Last modified: 22 August 2016

Taxability of Capital Gains II

Cost of Inflation Index

Financial Year IndexFinancial Year Index
1981-821002000-01406
1982-831092001-02426
1983-841162002-03447
1984-851252003-04463
1985-861332004-05480
1986-871402005-06497
1987-881502006-07519
1988-891612007-08551
1989-901722008-09582
1990-911822009-10632
1991-921992010-11711
1992-932232011-12785
1993-942442012-13852
1994-952592013-14939
1995-962812014-151024
1996-973052015-161081
1997-983312016-171125
1998-99351
1999-00389

Tax on Short Term Capital Gain

  1. STCG covered under section 111A

    Section 111A is applicable in case of STCG arising on transfer of equity shares or units of equity oriented mutual-funds (*) or units of business trust other than a unit allotted by the trust in exchange of shares of a special purpose vehicle as referred to in section 47(xvii), which are transferred on or after 1-10-2004 through a recognised stock exchange and such transaction is liable to securities transaction tax (STT).

    (*) Equity oriented mutual fund means a mutual fund specified under section 10(23D) and 65% of its investible funds, out of total proceeds are invested in equity shares of domestic companies.

    If the conditions of section 111A as given above are satisfied, then the STCG is termed as STCG covered under section 111A. Such gain is charged to tax at 15% (plus surcharge and cess as applicable).

    With effect from Assessment Year 2017-18, benefit of concessional tax rate of 15% shall be available even where STT is not paid, provided that

    • transaction is undertaken on a recognised stock exchange located in any International Financial Service Centre, and
    • consideration is paid or payable in foreign currency
    Examples of 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 are cognised 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).
  2. STCG not covered under section 111A

    If STCG is not covered under Section 111A, it will be charged to normal tax rate depending on the total income of the assessee.

    Examples of STCG not covered under section 111A :

    • 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 on Long-term Capital Gain

Generally, long-term capital gains are charged to tax @ 20% (plus surcharge and cess as applicable), but in certain special cases, the gain may be (at the option of the taxpayer) charged to tax @ 10% (plus surcharge and cess as applicable). The benefit of charging long-term capital gain @ 10% is available only in respect of long-term capital gains arising on transfer of any of the following asset:
  1. Any security (*) which is listed in a recognised stock exchange in India;
  2. Any unit of UTI or mutual fund (whether listed or not) ($); and
  3. Zero coupon bonds.

(*) Securities for this purpose means "securities" as defined in section 2(h) of the Securities Contracts (Regulation) Act, 1956. This definition generally includes shares, scrips, stocks, bonds, debentures, debenture stocks or other marketable securities of a like nature in or of any incorporated company or other body corporate, Government securities, such other instruments as may be declared by the Central Government to be securities and rights or interest in securities.

($) This option is available only in respect of units sold on or before 10-7-2014.

In other words, in case of long term capital gain arising on account of aforesaid assets, the taxpayer has following two options:

  1. Avail of the benefit of indexation; the capital gains so computed will be charged to tax at normal rate of 20% (plus surcharge and cess as applicable).
  2. Do not avail of the benefit of indexation; the capital gain so computed is charged to tax @ 10% (plus surcharge and cess as applicable).

The selection of the option is to be done by computing the tax liability under both the options, and the option with lower tax liability is to be selected.

Exemptions from Long Term Capital Gains

  • Long-term capital gains arising on account of sale of equity shares listed in a recognised stock exchange, i.e., LTCG exempt under section 10(38)

    As per section 10(38), long-term capital gain arising on transfer of equity share or units of equity oriented mutual fund* or units of business trust other than a unit allotted by the trust in exchange of shares of a special purpose vehicle as referred to in section 47(xvii)is not chargeable to tax in the hands of any person, if following conditions are satisfied:

    • The transaction i.e. the transaction of sale of equity shares or units of an equity oriented mutual fund or units of business trust should be liable to securities transaction tax.
    • Such shares/units should be long-term capital asset.
    • Transfer should have taken place on or after October 1, 2004.

