Capital Gains Tax in India: Types, Tax Rates, Calculation, Exemptions & Tax Saving
When you sell an asset like property, shares, or mutual funds and earn a profit, that profit is called a capital gain. In India, this gain is taxed under the Capital Gains Tax as specified in the Income Tax Act, 1961.
Let`s break down everything you need to know about Capital Gains Tax in India.
What is Capital Gains Tax?
Capital Gains Tax is a tax on the profit you make when you sell a valuable asset. This tax is only charged when you sell or give away the asset. It does not apply if you just keep the asset or receive it as an inheritance.
What is a Capital Asset?
According to the Income Tax Act, capital assets include:
- Land
- Buildings
- Stocks and securities
- Mutual funds
- Gold and other valuable jewellery
- Vehicles
- Leasehold rights
Types of Capital Gains
Capital gains are categorized based on the holding period of the asset:
1. Short -Term Capital Gains (STCG)
Applies when the asset is held for a short period before selling. Holding periods for different assets:
- Equity shares & mutual funds (listed): < 12 months
- Real estate, gold, debt funds: < 36 months
- Unlisted shares: < 24 months
2. Long-Term Capital Gains (LTCG)
Applies when the asset is held for a longer period:
- Equity shares & mutual funds (listed): ? 12 months
- Real estate, gold, debt funds: ? 36 months
- Unlisted shares: ? 24 months
How is Capital Gain Calculated?
1. Short-Term Capital Gain (STCG)
STCG = Full Sale Value - (Cost of Acquisition + Cost of Improvement + Sale Expenses) Indexation benefit is not allowed.
2. Long-Term Capital Gain (LTCG)
LTCG = Full Sale Value - (Indexed Cost of Acquisition + Indexed Cost of Improvement + Sale Expenses)
Indexed Cost = Original Cost x (CII of year of sale / CII of year of purchase)
(CII = Cost Inflation Index)
This adjustment for inflation reduces the tax liability.
Capital Gains Exemptions (Section-wise)
To reduce or eliminate tax liability, the Income Tax Act provides various exemptions under specific sections.
1. Section 54
- Sale of residential property
- Reinvest in another residential property
- Time limit: Purchase within 1 year before or 2 years after sale (3 years for construction)
2. Section 54F
- Sale of any asset other than a house
- Reinvest the entire sale consideration in one residential house
- Full exemption if entire amount is reinvested
3. Section 54EC
- Sale of long-term capital asset (e.g., land or building)
- Invest in specified bonds (NHAI/REC)
- Limit: ?50 lakh (within 6 months of sale)
- Lock-in: 5 years
Capital Gains Tax Saving Tips
Here`s how you can reduce or save on your capital gains tax:
1. Invest in residential property (Section 54/54F)
Ideal for those selling property or other capital assets.
2. Invest in 54EC Bonds
Safe, government-backed, and provide tax exemption.
3. Offset with Capital Losses
You can set off short-term and long-term losses against respective gains.
4. Use Basic Exemption Limit
If you are a senior citizen or have lower income, you can adjust LTCG against the unused portion of your basic exemption limit.
5. Hold assets longer
Converting STCG to LTCG can significantly reduce your tax rate (especially for equities and real estate).
Documents Required for Capital Gains Reporting
- Sale deed / transfer document
- Purchase deed / cost documents
- Brokerage/payment receipts
- PAN card
- Indexation data (CII values)
- Investment proof (if claiming exemptions)
How to Report Capital Gains in ITR?
- Report STCG under Schedule CG - Short-Term Capital Gains
- Report LTCG under Schedule CG - Long-Term Capital Gains
- If exempt (under Section 54, etc.), mention it in Exempt Income schedule
File using ITR-2 or ITR-3, depending on your income sources.
Conclusion
Knowing how capital gains tax works and planning for it can help you make the most of your investments and lower your tax bill in a legal way. If you`re selling stocks, mutual funds, or real estate, it`s important to understand the rules about how long you hold the asset, the tax rates that apply, and any exemptions that might be available.
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