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Capital Gain Exemptions

What we offer?

  • Apply and get Lower Tax Deducted Certificate
  • Computation of Capital Gains
  • Tax Planning on Capital Gains
  • Income Tax Return Filing for Capital Gains
  • Advise on various Re-investment options available to avoid paying taxes.

CAPITAL GAINS FOR IMMOVABLE PROPERTY

Sale of an immovable property will amount to Capital gains. There are 2 types of Capital Gains:

  1. Short Term Capital Gains: When an immovable property is held for less than 36 months, then the profit on sale of such property is called as Short term Capital Gains.
  2. Long Term Capital Gains: When an immovable property is held for more than 36 months, then the profit on sale of such property is called as Long term Capital Gains.

Taxation on Capital Gains

  1. Short Term Capital Gains- Taxed at slab rates
  2. Long term Capital Gains- taxed at flat 20%

TDS on sale of immovable property by a NRI

As per Section 195 of Income Tax Act 1961, when an NRI sells property, the buyer is liable to deduct TDS @ 20% and pay the balance 80% to the seller. TDS deducted can be claimed by the seller against his Capital Gains computation. TDS will be deducted on the sale consideration of the immovable property.

Computation of capital Gains

Capital Gains will be computed based on the below given way:

Particulars Rupees
Full Value of Consideration XXX
Less: Cost/Indexed Cost of Acquisition (XXX)
Less: Cost/Indexed cost of improvement (XXX)
Gross Capital Gains XXX
Gross Capital Gains XXX
Less: Exemptions XXX
Net Capital Gains XXX

Concept of Indexation:

The concept of indexation is very important as this concept saves most of the profit from being liable to taxes.

Below example explains how the concept of indexation works:

Example: Mr. Rahul purchased a house on 18.08.2004 for Rs. 60 Lakhs. In the year of 2013, he incurred some cost to improve the house to the tune of Rs. 5 Lakhs.

In 2014, he wanted to sell the house. He found a buyer for Rs. 1.5 Crore.

At the face of this transaction, it seems like the seller has earned a profit of Rs. 85 Lakhs and he has to pay taxes on this amount.

But this is not his actual gains for tax purposes.

Summary of the situation:

Concept of Indexation:

For the purpose of calculating Long Term capital gain, indexation using the Cost inflation index shall be done to cost of acquisition and cost of improvement.

Indexed Cost=Cost inflation index at the year of sale / Cost inflation index at the year of Purchase

Full Value of Consideration: Is the total consideration received for sale of the property.

Cost/Indexed Cost of Acquisition: The price which the assesse paid including the expenses incurred to acquire the asset. This price includes all expenses paid to acquire the asset. For Stort Term Capital Gains only the value which is actually paid for the purchase of property is included. But in Long Term Capital Gains the value which is actually paid for purchase is inflated with respect to the inflation indexes which in short is known as Indexation.

Cost/Indexed Cost of improvement: Any Capital Expenditure incurred in making any additions or alteration to Capital Asset. Indexation benefit is not available for Short Term Capital Assets.

Example: Mr. Rahul purchased a house on 18.08.2004 for Rs. 60 Lakhs. In the year of 2010, he incurred some cost to improve the house to the tune of Rs. 5 Lakhs. In 2015, he wanted to sell the house. He found a buyer for Rs. 1.5 Crore.

Summary of the situation:

Particulars Rupees
Total sale value Rs. 1.5 Crore
Total Purchase in 2004 Rs. 60 Lakhs
Total cost of improvement Rs. 5 Lakhs

Calculation of Long term Capital Gains

Particulars Rupees
Full Value of Consideration 1,50,00,000
Less: Indexed Cost of Acquisition (1,35,12,500)*
Less: Indexed Cost of improvement (7,60,197)**
Gross Capital Gains 1411303
Less Exemptions Nil
Net Capital Gains 1411303
Tax on Capital Gains @ 20% 2,82,260

  • * 60,00,000x1081/480= Rs 1,35,12,500
  • * 5,00,000x1081/711= Rs 7,60,197

If Mr Rahul reinvests the sale proceeds in the below mentioned schemes, then he can claim exemptions and he might end up paying Nil/Low taxes.

