What is Capital Gains Tax (CGT)?
Any profit or gain that a person makes through the sale of a capital asset is referred to as a capital gain. The profit generated by the sale of the capital asset is subject to taxation under the “Income from Capital Gain” heading.
Selling the capital asset for more than it costs to buy it results in a profit. Since there is merely a transfer of ownership and no sale, the inherited property is exempt from capital gains tax. The Income Tax Act of 1961 completely exempts any asset obtained as a gift through a bequest or inheritance. However, CGT will be applicable if the inheritor decides to sell the asset.
Types of Capital Gains Tax
Capital gains tax is the term used to describe the tax imposed on gains made from the sale of capital assets. Short-term and long-term capital assets are the two categories into which capital assets are often divided.
Short-term Capital Asset
Assets that taxpayers retain for 36 months or less from the date of transfer are regarded as short-term capital assets. For immovable properties such as house property, building, or land, this threshold has been 24 months since FY 2017-18. In the case of some assets, this threshold is 12 months. When they are held for 12 months or less, they are considered short-term capital assets. This rule only applies if the asset’s transfer date is after July 10, 2014. (irrespective of the date of purchase). The following are those assets:
- Preference or equity shares of a business listed on a recognized Indian stock exchange
- Securities, such as bonds, debentures, and government securities, that are listed on a recognized stock exchange in India
- UTI units, whether they are quoted or not
- Units of equity-oriented mutual funds, whether they are quoted or not
- Zero-coupon bonds, whether they are quoted or not
Long-term Capital Asset
Assets held by taxpayers for a period exceeding 36 months are regarded as long-term capital assets. In the case of immovable assets, such as building, house property, and land, an asset is considered a long-term capital asset if it is held by its owner for 24 months or more. The following list of assets is considered long-term capital assets if they are held for more than 12 months.
- Preference or equity shares of a business listed on a recognized Indian stock exchange
- Securities, such as bonds, debentures, and government securities, that are listed on a recognized stock exchange in India
- UTI units, whether they are quoted or not
- Units of equity-oriented mutual funds, whether they are quoted or not
- Zero-coupon bonds, whether they are quoted or not
Tax Rates on Different Capital Assets – LTCG vs STCG
According to the Union Budget 2018, the long-term capital gains (LTCG) on sales of listed stocks over INR 1 lakh are subject to a 10% tax, while the short-term capital gains (STCG) are subject to a 15% tax. Additionally, long-term and short-term capital gains are subject to taxation in the case of debt mutual funds. Therefore, the LTCG on debt mutual funds is taxed at 20% with indexation and 10% without indexation, while the STCG on debt mutual funds is added to the taxpayer’s income and taxed at the individual’s IT slab rate. The adjustment of purchasing value for inflation is known as indexation.
Long-term capital gains (LTCG) on equity-based mutual funds are only taxable if the gains surpass INR 1 lakh. LTCG in these funds over and above INR 1 lakh without indexation is taxable at 10%. Short-term capital gains on equity mutual funds are subject to a tax of 15%.
Tax Exemption on Capital Gains For a Residential House Property
According to the budget 2019 change to section 54, if a person sold a home and made capital gains of up to INR 2 crore, they can invest the money in two more houses. However, this service is only available once in a person’s lifetime. The seller must build or purchase a new house using the capital gains generated within three years of the property transaction.
Terms That Should be Kept in Mind
Full Value Consideration
Full value consideration is the sum of money the seller will or already has received in exchange for transferring the capital asset. Even if the seller has received no compensation for the sale, capital gains tax is still taxable in the transfer year.
Cost of Acquisition
The seller’s expenses to purchase the capital asset are known as the cost of acquisition.
Cost of Improvement
The cost of improvement refers to the expenditure incurred by sellers when making any changes or additions to the capital asset.
When Can You Invest in the Capital Gains Account Scheme?
Finding a good seller, obtaining sufficient finances, and organizing the paperwork all take time when buying a new property. Therefore, the Income Tax Department supports these restrictions positively.
The Capital Gains Account Scheme, 1988 permits capital gains to be placed in PSU banks or other banks if they have not yet been invested as of the deadline for filing income tax returns, typically July 31 of the fiscal year in which the property is sold. No tax is due on the amount deposited because it can be deducted from capital gains.
What are Capital Assets?
Furthermore, land, housing property, buildings, trademarks, vehicles, leasehold rights, machinery, and jewelry are considered capital assets. In addition, capital rights include all kinds of legal, management, and control rights. The following items, however, do not fall within the category of capital assets.
- Agricultural land in a rural location
- Stock on trade
- Personal used items like furniture and clothing
- Consumable stores and raw materials held for work or business
- Gold deposit scheme gold bonds
- National defense gold bonds, special bearer bonds, and 6.5% gold bonds
Other Investment Alternatives
To expand your portfolio, it is always a good idea to consider various investment alternatives. Thus, your risk is reduced, and your rewards are maximized. You can make investments in safer options such as fixed deposits and government bonds. Consider investing in stocks if you have a high-risk tolerance. One of the rapidly growing investment opportunities made possible by technology is P2P lending. The FMPP® from LenDenClub 100% investors have earned between 10 to 12% p.a. based on returns earned in Sep., Oct., and Nov. 2022.
Conclusion
Compared to selling an identical asset in less than a year, the tax on a long-term capital gain is usually always cheaper. The highest long-term rate is not imposed on the majority of taxpayers. Tax law encourages you to keep onto capital gain-eligible assets for a year or longer.
