CAPITAL GAIN TAXATION

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This article is written by Anam Siddiqui of BALLB of 3^rd Semester of Sadanlal Savaldas Khanna Girls Degree College, Prayagraj , an intern under Legal Vidhya.

Abstract:

In this competitive life, everyone wants to amass profit or profit giving assets. Nowadays, almost everyone owns land, house (whether small or big), vehicles, buildings, machines etc. Profits that are earned by selling aforementioned assets are termed as Capital Gain. This article is going to deal with the concept of capital gain taxation. For which we also need to understand the concept of capital assets, types of capital assets, capital gains, types of capital gains and taxations on such gains.

Keywords: Capital assets, Capital Gains, Short term assets, Long term assets, Short term capital gain tax (STCG tax), Long term capital gain Tax (LTCG Tax), Full value consideration, Bond, Equity, Debt investment.

Introduction:

The term Capital Gain can be basically understood as a profit which a person earns by selling any of his capital assets at price exceeding the purchase price of such assts. This gain becomes an income for the individual. The individual is liable to pay tax on such income.

The entire amount that a person earns by the sale of capital assets is a Taxable Income.

Capital gains are charged for the tax in the year in which the capital assets are transferred.

Land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewellery are a few examples of capital assets. This includes having rights in or in relation to an Indian company. It also includes the rights of management or control or any other legal right.[1]

Investment in a house property is one of the most sought out investments primarily because you get to own a house. While others may invest with the intention of earning a profit upon selling the property in the future. It is important to note that a house property is regarded as a capital asset for income tax purposes. Consequently, any gain or loss incurred from the sale of a house property may be subject to tax under the ‘Capital Gains’ head. Similarly, capital gains or losses may arise from sale of different types of capital assets.

For understanding capital gain, we should familiarise ourself with the meaning of capital assets.[2]

Capital Assets:

According to Income Tax Department, Capital assets include any kind of property held by the assessee, whether connected to his business/profession or not. It includes movable as well as immovable property, tangible (which can be seen) as well as intangible (which cannot be seen), fixed or circulating. For Example: building, jewellery, furniture, land, plant and machinery, goodwill, motorcar, mutual funds, shares, debentures, securities, patents, trademarks etc.

“Following are not included in the definition of Capital Assets:

1.Any stocks in trade, consumable stores, or raw materials held for the purpose of business or profession have been excluded from the definition of capital assets.

2.Any movable property (excluding jewellery made out of gold, silver, precious stones, and drawing, paintings, sculptures, archeological collections, etc.) used for personal use by the assessee or any member (dependent) of assessee’s family is not treated as capital assets. For example, wearing apparel, furniture, car or scooter, TV, refrigerator, musical instruments, gun, revolver, generator, etc. is the examples of personal effects. (But see IRS publication 544 chapter 2.)

3.Agricultural land situated in rural area.

4.6.5% gold bonds or 7% gold bonds 1980, national defense gold bond 1980, issued by the central government.

5.Special bearer bonds, 1991.

6.Gold deposit bonds issued under gold deposit scheme, 1999.

7.Security deposits issued under gold monetisation scheme 2015.”[3]

So, we can easily say that capital assets are the significant piece of property such as home, car, land, bond, and even collectibles or arts.

Types of Capital assets: On the basis of the period after which the assets are sold off, they are divided in to two categories:

Short term capital assets: Those assets which se sold within 36 months of purchasing are referred to short term capital assets. The period can 24 or 12 months in some instances. Like, if any immovable property (land, building etc) sold within 24 months of purchasing would be a short term capital asset.
Long term capital assets: Those assets which are sold after 34 months of purchasing are referred to long term capital assets. Like any immovable property(land, building, etc) sold after 24 months of purchasing would be considered as a long term capital assets.

Note: Holding period varies as per the capital assets.

Gains made out of these assets are also divided into two categories.

Types of Capital Gains:

Short term capital gains: The profit which is earned by selling off the capital assets within one year of holding them, are called short term capital gains.
Long term capital gain: The profit which is earned by selling off the capital assets after one year of holding them, are called long term capital gains.

Capital gain calculations: The calculations ofCapital gain depend on the type of capital gain earned. The methods of calculating capital gains for short and long term capital gain differ from each other. For calculating capital gains, following factors are taken into the account:

Full value consideration: Talking in simple terms, full value consideration is that amount of money which a seller receives by transferring his capital assets.
Cost of acquisition: It is the cost price of the assets i.e., the price at which the person brought the asset.
Cost of improvement: It refers to the amount of money that is spent on the further improvement of the asset.

