Capital Gain Tax in India

Budget 2023 Updates

• The conversion of physical gold to Electronic Gold Receipt and vice versa does not result in capital gains
• Deduction under section 54 and section 54F is capped to Rs 10 crores
• Income from market linked debentures are taxed as STCG
• From April 1st 2023, capital gains arising from debt mutual fund investments are taxable as per the investor’s income tax slab rate, irrespective of the holding period.

An individual invests in different types of assets including mutual funds and shares. The capital gain or loss arises when an asset is sold. In this article,  we will cover capital gains and it’s  tax treatment for different assets

What is a Capital Gain Tax?

Capital Gain Tax arises when a taxpayer sells a capital asset after holding it for a period. The type of Capital Gain Tax depends on the period of holding and type of asset sold.

The first thing to remember is the following conditions that lead to a capital tax chargeable to tax.

• The transaction should be of a capital asset. On the date of transfer, the asset must be a capital asset
• The transfer must be made by the taxpayer. The transfer must be made during the previous year.
• There must be a gain or loss and must be as a result of the transfer.

What is a Capital Asset?

A capital asset is any asset that a taxpayer holds. It may or may not be related to his business or profession or held for personal use. It includes assets that are tangible or intangible, movable or immovable, and fixed or circulating.

For example house property, land, shares and stocks, mutual funds, bonds, jewelry, vehicles, patents, and trademarks.

Under the Income Tax Act 1961, the below however is not included in the definition of a capital asset;

• The stock-in-trade, raw materials, and consumable stores that a taxpayer hold for its business or profession
• The movable property a taxpayer holds for his or on behalf of his family for personal use. 
• Special bearer bonds and specific gold bonds
• The deposit certificates that are issued under the scheme of Gold Monetization
• The agricultural land in India.

Capital Asset- Agricultural Land

 If the agricultural land fulfills any of the below requirements, it is a capital asset.

Condition-1

• Firstly, it is situated with the jurisdiction of either:

• A municipality 
• A notified area committee
• A town area committee
• A cantonment board 
• Secondly, the population of the above is more than 10,000

Condition-2

It falls with a distance limit from a municipality or containment board

It falls with the specific population range

Distance from the local limits of municipality or containment board	Population of municipality or containment board
2 Km	Greater than 10,000 and less than 1 lakh
6 Km	Greater than 1 lakh and less than 10 lakh
8 Km	Greater than 10 lakh

What is a Long Term Capital Asset?

A capital asset that is held for more than 36 months is considered to be a long term capital asset. The period of 36 months is not the same across all the capital assets. For a few assets it’s 24 months as well as 12 months.

What is a Short Term Capital Asset?

A capital asset that is held for less than 36 months is considered as a short term capital asset. The period of 36 months has been reduced to 24 months for any immovable property such as a land, house, etc from FY 2017-18. 

The period is 12 months for a few intangible assets such as listed shares, equity mutual fund, units of, etc 

What is the Holding Period?

The holding period of any asset is the duration for which the asset is held by the person owning the asset. It is the time difference between the date of purchase and the date of sale of the asset.

The holding period of an asset is essential because the type of capital gain or loss is dependent on it. Basis of the holding period, an asset will have long term or short term capital gain. The rate of tax and treatment is different for both the type of gains. Hence it becomes very important to calculate it accurately.

While calculating the holding period, the period for which the previous owner held the asset is also considered. This is only if the taxpayer acquires an asset by inheritance, succession, or gift.

The holding period is counted from the date of allotment in case of bonus shares and right shares

Below table shows the capital asset, its holding period and capital asset type

Capital Asset	Short Term Capital Asset	Long Term Capital Asset
Listed Equity or Preference Shares	Holding Period < 12 months	Holding Period > 12 months
Units of Equity Oriented Mutual Funds
Units of UTI
Zero-Coupon Bond
Other Listed Securities
Unlisted Shares	Holding Period < 24 months	Holding Period < 24 months
Debt Oriented Mutual Funds (Till March 31st 2023)*	Holding Period < 36 months	Holding Period < 36 months
Immovable Property	Holding Period < 24 months	Holding Period < 24 months
Other Capital Asset	Holding Period < 36 months	Holding Period < 36 months

*Note: From April 1st 2023, irrespective of the investment holding period, the capital gains from debt mutual funds are taxable as per the investor’s income tax slab rate.

What are the Types of Capital Gains?

Short term capital gain- A short term capital gain or STCG arises when a short term capital asset is transferred or sold. 

