What’s Capital Gain Tax and its Implications on ITR

About

The gain from the sale of capital assets is subject to the capital gain tax, which is a significant tax. This tax, which is governed in India by the Income Tax Act of 1961, is a significant source of funding for the state. It is determined by the kind of asset sold and the length of time it was owned. In order to minimize their tax obligations, individuals and corporations should be aware of the exclusions and deductions that are permitted by the Act. Non-residents must adhere to specific rules regarding the repatriation of funds and pay capital gain tax as well.

Short-term capital gains (STCG) and long-term capital gains are the two forms of capital gains (LTCG). When an asset is sold within 24 months after acquisition, STCG is created, whereas LTCG is created when an asset is sold beyond 24 months. Long-term capital gains typically have a lower tax rate than short-term capital gains.

The capital gains tax is assessed on the difference between the asset's acquisition price and sale price. The purchase price comprises both the actual money spent on the asset as well as any out-of-pocket costs, like brokerage and legal fees. Similar to the purchase price, the sale price accounts for both the actual sum paid for the asset as well as any costs incurred throughout the transaction, such as brokerage and legal fees. When a business sells an asset, the gains are subject to tax at the rate that is appropriate for the kind of asset sold. Companies may, however, also benefit from the deductions and exemptions for capital gains that are covered in the section after that.

How is it Taxed?

In India, the capital gain tax is calculated based on the type of asset sold and the period for which it was held. Let’s take a closer look at how capital gain tax is calculated in India:

Real estate: The sale price of a property and the indexed cost of acquisition are used to determine the capital gain tax when the property is sold. The cost of acquiring the property and the cost inflation index (CII) for the year it was purchased and the year it was sold are used to compute the indexed cost of acquisition, which accounts for inflation. On the Income Tax Department's website, you can find the most recent CII. Long-term capital gains on real estate are taxed at a rate of 20%, whereas short-term capital gains are taxed at the same rate as the applicable income tax.

Shares and mutual funds: The capital gain tax is computed based on the asset's sale price and the asset's acquisition price when shares or mutual funds are sold. Gains are regarded as short-term capital gains if the shares or mutual funds are held for less than a year and are taxed at the applicable income tax rate. Gains on stocks or mutual funds held for more than a year are subject to long-term capital gains tax at a rate of 10%.

Other assets: When selling other assets like gold, jewelry, or works of art, the capital gain tax is computed based on both the asset's purchase price and sale price. Gains are regarded as short-term capital gains and are taxed at the applicable income tax rate if the asset is held for less than 36 months. Gains are regarded as long-term capital gains and are subject to a 20% tax if held for more than 36 months.

Exemptions & Deductions

The Income Tax Act provides for a number of capital gains exemptions and deductions. The exemption for long-term capital gains on the sale of a residential home is one of the most well-known exemptions. The long-term capital gains tax may be disregarded if the earnings from the sale of a residential property are invested in another residential property within a given time frame. This exemption is limited in scope and is only available once in a lifetime.

The deduction allowed by Section 80C of the Income Tax Code is another option. For investments made in specific instruments, such as Public Provident Fund (PPF), National Savings Certificate (NSC), and Equity Linked Saving Scheme, individuals may deduct up to Rs. 1.5 lakhs from their taxable income (ELSS).

(It is important to note that the capital gain tax is applied not just to Indian nationals but also to non-residents who sell their assets in India. Non-residents must abide by specific rules regarding the repatriation of funds and are subject to a higher tax rate.)

Conclusion

In a nutshell, like any other kind of income, capital gains are subject to taxation. Everyone who sells or otherwise disposes of a capital asset in India must take capital gain tax into account. It helps to regulate the economy and is a significant source of revenue for the Indian government. As a result, it is crucial for both people and companies to be aware of and adhere to the capital gain tax requirements in order to avoid fines and other legal repercussions.

Yet how capital gains are calculated differs depending on the asset in question and how long it was kept before being sold. You can get a more thorough understanding of the precise calculations involved in your capital gains tax from our experts at SuperCA if you've sold or intend to sell any assets. This will help you make better decisions. You’ll get one-stop solutions to all of your tax-related concerns from our in-house tax and finance specialists. Do contact us for a no-cost consultation.