Capital asset includes immovable property, movable property, tangible,
intangible, fixed or circulating like building, land, household furnishings,
stocks, bonds or mutual funds held as investments etc.
What is Capital Gain or Capital Loss
The difference between sale purchase and purchase price is capital gain or capital loss. It may be long term capital gain or loss and short term capital gain or loss.
As per the latest amendments in the finance bill if a property held for more than 24 months it is treated as long term capital asset and if it held for less than 24 months it is treated as short term capital asset. Before Financial year 2017-18 period of holding for long term capital asset was 36 months and asset held for less than that was treated as short term capital asset.
If the sale of capital asset generates profit, the assessee will have to pay capital gain tax on the profit at special rates. Tax rate for Long term capital gain is 20% and for short term capital gain is 15%.
Calculation of Long Term Capital Gain
For calculation of long term capital gain indexation is allowed and the assessee can deduct indexed cost of property /cost of improvement from the sale value to calculate capital gain. There are many exemptions to save capital gains tax.
Requirement of property Valuation report from Financial Year 2017-18 onwards
Base year for indexation has been changed from 1981 to 2001 w.e.f Financial Year 2017-18. If the property was purchased before 2001, a valuation report as on 2001 should be prepared through a Government approved valuer to calculate indexation.
The indexation table is easily available to calculate indexed value of property sold.
Tax Saving options to save tax on Long term Capital Gain
Under section 54 of Income Tax Act grants exemptions from long term capital gains tax, if certain conditions are satisfied. Following are the exemptions allowed:
|LTCG Exemption||Under Section 54||Under Section 54B||Under Section 54EC||Under Section 54F|
|Who can claim exemption||Individual/ HUF||Individual||Any person||Individual/ HUF|
|Eligible assets sold||A residential house property (minimum holding period 3 year)||Agriculture land which has been used by assessee himself or by his parents for agriculture purposes during last 2 years of transfer||Any long term asset||Any long term asset (other than a residential house property) provided on the date of transfer, the taxpayer does not own more than one residential house property from the assessment year 2001-02 (except the new house)|
|Assets to be acquired for exemption||Residential house property||Another agriculture land (urban or rural)||Bond of NHAI or REC||Residential house property|
|Time limit for acquiring new assets||Purchase: 1 year back or 2 year forward Construction: 3 years forward||2 years forward||6 months forward||Purchase: 1 year back or 2 year forward Construction: 3 years forward|
|Exemption Amount||Investment in the new assets or capital gain, whichever is lower||Investment in the agriculture land or capital gain, whichever is lower||Investment in new assets or capital gain, whichever is lower (Max. Rs. 50 lacs in Financial Year)||Investment in new assets or (Net Sale Consideration * Capital Gain)|
|Whether "Capital Gain Deposit Account Scheme" applicable||Yes||Yes||Not applicable||Yes|
1. Exemption u/s Section 54EC through investment in Bonds
(Applicable to LTCG only, on sale of both land / house property / commercial property)
Capital gains from sale of any long-term asset can be claimed as tax-exempt under Section 54EC of the Income-Tax Act by investing in notified bonds within six months of the transfer of Asset. These bonds are issued by the Rural Electrification Corporation and the National Highways Authority of India.
The exemption is equal to the investment or the capital gain, whichever is lower. If you transfer or take a loan against these bonds within three years, the capital gain will become taxable.
As per latest amendments in the finance Act there is a lock in period of 5 years for the bonds w.e.f . Financial Year 2018-2019. Earlier these bonds were redeemable after 3 years.
To claim tax exemption the investment in bonds should be done within a period of 6 months, but before the Income Tax Return filing date.
Maximum amount which can be deposited in tax saving bond is Rs. 50 lakhs.
2. Saving of Capital Gain tax by claiming Exemption u/s Section 54 (Applicable to Long Term Capital Gain on sale of house property only)
A. The assessee can use the entire Long Term Capital Gain proceeds on sale of a residential house to buy another house property (residential property) to save Capital Gains tax. Below conditions need to be satisfied though;
The new house has to be bought one year before (under-construction property) the transfer of the first house or within two years after the sale. (For an Under construction property or flat , the construction has to be completed within three years of the transfer of the first property.)
The deduction allowed is equal to the actual investment or the capital gain, whichever is lower.
B. By constructing a new house within three years from the date of the sale of the property. Cost of land can also be included in the cost of property.
3. Saving Capital Gain Tax under Section 54F on commercial land or property
Below conditions need to be satisfied in case you sell land and are planning to buy a residential home.
The assessee can use the entire sale proceeds (received by selling a plot / land) to buy a new house or to build a new residential house.
If the assessee use a part of the money, the deduction will be proportion of the invested amount to the sale price.
The time-frame for investment is the same as that for capital gains from residential property.
The party should not own more than one residential house prior to this investment.
If the new house is sold within three years, the deduction claimed will become taxable as a long-term gain.
This new house purchased or constructed must be situated in India.
The proceeds should not be invested in a commercial property or in another vacant plot
Saving of Long Term Capital Gains Tax without buying another House Property
If you are unable to invest the sale proceeds in any of the above options before the date of income tax returns filing , you can deposit the CAPITAL GAINS (not entire sale proceeds) amount in a public sector bank or other banks as per the Capital Gains Account Scheme- CGAS, 1988.
The capital gain (full amount or utilized amount) can be deposited in CGAS account.
This is only a stop-gap arrangement, as the funds have to be used to buy or build a house within the period specified.
The deposited money can be used only to buy or construct a residential house within the prescribed time frame.
If you withdraw funds from this account, they have to be used within 60 days.
If you do not utilize the amount within three years of the sale of the first property, such un-utilized amount will be treated as LTCG this will lead to taxation of the unutilized amount as long-term capital gain after three years of the sale of the first / original property.
The interest rates paid on these accounts are the same as those on regular savings and term deposits. Kindly note that interest earned on this account is taxable.
Other Important points on calculation of capital gain
Agricultural land in a rural area in India it is not considered a Capital Asset, and therefore no capital gains are applicable on its sale.
While calculating capital gains, expenses related to transfer / sale like advertisement expenses, brokerage expense, Stamp duty, Sale deed registration fees, Legal (lawyer) expenses etc., can be deducted from the Purchase price.
Sale of a property that is inherited or accepted as a gift will also attract capital gain/loss provisions even though you haven't spent any money to acquire it. In such a case, capital gains will be computed on the basis of the cost to the previous owner, indexed to the year of purchase.
If the cost of the new residential property is lower than the total sale amount, then the exemption is allowed proportionately.
The new property must only be bought on the name of the seller and not on anybody else's name. Joint ownership can be acceptable but exemption can be limited to the share of ownership.
You must also remember that you are allowed to purchase or construct only one new asset from the capital gain that accrues. This means that you cannot make multiple property acquisitions and thus seek to reduce your tax outgo. However, if you sell more than one property, you can invest the resulting cumulative capital gain amount in a single new property.
If you use the capital gain amount to clear loans then tax on LTCG cannot be saved. No exemptions can be claimed.
Capital Gain Tax cannot be saved if the sale proceeds are invested in a commercial property, agricultural land or plot.
According to the latest amendments in the Income Tax Act, the residential property which is bought by re-investing the long-term capital gains must be situated in India. If you would like to buy a property outside India, you need to pay tax on the capital gain portion of the sale proceeds.