What is Capital Gain? Capital gain means any profits or gains which arises from sale of capital assets. Capital gain is chargeable to income tax under the head capital gains in that financial year in which the transfer takes place. Taxation of capital gains, thus, depends on two aspects – capital assets and transfer.
What is Capital Asset?
Capital asset means any property whether it is movable or immovable, held by the assessee either for business purpose or personal purpose. For example: building. furniture, motor car or any other vehicle, jewellery, drawings, paintings, shares of companies, mutual funds etc.
According Indian Income Tax Act Capital gain is divided in to two parts i.e. Short term capital gain and long term capital gain.
TYPES OF CAPITAL GAIN
Capital gain is divided in two parts i.e Short Term Capital Gain and Long Term Capital Gain.
Short Term Capital Gain? A capital asset held by the assessee for not more than the specified period immediately preceding the date of its transfer is called as ‘short term capital asset’ and capital gain arising on its transfer is called ‘short term capital gain’. The specified period is as under:-
- Shares in a company
- Listed on stock exchange 12 months
- Transferred up to 10.07.2014 12 months
- Transferred after 10.07.14 and upto 31.03.2016 36 months
- Transfer on or after 01.04.2016 24 months
- Securities (other than units)
- Listed on stock exchange 12 months
- Unlisted 36 months
- Units of
- Equity oriented mutual fund 12 months
- Other than equity oriented mutual fund
- Transferred up to 10.07.2014 12 months
- transferred after 10.07.2014 36 months
- Units of
- Zero coupon bond 12 months
- An immovable property, being land or building or both
- Transferred up to 31.03.2017 36 months
- Transferred on or after 01.04.2017 24 months
- Other capital assets 36 months
An equity oriented mutual fund is one which invests more than 65% of its total investment in equity shares of domestic companies.
Illustration: Mr. X purchased 1000 equity shares of M/S XYZ Ltd. for Rs.20000/= on 20.10.2015 and sold all the shares on 18.05.2016 for Rs.30000/=. Calculate capital gain for F.Y.2016-17. These shares were subject to STT.
|Sale consideration of shares||Rs. 30000/=|
|Less: Cost of acquisition of shares||Rs. 20000/=|
|Short Term Capital Gain||Rs. 10000/=|
Clarification: Since the shares were sold by Mr. X before the expiry of 12 months from the date of purchase of shares, therefore the profit on sale of shares will be treated as short term capital gain.
Illustration: Mr. Y purchased a residential house for Rs.2500000/= on 12.10.2014 and sold it on 10.12.2016 for Rs.3200000/=. Calculate capital gain for F.Y.2016-17.
|Sale consideration of house||Rs.3200000/=|
|Less: Purchase price of house||Rs.2500000/=|
|Short Term Capital Gain||Rs.700000/=|
Clarfication: The house was sold by Mr. Y before the expiry of 36 months from the date of purchase of residential house, therefore, the profit on sale will be treated as short term capital gain under Indian income tax act.
Mr. X purchased debt oriented mutual fund for Rs.100000/= on 10.02.15 and sold them on 12.08.16 for Rs.120000/=. Calculate the capital gain.
|Sale consideration of non-equity mutual funds||Rs.120000/=|
|Less: Purchase price of house||Rs.100000/=|
|Short Term Capital Gain||Rs.20000/=|
Clarification: In this case, the gain of Rs.20000/= shall be treated as short term capital gains. Though, the period of holding is more than 12 months but as per the latest amendment in income tax in financial year 2014-15, the holding period of debt mutual fund is increased from 12 months to 36 with effect from 11.07.14 months in respect of short term capital gain.
What is Long Term Capital Gain? A capital asset held by the assessee for more than the specified period (as above) is called ‘long term capital asset’ and capital gain arising on its transfer is called ‘long term capital gain’. In other words and capital gain which is not short term capital gain, is called long term capital gain.
