| Short-term Capital gains tax | Long-term capital gains tax | |
| Sale transactions of securities which attracts STT:- | 10% | NIL |
| Sale transaction of securities not attracting STT:- | ||
| Individuals (resident and non-residents) | Progressive slab rates | 20% with indexation; 10% without indexation (for units/ zero coupon bonds) |
| Partnerships (resident and non-resident) | 30% | |
| Individuals (resident and non-residents) | 30% | |
| Overseas financial organisations specified in section 115AB | 40% (corporate) 30% (non-corporate) | 10% |
| FIIs | 30% | 10% |
| Other Foreign companies | 40% | 20% with indexation; 10% without indexation (for units/ zero coupon bonds) |
| Local authority | 30% | |
| Co-operative society | Progressive slab rates |
A taxpayer can legitimately make investments of Rs 50 lakh each in two consecutive financial years, provided the said investments are made within a period of six months.
Section 54EC of the Income Tax Act, 1961 provides exemption from long-term capital gains tax provided an assessee invests within six months after the sale of his property in long-term “specified assets”. The Finance Act 2007 limited such exemption to Rs 50 lakh in any financial year.
Some overzealous tax assessing officers seem to interpret this as a one-time exemption up to Rs 50 lakh only. Such an interpretation will prevent anyone taking advantage of a property sale, for example, in January 2008, facilitating an immediate Rs 50 lakh investment in January 2008 in “specified assets”, and another Rs 50 lakh investment before the expiry of six months after sale in “specified assets”.
It is evident from a strict interpretation of the law that the limitation of Rs 50 lakh is with reference to a particular financial year and not with reference to a particular sale transaction. Therefore, a taxpayer can legitimately make investments of Rs 50 lakh each in two consecutive financial years, provided the said investments are made within a period of six months after the date of transfer of the said capital asset.
Both the National Highway Authority of India (NHAI) and Rural Electrification Corporation Ltd (REC) have just released their new 54EC CGT exemption 5.75 per cent three-year bonds for the fiscal 2008-2009, allowing investors to invest up to Rs 50 lakh. These issues close on March 31, 2009.
Infrastructure investments
The Ministry of Finance has been proactive in developing a fiscal policy tailored to the development needs of the country by channelling long-term capital gains into infrastructure investments with appropriate tax incentives. Such measures have partially helped to arrest the growth of the underground economy. There is a strong incentive to undervalue property transactions, as a market value transaction is subject to LTCG tax at 20 per cent. The buyers encourage undervaluation, as they too escape the stamp duty of 9 per cent payable on registration.
The limitation of investments up to Rs 50 lakh seems to have been instituted to prevent the misuse of exemptions by corporations by artificially structuring transactions, which virtually seems to have eliminated the availability of such bonds for investors with legitimate long-term capital gains.
The MoF has a delicate balancing act to perform in achieving its somewhat competing and conflicting objectives. Such limits on investment run counter to official attempts to bridge the gap between the market value and registered value of properties. The MoF needs to consider increasing the limits on exemption, as and when it finds it appropriate to do so without jeopardising its revenue and developmental goals.
If you sell any capital asset (like a house property), a capital gains tax liability can arise on the same. If the asset (property in this case) has been sold within 36 months from the date of purchase, it amounts to short-term capital gains. Conversely, if the asset is held for a period of more than 36 months, a long-term capital gain arises.
In case of assets like mutual funds, the holding criterion for determining long-term or short-term is reduced to 12 months. So if you hold the security for over 12 months, it qualifies for a long-term gain.
The following illustration explains how a capital gains are computed. Table 1 Cost of Purchase (Rs) 1,500,000 Sale Proceeds (Rs) 3,000,000 Date of Purchase 01-Mar-95 Date of Sale 01-Mar-05 Cost Inflation Index for the year of purchase 259 Cost Inflation Index for the year of sale 480 Sale Proceeds (Rs) 3,000,000 Less: Indexed Cost of Purchase (Rs) 2,779,923 Long-term capital gains chargeable to tax (Rs) 220,077 Long-term capital gains tax @ 20% 44,015 Suppose you purchased a house property in March 1995 at a cost of Rs 1,500,000 and sold the same 10 years hence at Rs 3,000,000. Your profit on sale would be Rs 1,500,000. However for the purpose of computing capital gains, the purchase price has to be adjusted for inflation using the Cost Inflation Index (see Table 1). The long-term capital gains will now amount to Rs 220,077. At a tax rate of 20% (for long-term capital gains), the tax liability amounts to Rs 44,015. Now let us examine the various options available for managing the capital gains liability. 1. Invest in capital gains bonds Assesses have the option of not paying any long-term capital gains tax by investing the profit (Rs 220,077) in capital gains bonds with a stipulated time period. Capital gains bonds are issued by specified institutions and tax benefits are available under Section 54EC of the Income Tax Act. For the purpose of claiming tax benefits, investments should be made within a period of 6 months from the date when the capital asset was sold. Similarly, investors are required to stay invested in the bonds for a period of 36 months from the date of investment. Redemption before completion of the 36-month period will negate the tax benefits. Table 2 demonstrates the working on capital gains bonds. NABARD offers capital gains bonds with a coupon rate of 5.50% for a 5-year period. Investors have the option of liquidating their investments at the end of 3 years without affecting the tax benefits claimed. Table 2 Long-term capital gains (Rs) 220,077 Tax saved at time of investing (Rs) 44,015 Effective amount invested (Rs) 176,062 Coupon rate 5.50% Tenure (years) 3 Maturity proceeds (Rs) 246,252 3-year CAGR returns* 11.83% (*Returns adjusted for tax benefits) Since investing in capital gains bonds entails not paying any long-term capital gains tax, the net amount (long-term capital gains less tax liability on the same) has been used for computing the returns. Similarly, interest earnings from the capital gains bonds are assumed to be taxed at the highest tax slab (30%, plus 2% for education cess). In the above example, the investor would earn returns at 11.83% CAGR over the 3
-year period. This option will appeal to investors with a low risk appetite and to those for whom not paying tax is a high priority.
