Capital Gains Tax: A Comprehensive Guide 

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Every time you sell an investment, whether it’s shares, mutual funds, property, or gold, the purpose is to earn a profit. But it is not the entire profit you might keep for yourself, which is why the concept of Capital Gains Tax was introduced. Most of the valuable assets you hold could be classified as capital assets, the sale of which attracts capital gains tax. Capital gains tax is the tax you pay on the profit made from selling a capital asset, and understanding it can make a huge difference in how much of your earnings you actually retain.     

These assets are generally classified as short-term or long-term based on the holding period and taxed differently. The Long-Term Capital Gains tax rate is 12.5% and the Short-Term Capital Gains tax rate is 20% or at slab rates as updated in Budget 2024. 

What is Capital Gains Tax?

Capital gains tax in India is the tax levied on profits earned from the sale of capital assets, such as property, stocks, or mutual funds. The gain is treated as income and is taxable in the year the asset is transferred. Not all countries impose a capital gains tax, and most have different tax rates for individuals and corporations. Countries that do not impose a capital gains tax include Bahrain, Barbados, Belize, the Cayman Islands and many more. 

Capital gains taxes are payable on the most valuable items or assets sold at a profit. Antiques, shares, precious metals and second homes could all be subject to the tax if the profit is large enough. The government sets this lower profit limit; if the profit falls below it, it is tax-free. The profit is, in most cases, the difference between the amount (or value) an asset is sold for and the amount it was bought for.      

Types of Capital Gains: 

There are two types of capital gains based on the holding period of the assets:

• Short-Term Capital Gains (STCG): For assets held for less than 12 months in the case of equity shares, units of equity-oriented mutual funds, and units of business trusts. In case of other assets, the holding period is 24 months. 
• Long-Term Capital Gains (LTCG): For assets held over 12 months in the case of equity shares, units of equity-oriented mutual funds, and units of business trusts. In case of other assets, the holding period is 24 months. 

Meaning of 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 an Indian company. It also includes rights of management, control, or any other legal rights.

Exceptions to Capital Asset

• Any stock, consumables or raw material, held for the purpose of business or profession.
• Personal goods such as clothes and furniture are held for personal use.
• Agricultural land in rural India.
• 6.5% gold bonds (1997) or 7% gold bonds (1980) or National Defence gold bonds (1980) issued by the Central Government.
• Special bearer bonds (1991).
• Gold Deposit Bond issued under the Gold Deposit Scheme (1999) or deposit certificates issued under the Gold Monetisation Scheme, 2015 and Gold Monetisation Scheme, 2019, notified by the Central Government.

What is Capital Gains Tax Indexation 

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To understand capital gains tax indexation, it is first essential to understand what indexation is, the concept of the cost inflation index, and the concept of capital gains tax indexation.

What is Indexation?

Indexation is a systematic process that enables individuals to protect their earnings against tax erosion. The method that allows individuals to adjust investment costs for inflation using a price index. Through indexation, investors not only learn to account for inflation but also to lower their tax liability. 

If individuals hold assets such as equities, preference shares, UTI units, zero-coupon bonds, and equity bonds for over a year, they would be treated as long-term capital assets.  

Concept of Cost Inflation Index

The rate of inflation tends to increase over the years. Therefore, it is wise to take this into account when estimating one’s tax liability and building an index cost for capital gains. Typically, the Cost Inflation Index (CII) is a measure of inflation. The long-term capital gain index is calculated using the latest cost inflation index prepared by the Government of India. To calculate long-term capital gains, an individual needs to determine the asset’s indexed cost. 

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For Example:

Suppose Mr X bought a housing property on 7th August, 2004, for ₹30 lakh and sold it on 6th April,2018, for ₹35 lakh. What is the indexed cost of acquisition?

Sol. (Cost of acquisition* CII at the time of sale)/CII at the time of purchase

(₹30 lakh*280)/113 = ₹74.33 lakh

Therefore, the capital gain would be ₹ (85-74.33) lakh = ₹10.67 lakh

The Cost of Inflation index table below helps calculate the index cost for capital gain. 

Short-Term Capital Gains Tax on Shares

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When you sell equity shares listed on a stock exchange within 12 months of purchasing them, you may incur a short-term capital gain (STCG) or a short-term capital loss (STCL). Furthermore, if you sell shares you have held for more than 12 months, you incur long-term capital gains (LTCG).

A short-term capital gain occurs when you sell shares at a higher price than their purchase price. Currently, short-term capital gains on shares are taxed at 20% under Section 111A, effective from 23rd July 2024.

Calculation of Short-Term Capital Gain Tax on Shares

Suppose you purchased 1000 shares of a particular company at ₹200 per share in July 2024. Now you sell the same shares at a profit of ₹80 per share, i.e., at a share price of ₹280 in October 2024. Furthermore, you paid a brokerage of ₹2,000.

Initial investment amount = ₹200*1000 = ₹2,00,000

Full value of consideration = ₹280*1000 = ₹2,80,000

Here’s how you can calculate your short-term capital gains and tax liability-

Long-Term Capital Gain Tax on Shares

In India, profits from the sale of assets held for more than 24 months are subject to long-term capital gains tax. The kind of asset and the relevant tax legislation determine the tax rate on long-term capital gains. 

If long-term capital gains exceed INR 1 lakh, they are currently subject to a 12.5% long-term capital gains tax on listed assets. However, long-term capital gains will not be subject to taxation if the securities transaction tax (STT) was paid on the acquisition and sale of securities.  

The long-term capital gains tax rate for other assets, such as gold or real estate, is 12.5%, with an indexation advantage. This indicates that the asset’s purchase price, adjusted for inflation, determines the tax rate. 

