Understanding How Capital Gains Taxation Work

Taxation can get quiet handful especially for people who are not well versed with various laws. Income is taxed basis the type of income you earn. Although individuals are taxed as per slab rates for the income that they earn, there are certain incomes like capital gains, income from lotteries puzzles etc that are taxed at special rates of tax. Let us understand here what are capital gains, their calculations and taxation.

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What is a Capital Asset?

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Capital assets can be property of any kind. It usually includes all types of assets, be it movable or immovable, tangible or intangible. Securities held by FIIs (Foreign Institutional Investor) are also considered as capital assets.

There are however, certain assets that cannot be considered as capital assets. H&R Block’s webinar on Capital Gains Taxation elaborates all such assets in detail for you.

What is Capital Gain?

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Any profits/gains earned from the sale or transfer of capital asset during the previous year is known as capital gain. This capital gain is liable to tax. It is important that you have earned a profit out of the transfer of the asset.

Depending on the period for which a capital asset is held by the assessee, there are two types of capital gains. These capital gains are known as the Short-term capital gains and the Long-term capital gains.

Short-term Capital Gains: When a capital asset is held for less than 36 months, it is called as a short-term capital asset. The profit/gain acquired on the transfer of this type of capital asset is then called as a short-term capital gain.

Long-term Capital Gains: When a capital asset is held for more than 36 months, it is called as a long-term capital asset. The profit/gain acquired on the transfer of this type of capital asset is then called as a long-term capital gain.

However, units of equity oriented mutual funds, Government securities and listed debentures, Zero Coupon Bonds, equity shares that are listed on a recognized stock exchange and units of UTI’s period of holding is considered for 12 months rather than for 36 months.

Computation of Capital Gains

Short Term Capital GainLong Term Capital Gain
ParticularsAmountParticularsAmount
Total Value of ConsiderationXXXTotal Value of ConsiderationXXX
LessCost of TransferXXLessCost of TransferXX
Net Sales ConsiderationXXXNet Sales ConsiderationXXX
LessCost of acquisitionXXLessCost/Indexed cost of acquisitionXX
Cost of improvementXXCost/Indexed cost of improvementXX
Gross Short Term Capital Gains/(Loss)XXXGross Short Term Capital Gains/(Loss)XXX
LessExemption u/s 54B, 54G and 54GAXXLessExemption u/s 54B, 54D, 54EC, 54F, 54G and 54GAXX
Taxable Short Term Capital Gains/(Loss)XXXTaxable Long Term Capital Gains/(Loss)XXX

As per Budget 2017, the base year for the indexation calculation is now 2001.Indexation is nothing but determining the value of the asset based on the Cost Inflation Index (CII). The cost inflation index is different every year and therefore it is important that while calculating the indexed cost of acquisition/improvement, the correct CII value is computed.

Indexation Formula: Cost of acquisition/improvement * CII of the year of purchase/improvement

The exemptions from capital gains are provided basis fulfillment of certain conditions where these capital gains need to be invested in either immovable property or specified bonds.

Rates of tax for capital gains

Capital gain tax rates are lower of:

  • Tax Rate as applicable under the normal provision of the Income Tax Act
  • Tax Rate applicable under Chapter XII-A of the Act
  • Tax Rate under DTAA with the country of residence

Here are the rates of tax applicable on different capital assets

DescriptionRate of Tax
 LTCGSTCG
Equity Shares or units of an equity-oriented fund, on which STT is paidExempt u/s 10(38)15%
Other listed or non-listed securities and debt funds on which STT is not paid10% without indexation or 20% with indexationSlab rates
Capital assets other than those mentioned above20% with indexationSlab rates

 

Claiming Benefits under Chapter XII-A and DTAA

One can get some relief in capital gain tax rates basis certain provisions in law. Especially for capital gains on foreign assets. Chapter XII A specifies these conditions. It specifies the different assets on which the benefit can be claimed.

A person can get special tax treatment under the DTAA. An assessee can choose lower of either the Treaty Rates u/s 90(2) or the local tax rates. If the assessee wants to claim this benefit, he will have to furnish a Tax Residency Certificate (TRC).

What happens in case of Capital Loss?

In case an assessee has suffered a capital loss on a certain asset, he can set it off against other capital gains in the same year. Any unadjusted loss can be carried forward up to 8 years.

Taxation of capital gains is difficult to understand and improper handling can make you pay a large amount of tax. Our tax experts at H&R Block can help you optimize your taxes and help you plan better so that you can save the maximum amount of tax. Visit any of our retail offices to avail Income Tax related services.

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Published Date: Jul 31, 2017 01:28 pm | Updated Date: Jul 31, 2017 06:35 pm


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