2. Pay the tax and invest in other avenues
If you are not happy with the idea of locking away your gains in capital gains bonds for a 3-year period, you can explore the possibility of paying the capital gains tax liability and investing the balance in alternate avenues like mutual funds.
Table 3 lists returns clocked by some leading diversified equity funds and balanced funds.
Table 3
| 3-year* |
Diversified Equity Funds |
|
HDFC [Get Quote] Top 200 | 66.33% |
Franklin India Bluechip | 59.91% |
Sundaram Growth | 55.55% |
Balanced Funds |
|
HDFC Prudence | 53.89% |
DSP ML Balanced | 42.79% |
FT India Balanced | 37.64% |
(Source: Credence Analytics; NAV data as on November 11, 2005. *Returns are Compounded, Annualised.)
Clearly the mutual fund schemes under consideration have clocked far superior returns vis-�-vis the capital gains bonds as seen in Table
3. However, equity-oriented schemes are high-risk investment avenues and expose investors to considerably higher levels of risk as compared capital gains bonds.
Secondly, unlike capital gains bonds, mutual funds don't offer assured returns. Finally the returns listed above are historical in nature.
While it would be difficult to predict how the equity markets will behave over the next 3 years, we believe a 15% CAGR return over this time frame seems like a reasonable one. Equity-oriented funds if held for a period of more than 12 months are exempt from any long-term capital gains tax liability; also dividends received from such funds are totally exempt from tax.
In such a scenario, investors will be better off paying tax and investing the balance in mutual funds rather than investing in capital gains bonds.
Table 4
Long-term capital gains (Rs) | 220,077 |
Less: Long-term capital gains tax paid (Rs) | 44,015 |
Net amount invested (Rs) | 176,062 |
3-year returns* | 15.00% |
Tenure (years) | 3 |
Maturity proceeds (Rs) | 267,768 |
(*Returns are Compounded, Annualised.)
3. Invest the gains in a residential house property Section 54 and Section 54F of the Income Tax Act contains provisions whereby long-term capital gains can be utilised to acquire/construct a residential house property. If the necessary conditions (including the time frame within which the gains must be invested for buying/constructing a property) are fulfilled, the assessee is exempt from paying capital gains tax. As in the case of capital gains bonds, the property acquired should not be transferred within a 3-year period from the date of transfer or construction; failure to adhere to the same will negate the tax benefits claimed. As we had mentioned earlier, capital gains bonds are not the only means for managing your tax liability. Your decision to invest in capital gains bonds or otherwise should be determined by your risk appetite and investment objective among others. For example, if you are content with the idea of a low-risk but assured-returns investment avenue, coupled with the prospect of not paying any tax, capital gains bonds are your calling. Alternately, you can consider paying up your tax liability and using the mutual fund route.
An International Comparison of Capital Gains Tax Rates
American Council for Capital Formation
August 1998
Most industrial and developing countries tax individual and corporate capital gains more lightly than does the United States, according to a survey of twenty-four industrialized and developing countries that the ACCF Center for Policy Research commissioned from Arthur Andersen LLP. The Center's analysis shows that the United States taxes both short- and long-term capital gains more harshly than most other countries. High capital gains tax rates increase the bias against saving and investment, raise the cost of capital for new investment, and slow U.S. economic growth.
Individual Capital Gains Tax Rates
Both short- and long-term capital gains on equities are taxed at higher rates in the United States than in most of the other twenty-three countries surveyed. Short-term gains are taxed at 39.6 percent in the United States compared to an average of 19.4 for the sample as a whole (see comparison table, parts I & II, and accompanying notes [marked with asterisk]). Long-term gains face a tax rate of 20 percent in the United States versus an average of 15.9 for all the countries in the survey. Thus, U.S. individual taxpayers face tax rates on long-term gains that are 26 percent higher than those paid by the average investor in other countries. In addition, the United States is one of only five countries surveyed with a holding period requirement in order for the investment to qualify as a capital asset.
The reduction in individual capital gains tax rates in the Taxpayer Relief Act of 1997 lowered the cost of capital for new investment and thus will enhance U.S. productivity and economic growth. The 1997 reductions almost certainly contributed to the current budget surpluses. In addition, shortening the holding period for long-term capital gains from eighteen to twelve months, which was included in the IRS Restructuring and Reform Act of 1998, signed into law by President Clinton July 22, 1998, will be a further boost to investment.
Corporate Capital Gains Tax Rates
Similarly, short- and long-term corporate capital gains tax rates are higher in the United States than in most other industrial and developing countries surveyed. Both short- and long-term gains are taxed at a rate of 35 percent in the United States, compared to an average of 22.8 percent for short-term gains and 19.6 percent for long-term gains in the sample as a whole. In other words, U.S. corporations face long-term capital gains tax rates almost 80 percent higher than those of their competitors in other countries. The U.S. tax rate on long-term corporate capital gains is higher than that of all but two of the other countries surveyed (Germany [45 percent] and Australia [36 percent], and Australia provides for indexing the cost of an asset). In addition, only four of the twenty-four countries surveyed impose a holding period in order to be eligible for preferential corporate capital gains tax rates.