    * Equity oriented mutual fund means a mutual fund specified under section 10(23D) and 65% of its investible funds out of total proceeds are invested in equity shares of a domestic company.

    If LTCG is covered under section 10(38), then it is exempt from tax.

    Exemption from long term capital gains under section 10(38) shall be available w.e.f April 1, 2017 even where STT is not paid, provided that -

    • transaction is undertaken on a recognised stock exchange located in any International Financial Service Centre, and
    • consideration is paid or payable in foreign currency
  • Section 54:

    In case the asset transferred is a long term capital asset being a residential house, and if out of the capital gains, a new residential house is constructed within 3 years, or purchased 1 year before or 2 years after the date of transfer, then exemption on the LTCG is available on the amount of investment in the new asset to the extent of the capital gains. It may be noted that the amount of capital gains not appropriated towards purchase or construction of a new house within 3 years may be deposited in the Capital Gains Account Scheme of a public sector bank before the due date of filing of Income Tax Return. This amount should subsequently be used for purchase or construction of house.

  • Section 54F:

    When the asset transferred is a long term capital asset other than a residential house, and if out of the consideration, investment in purchase or construction of a residential house is made within the specified time as in sec. 54, then exemption from the capital gains will be available as:

    1. If cost of new asset is greater than the net consideration received, the entire capital gain is exempt.
    2. Otherwise, exemption=Capital Gains x Cost of new asset/ Net consideration. It may be noted that this exemption is not available, if on the date of transfer, the assessee owns any house other than the new asset.

    It may be noted that the Finance Act 2000 has provided that with effect from assessment year 2001-2002, the above exemption shall not be available if assessee owns more than one residential house, other than new asset, on the date of transfer. Investment in the Capital Gains Account Scheme may be made as in Sec.54.

  • Section 54EA:

    If any long term capital asset is transferred before 1.4.2000 and out of the consideration, investment in specified bonds/debentures/shares is made within 6 months of the date of transfer, then exemption from capital gains is available as computed in Section 54F.

  • Section 54EB:

    If any long term capital asset is transferred before 1.4.2000 and investment in specified assets is made within a period of 6 months from the date of transfer, then exemption would be available as computed in section 54F.

  • Section 54EC:

    This section has been introduced from assessment year 2001-2002 onwards. It provides that if any long term capital asset is transferred and out of the consideration, investment in specified assets including bonds issued by National Bank for Agricultural & Rural Development or by National Highway Authority of India or by Rural Electrification Corporation is made within 6 months from the date of transfer, then exemption would be available as computed in Sec. 54F.

  • Section 54ED:

    This section has been introduced from assessment year 2002-03 onwards. It provides that if a long term capital asset, being listed securities or units, is transferred and out of the consideration, investment in acquiring equity shares forming part of an eligible issue of capital is made within six months from the date of transfer, then exemption would be available as computed in Sec. 54F.

Loss under Capital Gains

Loss from transfer of a short term Capital Asset can be set off against gain from transfer of any other capital asset (Long Term or Short Term) in the same year. Loss from transfer of a Long term Capital Asset can be set off against gain from transfer of any other long term Capital Asset in the same year.

If there is a net loss under the head "Capital Gains" for an assessment year, the same cannot be set off against any other head of income viz., Salaries, House Property, Business or Profession or other sources. It has to be separated into Short term Capital Loss (STCL) and long term capital loss (LTCL) and carried forward to next assessment year. In the next year, the STCL can be set off against any gains from transfer of any capital asset (Long term or Short term) and the LTCL can be set off against gains from transfer of long term capital asset only. Any unabsorbed loss after such set off can be further carried forward to next assessment year.

Capital loss computed in an assessment year can be carried forward for eight assessment years and set off as above.

