In India, tax on capital gains is assessed and collected based on the provisions laid out in the Income Tax Act, 1961. Capital gains tax applies to the profit earned from the sale of capital assets such as property, stocks, and bonds. Here’s a detailed overview of how capital gains tax is assessed and collected: 1. Types of Capital Gains: Short-Term Capital Gains (STCG): Gains arising from the sale of a capital asset held for less than 36 months (12 months for certain assets like listed securities, units of equity mutual funds, and others) are considered short-term. Long-Term Capital Gains (LTCG): Gains from the sale of a capital asset held for more than the specified holding period (36 months or 12 months for specified assets) are considered long-term. 2. Assessment of Capital Gains: Calculation of Capital Gains: Selling Price: The price at which the asset is sold. Cost of Acquisition: The purchase price of the asset, which may include any expenses incurred in acquiring the asset (e.g., registration fees). Cost of Improvement: Any costs incurred to improve the asset, which can be added to the cost of acquisition. Indexed Cost of Acquisition: For LTCG, the cost of acquisition can be adjusted for inflation using the Cost Inflation Index (CII) provided by the government. Formula: For STCG: STCG = Selling Price − Cost of Acquisition STCG=Selling Price−Cost of Acquisition For LTCG: LTCG = Selling Price − Indexed Cost of Acquisition LTCG=Selling Price−Indexed Cost of Acquisition 3. Tax Rates: Short-Term Capital Gains Tax: STCG is taxed at the individual's applicable income tax slab rates or at a flat rate of 15% for specific assets like equity shares and mutual funds. Long-Term Capital Gains Tax: LTCG exceeding ₹1 lakh in a financial year is taxed at 20% with indexation benefits. Gains up to ₹1 lakh are exempt from tax for individuals and Hindu Undivided Families (HUFs). 4. Reporting and Filing: Taxpayers must report capital gains in their income tax returns (ITR). Details regarding the sale, purchase, and calculation of capital gains must be disclosed accurately in the appropriate schedules of the ITR. 5. Collection of Tax: Tax Deducted at Source (TDS): For the sale of certain assets, TDS may be deducted at the time of the transaction. For example, the buyer is required to deduct TDS at the rate of 1% on the sale of immovable property if the consideration exceeds ₹50 lakh. For securities transactions, TDS is generally not applicable as capital gains are taxed under the income tax provisions. Self-Assessment Tax: Taxpayers must compute and pay any tax on capital gains during the assessment year through self-assessment. 6. Exemptions and Deductions: Section 54: Exemption on LTCG arising from the sale of a residential property if the proceeds are reinvested in another residential property within a specified period. Section 54EC: Exemption on LTCG if the amount is invested in specified bonds issued by NHAI or REC within six months of the transfer. Section 80C: Investments in specified assets may qualify for deductions, although this is more applicable to other income categories than capital gains. 7. Assessment Process: The Income Tax Department may conduct assessments if discrepancies are found in the declared capital gains. This can lead to scrutiny or audits of the taxpayer's financial records. Conclusion: Capital gains tax in India is assessed based on the duration of asset holding and calculated based on the profit from the sale of capital assets. The tax rates vary for short-term and long-term gains, and there are specific exemptions and deductions available to taxpayers. Accurate reporting in income tax returns and adherence to TDS regulations are essential for compliance.

