Many types of taxes are levied in India. These taxes are of different types. Individuals have to pay tax according to their income. One such tax is the capital gains tax. Information related to this is being given through this article.
What are capital gains tax?
To understand capital gains tax, first we need to know what is capital gain –
- Capital gain is a type of profit that a person receives through the sale of capital assets.
- The profit received through sale falls in the category of income and is taxed under the Income Tax Act, 1961.
- The Act states that income derived from the sale of any type of property such as commercial space or house, land, equity, debentures, jewelry, machinery, trademarks, patents, vehicles, leases etc. will be assessed under capital gains tax.
- Hence after the sale of such assets the person has to pay 10% and 15% capital gains tax respectively for long term capital gains or short term capital gains.
- Tax is also payable for inherited property which has not been sold under this category of tax. However, capital gains tax is not levied on agricultural land, certain bonds etc.
Types of capital assets
Capital assets can be divided into two categories. Which are summarized below –
Short term capital assets – Short-term capital assets are those which are held for a period of less than 3 years. For real estate like land, building and house, this period has been fixed for 24 months.
Long term capital assets – Assets held for more than 36 months are classified as long-term capital assets.
Capital gains tax exemption
Tax exemption on capital gains can be availed under Section 54, Section 54F and Section 54EC. More information about it is given below –
section 54 – Gains tax benefits on buying another house by selling the house
When you use the capital gains from the sale of one property to buy or construct another property as a house, you can claim tax exemption under Section 54. You can get a maximum of 2 exemptions in a lifetime under this provision, provided the capital gain does not exceed 2 crores. However, you can avail this rule only if certain conditions are met.
section 54F – Gains tax benefits on capital gains from sale of any property other than house property
Under this provision, you can get tax exemption on capital gains from the sale of long-term assets other than house property. The tax exemption can be availed under section 54F when the entire proceeds from the sale are invested to buy a new property and not just capital gains. The benefit of this exemption is given for the new property purchased one year before the sale of the property or for the property purchased 2 years after the sale of the property. If you use capital gains for the construction of another asset three years after selling the property, you can still get an exemption under this provision.
Section 54EC – Tax benefit on sale of house property to reinvest in specific bonds
An exemption can be claimed under Section 54EC when capital gains from the sale of the first property are used to purchase the specific bond. You can avail tax benefits by using capital gains to buy the following types of bonds –
- To purchase bonds issued by NHAI (National Highways Authority of India) or REC (Rural Electrification Corporation).
- The taxpayer has to reinvest the capital gains into bonds within six months.
- The invested capital can be redeemed after 3 years, but cannot be sold before the 3-year period from the date of sale.
Procedure for calculating long term capital gains
Estimate the total value of your property. After this deduct the following expenses –
- Expenses incurred due to transfer
- Money spent on acquisition
- Amount spent in renovation or improvement
You can calculate the long-term capital gains by deducting the exemptions under Sections 54F, 54EC and 54 from the amount that comes after deducting the above.
Procedure for calculating short term capital gains
Estimate the total value of your property. After that cut the following from it –
- Expenses incurred due to transfer of property
- Money spent on its acquisition
- Amount spent in renovation or improvement
The amount left after all the above deductions will be short term capital gains.