Conclusion
Sound tax policy and economic considerations, as well as revenue consequences, argue for further reductions in U.S. individual capital gains taxes. In addition, the U.S. corporate capital gains tax rate of 35 percent should be reduced, thereby creating a meaningful differential between the tax rate on ordinary corporate income and on capital gains. This would reinstate the historical U.S. treatment of corporate capital gains: an alternative corporate capital gains tax was part of the Internal Revenue Code from 1942 until its repeal by the Tax Reform Act of 1986.
| PART I: COMPARISON OF CAPITAL GAINS TAX RATES FOR INDIVIDUALS (*indicates note) | |||||
| Country | Gross Domestic Saving as a Percent of GDP | Maximum Individual Tax Rate | Individual Capital Gains: Max. Tax Rate on Equities | Individual Holding Period | |
|---|---|---|---|---|---|
| Short-term | Long-term | ||||
| Argentina | 18.0 | 33.0 | Exempt | Exempt | No |
| Australia | 21.0 | 48.5 | 48.5 | 48.5; asset cost is indexed | No |
| Belgium | 23.0 | 56.7 | Exempt | Exempt | No |
| Brazil | 18.0 | 27.5 | 15.0 | 15.0 | No |
| Canada | 21.0 | 31.3 | 23.5 | 23.5 | No |
| Chile | 26.0 | 45.0 | 45.0; annual exclusion of $6,600 | 45.0; annual exclusion of $6,600 | No |
| China | 44.0 | 45.0 | 20.0; shares traded on major exchange exempt | 20.0; shares traded on major exchange exempt | No |
| Denmark | 21.0 | 61.7 | 40.0 | 40.0; shares valued at less than $16,000 exempt if held 3+ years | Yes, 3 years* |
| France | 21.0 | 58.1 | 26.0; annual exclusion of $8,315 | 26.0; annual exclusion of $8,315 | No |
| Germany | 23.0 | 55.9 | 55.9 | Exempt | Yes, 6 months |
| Hong Kong | 31.0 | 20.0* | Exempt | Exempt | No |
| India | 24.0 | 30.0 | 30.0 | 20.0 | Yes, 1 year |
| Indonesia | 33.0 | 30.0 | 0.1 | 0.1 | No |
| Italy | 22.0 | 46.0 | 12.5 | 12.5 | No |
| Japan | 30.0 | 50.0 | 1.25% of sales price or 20% of net gain | 1.25% of sales price or 20% of net gain | No |
| Korea | 34.0 | 40.0 | 20.0; shares traded on major exchange exempt | 20.0; shares traded on major exchange exempt | No |
| Mexico | 23.0 | 35.0 | Exempt | Exempt | No |
| Netherlands | 26.0 | 60.0 | Exempt | Exempt | No |
| Poland | 18.0 | 40.0 | Exempt | Exempt | No |
| Singapore | 50.0 | 28.0 | Exempt | Exempt | No |
| Sweden | 22.0 | 57.0 | 30.0 | 30.0 | No |
| Taiwan | N/A | 40.0 | Exempt (local company shares) | Exempt (local company shares) | No |
| United Kingdom | 15.0 | 40.0 | 40.0; shares valued at less than $11,225 exempt | 40.0; shares valued at less than $11,225 exempt | Yes, 1 to 10 years* |
| United States | 16.0 | 39.6 | 39.6 | 20.0 | Yes, 1 year* |
| Average | 25.2 | 42.4 | 19.4 | 15.9 | 79.2% have no holding period |
| PART II: COMPARISON OF CAPITAL GAINS TAX RATES FOR CORPORATIONS (*indicates note) | ||||
|---|---|---|---|---|
| Country | Maximum Corporate Income Tax Rate | Corporate Capital Gains: Maximum Tax Rate on Equities | Corporate Holding Period | |
| Short-term | Long-term | |||
| Argentina | 33.0 | 33.0 | 33.0 | No |
| Australia | 36.0 | 36.0 | 36.0; asset cost is indexed | No |
| Belgium | 40.2 | Exempt | Exempt | No |
| Brazil | 33.0 | 33.0 | 33.0 | No |
| Canada | 29.1 | 21.8 | 21.8 | No |
| Chile | 15.0 | 15.0 | 15.0; asset cost is indexed | No |
| China | 33.0 | 33.0; shares traded on major exchange exempt | 33.0; shares traded on major exchange exempt | No |
| Denmark | 34.0 | 34.0 | Exempt* | Yes, 3 years* |
| France | 41.7 | 41.7 | 23.8 | Yes, 2 years |
| Germany | 45.0 | 45.0 | 45.0 | No |
| Hong Kong | 16.0* | Exempt | Exempt | No |
| India | 35.0 | 35.0 | 20.0* | Yes, 1 year |
| Indonesia | 30.0 | 0.1* | 0.1* | No |
| Italy | 37.0 | 37.0 | 27.0* | Yes, 3 years |
| Japan | 34.5 | 34.5 | 34.5 | No |
| Korea | 28.0 | 20.0; shares traded on major exchange exempt | 20.0; shares traded on major exchange exempt | No |
| Mexico | 34.0 | 34.0 | 34.0 | No |
| Netherlands | 35.0 | Exempt | Exempt | No |
| Poland | 36.0* | Exempt | Exempt | No |
| Singapore | 26.0 | Exempt | Exempt | No |
| Sweden | 28.0 | 28.0 | 28.0 | No |
| Taiwan | 25.0 | Exempt (local company shares) | Exempt (local company shares) | No |
| United Kingdom | 31.0* | 31.0* | 31.0*; asset cost is indexed | No |
| United States | 35.0 | 35.0 | 35.0 | No |
| Average | 32.1 | 22.8; United States is 54% higher than average | 19.6; United States is 79% higher than average | 83% have no holding period |
Capital Gains Tax
Tax is payable on capital gains on sale of assets.
Long-term Capital Gains Tax is charged if
• Capital assets are held for more than three years and
• In case of shares, securities listed on a recognized stock exchange in India, units of specified mutual funds, the period for holding is one year.
