HOW TO DISCLOSE CAPITAL GAIN IN INCOME TAX RETURN
What is Capital Gain?
The Capital gains are the profits accrued through the sale of capital assets.
There are 2 types of capital gains are long-term and short-term.
Long-term capital assets are those held for 36 months or more, while short-term assets are held for a shorter duration. Capital gains arise when you sell a capital asset for an amount that is more than what you paid for it. Capital assets are any investment products like mutual funds, stocks, or any real estate product like land, house, etc. An increase in the value of any of these when you sell them is termed as a capital gain. Similarly, a capital loss is suffered in case there is a decrease in the value of an asset for its purchase price.
How to Calculate Capital Gain?
Profits or gains arising from transfer of a capital asset such as property, gold, shares and bonds are considered capital gains and taxed under the income head “capital gains". Such gains are of two types—short-term and long-term—depending on the period of holding. Capital gains are calculated by deducting the cost of acquiring the asset from its sale value. But the rules are different for different assets.
Short-term Capital Gains Tax
In the case of short term capital gains the formula used is Short-term capital gain= full value consideration – (cost of acquisition + cost of improvement + cost of transfer).
Long-term Capital Gains Tax
To calculate the long-term capital gains tax payable, the formula is to be used namely Long-term capital gain = full value of consideration received or accruing – (indexed cost of acquisition + indexed cost of improvement + cost of transfer), where Indexed cost of acquisition = cost of acquisition x cost inflation index of the year of transfer/cost inflation index of the year of acquisition. Indexed cost of improvement = cost of improvement x cost inflation index of the year of transfer/cost inflation index of the year of improvement.
Capital Gains Rate
The rate at which capital gains is calculated varies from year to year. In the case of long-term capital gains, individuals are taxed at 20.6% (including education cess). There are no deductions that can be availed under capital gains tax. Short-term capital gains tax is levied at the tax slab under which the individual falls under. Gains made from transfer of immovable property
Gains made from transfer of immovable property
Immovable property like land, house, apartment within two years of purchase are considered short-term capital gains (STCG);
after two years, they become long-term capital gains (LTCG). The LTCG rate is 20% with indexation, while STCG is taxed at the slab rate.
Gold and bonds
Jewellery or bullion are chargeable to capital gains tax, irrespective of the method of acquisition—self-purchased, gifted or inherited. If sold before three years from the date of purchase, gains are considered STCG, else LTCG. STCG from sale of gold is taxed at the slab rate, and LTCG at 20% with indexation.
Shares and mutual funds
Gains from transfer of shares and equity oriented mutual funds within a year of purchase are considered STCG; after a year, they are considered LTCG.
Exemptions under Capital Gain
To protect the income generated through a sale of capital assets and lower the overall tax liability associated with the same; several exemptions under capital gains have been introduced.
Individuals can avail such exemptions, but to do so, they need to become aware of different exemptions and learn about the conditions that come along.
Here is a list of a few basic exemptions concerning long-term capital gains for the year 2019-2020 –
Case-Specific Exemptions Under capital Gains
The list of exemptions under capital gain would offer individuals a better idea about such deductions and their associated conditions.
Section 54 E, 54EA, 54EB – Proceeds earned through investment in certain securities
Capital gains accrued through a transfer of long-term capital assets come under this capital gains exemption. Individuals can avail such long-term capital gain exemption, if they reinvest in specific securities like UTI units, government securities, targeted debentures, government bonds, etc.
However, the following conditions are required to be fulfilled–
Individuals must reinvest in such new securities within six months from the day the capital assets were transferred.
If individuals decide to sell the new securities before 36 months, the exemption that was previously offered would be deducted from its cost to find out the capital gains.
Additionally, a loan availed against new securities before 36 months; it would be treated as capital gains.
Section 54EC – Proceeds earned through the sale of a long-term capital asset is exempted when reinvested in specified long-term assets.
Capital gains accrued through the sale of long-term assets would be entitled to long-term capital gain exemption. Individuals will avail such exemptions, given they reinvest their proceeds into specific assets of either Rural Electrification Corporation or NHAI. Such capital exemptions can be availed if –
Individuals reinvest the proceeds into specified assets before the end of 6 months from the day the asset was sold.
Capital gains should not be more than the investment amount. If only a portion of gains were reinvested, an exemption under capital gain would be applicable only on the amount that was reinvested.
Specified assets must be held for at least 36 months.
Section 54EE – Proceeds earned through a transfer of investments.
Capital gains accrued through the transfer of long-term capital assets would apply to avail an exemption under capital gain, given –
Individuals should reinvest their proceeds within six months of transfer.
If individuals sell their new securities before 36 months, the exemption that was previously offered would be subtracted from its cost to calculate capital gains.
A loan is taken out against new securities before 36 months; it would be treated as capital gains.
Such investments should not exceed Rs. 50 Lakh in both the current and the following financial year.
Section 54 – Proceeds earned through the sale of a residential housing property
Capital gains accrued through the sale of a housing property used for residential purpose comes under capital gains exemption, given –
The Assesse in question is an individual or a Hindu Undivided Family (H.U.F).
The residential property was held for over 36 months.
A new property was purchased 12 months before or 24 months after the property in question was sold.
A new property has been constructed within 36 months of the sale of the housing property in question.
Proceeds generated are less than that of the cost of the new property.
If capital gains are less than the cost of the new property; the difference in sum would be deemed liable for taxation. A 20% rate of tax would be levied on the difference, and it would be treated as a long-term capital gain for the year the old residential property was sold.
If the new property is sold before 36 months from the date of construction or purchase the cost would be deducted from the previously accrued capital gain exemption amount. The difference between the reduced cost and the sale price of the new property would be treated as a short-term capital gain for the year the new housing property was sold.
Section 54F – Proceeds earned through the sale of capital assets besides a residential housing property.
Capital gains accrued through the sale of an asset other than property used as a residence would be entitled to capital gains exemption, given the proceeds were reinvested in a residential property. Such exemptions can be claimed, given –
Assesse/s in question is an individual or a Hindu Undivided Family (H.U.F).
The new property was purchased 12 months before or 24 months after the capital asset in question was sold or,
A new property was constructed or bought within 36 months from the date the capital asset in question was sold.
The sale value of the asset in question (exclusive of the cost of transfer) does not exceed the cost of the new housing property.
In the event of not investing the sale proceeds before the stipulated time, individuals need to open a Capital Gains Scheme account. They can access the amount at the time they intend to start construction or decide to purchase a house.
Individuals should not own more than one residential property on the date of sale of the asset in question. Also, they should not purchase within 24 months or decide to construct another residential housing property within 36 months from the same date.
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