You might have invested in property, shares, Mutual Funds, or gold in the past and might have probably considered selling these investments as well, at some point. Did you know that the income you gain after selling any of these assets is taxable? Here’s a quick guide which will help you understand capital gains and how you can claim tax benefits on them.
What are capital gains?
In simple words, a capital gain is the profit that you gain after selling or transferring your asset/investment (like property, shares, jewellery, Mutual Funds, etc). It is the difference between the actual purchase price of the asset and the price at which it was sold.
Types of capital gains
Speaking of types, capital gains are mainly divided into two categories:
- Short-term capital gain: Any profit that you may have earned by selling/transferring any asset held for a period of 36 months or less is called a short-term capital gain. In case of shares, Mutual Funds and debentures, the holding period is only 12 months.
- Long-term capital gain: Any gain that you might have accumulated after selling/transferring an asset that has been held for a period of more than 36 months, is classified as long-term capital gain. In case of shares and securities, this period is 12 months or more.
Understanding tax on capital gains
The calculation of tax on capital gains is completely dependent on the type of capital gain you have accumulated.
- Short-term capital gains: The tax calculation is simpler in this case. The gain is added to your total income and the tax is calculated depending on the tax bracket you fall into.
- Long-term capital gains: The tax calculation for long-term capital gain is slightly complex. Since these assets are held for a longer period, inflation becomes a major factor while computing the tax on long-term capital gains.
For long-term capital gain tax calculation, the cost inflation index is considered a major component. This index is fixed and declared by the government every year.
Additional Reading: How to Calculate Capital Gains
What is indexation?
Indexation is the process of adjusting the price of an asset based on a standard index, keeping in mind the inflation rate over the years. This calculation helps in understanding the actual profits earned by an individual, since property prices vary with time and the prices may have increased or decreased from the time when the property was bought.
So, indexation is a more accurate process for calculating the actual gains earned by an individual before calculating his taxes.
Tax exemptions on capital gains
- You can get a tax exemption on the profits earned from your capital gains if:
– You have spent the entire profit to buy another house. You can buy a new house within two years from the date of sale of your previous property or construct a new one within three years from the date of sale.
– You use the profit to buy bonds issued by the National Highways Authority of India or Rural Electrification Corporation. You can claim tax benefits up to Rs. 50 Lakhs.
- If you sell agricultural land which is not within the city limits, then a tax is not levied on your capital gains.
- You are eligible for tax exemption on capital gains, if you use your profits to set up a small scale or medium scale industry. However, you need to buy the manufacturing tools for the industrial unit within six months from the date of sale of your asset.
- In case you are not able to find a suitable property to buy within two or three years from the date of selling your capital asset, you can deposit this amount in a separate account of any nationalised bank under the Capital Gains Accounts Scheme.
- If you have long-term capital losses, these can be used to off-set long-term capital gains.
Use this guide on capital gains to help you evaluate your capital gains taxes and understand what tax exemptions you are entitled to.
Additional Reading: Long-term and Short-term Gains Computation
You are eligible for tax exemption on capital gains, if you use your profits to set up a small scale or medium scale industry. However, you need to buy the manufacturing tools for the industrial unit within six months from the date of sale of your asset.
For clarifying this clause please provide more example and any Gazette notification. Appreciate thanks
Thanks for your comment. For the time being, you can refer to the Income Tax website for more information about this. Please look out for more updates on our blog in the future.
I was keep looking for this and found something on income tax act 1961 under clause 54GB that something mentioned about exemption on investing in micro small medium Industry. Please just take a look on it and clarify if i have to be register somewhere if i claim of it.
It is true that capital gains exemption is available for investment in shares of certain eligible companies. However, there are several clauses attached. Please check with your Chartered Accountant for the details.
i am NRI i parches the land plot in march 1996 pay R_240000 that time 50% my shear and 50% my bother shear . all the paper work only my name .now we want to sale this plot .plese give me some adves how to save the capital geain tax .LTCG
You can invest your capital gains in a residential property for saving capital gains tax. You could also invest in capital gains bonds. Read this post for more information.
Thanks for the advice sir.
My question is if we me and my brother register this plot in partnership 50% -50 % and then sell this plot, so this way we are both responsible to pay own capital gain taxes.
So please advise me what is the right way to deal with this property and save Texas.
You should pay capital gains taxes in the proportion in which you held the property. Read this blog post for more information.
Sold a residential plot, I got capital gain 10,00,000/- now planning to buy Mutual funds. Is it tax exempted ?
Hi Ch Raju, There is no capital gain exemption for investing in Mutual Funds. Read this post for more information – How To Save Tax On Long-Term Capital Gains. Cheers, Team BankBazaar
Can the capital gain be kept in fixed deposit before the IT return filling date before investing in capital gain bonds for tax exemption?
You can put your capital gains in the capital gains account. 28 banks are allowed to offer capital gains account services. Ask your bank if they have this account.