Long-term capital gains are taxed at a basic rate of 20%. However, long-term capital gain from sale of equity shares or units of mutual funds are exempt from tax.
Short-term capital gains are taxed at the normal corporate income tax rates. Short-term capital gains arising on the transfer of equity shares or units of mutual funds are taxed at a rate of 10%.
Long-term and short-term capital losses are allowed to be carried forward for eight consecutive years. Long-term capital losses may be offset against taxable long-term capital gains and short-term capital losses may be offset against both long term and short-term taxable capital gains.
Threshold limit of exemption in the case of all assessees to be increased by
Rs.10,000 thus giving every assessee a relief of Rs.1,000; in the case of a
woman assessee, threshold limit to be increased from Rs.135,000 to
Rs.145,000 and in case of a senior citizen from Rs.185,000 to Rs.195,000
giving him or her a relief of Rs.2,000; deduction in respect of medical
insurance premium under section 80D to be increased to a maximum of
Rs.15,000 and, in case of a senior citizen, a maximum of Rs.20,000.
Other State Taxes
• Stamp duty on transfer of assets
• Property/building tax levied by local bodies
• Agriculture income tax levied by State Governments on income from plantations
• Luxury tax levied by certain State Government on specified goods
How to invest long-term capital gains
July 09, 2007
The Income Tax Act contains exemption provisions from long-term capital gains tax if the taxpayer were to invest in a residential house property. This provision has helped countless taxpayers to first own and thereafter move into bigger and better houses at the cost of the exchequer by saving income tax on their long term capital gains.
There are two sections in the IT Act that deal with the exemption - section 54 and section 54F. The first one deals with capital gain on sale of one house property and reinvestment of the capital gains of that property into another residential house property.
The second section deals with capital gains on any asset other than house property (for example gold) and investment of the net consideration (sale proceeds reduced by the direct expenses on the sale).
In other words, the second section demands investment of a larger amount into the property compared to the first one where only the capital gain is to be invested in the property. Let us understand these two sections with examples.
Mr A who had purchased his flat in 1990 for Rs 10 lakh (Rs 1 million) sold it for Rs 25 lakh (Rs 2.5 million) in 2005. He is required to invest only Rs 15 lakh (Rs 25 lakh less Rs 10 lakh) in another residential property under section 54.
Compare this with Mr B's situation who had purchased jewellery for Rs 10 lakh for his wife in the year 1990 and sold it in 2005 for Rs 25 lakh. Mr B is required to invest Rs 25 lakh under section 54F in another residential property in order to save tax on the identical amount of capital gain of Rs 15 lakh (Rs 1.5 million).
The time limit for investment in the other residential property is identical under both the sections:
For outright purchase of residential property it has to be within a period of one year before the sale or two years after the sale; or within a period of three years after the sale construct the residential house. The rationale behind the different time limits is that an outright purchase takes lesser time compared to building a house.
Needless to state is the fact that the reinvestment must be in a residential house property. By implication commercial property or vacant plot of land are not eligible. Similarly, short term capital gains enjoy no exemption. So if you sell your house within 36 months of purchase, you will not have any tax benefits.
If the long-term capital gain or the net consideration under the above two sections is not invested in the purchase of a new house within one year before the date of sale of the earlier house or other asset; or not utilised for purchase or construction of the new house before the due date of filing the return of income, this capital gain or net consideration is required to be deposited, before filing the return, in a separate deposit account.
The central government has designated nationalised banks like State Bank of India [Get Quote], Bank of India, Bank of Baroda [Get Quote] etc to open such a special deposit account. From these deposits the taxpayer is expected to issue cheques for the purchase or construction of the property. These deposits earn a nominal interest also.
There is one more aspect of section 54, which is a subject matter of some controversy with the Income tax Department. The controversy centres around the use of the word 'a' before residential house while referring to the reinvestment of the gain.
To illustrate: Mr A, having a large house, sells it for Rs 2 crore (Rs 20 million) making a capital gain of Rs 1 crore (Rs 10 million). Out of the capital gain of Rs 1 crore, Mr A purchases two flats each of Rs 50 lakh (Rs 5 million) on the seventh and eighth floors of a building within the time laid down by the law.
Strict interpretation of Section 54 leads to the view that Mr A will be entitled to exemption of only Rs 50 lakh being purchase of 'a' residential property on the seventh floor.
In other words, the purchase of the second residential property on eighth floor will not be eligible. He should have purchased one large flat on either seventh or eighth floor. This view of the Income tax Department has been recently upheld by the Income Tax Appellate Tribunal, Pune Bench. Coming to section 54F, the section permits investment of consideration in maximum two properties and not more.
Income from Capital Gains
Transfer of capital assets results in capital gains. A Capital asset is defined under section 2(14) of the I.T. Act, 1961 as property of any kind held by an assessee such as real estate, equity shares, bonds, jewellery, paintings, art etc. but does not include some items like any stock-in-trade for businesses and personal effects. Transfer has been defined under section 2(47) to include sale, exchange, relinquishment of asset, extinguishment of rights in an asset, etc. Certain transactions are not regarded as 'Transfer' under section 47.
For tax purposes, there are two types of capital assets: Long term and short term. Long term asset are held by a person for three years except in case of shares or mutual funds which becomes long term just after one year of holding. Sale of such long term assets gives rise to long term capital gains. There are different scheme of taxation of long term capital gains. These are:
- As per Section 10(38) of Income Tax Act, 1961 long term capital gains on shares or securities or mutual funds on which Securities Transaction Tax (STT) has been deducted and paid, no tax is payable. STT has been applied on all stock market transactions since October 2004 but does not apply to off-market transactions and company buybacks; therefore, the higher capital gains taxes will apply to such transactions where STT is not paid.
