Capital gain guide

Capital Gain

1. What is “Capital Gain”?

Capital Gain is defined as any profit or gain that arises from the sale of a ‘capital asset’. This capital gain is charged to tax in the year in which the sale or transfer of the capital asset takes place.


Capital Asset

2. What is the meaning of Capital Asset?

The term “Capital asset” means:

  • Immovable assets such as Land, building or House property
  • Financial assets such as stocks, bonds, mutual funds
  • Intangible assets such as Trade marks, brand name, goodwill, copyrights, patents, technical know-how relating to the production of goods and services
  • Movable assets such as Gold,jewelry
  • Archaeological collections, drawings, paintings, sculptures; orany work of art
  • Any rights in or in relation to an Indian company including rights of management or control or any other rights whatsoever
  • Any securities held by a Foreign Institutional Investor

3. Are all assets defined as Capital Assets?

The following assets are excluded from the definition of Capital Assets

  • Any stock-in-trade, consumables or raw material held for the purpose of business or profession
  • Personal effects such as clothes and furniture held for personal use.
  • Agricultural land in rural India
  • 6½% gold bonds, 1977or 7% gold bonds, 1980or national defense gold bonds, 1980 issued by the central government
  • Special bearer bonds, 1991
  • Gold deposit bond issued under the gold deposit scheme, 1999
  • Deposit certificates issued under Gold Monetization Scheme, 2015

4. I own agricultural land in rural India, is it considered a Capital Asset as per the Income Tax Act?

For the purpose of exclusion as a Capital Asset, rural Area is defined as follows:

From A.Y. 2014-15-Any area which is outside the jurisdiction of a municipality or cantonment board, having a population of 10,000 or more.

Further, if it does not fall within a distance (to be measured aerially) given below – (population is as per the last preceding census).

2 kms from local limit of municipality or cantonment board If the population of the municipality/cantonment board is more than 10,000 but not more than 1 lakh
6 kms from local limit of municipality or cantonment board If the population of the municipality/cantonment board is more than 1 lakh but not more than 10 lakhs
8 kms from local limit of municipality or cantonment board If the population of the municipality/cantonment board is more than 10 lakhs

5. What are Short-Term Capital Assets?

An asset is defined as Short Term Capital Assetif it held for less than 36 months. An asset other than a Short-Term Capital Assetis regarded as a Long-term capital asset However, in certain cases the holding period of STCA is defined as follows:

  • Asset held for less than 24 months in the case of immovable property being land, building, and house property
  • Asset held for less than 12 months in the following cases:
    • A. Equity or preference shares in a company listed on a recognized stock exchange in India
    • B. Securities (like debentures, bonds, govt. securities etc.) listed on a recognized stock exchange in India
    • C. Units of UTI, whether quoted or not
    • D. Units of equity oriented mutual fund, whether quoted or not
    • E. Zero coupon bonds, whether quoted or not

6. What is Short-Term Capital Gain?

Profit from the sale of a Short-Term Capital Assetis termed as Short-Term Capital Gain.


7. What is the tax rate onShort-Term Capital Gains? How can I save Short-Term Capital Gains tax?

Short term capital gains are added to the total income and you need to pay income tax as per your income tax slab. For example, if Simran is in the 30% tax bracket, her short-term capital gains will be taxed at 30%.

Tax on short-term capital gain if securities transaction tax is applicable:

If securities transaction tax is applicable, the short-term capital gain is taxable at the rate of 15% +surcharge and education cess.


8. How to calculate short term Capital Gains?

Short Term Capital Gain = Sale Price – (Cost of Acquisition + Cost of Improvement + Expenses on Transfer)

Let’s explain this with the help of an example

Simran purchased a residential house in January 2017 for Rs. 20,00,000. She sold the house in January 2018 for Rs. 30,00,000. Expense on Transfer was Rs. 20,000.

She held the capital asset i.e. residential house for less than 24 months, hence the asset is a Short-Term Capital Asset.

Short Term Capital Gain = 30,00,000 being Sale Price – (20,00,000 being Cost of Acquisition +Rs. 20,000 being Expenses on Transfer) Short Term Capital Gain =Rs. 9,80,000


9. What is the meaning of Expenses on Transfer in relation to a capital asset?

Expenses on Transfer or Cost of Transfer include any expenditure incurred, whether directly or indirectly, for the purpose of transfer/ sale of a capital asset. Following are some examples of Expenses on Transfer:

Advertisement expenses

  • This includes cost of inserting advertisements in newspapers or on the internet for sale of the asset and commission paid to auctioneer, etc.

Brokerage or commission paid

  • This includes Brokerage or commission paid to broker for securing a purchaser in the case of sale of immovable property being land, building, and house property, or
  • Broker’s commission related to thesale of shares in the market where transaction has taken place through a broker

Stamp duty, registration fees

  • The transfer of immovable property being land, building and house property attracts stamp duty and statutory registration fees.

Legal expenses

  • legal expenses incurred for preparing conveyance and other documents

Travelling expenses

  • This includes expenses to get to the place where the asset is located in order to complete the transfer procedure. In case of house property there is a need for the registration which will require the presence of the buyer and in such a situation the individual will have incurred the expense to travel for this purpose.

10. What are Long-Term Capital Assets?

An asset is defined as a Long-Term Capital Asset (LTCA) if it is held for more than 36 months. In other words, an asset other than a Short-Term Capital Asset is regarded as a Long-term capital asset.

However, in certain cases the holding period of LTCA is defined as follows:

  • Asset held for more than 24 months in the case of immovable property being land, building, and house property
  • Asset held for more than 12 months in the following cases:
    • A. Equity or preference shares in a company listed on a recognized stock exchange in India
    • B. Securities (like debentures, bonds, govt. securities etc.) listed on a recognized stock exchange in India
    • C. Units of UTI, whether quoted or not
    • D. Units of equity oriented mutual fund, whether quoted or not
    • E. Zero coupon bonds, whether quoted or not

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