Capital Gain Tax in India is a critical fiscal component that applies to the profit earned from the sale of an asset, such as real estate, stocks, or bonds.

These gains are categorized into short-term or long-term based on the holding period, and different tax rates apply accordingly. Understanding the intricate details of Capital Gain Tax is essential for both individual and institutional investors, as it has significant implications on investment strategies and financial planning. Compliance with the regulations governing Capital Gain Tax is a crucial aspect of responsible financial management in India.

What are Capital Assets & Their Types?

Some examples of capital assets are real estate, buildings, houses, cars, jewellery, patents, trademarks, and leasehold rights. It also involves owning stakes or having ties to Indian businesses. Aside from those, it also refers to any other legal rights, such as management or control rights.

Here are a few items that the Government does not consider as capital assets:

• Personal items like clothing and furnishings are maintained solely by the owner except jewellery, costly stones, and ornaments made of silver, gold, platinum or any other precious metal, archaeological collections, drawings, paintings, sculptures or any work of art.

• Central government-issued 7% gold bonds from 1980 and National Defense gold bonds from 1977.

• Any inventory, consumables, or raw materials kept for work-related purposes.

• Agricultural land in rural India and Special Bearer Bonds from 1991.

• Gold deposit bonds or deposit certificates issued under the Gold Monetization Scheme of 2015 or the Gold Deposit Scheme of 1999, respectively.

What is Capital Gains Tax in India?

A capital gain refers to any profit or gain resulting from selling a "capital asset." Such capital gains are subject to taxation in the year the capital asset is transferred. The tax that is paid is called as capital gains tax.

There are two types of Capital gains - Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG). Let’s learn more about them.

Types of Capital Gains Taxation

The following is a list of the two categories of capital assets:

Long-Term Capital Gain Tax

A long-term capital asset is one that people own for a period of time greater than 36 months. This category includes items like jewellery and other items kept for over 36 months For certain types of securities, holding period of 36 months is reduced to 12 months in order to qualify as a Long-term capital asset. Such securities are as follows:

• Unit Trust of India (UTI) shares (regardless of whether quoted or not),

• Bonds with no coupon payments (regardless of whether quoted or not),

• Equity-based mutual fund units (regardless of whether or not quoted),

• Securities listed on a recognized Indian stock market, and

• Holdings of preference shares or stock in a company listed on an Indian stock exchange.

The holding period for unlisted shares and immovable property (including land and building) shall be 24 months in order to qualify as a Long-term capital asset.

Short-Term Capital Gain Tax

Assets can be categorized as short-term capital assets if held for 36 months or less. However, the time period has been shortened from 36 to 24 months for immovable assets, including real estate, structures, and land. For securities mentioned above, the asset shall be considered as short-term capital asset if it is sold before 12 months.

So, if someone decides to sell a piece of land or a home after owning it for 24 months, the money they make falls under the long-term capital gain category.

Any debt Mutual Funds (exposure of more than 65% to debt securities) purchased on or after 1 April 2023 shall be considered as short-term capital asset irrespective of the holding period.

Tax Rates – Short-Term Capital Gains & Long-Term Capital Gains

Here is a table representing the capital gain tax rate for both LTCGs and STCGs:

Taxation on Equity and Debt Mutual Funds

Capital gains incurred via the sale of debt and equity funds are handled differently. A fund is called an equity fund if it makes up over 65% of the portfolio.

Exemption of Capital Gains Tax in India

The following clauses allow for claims of tax exemptions for profits made from assets:

Section 54:

The capital gains made by transferring ownership of a property are tax-exempt if the money made from selling a residential property is used to buy another one. Deductions are only permitted provided the following requirements are met:

• A person must acquire a second property within two years of the first one's sale or one year prior to ownership transfer.

• When buying a second home after transferring ownership of the first one, you must do it within three years of the first one being finished.

• Purchased property cannot be sold for three years after the date of purchase.

• The newly purchased property must be situated in India.

The amount of deduction is limited to Rs. 10 crore starting 1 April 2023.

Section 54F:

PTR also has a significant influence on the tax efficiency of the fund. When capital gains from long-term assets other than residential properties are realized, exemptions under Section 54F may be claimed. But the exemption is no longer applicable if you sell the new asset before three years have passed since you bought it or had it built.

You should buy a new house within two years of receiving the money. Also, construction projects must be finished within three years after the sale date.

The amount of deduction is limited to Rs. 10 crore starting 1 April 2023.

Section 54EC:

Suppose capital gains statements are used and produced for investments that are made from the particular bonds leveraging a property sale proceeds. In that case, individuals may have eligibility for tax deductions under Section 54EC.

The invested amount would be redeemable after three years from the sale date. However, one cannot sell the bonds during that time. Ever since the 2018–19 fiscal year, this time frame has been increased to five years.

There’s an obligation on the part of investors to invest in these bonds within six months following property sale.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.