The taxation of capital gains in India – how it works and what you need to know

Capital gains are the profit you make when you sell an asset that you have owned for more than one year. In India, capital gains are subjected to both short-term and long-term tax rates that vary from person to person and from asset class to asset class depending on how long you have held the asset, how much your tax slab is, etc. In this article, we will explain to you in detail how capital gains are taxed in India and give you an overview of what you need to know about them. Read on!

Which Assets are taxable under capital gains?

Capital gains refer to profits made from selling a capital asset. These include both tangible assets (such as land, cars, jewellery) and intangible assets (such as patents, shares). There are two types of capital gain: short-term capital gain (assets held for less than 12 months), which is taxed at a flat rate of 15%; long-term capital gain (assets held for more than 12 months), which is tax-free except for investments in equity. In addition, long-term financial assets are eligible for indexation benefit, wherein inflation since purchase will be added on before computing profit or loss.

Exemptions from capital gains

You don’t have to pay tax on capital gains if your total income (including those from other sources) is less than Rs. 2,50,000. But there are certain conditions attached. One is that during a financial year, your capital gain should not exceed Rs. 1 lakh. If your total income from all sources exceeds Rs. 2,50,000 but does not exceed Rs.

Capital Gain Calculation

Capital gains computation in India is a little different from other countries. Capital gain is defined as an increase in value in respect of any asset or property held for more than twelve months. Capital assets include land, buildings, machinery and shares. Profits on disposal (either by sale or transfer) are considered capital gains. However, agricultural land is exempted from paying capital gains tax in India. In addition, short-term gains made during a year are taxed at your normal income tax rate rather than being considered as long-term profit over 18 months, and there’s also no distinction between private property and business/professional premises either.

Calculating short term vs long term capital gains

Under Section 111A of Income Tax Act, Long-term capital gain arises in certain circumstances. For example, if a property is sold after more than 36 months from its purchase date; or if shares are sold after holding them for more than 36 months from their acquisition date. However, long-term capital gain has a lower tax rate: 20% (plus applicable surcharge and cess) for those in the highest tax bracket, whereas short-term capital gain is taxed at your normal income tax rate: 30% (plus applicable surcharge and cess). For example, let’s assume you earn Rs 1 lakh through short term capital gain; under normal income tax rates that would be Rs 30k plus applicable taxes.

Indexation benefit

If you have purchased capital assets during April 2010 or before, then there is an option available to you called indexation benefit on long term capital assets in India. What is it? Capital gain (LTCG) that results due to sale of long term capital asset, is adjusted with inflation rate in order to calculate actual LTCG. This reduced amount (actual LTCG) is then taxed at 10%. In simple words, if an individual sells his capital asset after 1 year from purchase date and paid tax on actual gain at that time, he can claim indexation benefit on long term capital assets in India in next 5 years. Here are some important points about indexation benefit

Important points about indexation benefit

If an asset is held for over a year, you can get some indexation benefit while computing your capital gain. This effectively increases your cost base by a small amount to adjust for inflation during that time. This means that if say gold were at Rs 1000 per gram when you purchased it, but has risen to Rs 2500 per gram at sale, then even though gold has appreciated sharply in value, its effect on your tax liability would be reduced because you will be using your cost price instead of current market price while computing your taxable income. This gives rise to indexation benefit which reduces net taxable income significantly for long term investors/traders.

Difference between Long Term Capital Gains (LTCG) & Short Term Capital Gains (STCG)

LTCG is a profit from sale of equity or mutual fund units or shares in an Indian company. These profits, when declared as LTCG, are subject to 10% tax in India. This is called short term capital gain (STCG). Long term Capital Gains are taxed at 20%.

Income tax slab for individuals on capital gains

Income tax is a major factor that investors or stock traders take into account before undertaking any such trading activity. Though there are many other factors like risk, speculation etc. involved in trading, tax becomes one of those determining factors for an investor with a medium to long term view. And since investments are taxed under different heads, so is capital gain on investments (only if they exceed Rs. 1 lakh). The same is true for an Indian resident individual who sells his shares held as stock-in-trade or investment assets after 1 year from allotment date (or) acquisition date. This applies whether listed or unlisted shares are sold and regardless of whether they were bought directly from SEBI registered stock exchanges or over-the-counter (OTC) marketplaces.

Exemptions under different sections on Capital Gains

There are some exemptions on Capital Gains in India under different sections, let us take a look at them. However, even if an asset qualifies for one or more exemptions from long-term capital gains tax in India under Sec 54EC or Sec 54D, there is still a possibility that such exemption will not be available to all types of assets. For example, only land is eligible for any exemption under Section 54EC, provided that it has been held for five years. It is also important to note that once your entire investment in a business exceeds 50% (or Rs 50 lakhs), even then any exempt long-term capital gain does not get exempted from short-term capital gain tax in India.