Capital Gains: An Overview

What is capital gains tax?

Any profit or gain that arises from the sale of a ‘capital asset’ comes under the category ‘income’, and hence you will need to pay tax for that amount in the year in which the transfer of the capital asset takes place. This is called capital gains tax.

Simply put, any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain. This gain or profit comes under the category ‘income’, and hence you will need to pay tax for that amount in the year in which the transfer of the capital asset takes place. This is called capital gains tax, which can be short-term or long-term. 

Capital gains are not applicable to an inherited property as there is no sale, but only a transfer of ownership. The Income Tax Act has specifically exempted assets received as gifts by way of an inheritance or will. However, if the person who inherited the asset decides to sell it, capital gains tax will be applicable.

Types of Capital Gains:

a) Long Term Capital Gains

 LTCG ( Long-term capital asset ): An asset held for more than 36 months is a long-term capital asset. They will be classified as long-term capital assets if held for more than 36 months as earlier.

Capital assets such as land, building and house property shall be considered a long-term capital assets if the owner holds it for a period of 24 months or more (from FY 2017-18).

Whereas, the below-listed assets if held for a period of more than 12 months, shall be considered a long-term capital asset.

Equity or preference shares in a company listed on a recognized stock exchange in India
Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India
Units of UTI, whether quoted or not
Units of equity-oriented mutual funds, whether quoted or not
Zero coupon bonds, whether quoted or not

b) Short Term Capital Gains

An asset held for a period of 36 months or less is a short-term capital asset.

The criteria are 24 months for immovable properties such as land, building and house property from FY 2017-18. For instance, if you sell a house property after holding it for a period of 24 months, any income arising will be treated as a long-term capital gain, provided that the property is sold after 31st March 2017.
The reduced period of the aforementioned 24 months is not applicable to movable property such as jewellery, debt-oriented mutual funds etc.

Some assets are considered short-term capital assets when these are held for 12 months or less. This rule is applicable if the date of transfer is after 10th July 2014 (irrespective of what the date of purchase is). These assets are:

Equity or preference shares in a company listed on a recognized stock exchange in India
Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India
Units of UTI, whether quoted or not
Units of equity-oriented mutual funds, whether quoted or not
Zero coupon bonds, whether quoted or not

How to Calculate Long-Term Capital Gains?

Step 1: Start with the full value of consideration

Step 2: Deduct the following:

Expenditure incurred wholly and exclusively in connection with such transfer
Indexed cost of acquisition
Indexed cost of improvement

Step 3: From this resulting number, deduct exemptions provided under sections 54, 54EC, 54F, and 54B

How to Calculate Short-Term Capital Gains?

Step 1: Start with the full value of consideration

Step 2: Deduct the following:

Expenditure incurred wholly and exclusively in connection with such transfer
Cost of acquisition
Cost of improvement

Step 3: This amount is a short-term capital gain

Penalty for Late Filing Income Tax Return

Taxpayers who do not file their income tax return on time are subject to penalties and charged interest on the late payment of income tax. Also, the penalty for late filing income tax returns on time has been increased recently. The penalty for late filing income tax return is now as follows:

Late Filing between 1st August and 31st December - Rs.5000  
Late Filing After 31st December - Rs.10,000  
Penalty if taxable income is less than Rs.5 lakhs - Rs.1000