Capital Gains Income Tax Guide AY 2020-21

Profits or gains arising from transfer of a capital asset are called “Capital Gains” and are charged to tax under the head "Capital Gains". Income from capital gains is classified as "Short Term Capital Gains" and "Long Term Capital Gains".

Capital Asset Definition

Capital Asset defined as

Any kind of property held by an assessed, whether or not connected with business or profession of the assessee.
Any securities held by a FII which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992.

The following items are excluded from the definition of "capital asset":

Any stock-in-trade (other than securities referred to in (b) above), consumable stores or raw materials held for the purposes of his business or profession.
Personal effects, that is, movable property (including wearing apparel and furniture) held for personal use by the taxpayer or any member of his family dependent on him, but excludes.

Jewellery

Ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stones, and whether or not worked or sewn into any wearing apparel.
Precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel.

Archaeological collections
Drawings
Paintings
Sculptures
Any work of art

Agricultural Land in India, not being a land situated:

Within jurisdiction of municipality, notified area committee, town area committee, cantonment board and which have a population of not less than 10,000.
Within range of following distance measured aerially from the local limits of any municipality or cantonment board:

Not being more than 2 KMs, if population of such area is more than 10,000 but not exceeding 1 lakh
Not being more than 6 KMs, if population of such area is more than 1 lakh but not exceeding 10 lakhs, or
Not being more than 8 KMs, if population of such area is more than 10 lakhs. Population is to be considered according to the figures of last preceding census of which relevant figures have been published before the first day of the year.
61/2 per cent Gold Bonds,1977 or 7 per cent Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government
Special Bearer Bonds, 1991
Gold Deposit Bonds issued under the Gold Deposit Scheme 1999 or deposit certificates issued under the Gold Monetisation Scheme, 2015

Short Term Capital Gains

Period of holding for short term capital gains:

In respect of certain assets like shares (equity or preference) which are listed in a recognised stock exchange in India (listing of shares is not mandatory if transfer of such shares took place on or before July 10, 2014), units of equity oriented mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months.

Period of holding to be considered as 24 months instead of 36 months in case of unlisted shares of a company or an immovable property being land or building or both.

Any capital asset held by the taxpayer for a period of not more than 36 months immediately preceding the date of its transfer will be treated as short-term capital asset.

Short-term capital gains (STCG) are divided into 2 types:

Short-term capital gains covered under section 111A.
Short-term capital gains other than covered under section 111A.

STCG covered under section 111A

STCG arising on sale of equity shares listed in a recognised stock exchange, which is chargeable to STT.
STCG arising on sale of units of equity oriented mutual fund sold through a recognised stock exchange which is chargeable to STT.
STCG arising on sale of units of a business trust
STCG arising on sale of equity shares, units of equity oriented mutual fund or units of a business trust through recognised stock exchange located in any International Financial Services Centre and consideration is paid or payable in foreign currency even if transaction of sale is not chargeable to securities transaction tax (STT).

STCG other than covered under section 111A [As amended by Finance Act, 2018]

STCG arising on sale of equity shares other than through a recognised stock exchange.
STCG arising on sale of shares other than equity shares
STCG arising on sale of units of non-equity oriented mutual fund (debt oriented mutual funds).
STCG on debentures, bonds and Government securities.
STCG on sale of assets other than shares/units like STCG on sale of immovable property, gold, silver, etc.

Tax Rates on STCG:

Tax rates of STCG covered under section 111A is charged to tax @ 15% (plus surcharge and cess as applicable).
Normal STCG, i.e., STCG other than covered under section 111A is charged to tax at normal rate of tax which is determined on the basis of the total taxable income of the taxpayer.

Note:

Only a resident individual and resident HUF can adjust the exemption limit against STCG covered under section 111A. Thus, a non-resident individual/HUF cannot adjust the exemption limit against STCG covered under section 111A.

A resident individual/HUF can adjust the STCG covered under section 111A against the basic exemption limit but such adjustment is possible only after making adjustment of other income.

In other words, first income other than STCG covered under section 111A is to be adjusted against the exemption limit and then the remaining limit (if any) can be adjusted against STCG covered under section 111A.

Long Term Capital Gains

Period of holding for Long term capital gains:

Any capital asset held by the taxpayer for a period of more than 36 months immediately preceding the date of its transfer will be treated as long-term capital asset.