- In case of other shares and securities, person has an option to either index costs to inflation and pay 20% of indexed gains, or pay 10% of non indexed gains. The indexation rates are released by the I-T department each year.
- In case of all other long term capital gains, indexation benefit is available and tax rate is 20%.
All capital gains that are not long term are short term capital gains, which are taxed as such:
- Under section 111A, for shares or mutual funds where STT is paid, tax rate is 15% .
- In all other cases, it is part of gross total income and normal tax rate is applicable.
For companies abroad, the tax liability is 20% of such gains suitably indexed (since STT is not paid).
For more information Short Term and Long Term Capital Gains and Exemptions from Capital Gains under Sections 54, 54B, 54D, 54EC, 54F, 54G, 54GA
Other Exempt Income
The Indian Income tax act specifically exempts certain income from tax:
- Money received from an Insurance company as proceeds of an insurance policy (by way of an insurance claim, or by maturity) is generally exempt. However there are three types of payments under life insurance policy that are not tax free . These are :
-
- any sum received under sub-section (3) of section 80DD or sub-section (3) of section 80DDA - this refers to specific policies for disabled dependants; or
- any sum received under a Keyman insurance policy; or
- any sum received under policies issued on or after 1 April 2003 where premium paid is greater than 1/5th the sum assured
- Maturity proceeds of a Public Provident Fund (PPF) account.
What is cost of acquisition?
It represents the actual cost incurred for acquisition of the Capital asset.
In the following cases the cost of acquisition is 'Cost to the Previous Owner'
| S.No | Modes of Acquisition | Sec. Ref. | Cost of Acquisition |
|---|---|---|---|
1 | Distribution of capital assets on the total or partial partition of HUF, or throwing an asset of the member of HUF into HUF. | 49(1)(i) | Cost to the Previous Owner |
2 | Succession, Inheritance or Devolution | 49(1)(iii)(a) | Cost to the Previous Owner |
3 | Transfer of a capital asset under a gift or will or an irrevocable trust | 49(1)(ii) & 49(1)(iii)(d) | Cost to the Previous Owner |
What is Cost to previous owner?
The cost at which the asset was purchased by the previous owner.
If it is not capable of determination, then it is the Fair Market Value of the Asset on the date on which the capital asset became the property of the previous owner.
What is Fair Market Value?
"Fair Market Value" in relation to a capital asset, has been defined under section 2(22B), to mean
It is the price that the capital asset would fetch on sale in the open market on relevant date; and
where the price referred to in sub-clause (i) is not ascertainable, such price as may be determined in accordance with the rules made under this Act.
What is Cost of Improvement?
Cost of Improvement is defined as given below
| In relation to | Cost of Improvement |
|---|---|
Goodwill of a business or a right to manufacture, produce or process any article or thing or right to carry on any business. | Nil |
Capital asset, which became the property of the previous owner or assessee before the 01.04.1981. | All expenditure incurred in making any additions or alterations to the capital asset on or after the said date (01.04.1981) by the previous owner or the assessee. |
In any other case | All expenditure of a capital nature incurred in making any additions or alterations by the assessee after it became his property or by the previous owner. |
What is Indexed Cost of Acquisition?
Indexed cost of acquisition is calculated as under: -
| Cost of acquisition or FMV as on 1-4-1981 at the option of the assessee --------------------------------------------- Cost Inflation Index number of the previous year in which the asset was first held by the assessee or 01.04.1981 whichever is later. | X | Cost Inflation Index for the year in which the asset is transferred. |
What is Indexed Cost of Improvement?
Indexed cost of Improvement is calculated as under: -
| Cost of Improvement --------------------------------------------- Cost Inflation Index number of the previous year in improvement was made to the asset. | X | Cost Inflation Index for the year in which the asset is transferred. |
Long Term Capital Gain Tax Calculation Cost Inflation Index number In India
Cost Inflation Index number: -
Financial Year | Index Number |
|---|---|
| 1981-82 | 100 |
| 1982-83 | 109 |
| 1983-84 | 116 |
| 1984-85 | 125 |
| 1985-86 | 133 |
| 1986-87 | 140 |
| 1987-88 | 150 |
| 1988-89 | 161 |
| 1989-90 | 172 |
| 1990-91 | 182 |
| 1991-92 | 199 |
| 1992-93 | 223 |
| 1993-94 | 244 |
| 1994-95 | 259 |
| 1995-96 | 281 |
| 1996-97 | 305 |
| 1997-98 | 331 |
| 1998-99 | 351 |
| 1999-2000 | 389 |
| 2000-01 | 406 |
| 2001-02 | 426 |
| 2002-03 | 447 |
| 2003-04 | 463 |
| 2004-05 | 480 |
| 2005-06 | 497 |
| 2006-07 | 519 |
| 2007-08 | 551 |
Capital Gains Tax Exemption
u/s 54, 54B, 54D, 54EC, 54F, 54G and 54GA
Capital Gains Tax Exemption available in India for the AY 2008-09 FY 2007-08 is given below.
Capital Gain Tax Exemption available for Individuals or HUFs
Exemption for Residential House Property
Exemption for Agricultural Land
Exemption for Long term capital assets other than House Property
Capital Gain Exemptions available for Any Assessee
Exemptions for Any Long term Capital Assets
Exemptions for Any Compulsory Acquisition of Land or Building
Exemptions for Transferring Business from Urban area to Non Urban area
Exemptions for Transferring Business from Urban area to SEZ
Capital Gain Tax Exemption Residential House Property
Section Ref
54
Eligible Assessee
Individual and HUF
Capital Asset Transferred
Residential house chargeable under the head "Income from House Property".
And It should be a long-term capital asset.