In case of bonus shares, the period shall be started from the date of allotment of such bonus shares.
Cost Inflation Index:- An adjustment is made in cost of purchase of long term capital assets to derive the actual long term capital gain. This adjustment is done because of the inflation of the assets from the date of purchase of long term capital assets to the date of sale of long term capital assets. Cost Inflation Index are published by the government from time to time for every financial year.
How to Calculate Index Cost? Indexation is done in case of long term capital gain from non-equity funds and other assets. Indexed cost of an asset is done as per the following formula:-
a) Indexed cost of acquisition up to 31.03.2017 =
Cost of acquisition X Cost inflation index for the year of Transfer
Cost inflation index for the year of acquisition or 1981-82, Which ever is the later
b) Indexed cost of Improvement =
Cost of improvement X cost inflation index for the year of Transfer
Cost inflation index for the year of improvement
Note: Base for indexation of cost acquisition/improvement shifted to 01.04.2001 i.e. 2001-02. Up to financial year 2016-17 the base year for indexation was 1981-82
COMPUTATION OF CAPITAL GAIN
Capital gain is calculated as follows:-
1. Ascertain the full value of sales consideration.
2. Deduct the followings from the full value of sales consideration:-
- Transfer expenditure like brokerage, legal expenses etc.
- Cost of acquisition of the capital assets/indexed cost of acquisition in case of long term capital assets.
- Cost of improvement to the capital asset/indexed cost of improvement in case of long term capital asset.
3. The balance left-over is the gross capital gain/loss.
4. Deduct the amount of permissible exemptions u/s 54 of Income Tax Act as explained below.
5. The balance is the net capital gain/loss, chargeable to income tax.
Capital Gain Exempt From Income Tax (U/S 54)
Long Term Capital Gain From Transfer of a Residential House: An individual/HUF will be exempt from tax if the assessee has within a period of one year before or two years after the date of such transfer purchased, or within a period of three years constructed a residential house.
The amount of exemption available is equal to the amount so utilized or the amount of capital gain, whichever is the less. If the whole of capital gain is not utilized before the filing of income tax return, the balance should be deposited in Capital Gain Account Scheme. The amount can be utilized within the specified period to purchase or construct a residential house.
Note: For availing this exemption, the assessee must not transfer the new house, within a period of three years from the date of its purchase.
Long Term Capital Gain Invested In Certain Bonds: Any long term capital gain shall be exempt from income tax if the whole of the amount of such capital gain is invested in long term specified assets i.e. bonds issued by NHAI, or Rural Electrification Corporation Ltd.
- Amount of long term capital gain must be invested in bonds within a period of 6 months from the date of transfer.
- With effect from 01.04.07 the amount of investment in bonds during the financial year, shall not exceed Rs.50 lakhs.
- Lock in period of the bonds is 3 years. It means these bonds can be redeemed after completion of three years from the date of investment.
- No deduction can be claimed by an income tax payee for investment made in these bonds u/s 80-C if exemption is already being claimed against long term capital gain u/s 54.
Capital Gains From An Assets Other Than Residential House: Any long term capital gain arising to an individual/HUF, from the transfer of any assets other than a residential house, shall be exempt if the whole of the net consideration is utilized within a period of one year before or two years after the date of transfer for purchase, or within 3 years in construction, of a residential house.
1. If the part of net consideration is so utilized, the amount of exemption shall be equal to:
Capital Gain x Cost of New Residential House
Amount of Net Consideration
2. If the amount is not utilized before the filing of income tax return, the balance should be deposited in Capital Gain Account Scheme. The amount can be utilized within the specified period to purchase or construct a residential house.
3. If a tax payer transfers the newly acquired residential house within a period of three years of its purchase or construction, then the amount of capital gains arising from the transfer of the original asset which was not charged to tax, shall become taxable as long term capital gains for the year in which the new asset is transferred.
4. The concession will not be available in case where the assessee owns more than one residential house on the date of the transfer of the original asset.
