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Tax Tip - Tell me "What do I need to know about capital gains?"

What is a Capital Gain?
What is the rate of taxation on Capital Gains?
What if I invest the capital gains into a new property or eligible bonds?
What is the time limit for investing in new property?
Can I claim exemption in my tax return if I am yet to invest in the new property?
How can I set-off losses that I incur on sale of property or shares?

What is a Capital Gain?

Gains from the sale of investments in property, stocks, mutual funds or other assets are termed as Capital Gains. Gains can either be short-term or long-term depending upon the holding period of the investment. Top

What is the rate of taxation on Capital Gains?

Gains from the sale of investments are taxed differentially, depending upon the holding period, or are not taxed at all.

For securities and mutual funds, the cut-off between short-term and long-term holding period is 1 year. For other assets, such as real estate, the cut-off period is 3 years. The following is the tax rate for various classifications:

• Long-term capital gain on stocks and equity mutual funds is exempt
• Long-term capital gain on debt instruments such as bonds or debt mutual funds is taxed at 10% without indexation or 20% with indexation
• Long-term capital gain on other capital assets is taxed at 20% after indexation
• Short-term capital gain on shares and equity mutual funds is taxed at 15% and on other capital assets is taxable at normal slab rates Top

What if I invest the capital gains into a new property or eligible bonds?

Under the Income Tax Act, if you investment your capital gains into certain types of investments, you might be entitled to a tax exemption. The following are some of the major options available:

1. If you sell a residential house, that you have held as a long-term capital asset, and the capital gains are invested in purchase or construction of new house property, then the gains will be tax exempt. However, the new asset must be acquired or constructed within the specified time limit what is the limit, should we say see below (Section 54)
2. If you do not want to invest in house property or if the asset sold is not a residential house, then the gains from sale of any long-term capital asset can be invested in bonds issued by National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC). The maximum exemption that one can claim by investing in such bonds is Rs.50 lakhs (Section 54EC)
3. If the long-term asset sold is not a residential house, but the new asset acquired or constructed is a residential house, then you will be eligible for a tax exemption on your gains if you acquire or construct the new property within a certain period of time. The following points must be kept in mind:
   • You must not own more than one residential house other than the new house on the date of transfer of original asset. Further, you must not purchase a new house in next 2 years or construct a new house in next 3 years
   • Exemption allowed will be in proportion to the sale consideration, net of transfer expenses that are invested in acquisition of the new house property Top

What is the time limit for investing in new property?

You must acquire the new property either 1 year before or 2 years after the date of the sale of the original asset. If you intend to construct a new property, then you must do so within 3 years from the date of the original sale. Top

Can I claim exemption in my tax return if I am yet to invest in the new property?

Sometimes a situation might arise where it has not been possible for you to invest your gains before the end of the tax year. In this case, the money must be deposited in designated bank in a special kind of account called Capital Gains Account Scheme. The amount deposited can be utilized at a later date for the specific purpose within the time limit provided (what is the time limit). The deposited amount will be deemed to be cost of the new property and will be eligible for tax exemption. Top

How can I set-off losses that I incur on sale of property or shares?

Losses on sale of property or shares and other capital assets are called capital loss. Depending on the period of holding, the losses may be long-term or short-term. Capital losses cannot be set-off against any other source of income. Further, short-term loss can be set-off against short-term as well as long-term capital gains, but long-term capital loss can be set-off only against long-term capital gains. If set-off is not possible in the same year, then such loss shall be carried forward to future years and shall be allowed to be set-off against future capital gains.

Lets take an example. Lets say that you have recently sold a property at a gain of Rs. 10 lakhs. At the same time you have certain investments in shares which are presently being held at a loss Rs. 4 lakhs compared to your entry price. Is there any way in which you can utilize this loss to reduce your tax liability?

Yes! If the loss from the investment in shares is short-term, then you can take advantage from the situation. By selling your shares you will be able to book a short-term capital loss. This can be set-off against the gains on sale of property, which may be short-term or long-term. In either case, your capital gains shall be reduced from Rs. 10 lakhs to Rs. 6 lakhs only. Top

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