Earned capital gains? Expert views on 5 things to keep in mind

One needs to know that when a loss is made from the sale of a capital asset, such a loss can be set off only against an income from capital gains

Disposing of any capital asset (land or a house or even shares) can help you earn profits. These profits are termed capital gains for the purpose of Indian income tax laws. The mechanism for the computation of gains, taxability of such gains, exemptions that can be claimed and the treatment of carrying forward capital losses etc. are quite unique from laws that govern taxability of other incomes. Therefore, here are certain key aspects that need to be kept in mind when you have earned capital gains in a financial year.

Period of holding

Period of holding determines the nature of an asset, i.e. if it is short-term or long-term. Nature of the asset determines tax rates. Period of holding differs for different classes of assets. Listed equity shares are considered long-term if held for more than 12 months, while unlisted shares and immovable property are considered long-term assets if held for more than two years. The holding period for most of the other assets in order to be considered long-term is three years. Assets held for a period below this threshold will be short-term.

Computation mechanism

Short Term Capital Gains, or STCG, are determined by reducing the purchase price from the sale price. However, long-term capital gains, or LTCG, are determined by first indexing the purchase price in order to factor in the impact of inflation over the years and then reducing this indexed purchase price from the sale price. Further, any expenses incurred towards repair, renovation etc. of the asset can also be reduced from the sale price. This is termed the cost of improvement or the indexed cost of improvement as the case may be.
 

How capital gains are taxed

Asset class	Nature	Tax rate
Listed shares	Short-term Long-term	15 per cent 10 per cent(on gains > Rs 100,000)
Unlisted shares	Short-term Long-term	Individual slab rates 20 per cent after indexation
Immovable property	Short-term Long-term	Individual slab rates 20 per cent after indexation
Most other assets	Short-term Long-term	Individual slab rates 20 per cent after indexation

Exemptions from capital gain tax

When you have earned capital gains, it is equally important for you to know how you can save on your taxes. The law allows a taxpayer to claim exemption from capital gains tax by reinvesting either the gains made or the entire sale proceeds in certain avenues, say a house property or bonds etc. This can, in a great way, help you bring down your tax liability for a given financial year. Taxpayers also have a provision whereby they can invest the capital gains into a capital gains account scheme with any bank, provided they subsequently utilize the proceeds towards the prescribed purpose within the stipulated time frame.

Deductions and Reporting of Capital gains

This is something very crucial. Unlike in the case of any other income, one cannot claim any deductions from capital gains income and has to pay taxes as per the prescribed rates directly on the amount of gains made, after, of course, claiming the appropriate exemptions as discussed in the point above.

In addition to the aforesaid points that are to be taken care of when gains are made, one also needs to know that when a loss is made from the sale of a capital asset. Such a loss can be set off only against an income from capital gains. While short-term loss can be set off either against short-term or long-term gains, long-term losses can be set off only against long-term gains. The author is Founder & CEO ClearTax. Views expressed are his own.