Capital Assets & Capital Tax

Capital Asset

A capital asset refers to asset or property of any kind held by a person irrespective of whether it is connected to the person’s business or profession. This would include land, immovable property like residential and commercial buildings or spaces, shares and stocks, securities and bonds, mutual funds, vehicles, trademarks, patents, machinery, jewellery, archaeological items, works of art like paintings, sculptures etc.

  • Stock-in-trade, consumable stores and raw materials used for business or profession
  • Items of personal used such as furniture and apparel.
  • Agricultural Land in rural area
  • 6.5% gold bonds, national defence gold bonds and special bearer bonds, defence gold bonds and special bearer bonds
  • Gold deposit bonds under the Gold Deposit Scheme 1999.
Taxability of Capital Gain

When you sell any capital asset, the profit/loss you make on it is termed as a capital gain or capital loss as the case may be. Such incomes are liable to tax in India as ‘Capital Gain tax’ in the year of sale. At the time of a sale, based on the period for which the capital asset has been owned by the assessee, the capital gain/ loss may be ‘Long Term’ or ‘Short Term’. A snapshot of the rules regarding this is provided below:

Asset Type Long Term Capital Asset Short Term Capital Asset
Immovable property (including land and buildings) Held for more than 24 months Held for upto 24 months
Shares & Securities (including equity or preference shares of a company listed on a recognized stock exchange, debentures, bonds, Government securities, equity oriented mutual funds, zero coupon bonds) Held for more than 12 months Held for upto 12 months
Any other capital asset Held for more than 36 months Held for upto 36 month

Long term capital gains (LTCG) are charged to tax at 20% with an adjustment to the acquisition cost of the asset in lines with its present value using a ‘Cost Inflation Index’. The Act also provides a number of tax-exempt re-investment options in the case of LTCG to help reduce the burden of tax.

Short term capital gains (STCG) are taxed either at 15% or at the applicable slab rates depending on the type of asset being sold.

Rates of tax on Capital Gains
Asset Type LTCG Rate STCG Rate
Immovable Property 20% Income Tax Slab Rates
Equity shares listed on a recognized stock exchange 10% on LTCG exceeding Rs. 1 Lakh 15%
Equity-oriented mutual funds 10% on LTCG exceeding Rs. 1 Lakh 15%
Debt-oriented mutual funds 20% Income Tax Slab Rates
Other Capital Assets (movable assets, unlisted shares and securities, assets not listed above) 20% Income Tax Slab Rates
Computation of Capital Gains

To compute the capital gains, full value of consideration (‘FVC’) needs to be computed. From the FVC, the following expenses ought to be deducted:

  • Expenditure incurred in connection with the transfer
  • Cost of acquisition (to be indexed if the asset is long term capital asset)
  • Cost of improvement (to be indexed if the asset is long term capital asset)

From the resulting amount, exemptions under various sections can be claimed in order to reduce the capital gains tax liability.

We exclusively assist NRIs in computing capital gains from sale of property, advice on lower tax certificates and tax filing.