Long term capital gain- A long term capital gain or LTCG arises when a long term capital asset is transferred or sold.

A transfer under capital gain includes

1. Sale, exchange or relinquishment of the asset
2. Extinguishment of rights that is related to an asset
3. An asset that is compulsorily acquired
4. A capital asset converted to a stock-in-trade
5. A zero-coupon bond is redeemed or matured
6. Any transaction that leads to transfer of an immovable property
7. A possession transferred to a buyer of an immovable property. This transfer is in part performance of any contract

You can use Scripbox’s Capital Gain Calculator to calculate the capital gain and tax payable. Additionally, you can also use Scripbox’s Income Tax Calculator to estimate the final tax payable including the tax under capital gains.  The income tax calculator is a ready to use, simple online tool.

Capital Gain Tax Rate in India

Capital Gain	On a sale of	Capital gains tax rate
Long Term Capital Gain Tax	On transfer of- Listed equity shares Units equity-oriented funds Units of a business trust	Capital Gain < 1 lakhTax-Exempt Capital Gain > 1 lakhTax rate- 10%
Long Term Capital Gain Tax	Any asset other than mentioned above	Tax rate – 20%
Short Term Capital Gain Tax	On transfer of- Listed equity shares Units equity-oriented funds Units of a business trust Market Linked Debentures (w.e.f Budget 2023)	Tax rate – 15%If STT paid
Short Term Capital Gain Tax	Any asset other than mentioned above	The capital gain to be added to the gross total income Taxed at normal slab rate

How To Calculate Capital Gain Tax in India?

Before understanding the calculation of capital gain tax, you must understand the following concepts

Capital Gain Terms

Full value of consideration

The full value of consideration is the total value that is received or will be received by the taxpayer in exchange for the transfer or sale of the asset. This value can be in cash or kind. In case of the value being in kind, the fair market value or FMV should be taken as the full value of consideration

Cost of acquisition

The cost of acquisition is the price paid to acquire or buy the capital asset. It includes all the expenses incurred to acquire the capital asset. 

Cost of improvement

The cost of improvement is the cost incurred by the taxpayer or previous owner to make additions or alterations to the capital asset. These expenses must be capital expenditure. Any expense made before 01-04-2001 is not considered under the Income Tax Act 1961

Indexation

Indexation is a benefit of inflation that is passed to the taxpayer. This is done to adjust the purchase price of an asset w.r.t. inflation over the years of holding an asset. Due to indexation, the purchase is increased leading to a decrease in capital gain. The indexation is available on a long term capital gain.

 Indexation benefit is not available to the below-mentioned assets:

1. Listed equity shares, units equity-oriented funds and units of a business trust
2. Bonds or debentures
3. Unlisted shares transferred by an NRI
4. Depreciable asset

Indexed cost of acquisition

The cost of acquisition is indexed by applying the cost inflation index or CII to it.

Indexed cost of acquisition =  

Cost of acquisition * (CII for the year of transfer or sale / CII for the year of acquisition or purchase or FY 2001-2002 whichever is later)

Indexed cost of improvement

The cost of improvement is indexed by applying the cost inflation index or CII to it.

Indexed cost of improvement =  

Cost of acquisition * (CII for the year of transfer or sale / CII for the year of acquisition or purchase)

How To Calculate Long Term Capital Gain?

Particulars

Full value of the consideration received

Less: Indexed cost of acquisition

Less: Indexed cost of improvement

Less: Expense related to the sale or transfer

Long Term Capital Gain

How To Calculate Short Term Capital Gain?

Particulars

Full value of the consideration received

Less: Cost of acquisition

Less: Cost of improvement

Less: Expense related to the sale or transfer

Short Term Capital Gain

Set-off and carry forward of capital loss

A capital loss cannot be a set-off with any other gain or income under other income heads. A short-term capital loss can be set-off against a long term capital gain or a short term capital gain. Whereas a long term capital loss can only be set-off against a long term capital gain.

A taxpayer can carry forward a short term or long term capital loss for up to 8 assessment years. However, a taxpayer must file the income tax return on the due date to carry forward such losses.

Income Tax Return to Carry Forward Losses

It is mandatory to file income tax return by the taxpayer. The return must be filed before the tax filing due date. The ITR forms are different for every taxpayer. The applicability of  ITR forms varies w.r.t. source of income and type of taxpayer. Similarly the applicable tax slab is different for every taxpayer. The tax slab depends on the total income.

Check Out Short-Term Capital Gains Tax on Shares