Any profit or gain that arises from the sale of capital asset is capital gain – ie gain treated as income which needs to pat tax ie Gain Tax
Gain tax is not applicable to inherited property as there is no sale, only a transfer of ownership
Capital Assets includes – Land, building, house, vehicle, patents, trademarks, leasehold rights, machinery and jewellery
Capital Asset not include – Stock & raw material held for business, personal goods, agricultural land, gold bonds issued by central government, special bearer bonds
Rural area – outside jurisdiction of municipality
Population more than 10000 & less than 100000 – 2 km distance More than 1 Lakh & less than 10 Lakh – 6 km More than 10 lakh – 8 km
Short term capital asset Immovable Property held for 24 months or less period Long term capital asset More than 36 months for other assets and more than 24 months for immovable property
In case an asset is acquired by gift, will, succession or inheritance, the period for which the asset was held by previous owner is included
Long term capital gain tax for immovable property – 20%
Short term capital gain tax – capital gain added to income tax return and the taxpayer is taxed accordingly to his income tax slab
Calculating Capital Gains 1) Full value consideration 2) deduct – expenditure incurred wholly and exclusively in connection with such transfer, cost of acquisition, cost of improvement
In case of sale of house property Deduct – brokerage or commission paid for securing purchaser, stamp paper cost, travelling expenses in connection with transfer and for inherited – cost of executor may allowed in some cases
Indexed cost of acquisition/improvement As per cost inflation index to adjust for inflation – this increases one's cost base and lowers capital gain
Exemption on capital gains
Section 54 – sale of house property on purchase of another house property
Assesses can get an exemption from long term capital gains from the sale of house property in up to two house properties against the earlier provision of one house property with same condition provided capital gains on the sale of house property must not exceed Rs 2 Crores
Conditions for availing this benefit
1) the new property purchased 1 year before Sale or 2 years after the sale of property
2) the gains can also be invested in the construction of property but construction must be completed within 3 years from the date of sale 3) exemption can be taken back if this new property is sold within 3 years of its purchase/Completion of construction
The gains can be deposited in a PSU banks or other banks as per the Capital Gains Account Scheme, 1988. This deposit can then be claimed as an exemption from capital gains and no tax has to be paid on it
Saving tax on sale of agricultural land
1) agricultural land in rural area is not considered as capital asset and hence any gains from its sale are not chargeable to tax 2) if the agricultural land hold as stock and trade then gains are taxable 3) capital gains on compensation received for compulsory acquisition of urban agricultural land are tax exempt under section 10(37) of income tax act
Exemption on capital gains from transfer of agriculture land used for agricultural purpose – section 54B
The exempted amount is for the investment in a new asset or capital gain, whichever is lower. You must reinvest into a new agricultural land within 2 years from the date of transfer New agricultural land which is purchased to claim capital gains exemption, should not be sold within a 3 years from date of its purchase
If the amount deposited as per Capital Gains Account Scheme was not used – treated as capital gains of the year in which the period of two years from date of sales of land expires
