The Long and Short of Capital Gains Tax | H&R Block

The Long and Short of Capital Gains Tax

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The Long and Short of Capital Gains Tax

Long & Short of Capital Gains Tax

Union Budget 2017-18 came with a slew of announcements for the housing sector, including a key change in the minimum holding period prescribed for a house property to be considered a long-term asset. It has come down to two years from three years earlier. Since the blow of long-term capital gains tax is always softer than that of its short-term counterpart, a shorter holding period is a positive for tax-payers.

However, rules are not uniform across asset classes. Here’s a lowdown on capital gains tax rules applicable to various asset classes:

House Property

Houses and plots of land are regarded as long-term capital assets if they are held for at least three years (two years, effective financial year 2017-18). Profit made from the sale of such assets will attract a long-term capital gains tax of 20%, after factoring in the indexation effect, which is linked to the cost of inflation index table released every financial year.

This is how it works: let’s assume you bought a house worth Rs 50 lakh in April 2013. In February 2017, you sold it for Rs 80 lakh, making a profit of Rs 30 lakh in absolute terms. However, the long-term capital gains tax of 20% will not be calculated assuming Rs 30 lakh to be the profit. Instead, it will be computed after deducting indexed (and not actual) cost of acquisition from the selling price. The formula for calculating this indexed cost is: (Index for the year in which the asset is sold or transferred/index for the year of purchase) × cost of acquisition. Now, the relevant indices for 2016-17 and 2013-14 are 1125 and 939 respectively. Therefore, the indexed cost of acquisition will be Rs 59.90 lakh, which means that taxable capital gain will be Rs 20.10 lakh. As you can see, indexation benefit slashes the absolute profit by pushing up cost of purchase. As a result, your tax outgo will be Rs 4.02 lakh (20% of Rs 20.10 lakh) and not Rs 6 lakh (20% of Rs 30 lakh). Do note that if you sell any property post 31st March 2017, which was purchased before 1st April 2001, the base year for arriving at the indexed cost of acquisition will be 2001-02 and calculations will based on it. 

If you sell your property without completing the stipulated holding period, you will enjoy no such tax concessions as short-term capital gains are added to your annual income and taxed at marginal rates.

 

Debt funds

Like property, debt funds were the beneficiaries of a benevolent tax regime until July 2014, post which they have lost a lot of shine. Union Budget 2014-15 raised the minimum holding period for debt funds to be treated as long-term capital assets from one year to three years. As things stand today, you have to shell out tax at the rate of 20% on any profits made, after taking indexation into account. If you redeem the units within three years of having made the investment, the short-term capital profit will be added to your normal income and taxed according to your slab rate.

 

Stocks/Equity mutual funds

Equity as an asset class enjoys a high degree of leeway when it comes to taxability, primarily due to government’s desire to promote equity investments amongst retail investors. For equity shares and equity mutual funds to be considered long-term investments, investors will have to stay invested for merely 12 months. Besides, any long-term gain made on sale or redemption of stocks and units is exempt from tax if you pay STT on the sale value. But from 1st April 2017 if you sell the share (Acquired after 1.10.2004) on which STT was not paid at the time of the purchase then you will not be eligible for capital gain exemption even if the STT is paid on the sale of such shares.  Short-term capital gains tax, too, is much lower at 15%.

 

Keep an eye on the losses too

It is interesting to note that not all asset sales will end with the investor booking a profit – some could result in losses too. And, you can use such losses to your advantage. Any capital loss incurred on the sale of house or land, stocks and units of mutual funds can be set off against taxable capital gains made under the same head, subject to certain conditions. Again, rules differ for long-term and short-term capital losses. You are allowed to set off long-term capital loss only against a long-term capital gain. However, short-term capital losses can be set off against long- as well as short-term capital losses. What’s more, the benefit is not restricted to the year of incurring the loss – you can carry it forward for up to eight subsequent financial years.

Chetan Chandak
Chetan Chandak
Chetan is a Tax-Lawyer by profession and has been working with H&R block as Assistant Manager-Tax Advisory from last four years. He has more than 7 years’ experience in audit, taxation and finance fields. He specializes in personal taxation of HNIs and Top Management Executives. His major area of interest is tax litigation, tax research handling dual tax impact for ex-pat clients. He loves to travel, trek and cook.

11 Comments

  1. Keval Mehta says:

    I am wondering if one sells property in India and invests in property in USA, will that qualify as capital gain avoidance

  2. Abhilasha Sharma says:

    Great nice info keep it up keep posting

  3. Isharaj says:

    If one receives a house as a gift and want to sell the same ,the holding period of the donor will be taken into consideration for taxation purpose or not ?

    • HRBlockIndia HRBlockIndia says:

      There are specific provisions in the income Tax Act which state that in the case of a gift, the period for which the previous owner held the asset had to be taken into consideration for determining if the asset was a long-term or short-term one.
      Further many High Courts has concluded that “For the purpose of computation of Capital Gains , Indexed Cost of Acquisition was to be computed with reference to year in which previous owner first held asset and not the year in which assessee become owner of assets by inheritance”.
      Related Cases:
      CIT Vs. Manjula J. Shah (Bombay High Court)
      CIT Vs. Gautam Manubhai Amin (Gujrat High Court)
      Arun Shungloo Trust Vs. CIT (Delhi High Court)

  4. Mohit says:

    If I get an ancestral property through a court decree, what will be considered as the year of acquisition (the year when it was purchased or year when court passed the decree in my favor)

  5. Vinayak says:

    For claiming exemption of capital gain, total sales proceed amount need to reinvest or only capital gain amount need to invest in residential property.
    e.g. sales proceeds is Rs. 70 lacs and capital gain amount is Rs. 40 lacs, then in this case total 70 lacs I have to invest or Rs. 40 lacs i have to invest in house property.

    • CHETAN CHANDAK says:

      In case if the capital gain arises out of the sale of House Property then it will be sufficient even if you invest the capital gain portion of it to claim exemption u/s 54.
      But if the gain is arising out of the sale of any other asset (other than a house) then you need to invest the net sale proceeds to claim exemption u/s 54F.

  6. Rajesh says:

    For calculating capital gain on sale of shop in FY 17-18 which was purchase in year 1995, Should we consider the fair market value of property as on 2001-02, for indexation or the actual cost ( ie amount paid in year 1995)for indexation?

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