Dear client, Capital Gains Capital gain is denoted as the net profit that an investor makes after selling a capital asset exceeding the price of purchase. The entire value earned from selling a capital asset is considered as taxable income. To be eligible for taxation during a financial year, the transfer of a capital asset should take place in the previous fiscal year. Financial gains against a sale of an asset are not applicable to inherited property. It is considered only in case of transfer of ownership. According to the Income Tax Act, assets received as gifts or by inheritance are exempted in the calculation of income for an individual. Buildings, lands, houses, vehicles, Mutual Funds, and jewelry are a few examples of capital assets. Also, the rights of management or legal rights over any company can be considered as capital assets. The following are not included under capital assets – a. Any stock, consumables or raw materials that are held for the purpose of business or profession. b. Goods such as clothes or furniture that are held for personal use. c. Land for agriculture in any part of rural India. d. Special bearer bonds that were issued in 1991. e. Gold bonuses issued by the Central Government such as the 6.5% gold bonus of 1977, 7% gold bonus of 1980 and defense gold bonus of 1980. f. Gold deposit bonds that were issued under the gold deposit scheme (1999) or the deposit certificates that were issued under the Gold Monetisation Scheme (2015). Types of Capital Gain Depending on the tenure of holding an asset, gains against an investment can be broadly divided into the following types – Short Term Capital Gain If an asset is sold within 36 months of acquisition, then the profits earned from it is known as short term capital gains. For instance, if a property is sold within 27 months of purchase, it will come under short term capital gains. However, tenure varies in the case of different assets. For Mutual Funds and listed shares, Long term capital gain happens if an asset is sold after holding back for 1 year. Long Term Capital Gain The profit earned by selling an asset that is in holding for more than 36 months is known as long-term capital gains. After 31st March 2017, a holding period for non-moveable properties was changed to 24 months. However, it is not applicable in case of movable assets such as jewelry, debt-oriented Mutual Funds, etc. Furthermore, a few assets are considered as short-term capital assets if the holding period is less than 12 months. Here is a list of assets that are considered according to the rule mentioned above – a. Equity shares of any organization listed on a recognized Indian stock exchange. b. Securities like bonds, debentures, etc. that are listed on any Indian stock exchange. c. UTI units, regardless of being quoted or unquoted. d. Capital gain on mutual funds that are equity-oriented, whether they are quoted or not. e. Zero-coupon bonds. All the assets mentioned above are considered as long-term capital assets if they are held for 12 months or more. In case of any asset acquired by inheritance or gift, then the period for which an asset is owned by a previous owner is considered. Furthermore, in the case of bonus shares or right shares, the period of holding is considered from the date of allotment. Calculation of Capital Gains The calculations of capital gains are dependent on the type of assets and their holding period. A few terms that an individual must know before calculating gains against their capital investments are here as follows – a. Full Value Consideration – It is the consideration that is received by a seller in return for a capital asset. b. Cost of Acquisition – The cost of acquisition is the value of an asset when a seller acquires it. c. Cost of Improvement – The cost of improvement is the amount of expenses incurred by a seller in making any additions or alterations to a capital asset. To calculate the value of short term capital gain, the full amount of consideration is required to be determined at first. From the obtained value, cost of acquisition, cost of improvement and the total expenditure incurred concerning the transfer of ownership has to be deducted. This resultant value will be the capital gain on investments. Indexed Cost of Acquisition The cost of acquisition is calculated on the present terms by applying the CII (Cost Inflation Index). It is done to adjust the values by taking into account the inflation that takes place over the years while holding the asset. The indexed cost of acquisition can be estimated as the ratio of the Cost Inflation Index (CII) of the year when an asset was sold by a seller and that of the year when the property was acquired or the financial year 2001-2002, whichever is later multiplied by the Cost of acquisition. Suppose, a person acquired an asset at Rs. 50 Lakh in the financial year 2004-2005 and she decided to transfer the property in the fiscal year 2018-19. The CII of the financial year 2004-05 and 2018-19 were 113 and 280 respectively. Therefore, the indexed cost of acquisition will be 50 X 280 / 113 = Rs. 123.89 Lakh. Indexed Cost of Improvement The indexed cost of the improvement is calculated by multiplying the associated cost of improvement that was required to the CII of the year divided by the CII of the year in which the improvement took place. Tax Exemptions on Capital Gains Tax exemptions can be claimed under the following sections on the profit earned against assets – 1. Section 54 If an amount earned by selling a residential property is invested to purchase another property, then the capital gains earned by transferring the ownership of a property is tax exempted. However, deductions can be claimed only if the following conditions are met – a. Individuals are required to purchase a second property within 2 years of sale or 1 year before transferring the ownership. b. In the case of an under-construction property, the purchase of a second property should be completed within 3 years of transferring the ownership of the first property. c. Newly acquired property cannot be sold within 3 years of purchase. d. The newly acquired property is required to be located in India. 2. Section 54F Exemptions under Section 54F can be claimed when there are capital gains earned from a long-term asset other than a residential property. However, the exemption stands invalid if you sell the new asset within 3 years after purchasing or construction. The purchase of a new property should be made within 2 years of earning the capital. Also, in the case of construction, it has to be completed within 3 years from the date of sale. 3. Section 54EC Individuals can claim tax exemptions under Section 54EC if the capital gains statements are submitted for investments into specific bonds with the amount earned by selling a property. The invested amount can be redeemed after 3 years from the date of sale, but the bonds cannot be sold within the period. This period has been increased to 5 years with effect from the financial year 2018-19. Individuals are required to invest in these special bonds within 6 months of a property sale. Earing capital gains is much convenient with various beneficial investment options in the market. Also, if reinvested correctly, tax incurred on capital gains can be reduced ensuring higher savings. Should you have any queries, please feel free to contact us!