Rates of Tax on Capital Gains
Different rate of income tax are charged on short term capital gains and long term capital gains as explained below:
Income Tax on Short term Capital Gains: Short term capital gains on non-equity oriented funds and other assets, are included in gross total income of the assessee and after allowing permissible deductions under chapter VI-A, tax is charged at normal rates i.e. as per income tax slabs of the assessee.
Note: Short term capital gains from transfer of equity shares/units of an equity oriented mutual fund, subject to Security Transaction Tax (STT), shall be taxable 15%. Please note that no deduction under chapter VI-A, shall not be allowable against such short term capital gain.
EC 2% + S&HEC 1% will be added on capital gain tax payable.
Illustration: Mr. Y purchased Debt oriented mutual fund for Rs.75000/= on 12.06.15 and sold them on 08.04.16 for Rs.100000/=. Mr. Y is 40 years old and his other taxable income is Rs.300000/= Calculate the amount of capital gain tax of Mr. Y during the F.Y. 2016-17.
|Sale consideration of mutual funds||Rs.100000/=|
|Less: Purchase cost of mutual funds||Rs.75000/=|
|Short Term Capital Gain||Rs.25000/=|
Amount of income tax payable shall be calculated as below:-
Other Taxable Income of Mr. Y Rs.300000/=
Add: Short Term Capital Gain From debt funds Rs.25000/=
Total taxable income Rs.325000/=
Tax payable on above income Rs.7500/=
Add: EC 2% on Rs.7500/= Rs.150/=
Add: S&HEC 1% on Rs.7500/= Rs.75/=
Total Tax Payable Rs.7725/=
Note: Basic exemption limit of taxable income is Rs.250000/= for individuals during F.Y. 2016-17. Income tax rate for taxable income from Rs.250000/= to Rs.500000/= is 10% plus cess.
Clarification: Since the holding period of non-equity oriented funds is less than 12 months, then in this case his short term capital gain is Rs.25000/=. This amount of Rs.25000/= shall be added in his normal income and tax shall be charged according to his tax bracket or tax slabs. Please note that latest amendment in income tax in respect of F.Y. 2014-15, if the debt mutual funds are sold up to 10.07.14 then the holding period shall be 12 months and if the debt mutual funds are sold after 10.07.14 then the holding period shall be 36 months.
Example: Mr. Shyam purchased a residential house on 10.10.14 for Rs.40,00,000/= and sold it on 15.6.16 for Rs.50,00,000/=. In this case, short term capital gain shall be Rs.10,00,000/= and this amount will be added in his normal income and tax shall be charged as per tax slabs applicable on him.
Clarification:- It is the short term capital gain because Mr. Shyam sold the house within 36 month from the date of purchase therefore, it will be added in his total income.
Income Tax on Long Term Capital Gains in respect of other than equity shares or equity orinted mutual fund subject to STT: Flat rate of Income tax is charged 20% on Long term capital gains in respect of debt oriented mutual funds and other assets.
However, in respect of long-term capital gains arising on transfer of mutual funds other than equity oriented mutual funds up to 10.07.14 shall be taxable 20% of the capital gain computed after allowing indexation benefit or 10% of the capital gain computed without giving the benefit of indexation which ever is less.
Illustration: Mr. Y purchased 1000 units of debt oriented mutual fund on 10.10.2012 Rs.10/= per unit. He sold these units on 12.05.14 Rs.25/= per unit . Calculate the long term capital gain for F.Y. 2014-15.
Index Cost For F.Y. 2012-13 is 852, for F.Y. 2014-15 is 1024.