Adjustment of LTCG against the basic exemption limit

Basic exemption limit means the level of income up to which a person is not required to pay any tax. The basic exemption limit applicable in case of an individual for the financial year 2016-17 is as follows :
  • For resident individual of the age of 80 years or above, the exemption limit is Rs. 5,00,000.
  • For resident individual of the age of 60 years or above but below 80 years, the exemption limit is Rs. 3,00,000.
  • For resident individual of the age of below 60 years, non-resident individual (irrespective of the age) and HUF the exemption limit is Rs. 2,50,000.

Only a resident individual/HUF can adjust the exemption limit against LTCG and STCG covered under section 111A but such adjustment is possible only after making adjustment of other income. In other words, first income other than LTCG and STCG covered under section 111A is to be adjusted against the exemption limit and then the remaining limit (if any) can be adjusted against LTCG and STCG covered under section 111A. A non-resident individual and non-resident HUF cannot adjust the exemption limit against LTCG and STCG covered under section 111A.

Deduction under sections 80C to 80U

No deduction is available under sections 80C to 80U on 'Short-term Capital Gains covered under Section 111A' and Long-term Capital Gains. Such deductions are available on 'Short Term Capital Gains not covered under section 111A'.

Transfers treated as Exempt Income

The Finance Act 2003, has introduced S.10(33) and S.10(36) w.e.f. 01.04.2004 which provide that income arising from certain types of transfer of capital assets shall be treated as exempt income.

Section 10(33) of Income Tax Act provides for exemption of income arising from transfer of units of the US 64 (Unit scheme 1964).

Section 10(36) of Income Tax Act provides that income arising from transfer of eligible equity shares held for a period of 12 months or more shall be exempt.

The Finance Act 2004 has introduced section 10(38) of the Income Tax Act which provides that no capital gains shall arise in case of transfer of equity shares held as a long term capital asset by an individual or HUF w.e.f. 01.04.2005 provided such a transaction is chargeable to 'securities transaction tax'.

Frequently Asked Questions

I have sold a house for Rs.5 lakh, which had been purchased by me 5 years ago for Rs.2 lakh. Am I required to pay any tax on the profit of Rs.3 lakh earned by me?
Yes. This profit, which is called capital gain, is taxable subject to certain conditions.
Sale of what kind of assets attracts capital gains?
All transfer of capital assets attracts capital gains. Capital assets are those properties that have an enduring value and they are not consumable.
What does transfer mean?
Transfer means giving up your right on an asset. It includes sale, exchange, compulsory acquisition under any law, relinquishment etc.
Does the capital gain tax differ according to period of holding an asset?
Yes. If assets are held for more than 36 continuous calendar months prior to transfer they are called long-term assets and their transfer results in long-term capital gain that is taxed at the rate of 20%. The only exception to this general rule is in respect of securities for which the period of holding prior to transfer is 12 months to be considered as long-term capital asset and the rate of tax is nil, provided securities transaction tax has been paid. Any transfer of assets held for lesser than these periods would result in short-term capital gain. This is taxed at normal rates in respect of all assets except securities. For securities the rate of tax is 10% along with payment of securities transaction tax.
Can I get any benefit for erosion in the value of money over the years while calculating my gain on sale of asset?
Yes. To neutralize the erosion of value of money over the years the cost index for the year of sale is factored in while calculating the cost of investment so that the impact of inflation is neutralized and only the actual gain to the seller is brought to tax.
I have sold a property and made profit. If the sale amount is reinvested in purchase of a site, is my profit exempt from tax?
No. For getting exemption the nature of property sold is relevant. If you have sold a residential property, the gain received on sale should be reinvested in another residential property {which may include land and building] to qualify for exemption {section 54]. Even if you have sold a property other than a residential property, you will qualify for exemption only if the net consideration is reinvested in a residential property which may include land and building{section 54F].
If I sell my land will I be taxed?
Gain from sale of non-agriculture land is taxable as capital gain. Gain from sale of agriculture land is taxable only if it is located within 8 kilometers from the urban limits.

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