Capital Asset Invested
Acquires , a Residential House within one year before or two years after the date of transfer.Or,
Constructs a Residential House within three years.
Quantum of Exemption
Lower of the following: -
Cost of new Residential House Property.
Capital Gains.
Withdrawal of Exemption
If the new asset is transferred within three years from the date of acquisition or construction, then the cost of new asset claimed as exempt shall be reduced by the capital gains.
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Capital Gain Tax Exemption Agricultural Lands
Section Ref
54B
Eligible Assessee
Individual
Capital Asset Transferred
Agricultural lands (situated in specified area) used for agriculture for at least two years before transfer by the assessee or his parents.
Capital Asset Invested
Acquires any other agricultural land within two years.
Quantum of Exemption
Lower of the following: -
Cost of new lands.
Capital Gains.
Withdrawal of Exemption
If the new capital asset is transferred within three years from the date of acquisition, then the cost of new asset claimed as exempt shall be reduced by the capital gains.
Go to Top
Capital Gains Tax Exemption Long term Capital Asset Other than House Property
Section Ref
54F
Eligible Assessee
Individual and HUF
The following conditions are to be fulfilled by the assessee: -
He does not own more than one residential house, other than new asset, on the date of transfer of original asset.
He does not purchase more than one residential house within a year or constructs within three years after the date of transfer of the asset.
The income from such residential house is chargeable under the head "Income from House Property", other than the one owned at the time of transfer.
Capital Asset Transferred
Any long-term capital asset not being a residential house property.
Capital Asset Invested
Acquires a Residential House within one year before or two years after the date of transfer, Or
Constructs a Residential House within three years.
Quantum of Exemption
If the cost of new asset is less than the net consideration, then the so much of the capital gain as the whole of the capital gains bears to the net consideration is exempt.
Withdrawal of Exemption
If the assessee
Transfer the new asset within three years from the date of acquisition or construction, then the cost of new asset claimed as exempt shall be reduced by the capital gains.
Purchases or Constructs a residential house (other than the new asset) with in 2 years after the date of transfer then any amount claimed as exempt shall be reduced by the capital gains.
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Capital Gains Tax Exemption for Long term Capital Asset
Section Ref
54EC
Eligible Assessee
Any Assessee
Capital Asset Transferred
Any long-term capital asset
Capital Asset Invested
Within six months after the date of transfer invested the whole or any part of capital gains in any Bond (Redeemable after three years) issued on or after 01.04.2006 by
National Highways Authority of India (NHAI).
Rural Electrification Corporation Limited.
Note: -
Maximum Limit for Investment in a New Asset is Rs.50 Lakhs
If exemption is availed here, then rebate under section 80C is not available.
Quantum of Exemption
Lower of the following: -
Cost of new assets.
Capital Gains.
Withdrawal of Exemption
If, within a period of three years: -
New asset is transferred or converted (otherwise than by transfer) into money.
Loan or advance is acquired on the specified asset.
then the amount which was exempt from Capital Gains, will be chargeable in the year of such event.
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Capital Gains Tax Exemption Compulsory Acquisition of Land or Building
Section Ref
54D
Eligible Assessee
Any Assessee
Capital Asset Transferred
Compulsory acquisition (under any law) of
Land or Building or
any Right in Land or Building
forming part of an industrial undertaking used by the assessee for business for at least two years before the date of transfer.
Capital Asset Invested
Within three years from the date of transfer has acquired any other land or building or any right in any other land or building or constructed any other building for shifting or re-establishing the industrial undertaking.
Quantum of Exemption
Lower of the following: -
Cost of new assets.
Capital Gains.
Withdrawal of Exemption
If the new asset is transferred within three years from the date of acquisition, then the cost of acquisition of new asset shall be reduced by the capital gains already exempt.
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Capital Gains Tax Exemption Business Assets - Machinery, Plant, Building or Land
Section Ref
54G
Eligible Assessee
Any Assessee
Capital Asset Transferred
Transfer of Machinery, Plant, Building or Land, or any rights in the Building or Land used for the purposes of business of an industrial undertaking situate in an Urban area, to any area (other than an urban area).
Capital Asset Invested
Within a period of one year before or three years after the date of transfer: -
Purchased new machinery or plant;
Acquired building or land or constructed building;
Shifted the original asset and transferred the establishment of such undertaking; &
Incurred expenses specified in a scheme framed by the Central Government for the purposes of this section.
Quantum of Capital gains tax Exemption
Lower of the following: -
Cost of new assets and expenditure
Capital Gains.
Withdrawal of Exemption
If the new asset is transferred within three years from the date of acquisition, then the cost of acquisition of new asset shall be reduced by the capital gains already exempt.
Capital Gains Exemption
Capital Gains Exemption u/s 10
Exemptions are available u/s 10 for the following Capital Gains
Units of UTI
Eligible Equity Share in Recognised Stock Exchange
Agricultural Lands
Shares/Units listed in Recognised Stock Exchange
Others
Exemptions available for Units of UTI
Any income arising from transfer of a capital asset, on or after 01.04.2002, being a unit of Unit Scheme, 1964 referred to in Schedule I to the Unit Trust of India Act, 2002, is exempt under section 10(33).
Eligible For:
Any Assessee
Quantum of Exemption:
Fully Exempt
Capital gain Exemptions for Eligible Equity Share in Recognised Stock Exchange
Any income arising from transfer of a long-term capital asset, being an eligible equity share in a company purchased on or after 01.03.2003 and on or before 29.02.2004, and held for a period of 12 months are more, shall be exempt under section 10(36).
For this 'eligible equity share' means -
Any equity share listed in BSE 500 index and the purchase or sale of such shares is transacted in a Recognised Stock Exchange in India, and
Any equity share allotted through a Public Issue during the said period and the transaction of sale is entered into on a Recognised Stock Exchange in India.