Computation of long term capital gain tax with indexation
Sale Price of 1000 units Rs.25/= Rs.25000/=
(Purchase cost of 1000 units Rs.10/= Rs.10000/=)
Indexed Cost of acquisition
10000 x 1024
————– = Rs.12019/=
Long Term Capital Gain Rs.12981/=
Tax payable on Rs.12981/= 20% Rs.2596/=
Computation of long term capital gain tax with out indexation
Sale Price of 1000 units Rs.25/= Rs.25000/=
Purchase cost of 1000 units Rs.10/= Rs.10000/=
Long Term Capital Gain Rs.15000/=
Tax Payable on Rs.25000/= 10% Rs.1500/=
We find that with indexation the amount of Long Term Capital Gain Tax Rs.2596/= and with out indexation the Long Term Capital Gain Tax amount is Rs.1500/=. So, the tax payable shall be Rs.1500/=.
Note: EC 2% + S&HEC 1% will be added on capital gain tax payable.
Clarification: As per the latest amendment of income tax act, if the debt oriented mutual funds are sold before 11.10.14, the long term capital gain can be calculated as per indexation and 10% without indexation, which ever is less.
Computation of Long Term Capital Gain tax after 10.07.2014
Illustration: Mr. Y purchased 1000 units of debt oriented mutual fund on 10.10.2010 Rs.10/= per unit. He sold 1these units on 01.01.15 Rs.35/= per unit . Calculate the long term capital gain for F.Y. 2014-15.
Cost index for F.Y.2010-11 is 711 and for F.Y. 2014-15 is 1024.
Sale Price of 1000 units Rs.35/= Rs.35000/=
Indexed Cost of acquisition
10000 x 1024
————– = Rs.14402/=
Long Term Capital Gain Rs.20598/=
Tax payable on Rs.20598/= 20% Rs.4120/=
Clarification: The concessional rate of tax 10/= on long term capital gain shall not be available on units of non-equity mutual funds with effect from 10.07.14.
Income Tax on Long Term Capital Gains in respect of equity shares or equity orinted mutual fund subject to STT:
No income tax is paid on long term capital gain in respect to equity funds and equity shares subject to share transaction tax. The holding period in respect of these type of investment is 12 months or more to determine the long term capital gain. No indexation is done in case of long term capital gain from equity oriented mutual funds and equity shares.
Basic Exemption Against Long Term and Short Term Capital Gains
In the case of resident individual or a HUF, the basic exemption limit will be allowed for calculating income tax on capital gains. It means while we calculate the taxable income of an individual or HUF and there is any shortfall in basic exemption limit then capital gain can be adjusted to reach minimum exemption limit. To reach basic exemption limit first the Short term capital gain (subject to 15% tax only) will be adjusted then Long term capital gain will be adjusted.
The surplus of capital gain (short term or long term) will be taxed as per rates prescribed for this purpose.
Mr. X (45 year old) had the following details for financial year 2016-17:-
- Long term capital gain subject to 20% Flat rate of income tax Rs.180000/=
- Income from business activities Rs.120000/=
- Interest from NCD (Non Convertible Debentures) Rs.5000/=
- Short term capital gain on sale of units subject to Securities Transaction Tax Rs.20000/=
- Amount deposited in Public Provident Fund RS.15000/=
Calculate basic exemption against capital gain and tax amount?