Section 54-Sell one house and purchase another.

Sell one residential property and purchase a residential property

If Mr. Rahul sells a residential property, he can:

  1. Purchase another residential property within 1 year before or two years after the due date of transfer of the property sold.
  2. Construction of residential house property within a period of 3 years from the date of acquisition.

Mr. Rahul must not transfer this new asset within a period of 3 years from the date of acquisition

Section 54 EC - Sell any asset and purchase in specified bonds

Sell any asset and purchase a new asset being specified bonds

If Mr. Rahul sells any asset within the act, he can:

  1. Invest within 6 months from the date of transfer in long term specified bonds as notified by the government of India for a minimum period of 3 years.

Notified bonds are issued usually by REC or NHAI and the rate of interest offered is 6%.

Section 54 F- Sell any asset and purchase a residential property

Sell any asset and purchase a new asset being residential property.

If Mr. Rahul sells any asset within the act, he can:

  1. Purchase another residential property within 1 year before or one year after the due date of transfer of the property sold.
  2. Construction of residential house property within a period of 3 years from the date of acquisition.

In this case, if the whole sale consideration is not invested and only a part of the sale consideration is invested, exemption shall be allowed proportionately. Amount Exempt= Capital Gains * Amount Invested / Net Sale Consideration

CAPITAL GAINS ON SALE OF SECURITIES.

Capital Gains on sale of shares/ mutual funds are taxed based on the nature of the capital Asset.

Particulars Short Term Capital Asset Long term capital asset
  • Listed shares
  • Units of Equity Oriented mutual funds
  • Units of UTI
<12 months >12 months
  • Unlisted Shares
  • Units of Debt Oriented Mutual Funds
  • Any other case
<36 months >36 months

Short Term Capital Gains on sale of shares and Mutual Funds

Short Term Capital Gains are taxed at a flat rate of 15%. However, if the assesse gross total income apart from Short term Capital Gains is less than Rs 2,50,000 then short term capital gains shall be reduced by an amount by which the other incomes falls short of Rs 2,50,000.

Example 1: Mr Rahul has income from other sources of Rs 3,00,000. And Short term Capital gains is Rs 1,50,000. How to calculate tax payable?

In this case Income from other sources will be taxed as per slab rates and Short Term Capital Gains as always is taxed at Flat Rate of 15%.

Particulars Amount (in Rs.)
Income from capital gains 1,50,000
Income from other Sources 3,00,000
Gross Total Income/Net total income 4,50,000

Tax on Net Total Income

Income from other Sources(As per slab rates) Income from Capital Gains
0-2,50,000= Nil 2,50,001-3,00,000=10%= 5,000 1,50,000*15%= 22,500

Total Tax= 5,000+22,500= Rs 27,500


Example 2: Mr Rahul has income from other sources of Rs 1,50,000 and Stort term capital Gains of Rs 1,50,000. How much taxes should he pay?

Calculation of taxes without indexation benefit

In this case, Gross Total income is 1,50,000 which is less than 2,50,000. Therefore, Short term capital Gains upto to extent of 2,50,000 that is Rs 1,00,000 will not be taxed. The balance 50,000 is taxed at a flat rate of 15%.

Tax on Total income= 50,000*15%= Rs 7,500.


Long Term Capital Gains on sale of shares and Mutual funds

  1. As per Sec 10(38) of income Tax Act 1961, Long Term Capital Gains on sale of shares and Mutual Funds are exempt if:
    • Sale of shares or mutual funds takes place after 1st October 2004 and,
    • Such transaction is chargeable to Securities Transactions tax.
  2. With respect to shares which are not listed in recognised stock exchange, then it will be taxed at 10% without indexation benefit or 20% with indexation benefit.
  3. In any other case it is taxed at 20% with indexation benefit.