Calculation of Long-Term Capital Gains Tax 

For the calculation of the Long-Term Capital Gains (LTCG) tax, the tax is charged on the profit gained from the sale of an asset held for longer than 24 months. The asset type and the holding period determine the LTCG tax rate. 

For Example, the LTCG tax on equities, mutual funds and stocks is 12.5% if the profits reach ₹1.25 lakh in a fiscal year. The LTCG tax rate is 12.5%, with indexation for other assets such as real estate, gold, and debt mutual funds. 

To compute the LTCG tax, perform the following steps-

• Calculate the Asset’s Sell Value
• Calculate the Cost of Acquisition.
• Calculate the Indexed Cost of Acquisition.
• Calculate the LTCG.
• Calculate the Tax.

Let’s assume you have invested ₹40 lakh in equity funds in 2020. By 2024, your funds are collectively valued at ₹55 lakh. 

The formula to calculate LTCG tax = Gains (minus) exemption amount* rate of tax

Here, gains are calculated by subtracting the redemption amount from the investment amount. From the above example, this would be ₹55 lakh (minus) ₹40 lakh = ₹15 lakh

Previous LTCG@ 10%, (Exemption – ₹1 lakh)- Regulation Before Union Budget 2024

(Gains – ₹1 lakh)*10%.

₹15,00,000 – ₹1,00,000)*10% = ₹14,00,000*10% = ₹1,40,000. 

New LTCG@ 12.5%, Exemption – ₹1.25 lakh)- Regulation After Union Budget 2024. 

(Gains – ₹1.25 lakh)*12.5% (₹15,00,000-1,25,000)*12.5% = 13,75,000*12.5% = ₹1,71,875. 

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Capital Gains Tax on Property

Many people own property as assets. It is significant to take into account the applicable capital gains tax on the sale or transfer of such property. Capital gains tax on the property is explicitly imposed on the monetary profit from the sale or transfer of residential properties or lands by an individual who does not consider it a profession or such income. Capital gains on property are taxed differently under these two types. The tax rate on long-term and short-term capital gains can be described as follows – 

Capital Gains Tax Slab Vs Flat Rate

Capital Gain Tax on Debt Mutual Funds

The taxation of debt mutual funds depends on the purchase date and the holding period. For years of acquisition on or after 1st April, 2023, any gains upon transfer, redemption, or maturity will be treated as short-term capital gains and taxed at the investor’s applicable slab rate, irrespective of the holding period. 

What is a Debt Mutual Fund?

Debt mutual funds are primarily investment vehicles that invest in fixed-income securities, including bonds, treasury bills, commercial paper, debentures, and other debt instruments. The returns generated by debt funds are primarily driven by interest income and occasional capital gains, making them attractive to conservative investors seeking secure, predictable returns. 

Capital Gain Tax Exemption in India

The sale of capital assets may result in a capital gain, which may be subject to tax under the Income Tax Act. To save tax on these capital gains, a few capital gains exemptions/deductions are available. Thus, one needs to plan benefits, taking into account all the relief available under the law. 

Exemptions Available for Capital Gains

The exemptions under the capital gains we will discuss below:

• Section 54 – Profit on sale of Property used for residential purposes
• Section 54B – Capital gain on transfer of land used for agricultural purposes
• Section 54D – Compulsory acquisition of land and buildings used in an industrial undertaking
• Section 54EC – Investment in certain bonds
• Section 54EE – Investment in units of a specified fund
• Section 54F – Investment in residential house
• Section 54G – Shifting of Industrial undertaking from urban to rural areas
• Section 54GA – Shifting of industrial undertaking from an urban area to an SEZ.

Conclusion

Capital Gains Tax is levied on the profit earned from the sale of capital assets such as stocks, mutual funds, property, or gold, and other valuable assets. The tax ensures that profits from investments are fairly taxed while offering avenues to minimise liability through exemptions, deductions, and indexation. In India, earnings from the sale of assets held for more than 24 months are subject to long-term capital gains tax. The kind of asset and the relevant tax legislation determine the tax rate on long-term capital gains. Indexation is a systematic process that enables individuals to protect their earnings against tax erosion. The method that allows individuals to adjust investment costs for inflation using a price index. Many people own property as assets. It is significant to take into account the applicable capital gains tax on the sale or transfer of such property.

FAQs

What is the Capital gains tax? 

Ans. Capital gains tax in India is the tax levied on profits earned from the sale of capital assets, such as property, stocks, or mutual funds. The gain is treated as income and is taxable in the year the asset is transferred. The government sets this lower profit limit; if the profit falls below it, it is tax-free. The profit is, in most cases, the difference between the amount (or value) an asset is sold for and the amount it was bought for. 

Should TDS be deducted on Capital Gains on payments made to NRI?

Ans. The person buying the property must deduct taxes at the rate applicable to the NRI’s income slab for the capital gains, if the property is a short-term asset. If the property is a long-term asset, a 20% LTCG tax is deducted.

What is the rate of tax on Long-Term Capital Gains on the sale of house property?

Ans. If the transfer is made before 23rd July 2024, Long-term capital gains on the sale of house property are taxable at 20% on the gains, with indexation benefit. If the transfer date is from after 23rd July, 2024, and the taxpayer has the option to pay tax either at 12.5% without indexation or at 20% with indexation on real estate transactions.

What do you mean by capital assets?

Ans. Land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewellery are a few examples of capital assets. This includes having rights in an Indian company. It also includes rights of management, control, or any other legal rights.

Can I set off my short-term capital loss against any other head of income?

Ans. First and foremost, capital losses can be set off only against capital gains. Accordingly, short-term capital losses can be set off against both short-term and long-term capital gains. However, Long-term capital losses can be set off only against long-term capital gains.  

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