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Concepts & Tutorials

Capital Gains Tax: A primer

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If you make a profit buying and selling Capital Assets (Property, Stock, Mutual Fund units etc.), you need to pay Capital Gains Tax.
Here’s a primer:

  1. Capital gains tax applies to you if you have both bought and sold property, shares etc (capital assets)
  2. The concept is that the “profit” you make from the purchase and subsequent sale of these assets is taxable – obviously, since it’s income to you.
  3. The government doesn’t like to tax you at the SAME rate as for your salary income – which is 30.6% at the high slab. The idea is that the government WANTS you to build capital assets, so capital gains tax is LOWER than tax on salary.
  4. There are two types of Capital gains: Long Term – when you’ve held the asset of 36 months or longer (12 months for shares/MFs). Short Term: Any period less than the long term period.

Okay that’s the basics. The complicated stuff is this. Each type of asset can have different tax implications on “profit”. Let’s take the stuff that I know about:
Real Estate
Capital gain is the difference between the purchase price and sale price. But usually real estate gets sold after a LONG time, sometimes more than 20 years after the purchase! I know cases where the purchase price was 1 Lakh and sale price was 55 Lakhs!
So the “purchase price” would be meaningless without accounting for inflation. The Government allows you to “adjust” your purchase price for inflation, and pay Capital Gains tax (20%) on the difference. There are government index tables for capital gains ratios – for each year starting, I think, with 1980. (Cost Inflation Index is available at the “Further Reading” link below)
For real estate: You can “ditch” paying tax by two ways:

  1. Invest in another capital asset (real estate only) within 6 months of the sale. If you purchase another property for less than the sale value of your earlier property, tax is paid on the retained gain.
  2. Invest in infrastructure bonds (or other section 54 tax saving products): You will be locked in for three years (can’t touch the money) but you won’t pay tax on the gain.

(Gold follows the same concept as Real Estate)
Shares/Mutual Funds etc.
This is a little complicated. There are many laws here, but here’s the basic thing: The long term capital gains on such assets is 10%, which applies if you have sold your shares or units at least ONE year after their purchase.
(The government also allows you this: You can pay either pay 20% on inflation indexed profit or 10% tax on the total capital gain WITHOUT adjusting for inflation – this is your choice and you can use whichever is lower. This is only for shares/mutual funds)
IF you have bought AFTER October 2004 then you paid something called “Security Transaction tax” (STT) on your purchase. This will be reflected in the contract note. If you have paid STT, then long term capital gains tax is ZERO – you keep ALL your money!
If you sold in LESS than one year, then Short Term Capital Gains Tax will apply. With STT in place, Tax is 10% on profits. (Earlier it used to be added to your net income – like salary income etc.)
You can’t avoid paying tax on share/MF sale profits by infrastructure bond investments (I think, correct me if I’m wrong)
That’s all the assets I know about.
One more Funda:
LOSSES: You may lose money when selling your asset. (i.e. sell for LESS than you buy for) Such losses can be adjusted for gains in the same asset type only (i.e. Long Term losses against long term gains only, real estate against real estate only etc.) Exception: Short Term Losses can be set off against Long Term Gains.
You can carry forward the losses too (adjust a loss this year against a profit next year etc.) for upto 8 years.
You cannot adjust losses against Salary Income. (sorry folks)
Further Reading:
Income Tax Department’s Website on Capital Gains

  • Paula Straub says:

    >Capital Gains Tax can really take a huge chunk of your profits.

    I have a blog and website to help people hold onto their gains if at all possible.

    Education is everything.
    Paula Straub
    http://www.savegainstax.com
    askpaula@savegainstax.com

  • AKS says:

    >My father recently sold an agricultural land in my name via Power-of-Attorney in my native village & utilized it for constructing shops. Do I incur any Capital Gains Tax as I’m a Govt. employee with approx Rs. 2.75 lac p.a. ?

  • BRS says:

    >Lot of useful info here. So, I am asking a question to which I have not been able to find an answer anywhere else. Please help.

    I had two demat accounts earlier A and B, both owned solely by me and
    both contained shares of the same company. The shares in account A
    were bought on 02-Jan-2007 and those in account B were bought on
    10-Dec-2007.

    For the sake of consolidation, I closed account A and transferred the
    shares to account B. Now, if I sell a few shares from account B,
    which ones would go first (02-Jan-2007 or 10-Dec-2007) ?

  • chandra says:

    >I have purchased a piece of land near Pune in 1996 & sold it in July 2008.

    I have purchased the plot for Rs. 75000 & sold it for Rs. 1100000.

    If I purchase new plot for Rs. 1500000 , can I get exemption from Long Term Capital Gains Tax.

    I have one house in my name.

  • Anonymous says:

    >1. How is Capital Gains Tax calculated on sale of shares of a private limited company incorporated in India?

    2. Which year is considered for taxation, the year when agreement is reached and money transferred or the year when the actual share transfer takes place?

    3. I understand that the tax on Capital Gains is ZERO if the gains are ploughed back in long term assets. What is this period for sale of shares of private limited company?

  • Yogesh Kulkarni says:

    >I wish to know correct (and current) rules of setting off Capital Gains related to Shares and Mutual Funds. I have done breakup of the Capital Gains as rules for 'Equity Oriented' mutual funds are different from 'Debt Oriented' mutual funds

    Here is the break-up:

    a) This year: Equity Based Mutual Fund Short Term
    b) This year: Equity Based Mutual Fund Long Term

    c) This year: Debt Based Mutual Fund Short Term
    d) This year: Debt Based Mutual Fund Long Term

    e) This year: Equity stocks Short Term
    f) This year: Equity Stocks Long Term

    g) Last year: Equity Based Mutual Fund Short Term
    h) Last year: Equity Based Mutual Fund Long Term

    i) Last year: Debt Based Mutual Fund Short Term
    j) Last year: Debt Based Mutual Fund Long Term

    k) Last year: Equity stocks Short Term
    l) Last year: Equity Stocks Long Term

    ——————————————————————

    I am confused about the rules used for set-off. But following is what I think (which may not be correct)

    m) Last Year's Equity Long Term which cannot be carried forward is = h + l (permanent loss)
    n) Last Year's Debt Long Term that can be carried forward = j
    o) Last Year's Debt Short Term that can be carried forward = i + k

    p) This Year's Short Term so far = c + e
    q) This Year's Debt Long Term so far = b + d + f(?)

    r) Short Term offset = p – o = Taxed? or can be offset with 's'
    s) Long Term offset = n + q = Still available for offset

    But if 'r + s' is allowed then it is available for offset next year

    Yogesh – kulkarniay at gmail dot com

  • Anonymous says:

    >Awesome Website!! Can you please include the tax on postal recurring deposit. I invested for 5 yrs in it and have earned proceeds at 8%. Would like to know if this is taxed or not. If to be taxed, then LTCL applies? How about indexation?
    Pls give an example!

    Many thanks!
    SK

  • blog says:

    It’s hard to find knowledgeable people on this topic, but you sound like you know what you’re talkin