Understanding capital gains can help you save taxes: All you need to know

The initial thought of taxation on capital gains can be exhausting when you encounter it for the first time or come across an issue which does not seem familiar. However, capital gains are not as complicated as it may seem. Understanding a few basic concepts relating to capital gains will ease the process of taxation on gains and may also help save taxes.

Defining capital gain

Simply put, the profit made on the sale of a capital asset is termed as capital gain. This leads us to understand as to what all is included in a capital asset.

Capital asset includes land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewellery. It has also been clarified that the following assets are not capital assets:

a. Any stock, consumables or raw material, held for the purpose of business or profession

b. Personal goods such as clothes and furniture held for personal use

c. Agricultural land in rural India

d. 6½ per cent gold bonds (1977) or 7 per cent gold bonds (1980) or national defence gold bonds (1980) issued by the central government

e. Special bearer bonds (1991)

f. Gold deposit bond issued under the gold deposit scheme (1999)

Period of holding

Period of holding decides the rate of taxability of capital gains. Period of holding bifurcates capital assets into :

a. Short term capital gains (assets held for less than 36 months with exceptions)

b. Long term capital gains (assets which are not short term capital assets)

Short term capital assets and their taxability

In the most generic terms, when an asset is held for less than 36 months it is referred to as short term capital assets. When an asset is taxed as a short term capital asset it will be taxed at 15 per cent plus surcharge and cess. There are some assets which are an exception to the limit of 36 months and the rate of 15 per cent:

Type of Asset

Holding Period (which defines them as short term capital asset)

Tax Rate

House property

< 24 months

Slab rate

Equity Mutual Funds

< 12 months

15%

Debt Mutual Funds

<36 months

Slab rate

Listed Shares (Securities transaction tax* is paid)

< 12 months

15%

Unlisted shares

< 24 months

slab rates

Other assets

<36 months

slab rates

*Securities Transaction Tax (STT) tax paid at the time of transaction in securities through a recognized stock exchange

Long term capital assets and their taxability

Long term capital assets are generally the assets which have been held for over 36 months. The tax rate applicable to long term capital assets is 20% plus surcharge and cess. The long term capital assets also have exceptions to the holding period of 36 months and tax rate of 20%.

When computing taxes on long term capital assets, a taxpayer can also claim benefits of indexation 

CII is the factor used to factor in the impact of inflation in the prices of capital assets.

Type of Asset

Holding Period (which defines them as short term capital asset)

Tax Rate

House property

> 24 months

20%

Equity Mutual Funds

> 12 months

10%(*)

Listed Shares (Securities transaction tax* is paid)

> 12 months

10%(*)

Unlisted Shares

>24 months

20%

Other assets

>36 months

20%

* Gains made in excess of Rs 1 lakh will be taxed at this rate effective 1 April 2018

Assets acquired as gifts, inheritance, through will or succession

The asset which has been acquired by gift, will, succession or inheritance, the period for which it was held by previous owner is also included when determining the period of holding of the asset.

Example:
 

Ranjan has acquired shares from his father in July 2017 through a will his father left behind.  His father purchased these shares in April 2007. In December 2017 Ranjan intends to sell these shares. 

The period of holding for these shares will be calculated from April 2007. Therefore the shares will be assessed as long term capital assets in the hands of Ranjan. Archit Gupta is Founder & CEO, Cleartax.