Understanding Capital Assets 

Capital gain is defined as income arising from sale, exchange or transfer of a capital asset. The capital asset is any kind of property owned by the taxpayer, though need not be related to his business or profession. However the following are not included in the capital assets:

• Stockintrade, consumable goods, or raw materials held for business or professional purposes.
• Personal belongings of the taxpayer or his relatives, like clothes and furniture. Art pieces, ornaments, or any other unique collection are not considered for this exemption.
• Land cultivated for agriculture in India, as long as certain conditions are fulfilled.
• Specific categories of government bonds.
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Short Term vs. Long Term Capital Asset

There are two conditions under which tax is collected on capital gains: under which time duration the asset is held. Assets are either Short Term or Long Term depending upon the holding period.

• Long Term capital assets: Assets held for a period of more than 36 months prior to the date of their sale. However, this period is limited to 12 months in cases of specific assets, which includes company shares, securities listed on any recognized stock exchange, and units of specified mutual funds.
• Short Term capital assets: Assets held for 36 months or less (or 12 months in particular cases).

 

Capital Gains Tax

Classification of an asset as short term or long term decides the taxation of the gains.

Additionally, it doesn’t matter which one it is. Short Term capital gains add to your total income and are taxed as regular income tax. Long term capital gains are generally at 20 percent, with some exceptions. 

Short Term capital gains from sales of equity shares or equity oriented funds, under certain circumstances, are taxed at 15%, with some exceptions.  Whereas long term capital gains from sale of equity shares or units in equity oriented funds, once more subject to specific considerations, can be fully exempt from tax.

 

How Capital Gains Are Computed  

• Expense items that are deducted from the selling price for computing capital gains include: 
• Expenses incurred on sale or transfer.
• Original cost of purchase of the asset.
• Any Cost of additions on the asset.

When the sale involves securities liable for Securities Transaction Tax (STT), then no deduction is permitted of the tax paid at the time of sale.

Used under following circumstances: Employees who transfer shares, warrants or even debentures acquired through Employee Stock Option Plan (ESOP), the fair market value prevalent at the time of the transfer is treated as the amount realized from the sale.

The sale price of land or buildings is considered as less than the stamp duty value. Stamp duty value would then be taken as the sale price for the purposes of capital gains if so stated. The taxpayer may request a valuation by a tax officer if this is disputed and the tax officer may revise the stamp duty value.

In the case of gifts or inheritances, for assets acquired through this manner, cost of acquisition would be considered the same as that by the previous owner. Bonus shares are considered to have a nil cost of acquisition.

If acquired prior to April 1, 1981, cost of acquisition can be indexed to the market value at that date and inflation indexing may be available on cost of acquisition and improvement also.

Special Provisions for NonResidents

Nonresidents who dispose of shares or debentures of an Indian company acquired out of foreign exchange shall have to make the following arrangements.

Transfer the selling price to the original foreign currency using the rate of the date of transfer.

Convert the cost of acquisition using the date of purchase exchange rate.

Convert any cost of selling realized during the sale using the rate of the date of the cost.

Subtract the cost of acquisition and cost of selling from the selling price to get the capital gain in foreign currency.

Convert this gain into Indian rupees at the exchange rate on the transfer date.

For nonresidents selling long term assets like shares or debentures, indexation benefits do not apply.

Exemptions for LongTerm Capital Gains 

Certain long term capital gains may be exempt if the proceeds are reinvested in specified assets:

Reinvestment in residential property: If you sell long term residential property and invest the proceeds received in another residential property. You would be exempt from any capital gains, if:

You buy a new property within one year or two years following the date of sale, or You build a new property within three years after the date of sale.

In the case of exempt property, the exemption amount shall be determined by the lower between the new property’s purchase price and sale consideration. Exemption is reversed where the new property is sold within three years, and capital gains taxes will be charged.

Reinvestment in Specified Bonds: This long term capital gain can also be exempt if such a gain is reinvested in certain specified bonds within six months from the date of sale. Such specified bonds can be either those issued by the National Highways Authority of India, the Rural Electrification Corporation, etc. There is a cap of INR 50 lakh per financial year on such investments.

Reinvestment in Residential Property from NonResidential Assets: When selling long term capital assets other than residential property, you are still eligible to be allocated an exclusion; however, that can be done only by reinvesting the amount thus received into a newly acquired residential property under similar conditions as mentioned above.

In all cases, if the sale proceeds are not invested in further investment of the business venture by the date when you have to file your income tax, they must be deposited in a capital gains account with a public sector bank. The amount so deposited must then be invested within the time specified or else it gets taxed as long term capital gains.