchase price can be reduced from sale price to determine gains. So, indexation applies only to assets held for long-term.
Q: What is the rate of tax on long-term capital gains on sale of house property?
Long-term capital gains on sale of house property is taxable at the rate of 20% flat on the quantum of gains made
Q: Can I set off my short-term capital loss against any other head of income?
First and foremost, capital losses can be set off only against capital gains. Accordingly, short-term capital losses can be set off against any income under capital gains be it short-term or long-term. However, long-term capital losses can be set off only against long-term capital gains.
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