Introduction to capital gains
Capital gain taxation is introduced in order to tax transaction involving capital assets which is considerable valued higher in practical sense.
Real estate transactions is dominant in case of capital gain tax collection, it is also the main area in which black money is generated and dumped, so many measures regarding regulation of cash transactions are done to bring these transactions under tax net.
Sharing of information by State Registration department about value of transactions executed to income tax department also enabled income tax department to track these transactions.
Buyers or sellers are not aware of capital gains transactions in real estate sector to the large extent which results in much more complications with regard to real estate transactions when the transaction is tracked and taxpayer is summoned.
It is best to take advisory from knowledgeable capital gains tax consultant in your city prior to entering in to transactions. We have focused on long term capital gain on land or building or both.
What is capital gains ?
- Capital gains is amount of gain or profit arising on transfer of capital asset during the financial year
- Capital asset means property of any kind held by the person whether not connected with his business
- Land, building, shares, jewellery made of any precious metals like gold, silver, platinum, precious stones, works of art and sculpture are considered as capital asset generally under income tax act, so if there is any transfer relating to the said asset it shall be assessed to income tax under the head income from capital gains.
- Rural agricultural land is not considered as capital asset, however classification of agricultural land is based on rules mentioned in income tax act general meaning shall not be assigned to it.
Difference between long term capital gain and short term capital gain
- Long term capital asset in case of land or building or both, unlisted shares, is when the asset is held by the assessee for more than 24 months, so 24 months should have been completed from the date of purchase and date of sale.
- In case of shares and debentures of listed companies the holding period is more than 12 months to be qualified for long term capital asset.
- For jewellery, precious metals, and other precious stones the holding period of capital asset is more than 36 months.
- Incase of equity oriented mutual funds it is 12 months and in case of debt oriented mutual fund the time period is increased to more than 36 months.
- Capital asset which is held for the period less than mentioned above is called as short term capital asset.
The period of holding to be calculated from the date of acquisition and end on date of transfer. Calculation of date of acquisition and ate of transfer is vital in determining the nature of capital asset which requires application of numerous rules and provisions by capital tax consultant to arrive at correct data. It is advised to disclose as much as information regarding the transaction.
Calculation of capital gain for short term capital asset
In order to calculate short term capital gain we need following information
- Cost of acquisition – Purchase price, expenses incurred for purchase of the asset, any charges paid to government like stamp duty etc.
- Cost of improvement – Cost of improvement is cost incurred in improving the value of the asset, eg charges paid for conversion of agricultural land in to commercial land, amount paid for vacating the tenant.
- Net consideration – actual selling price, and stamp duty value.
- Charges incurred for selling the property, eg : brokerage paid to broker, any other charges which is necessary to complete the sale.
Tax rate for short term capital gain
Tax rate for short term capital gain is taxed at normal tax slab rates applicable to them how ever in case of equities and other securities where security transaction tax is paid tax is calculated @ 15 % and same shall be paid along with surcharge if applicable and educational cess @ 4 %.
Where short term capital gain is chargeable at flat rate eg : 15 % and the assessee other net income is less than basic exemption limit, then the balance of basic exemption limit which was remaining can used to reduce amount of that capital gain.
Example 1 : Mr.Alagappan sold his property of 2000 sqft land at Nungambakkam chennai for the value of Rs. 4 crores. The date of acquisition is 31 st march 2021 and date of sale is 18 December 2021, purchase for the price of Rs. Rs.3,50,00,000, in both the transaction brokerage of 2 % is paid, business income is Rs.1,00,000.
|Sale consideration net of 2 % brokerage paid for agent||Rs.3,92,00,000 (Rs.4,00,00,000 – Rs.8,00,000 )|
|Less : Cost of acquisition||Rs. 3,57,00,000 (Rs.3,50,00,000 + Rs.7,00,0000 )|
|Short term capital gain||Rs. 35,00,000.|
In this case short term capital gain of Rs.35,00,000 is added to his business income of Rs.1,00,000 to arrive at total income of Rs.36,00,000. Tax calculated at normal rates including educational cess is arrived at Rs. 9,28,200.
Example 2 : Mr.Kaliappan sells shares for Rs.15,00,000 on 31 st march 2022 and purchase price was Rs.10,00,000 executed on 1 st march 2022, STT (Securities transaction charges were paid on all these transactions). Other net total income was Rs.2,00,000.
