Introduction to capital gains

Capital gain taxation is introduced in order to tax transactions involving capital assets that are considerably valued higher in a practical sense.

Real estate transactions are dominant in the case of capital gain tax collection, it is also the main area in which black money is generated and dumped, so many measures regarding the regulation of cash transactions are done to bring these transactions under the tax net.

Sharing of information by the State Registration Department about the value of transactions executed to the income tax department also enabled the income tax department to track these transactions.

Buyers or sellers are not aware of capital gains transactions in the real estate sector to a large extent which results in much more complications with regard to real estate transactions when the transaction is tracked and the taxpayer is summoned.

It is best to take advice from knowledgeable capital gains tax consultants in your city prior to entering into transactions. We have focused on long-term capital gain on land or building or both.

What are capital gains?

• Capital gains is the amount of gain or profit arising on the 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, jewelry 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 a capital asset, however, the classification of agricultural land is based on rules mentioned in the 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 the 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 the case of shares and debentures of listed companies, the holding period is more than 12 months to be qualified for long-term capital assets.
• For jewelry, precious metals, and other precious stones the holding period of capital assets is more than 36 months.
• In the case of equity-oriented mutual funds, it is 12 months and in the case of debt-oriented mutual funds, the time period is increased to more than 36 months.
• The capital asset which is held for a period less than mentioned above is called a short-term capital asset.

The period of holding is to be calculated from the date of acquisition and the end on the date of transfer. Calculation of the date of acquisition and date of transfer is vital in determining the nature of capital assets which requires the application of numerous rules and provisions by capital tax consultants 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 the following information 

1.  Cost of acquisition – Purchase price, expenses incurred for the purchase of the asset, any charges paid to the government like stamp duty, etc.
2. Cost of improvement – Cost of improvement is the cost incurred in improving the value of the asset, eg charges paid for the conversion of agricultural land into commercial land, and the amount paid for vacating the tenant.
3. Net consideration – actual selling price, and stamp duty value.
4. Charges incurred for selling the property, eg: brokerage paid to the broker, any other charges which are necessary to complete the sale.

The tax rate for short-term capital gain

The tax rate for short-term capital gain is taxed at normal tax slab rates applicable to them however in the case of equities and other securities where security transaction tax is paid tax is calculated @ 15 % and the same shall be paid along with a surcharge if applicable and educational cess @ 4 %.  

Where the short-term capital gain is chargeable at a flat rate eg: of 15 % and the assessee’s other net income is less than the basic exemption limit, then the balance of the basic exemption limit which was remaining can be used to reduce the 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 the 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, and 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, a short-term capital gain of Rs.35,00,000 is added to his business income of Rs.1,00,000 to arrive at a total income of Rs.36,00,000. Tax calculated at normal rates including educational cess arrived at Rs. 9,28,200.

Example 2: Mr.Kaliappan sells shares for Rs.15,00,000 on 31 st March 2022 and the 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 a short-term capital asset and a gain of Rs.5,00,000 (Rs.15,00,000 – Rs.10,00,000) shall be offered as a 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

1. 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 the state registration department of the housing board for allotment of the property.
2. Cost of improvement – This includes any cost incurred for addition or improvement in the capital asset.
3. Sale consideration – It is the sum of all amounts received or receivable for the transfer of the asset after deducting charges incurred for the transfer of the asset such as advertising in the online portal, charges paid to the broker, etc.
4. Date of acquisition and date of transfer
5. Index value of the financial year in which the asset was transferred, and acquired respectively.

The tax rate for long-term capital gain

• long-term capital gain on the transfer of jewelry, precious stones, land, building, or both is taxed at 20 % along with a surcharge if applicable and educational cess.
• The cost of acquisition and cost of improvement shall be indexed with the index value published by the income tax department for the year of acquisition, and improvement respectively by multiplying the index value for the year of transfer divided by the index value of the year of acquisition or year of improvement respectively.
• The benefit of an exhausted basic exemption limit is also available for long-term capital gain.

Example 1. 

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 the amount of Rs. 10,00,000, and brokerage paid Rs.20,000 for the purchase,  stamp duty and other registration charges is Rs.60,000. He incurred Rs.10,00,000 for the Cost of constructing a house in the year financial year 2014-2015 on the empty plot.

Index value: The year 2009-2010 – 148  – Year of purchase of empty land

Index value: The year 2021-2022 – 317  – Year of sale of land along with building

Index value: The year 2014-2015  – 240 – Year of constructing a building, year of improvement.

 

Calculation

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 )	Rs.35,05,563
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

1. 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.
2. If the asset is purchased before 01st April 2001 the cost of acquisition shall be taken as fair market value as of 01.01.2001 or the actual cost of acquisition at the option of the assessee. If the fair market value is adopted as the actual cost of acquisition then it shall not exceed the stamp duty value as of that date.
3. Partial exemption or a complete exemption is available for capital gains based on the re-investment opted by the assessee U/s 54, 54B, 54D, 54F, 54EC, and 54GB.
4. 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 a capital asset and alternatively assessable under head profits and gains from the business of profession.
5. Income tax return filing for capital gains is mandatory even if the total income after the exemption is less than the basic exemption limit of Rs.2,50,000.
6. Sale consideration is higher than the stamp duty value or actual selling price.
7. 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 the property to his son through inheritance then the period of holding of the property by the son includes a period of holding by the father also.
8. TDS @ 1 % shall be deducted by the buyer if the sale consideration is more than Rs.50,00,000.
9. The cost inflation index for every year will be published by the income tax department (CBDT) each year, you can download cost inflation index table from income tax department portal portal