What is Capital Gains Tax in India?

As a taxpayer and an investor, if you also feel frustrated understanding the tax implications on your investment and feel lost when understanding terms like long-term capital gains, short-term capital gains, tax calculations, exemptions on your profits, etc., then this blog is for you. 

Before we delve into capital gain taxes in India, we need to understand capital gains, the different types of capital gains, how these gains are calculated, the exemptions you can claim on these gains, and the applicable tax rates. We’ll also discuss the key data points about the history of capital gain taxes and provide a detailed example to help you understand the concept better.

What is Capital Gains?

Capital gain is the gain or profit made by selling a capital asset. Capital assets include investment properties, stocks, bonds, homes, vehicles, jewellery, etc. The profits realized from selling these types of assets are called capital gains, and the taxes to be paid on these capital gains are called capital gains taxes.

Types of Capital Gains

Capital gains are of two types and their classification depends upon the time period the investor held the capital assets. We can classify capital gains into two categories based on holding periods of the capital asset:

• Long Term Capital Gains (LTCG)
• Short Term Capital Gains (STCG)

Classifying any capital gain into LTCG or STCG depends on the capital asset you are holding. The applicable tax rates are listed below:

Capital Gains Tax rates on different assets in India

In the table below, you can see the various financial asset classes and their respective tax structure:

Capital Gains Tax Calculation 

In this example, an investor bought 1000 shares of Tata Motors at Rs. 440 on 14 February 2023 for a total investment of Rs. 4,40,000. The share prices of Tata Motors have increased and are now trading at Rs. 994.

Now, we will consider two scenarios

1. Shares held for long term (More than a year)

Suppose the investor wishes to sell the shares of Tata Motors on 11 March 2024 at Rs. 1028. In this case, the investor has held the shares for more than a year and would be liable to pay long-term capital gains tax. The law states that the first Rs. 1,00,000 of the profit will be tax-exempt, and the rest of the capital gains will be taxed at 10%.

Long term capital gains = (1028 – 440 ) * 1000 = Rs. 5,88,000

Exemption = Rs. 1,00,000

Taxable capital gains = Rs. 5,88,000 – Rs. 1,00,000 = Rs. 4,88,000

Long term capital gains tax amount = 10% * 4,88,000 = Rs. 48,800

2. Shares held for short term (Less than a year)

Suppose the investor wishes to sell the shares of Tata Motors on 10 January 2024 at Rs. 808. In this case, the investor has held the share for less than a year and would be liable to pay short-term capital gains tax. The law states that short-term capital gains will be taxed at 15%.

Short term capital gains = (880 – 440) * 1000 = Rs. 4,40,000

Taxable capital gains = Rs. 4,40,000

Short term capital gains tax amount = 15% * 4,40,000 = Rs. 66,000

Exemptions Under Capital Gains

Various sections of the Income Tax Act give exemptions on their taxable gain to reduce their tax liability significantly. These exemptions with their respective sections are listed below:

• Exemption under Section 54 E, 54 EA, 54 EB

Capital gains are exempt from taxes only if the following conditions are met:

1. Capital gains are tax-exempt if capital gains are reinvested in specific securities such as UTI units, government securities, government bonds, etc. 
2. Proceeds must be reinvested within 6 months from the day when capital gains were realized.
3. If an individual decides to sell new securities before 36 months, the exemption previously offered is deducted from the cost of new securities to calculate the capital gains.

• Exemption under Section 54EC

Capital gains are exempt from taxes only if the following conditions are met:

1. Investment of proceeds in specific assets of Rural Electrification Corporation or NHAI
2. Proceeds must be reinvested within 6 months from the day when capital gains were realized.
3. Capital gains cannot exceed the investment amount. If only a portion is reinvested, then only that amount is eligible for exemption.
4. Assets must be held for at least 36 months.

• Exemption under Section 54EE

Capital gains earned on the transfer of long-term capital assets are exempted under this section if the following conditions are met:

1. Proceeds must be reinvested within 6 months from the day when capital gains were realized.
2. If an individual decides to sell new securities before 36 months, the exemption previously offered is deducted from the cost of new securities to calculate the capital gains.
3. If an individual takes out a loan against new securities before 36 months, it would be considered capital gains.
4. Investments should not exceed Rs. 50 Lakh in both the current and the following financial year.

Conclusion

Capital gains tax is a crucial source of tax revenue for the Government of India. These taxes may dramatically impact the investment decisions of the investor or capital asset owners. Understanding the concept of LTCG and STCG, along with the exemptions provided and tax rates imposed on various types of capital gains, can help an investor manage their investment more effectively. Whether you are a long-time investor or just starting your investment journey, keeping yourself informed about these taxes will ensure you make the most of your financial decisions. However, it is always advisable to consult your investment advisor before investing.

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