Capital Gain Tax in India:

As like capital gains are divided as short term capital gains and long term capital gains, similarly, taxations are also divided as short term capital gain tax and long term capital gain tax. Let’s have a look on these:

Short Term Capital Gain Tax (STCG Tax):

Short term capital gains are charged for tax at the income tax slab rate applicable as per the income (considering Security Transaction Tax not applicable on the income).

Here, the capital gains are added to the income of the individual and then tax is charged as per the slab rate under which the income comes.

For instances, where STT (Security Transaction Tax) is applicable, such as in case of equity shares, then the STCG are taxed at 15%.

Long Term Capital Gain Tax (LTCG Tax):

Rate of Taxation for Long Term Capital Gain is 20%.

In some instances, like equity and debt related investments, rules differ.

Equity Funds having 65% or more investments in equity are taxed as:

15% – STCG Tax and 10% – LTCG Tax (if gain acquired exceeds 1 lakh in a financial year).

2. Debt Funds having 65% or more investments in debt are taxed as:

At the income tax slab rate – STCG Tax and 20% – LTCG Tax (including benefit of indexation).

Surcharge on Long term capital assets:

Surcharge refers to the extra or additional charge fee that is added to a cost of a good. The budget that was proposed for the year 2022 aimed at lowering down the surcharge rate on long term capital assets.

The maximum Surcharge rate for the long-term capital assets is 37%, while for gains of equity shares, units, etc. it is 15%.

Note: The Income Tax Act states that, assets which are gifted or received by inheritance, are not included in income of a person thus, exempted from such taxation.

Exemption on capital gain:

Taxation on capital gain takes away a significant part of an individuals’ earnings. Thus, an individual should be aware of the exemptions from such taxation to prevent the liability to pay huge amount of taxes.

Exemptions under Section 54:

Sale of house property on purchase of house property:

A taxpayer can exempt tax on two residential property only once in his lifetime, but the capital gain should not exceed 2 crores. Such exemption shall be granted only on capital gain by sale, if purchase price of property exceeds the capital gain. Following conditions must be noted:

The new property shall be purchased either one years before or two years after the sale of previous property.
If the gains are invested in the property construction, then it should be completed within three years.
One house property can be purchased or constructed with the capital gain to get exemptions.
If the new property is sold within three years of its’ purchase or construction, then the exemption will be annulled.

Sale of assets other than residential property:

This exemption can be granted to individuals where the capital gain is acquired by the sale of long-term assets other than residential property.

To achieve this exemption, the individual has to invest the sale consideration again to purchase a new property. Such investment should be made either after 24 months of sale or before 12 months of the sale of asset.

Section 54EC:

Capital gain from Sale of residential property and reinvesting in particular bonds:

Individuals can be granted exemptions where they sell the existing residential property and reinvests such sale consideration into bonds within six months of sale.

Section B:

Capital gain by transfer of land for agricultural use:

Individuals can be granted such exemptions on short as well as long term capital gains acquired by transfer of agricultural lands. The transfer of property shall be made 24 months before the sale of asset. Within 36 months of such transfer, the exempted amount shall be used in purchasing a new asset.

It is also provided that, the property brought by the sale consideration shall not to be sold within 36 months of purchase.

Case laws:

Ms. Moturi Lakshmi vs. The Income Tax Officer, 2020:

The taxpayer brought a new apartment by selling her old one and made a down payment prior to the sale of first one and sought exemption under section 54. The Assessing Officer (AO) denied the exemption. The Commissioner of Income-tax and the Income-tax Appellate Tribunal (ITAT) both dismissed the taxpayer’s appeals and upheld the AO’s decision.

Later Madras high court upheld. the benefit under section 54 to the taxpayer’s advance payment made for the purchase of a residential flat prior to the date of sale of the original apartment

Commissioner of Income Tax v. Syed Ali Adil, 2012;

The assessee had purchased two flats in the same building by selling his ancestral residential property. Both flats shared a common spot. The departments argued that the section lays down about single residential property as an asset. The Andhra High Court held that the word “a residential property” comprises more than one residential property and the assessee was entitled to get the benefit under Section 54.

Conclusion:

Capital Gain Taxes are someway difficult to calculate and understand. By investing in equity-oriented mutual funds and listed securities for long-term, we can get rid of such taxation on capital gains because they are not taxable. Along with such taxes, surcharges and various other levy are also applicable. Many individuals prepare strategies to get rid of heavy taxation.

References: