All about Capital Gains Tax

Capital Gains Tax

Inherited properties form a major part of capital gain tax, as far as Indian market goes. Although there is no cost of acquisition involved in such an inheritance, there is an occurrence of gain in the form of transfer of ownership. For computing capital gains, income from equity, debt, gold and real estate investments are considered. Any such assets held for a period from one to three years is termed as long term capital gain and equity assets held for less than a year are termed as short term capital gains. The other assets, namely debt and gold that are in possession for less than a year and real estate investments held less than three years, are included in the investor’s income and taxed according to the slab rate.

The elements that are taken into account while computing taxable capital gains are the cost of acquisition, cost of improvement and cost of transfer, which are considered in total for STCG (Short-term Capital Gain) and an indexed cost of acquisition, improvement and transfer are computed for LTCG (Long-term Capital Gain). LTCG attracts 20% tax and it is mandatory to pay a certain sum as advance tax.

Though capital gain is a taxable event, be it long-term or short-term, Income Tax Law provides options that individuals can utilize to save tax, specifically on property sale transaction and the resultant cash flow thereon. There may be myriad reasons for sale of an ancestral property or a personal investment, but as far as law is concerned, the gain resulting in such a sale has to be accounted and taxed for.

Section 54EC of Income Tax Act, the proceeds of the sale can be invested into certain bonds, provided the capital gain either in part or whole is invested within six months with a lock in period of three years. If converted, the gain from such conversion is taxable and also one cannot take loan against these bonds and the interest income from such bonds is also taxable.

For those individuals who own just one property, Section 54F of Income Tax Act, exempts the capital gain from tax, if the entire sale proceed is invested in one residential property, within a year before or two years after the date of transfer of such asset. If the individual is in possession of a land, he or she may opt to construct a residential property with the gain from sale, subject to a time period of within three years. Where one chooses to invest only a part of the sale proceeds, exemption will be proportionately calculated.

Every individual must keep in mind the tax proceedings while buying or selling properties, for it attracts capital gains that are taxable. Exceptional cases like Transfer of Equity Shares, Insurance Received, Conversion of Capital Asset into Stock-in-Trade, Transfer of Depreciable Assets etc. require special treatment of gains or losses and are calculated on case basis.

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by Balaji R via Shriram Properties