Capital gains refer to any profit or gain that arises from the sale of a capital asset. This gain or profit is charged to tax in the year in which the transfer of the capital asset takes place.

When there is a transfer (sale, exchange, relinquishment, extinguishment, compulsory acquisition, conversion, maturity, redemption, etc) of a capital asset then capital gains are charged to income tax. Also, if an inherited asset is sold by the person who inherits it, capital gains tax will be applicable. Assets received as gifts are conditionally exempted from the Income Tax Act.

Capital Asset

Capital asset means any property even if held for the purpose of business or profession and includes any securities held by an FII.

Examples of capital assets: land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewellery.

This also includes having rights in or in relation to an Indian company. It also includes rights of management or control or any other legal right.

The following are not considered capital assets:

  • Any stock, consumables or raw material held for the purpose of business or profession.
  • Personal goods such as clothes and furniture held for personal use (excluding jewellery, archaeological collections, drawings, paintings, sculptures).
  • Agricultural land in rural area in India.
  • Gold deposit bonds issued under the Gold Deposit Scheme (1999) or deposit certificates issued under the Gold Monetisation Scheme, 2015.

Definition of rural area (from AY 2014-15) – Any area which is outside the jurisdiction of a municipality or cantonment board, having a population of 10,000 or more is considered the rural area. (Population is as per the last census)

Distance from local limit of municipality or cantonment board is 2 km

If the population of the municipality/cantonment board is more than 10,000 but not more than 1 lakh

Distance from local limit of municipality or cantonment board is 6 km

If the population of the municipality/cantonment board is more than 1 lakh but not more than 10 lakh

Distance from local limit of municipality or cantonment board is 8km

If the population of the municipality/cantonment board is more than 10 lakh

Long-Term and Short-Term Capital Assets

Short-term Capital Asset

An asset which is held for not more than 36 months or less is a short-term capital asset.

Long-term Capital Asset

An asset that is held for more than 36 months is a long-term capital asset.

From F.Y. 2017-18 onwards – The criteria of 36 months has been reduced to 24 months in the case of Fixed assets being land, building, and house property.

Securities are short term capital assets if held for 12 months or less.

The assets are:

  • Equity or preference shares in a company listed on a recognized stock exchange in India
  • Securities (like debentures, bonds, government securities etc.) listed on a recognized stock exchange in India
  • Units of UTI, whether quoted or not
  • Units of equity oriented mutual fund, whether quoted or not
  • Zero coupon bonds, whether quoted or not

Tax on Equity and Debt Mutual Funds

Profits made on the sale of debt and equity funds are treated differently. Funds that invest heavily in equities, usually exceeding 65% of their total portfolio are called an equity fund.

Effective 11 July, 2014On or before 10 July, 2014
Short-Term GainsLong-Term GainsShort-Term GainsLong-Term Gains
Debt FundsAt tax slab rates of the individualAt 20% with indexationAt tax slab rates of the individual10% without indexation or 20% with indexation whichever is lower
Equity Funds15%Nil15%Nil

Change in Tax Rules for Debt Mutual Funds

Debt mutual funds have to be held for more than 36 months to qualify as a long-term capital asset. This change, in effect from last year’s Budget, means that investors would have to remain invested in these funds for at least three years to take the benefit of long-term capital gains tax.

If redeemed within 3 years, the capital gains will be added to one’s income and will be taxed under income tax slab.

Calculating Capital Gains

They are calculated differently for assets held for a longer period or short term.

Terms You Need to Know:

Full Value Consideration

The consideration of exchange of assets received or to be received by the seller, which he has transferred. Even if no consideration has been received, capital gains are chargeable to tax in the year of transfer.

Cost of Acquisition

The value of the capital asset was acquired by the seller.

Cost of Improvement

The cost incurred to make improvements in the capital asset by the seller.

Calculating capital gains tax can be done using one of the online tools designed for the purpose. When calculating capital gains tax using a calculator, the following information is to be entered:

  • Sale price.
  • Purchase price.
  • Details of the purchase such as the date, month and year of the purchase.
  • Sale details such as the date, month and year of sale.
  • Investment details, if any. The capital gains could have been invested in shares, debt funds, equity funds, real estate, gold or fixed maturity plans.

For any help on ITR Filing feel free to consult the tax experts at LegalRaasta. You can file ITR yourself via our ITR software or get CA’s help on filing income tax return. You can also use the option of Business ReturnBulk Return or Revised Return Filing.