In case of unlisted shares, period of holding is to be considered as 24 months instead of 36 months.

An immovable property being land or building or both, period of holding is to be considered as 24 months from AY 2018-19. Before AY 2018-19, the holding period is 36 months.

Computation of long term capital gain:

Particulars	Rs.
Full value of consideration (i.e., Sales consideration of asset)	XXXXX
Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (E.g., brokerage, commission, etc.)	(XXXXX)
Net sale consideration	XXXXX
Less: Indexed cost of acquisition (i.e. Purchased cost of asset with indexation )	(XXXXX)
Less: Indexed cost of improvement, if any (*)	(XXXXX)
Exemptions provided under sections 54, 54EC, 54F, and 54B	-
Long-Term Capital Gain	XXXXX

In the above computation indexation means:

Indexation is the process that takes into account inflation from the time taxpayer bought the asset to the time taxpayer sell it. The way it works is that it allows taxpayer to inflate the purchase price of the asset to take into account the impact of inflation. The end result is that you get the benefit of lowering your tax liability.

Formula for calculating the indexation:

Cost of acquisition × Cost inflation index of the year of transfer of capital asset

Cost inflation index of the year of acquisition

COST INFLATION INDEX UNDER SECTION 48

Sl. No.	Financial Year	Cost Inflation Index
1	2001-02	100
2	2002-03	105
3	2003-04	109
4	2004-05	113
5	2005-06	117
6	2006-07	122
7	2007-08	129
8	2008-09	137
9	2009-10	148
10	2010-11	167
11	2011-12	184
12	2012-13	200
13	2013-14	220
14	2014-15	240
15	2015-16	254
16	2016-17	264
17	2017-18	272
18	2018-19	280

All the above allowances can be understood by their names but yet there are some allowances, which needs an explanation.

Tax Rates:

Sale of equity shares and equity-oriented mutual funds held for more than one year, on or after April 1, 2018 will be chargeable to tax at 10% plus cess @ 4%. Budget 2018 has increased cess from 3% to 4%. Therefore, cess of 4% will be added for the taxes to be paid from FY2018-19 onwards. Before FY 2018-19, all the STT transaction, equity shares and equity-oriented mutual funds held for more than one year are exempted.

No indexation benefit will be allowed on such transactions. However, capital gains up to Rs.100000 in a single financial year will be exempt from tax FY 2018-19.

Apart from the sale of equity shares and equity-oriented mutual funds remaining all tax on long term asset is 20%.

Exemption on long term capital gains

Gain on sale of residential house property (Section 54):

The taxpayer has purchased a new house one year prior to the sale or two years after the sale of original house or if taxpayer is constructing a new house within a period of 3 years after the sale of original house.
The amount is deposited in a bank under the Capital Gains 1988 account scheme.
The cost of the new house is equal to or more than the capital gain earned.
The cost of the new house is less than the capital gain, then the difference amount is taxed at 20%.
If the new house is sold within 3 years from the date of purchase or construction, then the cost of the new house is deducted by the amount of capital gain exempted on the original house and the difference in the sale price of the new house will be treated as a short term capital gain

If the capital gain is invested in long term specified assets of NHAI or Rural Electrification Corporation (Section 54EC):

The taxpayer must invest a part of the capital gain or the whole of the gain in specified assets like bonds of NHAI or REC that have a 3 year lock-in period, 6 months from the date of sale of the original asset.
The investment made should not be less than the capital gain. If a part of the gain is invested, then the proportionate amount will be exempted while the balance amount will be taxable.
Taxpayer must retain the new asset for a minimum of 3 years.

Gain from the sale of an asset other than a residential house property is used to buy a residential house (Section 54F):

The capital gain should be from a sale of an asset that is not a residential house.
The taxpayer has bought a new house one year before the sale of the asset or two years from the sale. He can also construct a house within 3 years from the sale of the original asset.
The cost of the new house must not be less than the value of the asset sold. If a part of the capital gain is invested, then only that part will be exempt, the balance amount will be taxable
If the full amount is not invested to either buy a house or construct it, then it should be kept in the bank under Capital Gains Scheme 1988 account. The amount in that account should be utilised for constructing a house or to buy a new house.
On the date the taxpayer is selling the original capital asset, he must not own more than one residential house apart from the new house. He must also not buy another house in 2 years or construct a new house from 3 years of buying or constructing the new house.