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Capital Gains Tax in India- Calculation, Exemption and Rates
July 22 , 2013

Whenever you make profit on investment in some type of assets a part is to be given to the government as income tax on capital gains. Here we'll deal with how to calculate capital gains tax, which capital gains have exemptions and capital gains tax rates.

Capital assets and capital gains

We pay capital gains tax on capital assets. Which are the capital assets? Basically they are those assets whose value is expected to appreciate with time. Equity shares, mutual funds, real estate property, gold, bonds are all capital assets. Fixed deposit is not a capital asset since FD does not appreciate though you get income through interest, on which tax is paid separately.

Merely having a capital asset does not make you liable to pay tax. You need to make gains from it. Buying shares or investing in a mutual fund does not give tax liability, rather when you sell them for profit (or loss) the tax part comes into play.

Capital gains tax rate

Capital gains tax rate is not uniform. It varies with different assets and also with duration of holding them. As a thumb rule, just remember 2 things:

- Growth assets (equity, gold, real estate) have lesser capital gains tax

- Long term capital gains tax is lower than short term capital gains tax

Asset Class

Definition of short term

STCG Rate

LTCG Rate

Equity (listed shares and equity mutual funds)

< 1 year

15.45%

Nil

Listed bonds, deep discount bonds of 10 year duration, debt funds, gold funds

< 1 year

Marginal rate

10.3% non-indexed, or 20.6% indexed, whichever is lower

Real estate

< 3 years

Marginal rate

20.6% with indexation

Unlisted shares

< 3 years

Marginal rate

20.6% with indexation

Gold (physical or e-gold)

< 3 years

Marginal rate

20.6% with indexation

Interest bearing deposits or bonds

Interest is not treated as capital gains, but is taxed as income. It is added to your total income for the year

NA

NA

Calculating capital gains tax

Short term capital gains tax is calculated as

STCG = Sale value - (Cost of acquisition + cost of improvement + cost of transfer)

Long term gains tax is calculated as

LTCG = Sale value - (indexed cost of acquisition + indexed cost of improvement + cost of transfer)

Check detailed explanation on these in articles.

Exemptions on capital gains tax

Like shown in the rates table above, presently no tax is to be paid when you make profit on investment in shares or equity mutual funds, after holding them for at least one year. Thus you have the incentive of tax exemption in shares and equity oriented mutual funds.

Besides capital gains on selling agricultural land that has been acquired by a government law is exempt from capital gains tax. Such land should have been used for agriculture purpose during 2 years before the sale.

Apart from the exemptions, certain deductions are allowed on long term capital gains tax, especially in property. For details on this you can refer to article.

How and when capital gains tax is paid

Capital gain is one of your income sources. Others can be salary/pension, house property, professional/business income or other sources like interest, dividend and lottery. Since TDS does not generally apply in capital gains, tax on capital gains is to be calculated and paid by you. If your total tax liability is Rs 5,000 or more (excluding TDS) then you should pay it as Advance Tax in the same year you earn it. Else you can pay it as Self Assessment Tax in the following assessment year before due date of filing tax returns.

If we pass on profits it is only fair that we be able to pass on loss as well. So when there has been loss on investment you can deduct it from your income and pay income tax on lesser income. But there are rules on which income can be set off (deducted, in plain language) against.

Loss from capital gains cannot be set off against income from any other sources like salary, house property, professional income, interest etc. It can only be set off against capital gains. If it cannot be set off entirely in one year, you can carry it forward for 8 assessment years to set off against capital gains in those years.

Loss from short term capital gains can be set off against gains from short term or long term capital assets whereas loss from long term capital assets can be set off only against profits from long term capital assets.

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