When you sell capital assets like stocks, bonds or real estate, you are liable to pay taxes as per the Income Tax guidelines of the Indian government. However, this tax is not applicable on the total amount you acquire from the sale, but only on the profit that arises out of the sale. The profit is calculated as the difference at which the property was originally bought for and the current price at which it is sold.
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Do you know what the different types of capital gains are? Or how capital gains are calculated? Or how can you save taxes on long-term gains? Too many questions to ponder upon, right?
Don’t worry. We’ll make it as simple and as clear as possible for you.
What are capital assets?
Generally speaking, any form of property held by a tax payer is known as a capital asset. But the exceptions include:
- Any stock-in-trade or raw material held by a tax payer
- Personal movable items like apparel or furniture, which are in use by any member of the family
- Drawings, paintings, sculptures, works of art, archaeological items and jewellery
- Agricultural land, which is in a rural area and does not fall under the jurisdiction of a municipality or cantonment board
- 61/2 per gold bonds, 1977 or 7% gold bonds, or National Defence gold bonds
- Special bearer bonds, 1991, issued by the government
- Gold deposit bonds issued under the gold deposit scheme of 1999
Additional Reading: All About Capital Gains Taxes
Types of capital gains
Capital gains are divided into two categories:
- Short-term capital gain: Profits accumulated by selling/transferring any asset held for a period of 36 months or less is termed as a short-term capital gain. In case of shares, Mutual Funds and debentures, the holding period is only for 12 months.
- Long-term capital gain: Any profit that you might earn after selling/transferring an asset for a period of 36 months or more is classified as a long-term capital gain. In case of shares and securities, this period may start from a period of 12 months or more.
How is capital gains tax calculated?
The calculation of tax on capital gains is completely dependent on the type of capital gain that you earned out of the sale.
- For short-term capital gain: The profit which you earned after selling your asset is added to your total income, and the tax is calculated depending on the tax bracket you fall in.
- For long-term capital gain: The tax calculation for long-term capital gain is different. Since the holding period of long-term gains is usually 36 months or more, inflation becomes a major factor while computing the tax on long-term capital gains.
For long-term capital tax calculation, the cost inflation index is considered as a major component. This index is fixed and declared by the government every year. So in order to get an idea about the taxes applicable on your long-term capitals gains, you need to check the inflation index and do your calculations accordingly.
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How to save taxes on your capital gains?
Here is a comprehensive list of the tax exemptions that you can get on your capital gains:
- You can get tax exemption on profits earned from long-term capital gains if you spend the entire profit amount to buy or construct a new house. You have to buy the 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.
- In case you are unable to find a suitable property to buy or suitable land to construct the new house on within two or three years from the date of sale of your previous property, you need to open a Capital Gains Account Scheme in any public sector bank. The money deposited in this account has to be used only for buying or constructing a new house, or else it is taxable
- You can claim tax benefits up to Rs. 50 lakhs if you buy bonds issued by the National Highway Authority of India or Rural Electrification Corporation
- You can avail tax exemption if you invest your profits to set up a small or medium-scale industry. You need to buy the manufacturing tools for the industrial unit within six months from the date of sale of your asset
- If you sell agricultural land which is not within the city limits, the profit earned out of the sale is not taxable
Additional Reading: How To Save Tax On Long-Term Capital Gains
Hopefully this information should help you understand capital gains, as well as the taxation aspect it entails, in a better way.