Investing in property is a popular choice in India, whether for owning a home or making a profit by selling it later. However, it’s crucial to know that any profit from selling a property, or other assets like stocks and bonds, is subject to taxation under the “Capital Gains” category. Let’s break down what capital gains tax is and the recent changes introduced in the 2024 budget.
What is Capital Gains Tax?
Capital gains tax is the tax you pay on the profit made from selling a capital asset. These assets can include property, land, vehicles, stocks, bonds, patents, and jewelry. The tax is applicable in the year when the asset is sold or transferred. Capital gains are categorized into two types:
- Short-Term Capital Gains (STCG): Gains from selling an asset held for a short period, which varies depending on the asset type.
- Long-Term Capital Gains (LTCG): Gains from selling an asset held for a longer period.
Defining Capital Assets
Capital assets include land, buildings, vehicles, patents, trademarks, and even rights in an Indian company. However, some items are not considered capital assets, such as personal belongings, agricultural land in rural India, and certain government-issued bonds.
Budget 2024 Updates
The 2024 budget introduced some significant changes to capital gains tax rules, effective from FY 2024-25:
- Simplified Holding Periods: Now, there are only two holding periods—12 months for listed securities and 24 months for other assets. The previous 36-month period has been removed.
- Tax Rate Changes: The short-term capital gains tax on listed equity shares and certain mutual funds has increased to 20% from 15%. The exemption limit for long-term capital gains on equity shares has increased to ₹1.25 lakh, with the tax rate also rising from 10% to 12.5%.
- Indexation Benefit Removal: For assets sold after July 23, 2024, the indexation benefit has been removed, but taxpayers can choose between a 12.5% tax without indexation or a 20% tax with indexation for real estate transactions.
Types of Capital Assets
- Short-Term Capital Assets: These are assets held for 12 months (for listed securities) or 24 months (for other assets). For example, selling a house within 24 months of purchase is considered a short-term capital gain.
- Long-Term Capital Assets: Assets held for more than the defined periods (12 or 24 months) are considered long-term capital assets.
Inherited Assets
If you inherit an asset, the period it was held by the previous owner is included in determining whether it’s a short-term or long-term capital asset.
Tax Rates for Capital Gains
- Long-Term Capital Gains (LTCG): 12.5% for equity shares and certain mutual funds exceeding ₹1.25 lakh, and 12.5% for other assets.
- Short-Term Capital Gains (STCG): 20% if securities transaction tax (STT) is applicable, otherwise, it’s taxed as per your income slab.
Taxation on Mutual Funds
Debt and equity mutual funds are taxed differently. Post-April 2023, debt mutual funds are taxed at income slab rates without the indexation benefit, regardless of how long they are held.
Impact of New Tax Rules on Debt Mutual Funds
The removal of indexation benefits for debt mutual funds means that short-term gains could be more favorable under the new rules, but long-term investors might face higher taxes.
What Are Capital Gains?
Capital gains arise when you sell a capital asset like property, stocks, or jewelry at a profit. The taxation on these gains is categorized into two types:
- Short-Term Capital Gains (STCG): Arising from the sale of assets held for a short period.
- Long-Term Capital Gains (LTCG): Arising from the sale of assets held for a longer period.
How to Calculate Capital Gains
Short-Term Capital Gains (STCG)
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- Start with the full value of consideration: This is the total amount received from the sale of the asset.
- Deduct the following:
- Expenses related to the transfer, like brokerage or commission.
- Cost of acquisition of the asset.
- Cost of improvement, if any.
- Subtract exemptions: Exemptions under sections 54B/54D can be deducted.
Long-Term Capital Gains (LTCG)
- Start with the full value of consideration:
- Deduct the following:
- Expenses related to the transfer.
- Indexed cost of acquisition.
- Indexed cost of improvement.
- Subtract exemptions: Exemptions under sections 54, 54D, 54EC, 54F, and 54B can be deducted.
Key Terms You Need to Know
- Full value consideration: The total amount received or to be received from the transfer of the asset.
- Cost of acquisition: The original value at which the asset was purchased.
- Cost of improvement: Expenses incurred to enhance the value of the asset.
Understanding Indexation
Indexation is a technique used to adjust the purchase price of an asset to account for inflation. This adjustment helps in lowering the taxable capital gains. The indexed cost of acquisition and improvement is calculated using the Cost Inflation Index (CII).
Formula for Indexed Cost of Acquisition: Indexed Cost of Acquisition = (Cost of acquisition × CII of the year of transfer CII of the year of purchase or 2001 -02, whichever is later) \ text {Indexed Cost of Acquisition} = \left(\frac{\text{Cost of acquisition} \times \text{CII of the year of transfer}}{\text{CII of the year of purchase or 2001-02, whichever is later}} \right) Indexed Cost of Acquisition = (CII of the year of purchase or 2001 – 02, whichever is later Cost of acquisition × CII of the year of transfer)
Exemptions on Capital Gains
Section 54: Exemption on Sale of House Property
You can get an exemption on long-term capital gains from the sale of house property by investing in up to two other house properties, provided the capital gain does not exceed Rs 2 crores. The exemption is available only once in a lifetime.
Section 54F: Exemption on Sale of Assets Other Than House Property
This exemption applies when you reinvest the entire sale proceeds from the sale of a long-term asset into a residential house property. The exemption will be proportional if only part of the sale proceeds is invested.
Section 54EC: Exemption by Investing in Specific Bonds
Invest capital gains in bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC) within six months of the sale to claim this exemption. The maximum investment limit is Rs 50 lakhs, and the bonds must be held for at least five years.
Deductible Expenses
When selling a capital asset, certain expenses directly related to the sale are deductible from the sale price:
- Brokerage or commission paid for securing a buyer.
- Cost of stamp papers and traveling expenses incurred in connection with the sale.
- Legal expenses related to inheritance or transfer of the asset.
Capital Gains Account Scheme
If you’re unable to reinvest your capital gains before the due date for filing your IT return, you can deposit the gains in a Capital Gains Account Scheme (CGAS). This allows you to claim an exemption and defer the payment of taxes until you use the funds to purchase or construct a new property.
Conclusion
Understanding the capital gains tax and recent changes can help you make better financial decisions, especially when selling assets like property or investments. It’s essential to stay informed about these updates to manage your tax liabilities effectively. With our expert-assisted service, you can rest assured that your returns will be accurately filed, and your tax liabilities minimized. Contact us today to get started!