Understanding capital gain tax in India is crucial for managing your investments and property sales. When you sell property or shares, the profit you make is called a capital gain, and it is subject to tax.
This blog will explore different types of capital gain tax, how to calculate it, the applicable tax rates, available exemptions, and answer common questions.
Introduction to Capital Gains Tax
Capital gain tax is the tax imposed on the profit gained from selling property, stocks, or mutual funds. When these assets are sold for more than their purchase price, the resulting profit is known as a capital gain.
In India, capital gains are taxable and categorised into two types: short-term and long-term. When an asset is sold within a short period short-term gains occur, while long-term capital gains are from selling an asset held for a longer duration.
The tax rates for these gains differ, with short-term gains usually taxed at a higher rate. Understanding capital gain tax helps you plan your investments and manage your taxes effectively.
Types of Capital Gains in India
Understanding the different types of capital gains is essential for managing your taxes effectively. In India, when you sell an asset like property or stocks, the profit you make is called a capital gain, and it’s subject to tax.
These gains are categorised into two types:
Short-Term Capital Gains (STCG)
Short-term capital gains occur when you sell an asset, like stocks or property, within a short period after buying it. In India, this period is typically less than 36 months for real estate and less than 12 months for stocks and mutual funds.
If you sell within this timeframe and make a profit, that profit is considered a short-term capital gain. The tax on short-term capital gains is usually higher and is added to your income, taxed according to your income tax slab rate.
Long-Term Capital Gains (LTCG)
When you sell an asset after holding it for a longer period, long-term capital gains occur. For real estate, this period is more than 36 months, and for stocks and mutual funds, it’s more than 12 months.
The profit you make from selling these long-held assets is called a long-term capital gain. In India, long-term capital gains are taxed at a lower rate than short-term gains.
For real estate, the tax rate is 20% with indexation benefits, and for stocks, it’s 10% on gains above ₹1 lakh.
Calculation of Capital Gains
To calculate capital gains, you need to know the selling price and the purchase price of the asset. The basic formula is:
Capital Gain= Selling Price- Purchase Price
For long-term capital gains, consider the cost of improvements and indexation benefits, which adjust the purchase price for inflation. The formula becomes:
Long-Term Capital Gain= Selling Price- (Indeed Purchase Price+Cost of Improvements)
Indexation adjusts the purchase price based on the inflation index, making it fairer for taxpayers.
Example of Capital Gain
Let’s say you bought a piece of land for ₹5 lakhs and sold it after five years for ₹12 lakhs. Here’s how you calculate the capital gain:
- Short-Term Capital Gain (if held for less than 36 months):
- Selling Price: ₹12 lakhs
- Purchase Price: ₹5 lakhs
- Capital Gain = ₹12 lakhs – ₹5 lakhs = ₹7 lakhs
- Long-Term Capital Gain (if held for more than 36 months):
- Assume the indexed purchase price (after considering inflation) is ₹7 lakhs.
- Selling Price: ₹12 lakhs
- Indexed Purchase Price: ₹7 lakhs
- Capital Gain = ₹12 lakhs – ₹7 lakhs = ₹5 lakhs
In this, the short-term gain is seven lakhs, while the long-term gain, after indexation, is ₹5 lakhs. This simple calculation helps you understand how much profit you’ve made and the tax you’ll owe.
Capital Gain Tax Rates
Understanding the tax rates for short-term and long-term capital gains is crucial for managing your investments and tax liabilities effectively.
STCG Tax Rates
Short-term capital gains (STCG) are the profits you make from selling an asset within a short period. In India, for real estate, this period is less than 36 months, and for stocks or mutual funds, it’s less than 12 months.
The tax rate for STCG is the same as your income tax slab rate. This means the profit is added to your total income for the year and taxed accordingly.
LTCG Tax Rates
Long-term capital gains (LTCG) occur when you sell an asset after holding it for a longer period. For real estate, this period is more than 36 months, and for stocks or mutual funds, it’s more than 12 months.
The tax rate for LTCG on property is 20% with indexation benefits, which adjusts the purchase price for inflation. For stocks and equity mutual funds, LTCG above ₹1 lakh is taxed at 10% without indexation.
Exemptions on Capital Gain Tax
| Exemption Category | Details |
| Property Sale | Section 54: Save on long-term capital gains tax by reinvesting the profit in another residential property within a specified time frame. Section 54EC: You can obtain exemptions by investing the capital gains in particular bonds within six months of the sale. |
| Investments | Section 54F: Save on long-term capital gains tax by investing the proceeds from selling any asset (other than a house) in purchasing or constructing a residential house within the prescribed time limits. Section 80C: Investments in certain financial instruments like Equity Linked Savings Schemes (ELSS) can help reduce your overall taxable income, indirectly benefiting your capital gains. |
Conclusion
Understanding capital gain tax in India helps you make informed financial decisions, especially when selling property or other valuable assets. Knowing the types of gains, how to calculate them, the applicable tax rates, and available exemptions can save money and avoid unnecessary stress.
FAQs
Ans: Capital gain tax on property sales in India depends on the holding period. Short-term gains (if sold within 36 months) are taxed as per your income tax slab. Long-term gains (if sold after 36 months) are taxed at 20% with indexation benefits.
Ans: You can save on capital gain tax by reinvesting the proceeds in another residential property (Section 54) or by investing in specified bonds (Section 54EC) within six months of the sale.
Ans: Long-term capital gains up to ₹1 lakh from the sale of stocks and equity mutual funds are tax-free in India. Gains above this limit are taxed at 10%.
Ans: To avoid capital gains tax, you can reinvest the sale proceeds in another property or invest in specific bonds within the allowed timeframe. Additionally, certain exemptions under Sections 54 and 54F can help.
Ans: Senior citizens do not have specific exemptions for capital gains tax. However, they can still benefit from general exemptions like reinvesting in residential property or specified bonds.