Eligible For:
Any Assessee
Quantum of Exemption:
Fully Exempt
Capital Gains Exemption for Agricultural Lands
Under section 10(37), any income chargeable under the head "Capital Gains" arising from the transfer of agricultural land, in the case of an assessee, being an Individual or HUF, is exempt where -
(a) Such Land
Is located in any referred to in item (a) or (b) of section 2(14)(iii), and
Was being used for agricultural purpose by such HUF or Individual or a Parent of Individual, during the period of two years immediately preceding the date of transfer.
(b) Such Transfer
Is by way of compulsory acquisition under any law, or
The consideration of which is determined or approved by Central Government or RBI
(c) Such Income
Has arisen from the compensation or consideration for such transfer received by such assessee on or after 01.04.2004.
Eligible For:
Any Assessee
Quantum of Exemption:
Fully Exempt
Capital Gains Exemption for Shares/Units listed in Recognised Stock Exchange
Under section 10(38), any income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund is exempt, where -
The transaction of sale of such equity share or unit is entered into on or after the date on which Securities Transaction Tax comes into force (i.e., 01.10.2004) and
Such transaction is chargeable under Securities Transaction Tax.
For this purpose, Equity Oriented Fund means a fund -
Where the investible funds are invested by way of equity shares in domestic companies to the extent of more than 65% of the total proceeds of such fund; and
Which has been set up under a scheme of a Mutual Fund specified under section 10(23D)
Eligible For:
Any Assessee
Quantum of Exemption:
Fully Exempt
Other Capital Gains exemption available under section 10: -
Any Capital Gain in the hands of "Venture Capital Company" (VCC) or "Venture Capital Fund" (VCF) - Section 10(23FB).
Long-term Capital Gains in the hands of Infrastructure Capital Company (ICC) or Infrastructure Capital Fund (ICF) - Section 10(23G).
Political Parties - Section 13A.
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The following assets are not capital assets,
- Any stock-in-trade,
- Consumable stores or raw materials held for the purpose of business or profession,
- Personal effects of the assessee that are movable and are held for personal use of any member of his family dependent upon him. However, jewellery, precious or semi-precious stones, paintings, sculptures or any work of art are treated as a capital asset./
- Agricultural land in India provided it is not situated in a notified area or in any area within the jurisdiction of municipality or cantonment board have a population of 10,000 or more,
- Gold bonds issued under the Gold Deposit Scheme, 1999,
- 6 1/2 per cent Gold Bonds, 1977 or 7 per cent Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government, and
- Special Bearer Bonds, 1991.
Short Term Capital Asset
A capital asset held by an assessee for not more than 36 months immediately prior to the date of transfer is short term capital asset. However, some "financial assets" held for not more than 12 months are treated as short term capital assets,
- Equity or preference shares in a company (whether shares are quoted or not),
- Securities listed in a recognised stock exchange in India,
- Units of UTI and units of mutual funds specified under section 10923D) (whether quoted or not) and
- Zero coupon bonds (whether quoted or not) issued on or after June 1, 2005.
Long Term Capital Asset
A capital asset held by an assessee for more than 36 months immediately prior to the date of transfer is long term capital asset. However, some financial assets as listed above held for more than 12 months are treated as long term capital assets.
Computation of Short-term Capital Gain
1. Take the full value of consideration (full sale price without any deductions),
2. Deduct
- Expenses incurred for the transfer,
- Cost of acquisition, and
- Cost of improvement.
Computation of Long-term Capital Gain
1. Take the full value of consideration (full sale price without any deductions),
2. Deduct
- Expenses incurred for the transfer,
- Indexed cost of acquisition, and
- Indexed cost of improvement.
Income Tax Rate on Long Term Capital Gains (section 112)
1. Long term capital gain is taxable at a flat rate of 20%.
2. If long term capital gain is covered by section 115AB, 115AC, 115AD or 115E, the tax rate is 10%. Also, if the listed securities/units are transferred and the benefit of indexation is not taken, then long term capital gain is 10%.
3. Deductions under sections 80C to 80U are not available on the long term capital gains.
4. Secton 112(1)a provides some relief to resident individual and HUF.
5. If the transcation (after September 30, 2004) is covered by securities transaction tax, then the capital gain is not charable to tax (section 10(38)).
Income Tax Rate on Short Term Capital Gains (section 111)
1. Short-term capital gain in respect of securities transactions (subject to securities transcation tax under section 115AD) (after September 30, 2004) are taxable at the rate of 10% (for AY 2008-09) and 15% (for AY 2009-10). On this short term capital gains, deduction under sections 80C to 80U is not available.
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| « Last Edit: May 28, 2008, 12:44:51 AM by TaxExpertMyTaxes » | |
Capital Gain Tax in India
What is Capital Gain Tax?
It's an Income Tax liability on Capital gains of an assessee.
What is Capital gains?
Any profits or gains arising from the transfer of a capital asset in the previous year.
What is Capital Asset?
Any Asset held by the assessee, whether
Fixed Asset or Circulating Asset
Movable or Immovable asset
Certain Items of personal effect - Jewellery
whether or not connected with his business or profession.
But does not include the following Items: -
Any stock-in-trade, consumable stores or raw materials held for the purposes of business or profession;
Personal effects, i.e., movable property like wearing apparel and furniture held for personal use by the assessee or any member of his family dependant on him;
Agricultural land in India;
Special Bearer Bonds, 1981 issued by the Central Government;
Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government.
For the purpose of determining the Capital Gain Tax the capital assets are classified as
Short term capital asset
Long term capital asset
When we need to pay the Capital Gain Tax?
It is chargeable in the year of transfer.
