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Capital Gains tax is a tax on the gains made by assesses while selling assets. It does not relate to one's income. As such it has a special treatment in the Income tax act. Since the amounts involved are generally high, one must take care in making investments in the most tax efficient way.
Basically capital gain is calculated as the difference between the consideration or sale price received, as reduced by the purchase cost. The act allows a cost acquisition indexation which is designed to offset for inflation in the years between purchase and sale of an asset. By this the original price of the asset, for tax calculation purposes, is boosted by an incremental annual percentage specified by the department. Hence the purchase price for calculating tax will be more than the actual price paid. Cost of improvements made to the asset is also reduced from the consideration received. This relates particularly to sale of real estate assets.
Computation of Capital Gains/Losses
Computation of Short term capital gain:
Full value of consideration
Less:
Expenses incurred wholly and exclusively with sale or transfer
Cost of acquisition
Gross Short Term Capital Gain
Exemptions under sec. 54B/54D54G/54GA
Equals:
Net Short Term Capital Gain
On which: Tax as per normal income tax slabs
Long Term Capital Gains
Full value of consideration
Less:
Expenses incurred wholly and exclusively with sale or Transfer
Indexed cost of acquisition
Indexed cost of improvement
Equals:
Gross Long Term Capital Gains
Less Exemptions under sec. 54/54B/54D/54EC/54ED/54EE/54F/54GB
On which:
Tax at 20% on the balance as computed.
Advance tax too should be paid
Capital Gain Account Scheme
The money received from sale of property must be deposited in a Capital Gains Account in a bank. Deposits can be done in instalments or at one go and the account can be either a fixed or savings deposit account. It can be opened only in specified banks and must mention clearly that it is an account under the scheme. The deposit must be made before filing the return of income tax. This is only a temporary account for keeping funds, to be used for buying or building a new house. Withdrawals from this account can be used only for building or buying purposes. Taxpayers can use this exemption only for the net consideration or the capital gain amount.
Netting rules and carry forward of capital losses
Long term capital losses can be set off against only long term gains, while short term losses can be set off against short term losses. The capital loss must be from an earlier date. Losses can be carried forward for eight years. Long term loss from sale of securities cannot be set off. Hence this loss cannot be carried forward.
Exemptions in Capital Gains
There are several exemptions from capital gains. Taxpayers should evaluate these avenues while making decisions to sell properties and invest. The amount of exemption would be calculated based on the proportionate amount invested in each asset, based on sale and purchase prices.
The following exemptions are available if invested in the assets specified.
Sale of a residential unit can be offset by an investment in a new residential house. Sale of an agricultural land can be offset by an investment made in another agricultural land. Capital gains from compulsory acquisition of lands and buildings of an industrial undertaking; investment made for purchase of land or building to shift or re-establish the industrial undertaking. Long term capital gains resulting from transfer of machinery or plant or building or land of an industrial undertaking situated in an urban area; may be invested in machinery or plant or building or land for the purpose of shifting the industrial undertaking to any area other than an urban area. Capital gains on sale of asset other than a residential house and investment made in a residential dwelling. Investments in financial assets and investments under Sec. 54EC.
Tax planning tips
Capital Gains Bond Scheme - Section 54EC: This avenue can be used by those persons who already have a house. Under this scheme any amount from Rs. 20,000 to Rs, 50,00,000 can be invested in fully secured bonds issued by NHAI, REC etc. Holding period is three years. The bonds cannot be pledged and if sold before that period, capital gains would become chargeable.
Section 54GB: This section was introduced in 2012. This allows assesses to invest in shares of companies engaged in production and manufacturing goods. The section has a five year window, starting from 1, April 2012 and ending on 31st March 2017.
The following are the conditions for the investment:
The date of incorporation of the company should not be prior to the 1st day of April of the financial year in which the capital gain arises and not later than the due date of furnishing return of income. The company should be engaged in the production of an article or a thing. The company should qualify as a small or medium enterprise under the Micro, Small and Medium Enterprises Act, 2006. The eligible assessee, before the due date of furnishing the return of income u/s 139(1) of the Act, must utilize the amount of net consideration for subscribing to the ordinary shares of an eligible company. After subscription of shares, the eligible assessee should hold more than 50% of the share capital of the company or should be entitled to more than 50% of the voting rights in the company. The eligible company, within one year from the date of subscription, should utilize the amount for purchase of capital asset. The new asset must be purchased by the company, within a maximum time period of one year from the date of subscription to the ordinary shares by the assessee. New asset means new plant and machinery but does not include second hand machinery, equipment installed in a residential accommodation, a vehicle, office appliances and computers.
Section 54EE: Under this section, assesses may invest in a 'fund of funds' which will fund start-ups. The amount invested cannot exceed Rs. 50,00,000 and the lock in period is three years. The government aims to garner as much as Rs. 10,000 crores from this scheme.
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