Capital Gains Tax in India: An Explainer
In India, any profit or gain arising from the sale of a capital asset is deemed as capital gains and is charged to tax under the Income-tax Act, 1961. According to the Act, a capital asset is any kind of property held by an individual, such as buildings, lands, bonds, equities, debentures, and jewelry. It excludes stock-in-trade, agricultural land, and certain specified bonds.
Profits arising from the sale of capital assets is classified as Short-Term Capital Gains (STCG) or Long-Term Capital Gains (LTCG), depending on the period for which the capital asset has been held.
Generally, if a capital asset is held for less than 36 months, the profits arising from its sale are treated as STCG. LTCG, on the other hand, are profits arising from the sales of assets held for 36 months or more. In the case of listed equity shares and equity oriented mutual funds, a holding period of 12 months or more qualifies as ‘long-term’.
From the fiscal year 2017-18 onward, the holding criteria of 36 months has been reduced to 24 months for immovable property, such as land, building, and residential property. The change is not applicable to movable property, such as jewelry, furniture, and automobiles.
Rate of taxation
In India, tax on capitals gains depends on two factors: first, the nature of the capital asset and, second, the period for which it has been held.
While STCG arising from the sale of capital assets, such as property, gold, and bonds are taxed as per the individual income tax slab rate, LTCG on the sale of such assets are taxed at 20 percent (plus a cess of 3 percent on property and gold) and 10 percent (on bond).
In comparison, the LTCG on listed equity shares and equity oriented mutual funds enjoy tax exemption on the condition that the Security Transaction Tax (STT) is paid on purchase of such transactions.
The STCG on listed securities is, however, taxed at flat 15 percent. This is to deter those who invest only to make quick profits by speculating on the stock market, and incentivizes individuals to make long-term investments in companies, which benefits overall economic growth.
Tax rates are different for debt-oriented mutual funds. Debt-oriented mutual funds are those where the amount invested in equity and equity related instruments is less than 65 percent, whereas those holding more than 65 percent of corpus in equity are called equity mutual funds.
Calculating capital gains in India
To calculate short-term capital gains in the transfer of capital assets, the cost of acquisition along with other expenses are deducted from the total sale price of the asset. Other expenses include the expenditure that is incurred wholly and exclusively in the transfer of asset. For example, brokerage, commission, and advertisement expenses.
In case of long-term capital gains, it is the indexed cost of acquisition along with other expenses that is deducted from the total sale price of the asset. Indexed cost of acquisition is the cost of acquisition adjusted for inflation. This cost is calculated by applying the Cost Inflation Index (CII) to the purchase price of the asset.
Share and equity
Similar to the real estate capital gain calculation, expenses that are incurred during the transfer or sale of shares or mutual funds can be deducted from sale proceeds when calculating capital gains. For example, the broker’s commission and demat account fee. However, the securities transaction tax is not allowed as a deductible expense.
Given the volatility in the equity market, if there is a short-term capital loss, it can be set-off against other STCG or it can be forwarded for up to eight subsequent financial years. However, long-term capital loss is not allowed to be set off or carried forward.
Calculating capital gains for NRIs
As in the case of resident Indians, non-resident Indians (NRIs) selling property in India after 36 months of purchase are subject to LTCG tax of 20 percent. Likewise, if the property is sold within 36 months of purchase, the STCG tax rate is as per their individual income tax slab.
In addition to the capital gains tax, NRIs are subject to a TDS of 30 percent and 20 percent on their short-term and long-term capital gains, respectively.
However, NRIs can get a waiver of their TDS on LTCGs by investing in another property in India within two years of selling the old property. In the case of capital gains bonds, the re-investment needs to be made within six months to get the tax deducted at source waived off.
For tax exemption, NRIs selling their properties can apply for a tax exemption certificate to the income tax authorities, under the Income-tax Act. The application must be made under the same jurisdiction that the NRI’s Permanent Account Number (PAN) belongs to, along with documents proving re-investment of capital gains.