What transactions are regarded as "Transfer"?
Transfer Includes,
the sale, exchange or relinquishment of the asset; or
the extinguishments of any rights therein; or
the compulsory acquisition thereof under any law; or
conversion or treatment of any asset as, stock-in-trade of a business; or
the maturity or redemption of a zero coupon bond; or
any transaction involving the allowing of the possession of any immovable property
any transaction which has the effect of transferring, or enabling the enjoyment of, any immovable property
What is short term capital asset?
Short Capital Asset Means the following: -
Type of Asset | Period of Holding |
|---|---|
| Held by an assessee for not more than twelve months immediately preceding the date of its transfer. |
Any other Asset | Held by an assessee for not more than thirty-six months immediately preceding the date of its transfer. |
What is long term capital asset?
Long-term capital asset means a capital asset, which is not a short-term capital asset.
 | « on: May 19, 2008, 11:35:07 PM » | |
Any profit or gain arising from the sale or transfer of a capital asset is taxable as "capital gains". Capital asset is defined as a property of any kind, whether connected with the business or not, movable or immovable, tangible or intangible. A capital gain (or loss) from the sale or transfer of an asset can be a short term capital gain (or lose) or long term capital gain (or loss) depending upon the period the asset is held and the type of asset.
The following assets are not capital assets,
- Any stock-in-trade,
- Consumable stores or raw materials held for the purpose of business or profession,
- Personal effects of the assessee that are movable and are held for personal use of any member of his family dependent upon him. However, jewellery, precious or semi-precious stones, paintings, sculptures or any work of art are treated as a capital asset./
- Agricultural land in India provided it is not situated in a notified area or in any area within the jurisdiction of municipality or cantonment board have a population of 10,000 or more,
- Gold bonds issued under the Gold Deposit Scheme, 1999,
- 6 1/2 per cent Gold Bonds, 1977 or 7 per cent Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government, and
- Special Bearer Bonds, 1991.
Short Term Capital Asset
A capital asset held by an assessee for not more than 36 months immediately prior to the date of transfer is short term capital asset. However, some "financial assets" held for not more than 12 months are treated as short term capital assets,
- Equity or preference shares in a company (whether shares are quoted or not),
- Securities listed in a recognised stock exchange in India,
- Units of UTI and units of mutual funds specified under section 10923D) (whether quoted or not) and
- Zero coupon bonds (whether quoted or not) issued on or after June 1, 2005.
Long Term Capital Asset
A capital asset held by an assessee for more than 36 months immediately prior to the date of transfer is long term capital asset. However, some financial assets as listed above held for more than 12 months are treated as long term capital assets.
Computation of Short-term Capital Gain
1. Take the full value of consideration (full sale price without any deductions),
2. Deduct
- Expenses incurred for the transfer,
- Cost of acquisition, and
- Cost of improvement.
Computation of Long-term Capital Gain
1. Take the full value of consideration (full sale price without any deductions),
2. Deduct
- Expenses incurred for the transfer,
- Indexed cost of acquisition, and
- Indexed cost of improvement.
Income Tax Rate on Long Term Capital Gains (section 112)
1. Long term capital gain is taxable at a flat rate of 20%.
2. If long term capital gain is covered by section 115AB, 115AC, 115AD or 115E, the tax rate is 10%. Also, if the listed securities/units are transferred and the benefit of indexation is not taken, then long term capital gain is 10%.
3. Deductions under sections 80C to 80U are not available on the long term capital gains.
4. Secton 112(1)a provides some relief to resident individual and HUF.
5. If the transcation (after September 30, 2004) is covered by securities transaction tax, then the capital gain is not charable to tax (section 10(38)).
Income Tax Rate on Short Term Capital Gains (section 111)
1. Short-term capital gain in respect of securities transactions (subject to securities transcation tax under section 115AD) (after September 30, 2004) are taxable at the rate of 10% (for AY 2008-09) and 15% (for AY 2009-10). On this short term capital gains, deduction under sections 80C to 80U is not available.
Capital Gain Tax in India
What is Capital Gain Tax?
It's an Income Tax liability on Capital gains of an assessee.
What is Capital gains?
Any profits or gains arising from the transfer of a capital asset in the previous year.
What is Capital Asset?
Any Asset held by the assessee, whether
Fixed Asset or Circulating Asset
Movable or Immovable asset
Certain Items of personal effect - Jewellery
whether or not connected with his business or profession.
But does not include the following Items: -
Any stock-in-trade, consumable stores or raw materials held for the purposes of business or profession;
Personal effects, i.e., movable property like wearing apparel and furniture held for personal use by the assessee or any member of his family dependant on him;
Agricultural land in India;
Special Bearer Bonds, 1981 issued by the Central Government;
Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government.
For the purpose of determining the Capital Gain Tax the capital assets are classified as
Short term capital asset
Long term capital asset
When we need to pay the Capital Gain Tax?
It is chargeable in the year of transfer.
What transactions are regarded as "Transfer"?
Transfer Includes,
the sale, exchange or relinquishment of the asset; or
the extinguishments of any rights therein; or
the compulsory acquisition thereof under any law; or
conversion or treatment of any asset as, stock-in-trade of a business; or
the maturity or redemption of a zero coupon bond; or
any transaction involving the allowing of the possession of any immovable property
any transaction which has the effect of transferring, or enabling the enjoyment of, any immovable property
What is short term capital asset?
Short Capital Asset Means the following: -
Type of Asset | Period of Holding |
|---|---|
| Held by an assessee for not more than twelve months immediately preceding the date of its transfer. |
Any other Asset | Held by an assessee for not more than thirty-six months immediately preceding the date of its transfer. |
What is long term capital asset?
Long-term capital asset means a capital asset, which is not a short-term capital asset.