COMPUTATION OF TAXABLE INCOME AND INCOME TAX
|– BUSINESS INCOME||
|– INTEREST FROM NCD||
|GROSS INCOME BEFORE CAPITAL GAINS||
|LESS: DEDUCTION U/S 80-C OF CHAPTER VI-A|
|– DEPOSIT IN PUBLIC PROVIDENT FUND||
|NET INCOME BEFORE CAPITAL GAINS||
|BASIC EXEMPTION LIMIT FOR INDIVIDUAL FOR F.Y. 2016-17, IS RS.250000/=. TO AVAIL THIS LIMIT, RS. 140000/= OF CAPITAL GAIN CAN BE ADJUSTED. THEREFORE, THE FOLLOWING AMOUNTS WILL BE ADJUSTED TO REACH TO BASIC EXEMPTION LIMIT:-|
|ADD: SHORT TERM CAPITAL GAINS (SUBJECT TO 15% STT)||
|ADD: LONG TERM CAPITAL GAINS||
|BASIC EXEMPTION LIMIT||
|AFTER AVAILING EXEMPTION LIMIT, BALANCE OF LONG TERM CAPITAL GAIN, LEFT FOR TAXATION (180000-120000)||
|INCOME TAX 20% ON LONG TERM CAPITAL GAIN (balance)||
|EDUCATION CESS 2% ON 6000/=||
|SECONDARY & HIGHER EDUCATION CESS 1% ON 6000/=||
|TOTAL TAX PAYABLE||
Set off any loss against Short Term Capital Gains
In case of loss under any head except taxable long term capital loss, can be set off against the income from taxable short term capital gain. Taxable short term capital gain means the loss from debt oriented mutual funds or other capital assets. Short term capital loss from equity oriented mutual funds or equity shares subject to STT, can not be set off against taxable short term capital gains.
Illustration: Mr. X had the following details relating to income and losses in respect of F.Y. 2016-17:-
Short term capital loss from Equity Shares Rs.20000/=.
Short term capital Gain from debt funds Rs. 40000/=
Loss from business Rs.10000/=
Calculate the taxable amount
Short term Capital Gain from debt funds Rs.40000/=
Less: loss from business Rs.10000/=
Less: Short term capital gain from equity shares NIL
Net short term capital gain from debt funds Rs.30000/=
Clarification: Since the short term capital gain from equities is not taxable therefore the short term capital gain from equity shares also can not be set off against taxable short term capital gain.
Set Off Any Loss Against Long Term Capital Gains
If there is a loss under any head including taxable short term capital loss, can be set off against taxable Long Term Capital Gains.
Illustration: Mr. Y had the following details relating to income and losses in respect of F.Y. 2016-17:-
Business loss Rs.20000/=
Long term capital Gain from debt funds Rs.50000/=.
Short Term capital loss from debt funds Rs. 20000/=
Short Term Capital loss from equity shares Rs.5000/=
Calculate the taxable amount
Long term Capital Gain from debt funds Rs.50000/=
Less: Business Loss Rs.20000/=
Less: Short Term capital loss from debt funds Rs. 20000/=
Less: Short term loss from equity shares nil
Balance in Long Term Capita gain Rs.10000/=
Long Term Capital Gain Tax 20% Rs.2000/=
EC 2% on Rs.6000/= Rs.40/=
S&HEC 1% on Rs.6000/= Rs.20/=
Total tax payable Rs.2060/=
Clarification: Long Term Capital Gain Tax will be paid on non-equity mutual funds 20%. The EC 2% and S&HEC 1% will be added on tax. No loss from equity shares or equity oriented mutual funds subject to STT, shall be set off against taxable long term capital gains.
SET OFF AND CARRY FORWARD OF CAPITAL GAINS
1. Any long term capital loss can be set off only against long-term capital gain and against no other income. Any long term capital loss can be carried forward to the next eight assessment years and can be set off only against long term capital gain in those years.
2. Any short term capital loss can be set off against any capital gains (long term capital gain and short term capital gain) and no other income. Any short term capital loss can be carried forward to the next eight assessment years and can be set off against any capital gain (both long term and short term) and against no other income in those years.
- Long term capital gains from equity shares or units of an equity oriented fund, subject to Security Transaction Tax (STT), shall be fully exempt.
- No Indexation is done in case of Equity Oriented Mutual Funds or Equity Shares subject to security transaction tax.
- No indexation done in case short term capital gain or loss whether equities or debt fund.
- Any taxable loss (short term or long term) can be carried forward.
- Any short term capital loss or long term capital loss from equity shares or equity oriented funds subject to security transaction tax, can not set off against any taxable capital gains.
- No Deduction will be allowed under chapter VI-A in case of Long term capital gains.
- EC 2% + S&HEC 1% will be added on capital gain tax payable.