The Capital Gains Tax was introduced in the Indian Tax Regime in 1997 and since then it has gone through several changes over the period of time. The understanding of this tax is relevant for a common man or a billionaire as it covers a wide range of taxation factors. The Capital Gains Tax is provided under the Income Tax Act, 1961, and has gone through various amendments since the time it was stemmed. Whether an individual is investing his or her capital income in a new house or selling an old one or investing their gains from the sale of any residential property into any securities, etc., they need to be aware of the notion of Capital Gains which revolves around these phenomena.
The Capital Gains Tax is levied on the sum which is received as profit through the transfer or sale of Capital Asset. The new Budget was presented by the Finance Minister, Nirmala Sitharaman, on 1st February 2020, brought about crucial changes in the structure of Capital Gains Tax in India. Examples of capital assets can be land, house property, jewelry, vehicle, machinery, building, etc. The following assets are not called as a capital asset which is the following as under:
- Any consumable or raw material, stock, etc. held for business or professional purposes.
- Personal goods – furniture or clothes held for personal use.
- Agricultural land in the rural parts of India.
- Gold bonds issued by the central government- 6 1?2 % gold bonds (issued in 1977), 7 % gold bonds (issued in 1980), and national defense gold bonds (issued in 1980).
- Special bearer bonds
- Gold deposit bonds
Capital gain means the net profit which a seller receives by selling his capital assets at a price that exceeds the original purchase price. To be eligible for taxation during the current fiscal year, the transfer of the asset sold must have been done in the previous financial year. However, if any loss occurs in the sale of such capital assets, the tax would be exempted. Capital gains tax is not levied on “inherited assets or assets procured through gift or partition of Hindu Undivided Family (HUF) property.
Types of Capital Gains Tax
The Capital Gains Tax is classified into two categories or types which are the following as under:
- Long-Term Capital Gain Tax: To be qualified to be taxed under Long-Term Capital Gains Tax the capital asset must be held for thirty-six months or more immediately preceding the date of its transfer. But, in case of financial capital assets involving; all securities. preference shares, debentures, zero-coupon bond, Unit Trust of India units which are listed and considered by a stock exchange, etc., the time period is more than twelve months. The tax rate of Long-Term Capital Gains under the Income Tax Act, 1961, is fixed at twenty percent in case of gains earned from Long-Term Capital Assets.
- Short-Term Capital Gains Tax: Short-Term Capital Gains Tax is applicable to the sale of capital assets which are held by the owner for less than thirty-six months immediately preceding the date of its transfer, But, there has been a reduction in the time pertinent from the financial year 2017-18 wherein, immovable property like land, building, house, etc which are owned for less than twenty-four months would be subject to Short-Term Capital Gains Tax. In case of financial capital assets involving; all securities, preference shares, debentures, zero-coupon bonds, Unit Trust of India units, which are listed and considered by a stock exchange, etc., the time to be considered under Short-Term Capital Gains Tax is less than twelve months, while in case they are unlisted, the time is less than te]wenty-four months. The Short-Term Capital Gains Tax is paid at a rate of fifteen percent on the capital gains earned from the sale of listed securities on which STT i.e. Securities transaction Tax is already paid. In the case where STT does not apply and Debt Funds, the capital gain is added to the income of the taxpayer and he or she is taxed according to their income slab.
Exemptions under Capital Gains Tax
There are some exemptions laid down in the Income Tax Act which enable the individuals to pay lower taxes on the income they earn through the sale of capital assets and it thus helps them to protect a part of their capital gain by availing benefits provided by such exemptions. An individual should be aware of these exemptions to benefit from them. To avail some exemptions under the Long-Term Capital Gains, an individual is required to fulfill certain income and age criteria, which are the following as under:
- Individuals who are a resident of India having an annual income of Rs. five Lakhs and are of the age of eighty years or above.
- Individuals who are a resident of India having an annual income of Rs. 2.5 Lakhs and are below the age of sixty years.
- Individuals who are a resident of India having an annual income of Rs. three Lakhs and are of the age of sixty years or above.
- A Hindu Undivided Family (HUF) having an annual income of Rs. 2.5 Lakhs.
- Individuals who are not residents of India having an annual income of Rs. 2.5 Lakhs.
Exemption under Section 54B
Exemptions under section 54B of the Income Tax Act can be utilized when there is a sale of Agricultural Land and the capital gains received from such sale are reinvested to buy another Agricultural Land by a Hindu Undivided Family (HUF) or an individual. This section applies to both Long-Term and Short-Term Capital Assets. Some conditions to avail such exemption are the following as under:
- 1. Such Agricultural Land must be in use by the individual or his parents or a member of the family (in case of HUF) for a minimum duration of two years immediately preceding the date of transfer.
- The exemption will be applied if the new land is bought within two years from the date of transfer of the old land.
- The exemption will be withdrawn if the taxpayer who claimed the exemption, transfers the new piece of land within three years from when it was acquired.
- If the amount of capital gain is equal to or less than the new asset such capital gain will not be taxed.
The structure of Capital Gains Tax in India has witnessed several changes since it was first introduced in 1997. To understand the concept of Capital Gains Tax, one is required to be well versed with the idea of Short-Term and Long-Term ‘Capital Assets’ and ‘Capital Gains’ and how they affect the income of a particular individual. Time constraints are of greatest value to determine under which class or division of tax your capital gain will fall.