Tax levied on the capital gains of stocks, bonds, real estate, mutual funds, and properties is termed as capital gains tax in India.
By: Tavaga Research
Profit arising from the transfer of capital assets is known as capital gains. The capital gains are further classified into long term capital gains and short term capital gains. The levy which is charged on the net gains that an investor makes after selling an asset over and above the purchase price is known as capital gains tax in India.
What is Capital Gain?
The profit that is realized on the sale of a capital asset for a price higher than the original purchase price, is defined as capital gains. Inversely, if the purchase price is higher than the selling price of an asset, the capital value decreases and an investor incurs a capital loss.
Capital gains (losses) can be of two types, namely: Realized capital gains (losses), and unrealized capital gains (losses).
- A capital asset that has been sold for a profit (loss) is termed as a realized capital gain (loss)
Illustration: XYZ purchases 10 shares worth Rs. 1000 each and sells after 6 months for Rs. 1050. The purchase price of the investor is Rs. 10,000; the selling price is Rs. 10500 and the realized capital gain is Rs. 500
- Unrealized capital gain (loss) is defined as the profit (loss) made on investments that have not been sold yet
Illustration: ABC purchases 1000 shares worth Rs. 500 each. One year later, the share price drops to Rs. 250, however, the investor does not sell those shares and continues to hold them in the portfolio. This is termed as an unrealized capital loss
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What is considered as a Capital Asset?
Land and building, house, machinery, paintings, sculptures, securities, vehicles, trademark, patents are all considered as capital assets. The following items are excluded from the definition of capital assets:
- Stock-in-trade, raw materials owned for the purpose of business or profession
- Agricultural land in India
- 6.5% Gold bonds of 1977, 7% gold bonds of 1980, and National Defence Gold Bonds issued by the union government
- Special Bearer Bonds of 1991
- Gold Deposit Bonds which were issued under the gold deposit scheme of 1991
- Sovereign gold bonds issued by the RBI
What is the Capital Gains Tax in India?
Simply put, the tax that is levied on the capital gains of stocks, bonds, real estate, mutual funds, and properties is termed as capital gains tax in India. The capital gain tax which arises from the sale of a capital asset is taxed under the head of ‘Income from Capital Gain’. Long term capital gain tax and Short term capital gain tax are the two types of capital gains tax in India.
What is Long Term Capital Gains Tax in India?
Long term capital gains (LTCG) tax is the levy on the profits of assets that are held for a longer period. The holding period (long term) varies from asset to asset.
| Asset | Long term definition | Long Term Capital Gains Tax |
| Equity and equity-oriented mutual funds | More than 12 months | 10% on gains exceeding Rs. 1 lakh |
| Debt mutual funds | More than 36 months | 20% with indexation benefit |
| Real estate | More than 24 months | 20% with indexation benefit |
| Bonds, debentures, government securities | More than 12 months | 10% |
| Preference shares | More than 12 months | 10% |
What is Short Term Capital Gains Tax in India?
Short term capital gains (STCG) tax is the levy on the profits of assets that are held for a shorter period of time. The holding period (short term) varies from asset to asset.
| Asset | Short term definition | Short Term Capital Gains Tax |
| Equity and equity-oriented mutual funds | Less than 12 months | 15% |
| Debt mutual funds | Less than 36 months | As per income-tax slab |
| Real estate | Less than 24 months | As per income-tax slab |
| Bonds, debentures, government securities | Less than 12 months | As per income-tax slab |
| Preference shares | Less than 12 months | As per income-tax slab |
Exemptions on Capital Gains Tax
1. Section 54
The taxes levied on the capital gains arising from the transfer of a house property are based on their holding period as shown above. In the case of a house property, if held for less than 24 months, the applicable STCG tax is as per the income tax slab.
However, if the individual opts to hold it for more than 24 months, the applicable LTCG tax is 20% with indexation benefits. With section 54, an individual can opt for exemption if the capital gain from the sale of a property is reinvested into buying a maximum of 2 properties.
For claiming the full amount of LTCG as an exemption, the entire LTCG amount must be reinvested into buying a new property. Otherwise, an investor will have to settle with a pro-rata relief depending on the reinvestment amount.
In order to take the benefit of exemption, the LTCG on the transfer of house property must not exceed Rs. 2 crores.
2. Section 54 EC
If an individual prefers not to reinvest the LTCG arising from the sale of a property into another real estate, he/she can redeploy the funds in 54EC bonds issued by the National Highway Authority of India (NHAI), and Rural Electrification Corporation (REC).
The individual has to reinvest the LTCG in these bonds within 6 months of selling the property. The lock-in period of the reinvested amount is 5 years and the investment amount cannot exceed Rs. 50 lakhs.
3. Section 54F
To claim exemption from the capital gains arising out of the sale of gold, stocks, bonds, or mutual funds, the investor must utilize the entire sale consideration (not only the capital gains) to buy a residential property.
E.g.: If ABC sells gold worth Rs. 50 lakhs whose purchase price was Rs 30 lakhs, in order to claim an exemption on the capital gains of Rs. 20 lakhs, the investor must redeploy the entire sale consideration, i.e., Rs. 50 lakhs, to buy a new property.
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