As the period of holding is not more than 12 months the asset is classified as short term capital asset and gain of Rs.5,00,000 (Rs.15,00,000 – Rs.10,00,000) shall be offered as short term capital gain.
In the above example his other total income is only Rs.2,00,000 however basic exemption limit available to him was Rs.2,50,000, so the remaining unused basic exemption limit is Rs.50,000 (Rs.2,50,000 – Rs.2,00,000), which can be used for reducing short term capital gain by Rs.50,000. So net short term capital gain is Rs.4,50,000 (Rs.5,00,000 – Rs.50,000).
A. TAX on other income – Nil
B. TAX on STCG – Rs. 67500.
C.Tax payable (A+B) – Rs. 67500.
D.Educational Cess @ 4 % – Rs. 2700.
E.Net tax liability (C+D) – Rs. 70,200.
Calculation of capital gain for long term asset
Details required for calculation of long term capital gains
- Cost of acquisition – the price paid by the assessee or any other person to buy the asset including any incidental charges of brokerage, this also includes stamp duty value paid to state registration department of housing board for allotment of the property.
- Cost of improvement – This includes any cost incurred for addition or improvement in the capital asset.
- Sale consideration – It is sum of all amount received or receivable for the transfer of the asset after deducting charges incurred for transfer of the asset such as advertising in online portal, charges paid to broker etc.
- Date of acquisition and date of transfer
- Index value of the financial year in which the asset was transferred, and acquired respectively.
Tax rate for long term capital gain
- long term capital gain on transfer of jewellery, precious stones, land, building, or both is taxed at 20 % along with surcharge if applicable and educational cess.
- The cost of acquisition, cost of improvement shall be indexed with index value published by income tax department for year of acquisition, improvement respectively by multiplying index value for year of transfer divided by index value of year of acquisition or year of improvement respectively.
- Th benefit of un exhausted basic exemption limit also available to long term capital gain.
Mr. Rajaram sold his property for Rs.70,00,000 and paid brokerage for the transaction Rs.1,40,000 on 1 st march 2022, the property was purchased on 01.01.2010 for amount of Rs. 10,00,000, brokerage paid Rs.20,000 for purchase, stamp duty and other registration charges is Rs.60,000. He incurred Rs.10,00,000 for Cost for constructing house in the year financial year 2014-2015 on the empty plot.
Index value : Year 2009-2010 – 148 – Year of purchase of empty land
Index value : Year 2021-2022 – 317 – Year of sale of land along with building
Index value : Year 2014-2015 – 240 – Year of constructing building, year of improvement.
|A. Sale consideration net off brokerage paid||Rs.68,60,000|
|B. Less :|
Indexed cost of acquisition – Rs. 2184730
(Rs.10,20,000 * 317/148)
|C. Less :|
Indexed cost of improvement – Rs. 1320833 35,05,563.
(Rs.10,00,000 * 317/240 )
|Long term capital gain (A-B-C)||Rs.33,54,437|
Tax on long term capital gain @ 20 % = Rs.6,70,887 (Rs.33,54,437 * 20 %)
Add SHEC @ 4 % = Rs.26835
Total income tax payable is = Rs.6,97,722.
Other important points
- Where the asset is purchased prior to 01 st April 2001 cost of improvement is available only for the amount spent on or after 01 st April 2001.
- If the asset is purchased before 01 st April 2001 the cost of acquisition shall be taken as fair market value as on 01.01.2001 or actual cost of acquisition at the option of the assessee. If fair market value is adopted as actual cost of acquisition then it shall not exceed stamp duty value as on that date.
- Partial exemption or complete exemption is available for capital gains based on the re investment opted by the assessee U/s 54, 54B, 54D, 54F, 54EC, 54GB.
- The purpose of holding the asset should be considered if it is held as stock in trade by a real estate developer, or promoter it shall not be treated as capital asset and alternatively assessable under head profits and gains from business of profession.
- Income tax return filing for capital gains is mandatory even is total income after exemption is less than basic exemption limit of Rs.2,50,000.
- Sale consideration is higher of stamp duty value or actual selling price.
- Where the property is acquired by the assessee by way of will or inheritance and other modes specified in Section 49(1) the period of holding of the previous owner shall be included. For example if a father transferred a property to his son through inheritance then the period of holding of the property by the son includes period of holding by the father also.
- TDS @ 1 % shall be deducted by the buyer if sale consideration is more than Rs.50,00,000.
- Cost inflation index for every year will be published by income tax department (CBDT) each year, you can download cost inflation index table from income tax department portal portal