Capital Gain Tax in India is levied on profits from asset sales like stocks, bonds, imposed by the government.
In India, capital gains refer to profits earned from the sale of assets. The Union Budget of 1956–1957 established capital gains tax as a permanent fixture in the country’s taxation system.
The tax is levied on both short-term and long-term capital gains, with several rates and exemptions. This depends on the type of assets and the period they were held. India’s capital gains tax system aims to encourage long-term investments while providing revenue for the government.
Based on the timeline of holding an asset, capital gains against investment can be categorised into two types:
1. Short-term Capital Assets (STCA)
Any asset held for less than 36 months is known as a short-term capital asset. For instance, if you sell a property after 27 months of its purchase, the gain will be calculated as short-term capital gains.
However, the time limit for unlisted shares and immovable properties from FY 2017-18 is 24 months. There are some assets with a holding period of 12 months or less termed as short-term ones. But this rule is valid if the transfer date is after July 10, 2014.
A few examples of these assets include:
Shares of a company listed on a recognised Indian stock exchange
Securities (e.g., debentures, government securities, or bonds) listed on a recognized Indian stock exchange
Units of UTI, regardless of quotation
Units of equity-oriented mutual funds, regardless of quotation
Zero-coupon bonds, regardless of quotation
2. Long-term Capital Assets (LTCA)
An asset held for more than 36 months is known as a long-term capital asset. Assets like buildings, house properties, and land will be considered LTCA if held for more than 24 months (from FY 2017-18).
Certain short-term assets held for over 12 months, like zero-coupon bonds or debentures listed on the Indian stock exchange, are classified as LTCA.
The gains earned after you sell your debt and equity funds are calculated differently. Any fund which invests in equities (65% of the total portfolio or more) is known as an equity fund.
Funds |
On or Before April 1, 2023 |
Effective from April 1, 2023 |
|||
STCG |
LTCG |
STCG |
LTCG |
||
Debt Funds |
As per the individual’s income tax slab rates |
At 20% with indexation or 10% without indexation (whichever is lesser) |
As per the income tax slab rate of the individual |
As per the taxpayer’s slab rate |
|
Equity Funds |
15% |
10% on over ₹1 Lakh (indexation not included) |
15% |
10% on over ₹1 Lakh (without indexation) |
|
Here are some parameters included under deductible expenses:
1. Sale of House Property
The following expenses are deductible from the total selling price:
Expenses of the stamp papers
Commission or brokerage, which is paid for securing a buyer
Travelling expenditures with respect to the transfer - these could be incurred post the transfer gets affected
2. Sale of Shares
You are allowed to subtract the following expenses:
Commission of the broker for the shares which have been sold
Securities Transaction Tax (STT) is not permitted as a deductive expenditure
3. Sale of Jewellery
Expenses incurred for broker services facilitating the sale of jewellery can be deducted from the proceeds of the sale. Expenses which are deducted from the selling price of the assets for computing the capital gains are not permitted as a deduction under any other income head. This can only be claimed once.
The acquisition and improvement cost are indexed by applying the Cost Inflation Index (CII). It is computed to adjust for inflation across the holding period of the asset. This lessens your capital gains and raises your costs.
The indexed acquisition cost is computed as follows:
Indexed acquisition cost |
(Acquisition cost X CII of the asset’s transfer year)/(CII of the financial year 2001-2002 or the year when the seller held the asset for the first time, whichever comes after) |
The asset’s acquisition cost procured prior to April 1, 2001, must be the actual cost on April 1, 2001, according to the taxpayer’s option.
The indexed improvement cost is computed as follows:
Indexed improvement cost |
Improvement cost x CII (year of asset transfer) / CII (year of asset improvement) |
It must be noted that the improvements which are made prior to April 1, 2001, must not be taken into consideration.
FAQs on Capital Gains
What are the types of capital gains?
Capital gains can be classified into two types, namely, long-term capital gains (LTCG) and short-term capital gains (STCG). The classification is made based on the duration the assets are held.
What does a capital gain affect?
Capital gains are applicable to every type of investment and purchase for your personal usage.
Which income is charged to tax under ‘Capital Gains’?
Any profit which arises from the transfer of capital assets during the year is generally taxed under ‘Capital Gains’.
How can one calculate LTCG tax on shares?
All you have to do is check the sale price, associated costs and purchase cost. Then, subtract the acquisition cost and sale expenditures from the sale price to compute capital gains.
How can I save capital gains tax on property sale?
You can invest in the Capital Gains Account Scheme or bonds and offset all capital losses to save on capital gains tax.
What is the exemption applicable on capital gains tax?
Section 54 allows individuals or HUFs selling residential property to claim exemptions by reinvesting capital gains into another residential property's construction or purchase.
How to calculate capital gains tax on property sale?
The capital gains tax on your sale of property depends on the holding period. If it is less than 24 months, it will be short-term capital gains. In this case, it is added to your total income and taxed at your applicable income tax slab rate. If it is 24 months or more, it will be long-term capital gains. Here, the tax rate will be 20% with indexation.
What is the time limit for a capital gains account?
Under the Capital Gains Accounts Scheme (CGAS) of 1988, you can keep the amount in the account for up to 3 years from the date of sale or transfer of the asset.
What is the time limit to avoid capital gains tax?
You can avoid paying long-term capital gains tax if you transfer or sell the asset in less than 24 months. This also depends on the type of asset you are transferring or selling.
How much capital gain is tax-free on property?
Non-senior citizens are exempted from paying capital gains tax on the sale of your property if your total income is under ₹2.5 Lakhs. The same is extended to ₹3 Lakhs if you are between the age of 60-80 years.
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