All About Capital Gain Tax in India

Capital Gain:- As per Indian Income Tax laws, a capital gain tax is a voluntary tax payable on the sale of assets, investments, capital accumulation, and productivity

Capital Gain can be divided into two parts with its name suggests one is capital and second is gain.

Capital investment: - is generally income earned from sale of Capital Investment, these investment may be as house or farmhouse, any stock, bond or shares and securities etc.

Gain: - Gain is generally the difference between sale and purchase price of the capital investment.

Capital Gain is of two types:-

1- Short term capital gain

2- Long term capital gain

Short term capital gain: - if any assets are sold with in three years to the date of purchase, it will be treated as short term capital gain. But in the contest of shares and securities the duration of short term is one year

Taxability of short term capital gain on shares and securities: - Section 111A of the income tax act 1961 provides that if the shares, bonds etc. are sold within 1 year to the purchase date, income derived from that sale will be treated as short term capital gain. The rate of income tax on short term capital gain on share is 10% up to assessment year 2008-09 and 15% from the assessment year 2009-10. The short term capital gains other than those u/s 111A shall be added to the income of the assesses and no such benefit is available on short term capital gains arising in other cases and they will be taxed normally at slab rates applicable to the assesses.

If someone does the business of selling and purchasing shares or securities, he/she can not take the advantage of Section 111A of the income tax act and the income of the assesses will be treated as ‘business income’ and will be taxed accordingly.

Taxability of short term capital gain if an assets sold:- If an assets like a house or farmhouse is sold with 36 months from the date of purchase, income generated from this sale will be short term capital gain and will be taxed according to tax slabs of an assesses and will include in business income. Capital gain also arises in case of the depreciable assets such like building or machinery etc. which reduces the value because of wear and tear or use. In this case capital gain will be calculated to the sale value of the assets minus the book value of the assets after deducting depreciation according to Section 50 of Income Tax Act.

Need to know more about depreciation?

All About Depreciation

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When assets are sold and purchased in same year: - If some assets purchased and sold in same assessment year and the assets are of same head, such income will not treated as short term capital gain like.

Book value of machinery on 1-4-2009-100000

Sale of machinery on 1-6-2009 - 125000

Purchase of machinery on 1-8-2009 -200000

In this case the income of 25000 will not be treated as short term capital gain and the depreciation will be allowed to deduct accordingly. The reason of not taxed capital gain is the head of same machinery exists in balance sheet.

When sale of Land & building together: - if the land and building are sold together, the value of land and building will be calculated separately because one is depreciable assets and second is not. Registered valuer will be the man who will calculate the land and building value separately.

In case of the partnership firm where some assets is transferred to any partner, the value of the assets will be presumed and not the market value and capital gain tax will be calculated to the presumed value.

In case of dissolution of the firm and the assets is divided or sale to partner, income arrived from this operation will be treated as short term capital gain of the firm and firm only need to pay the taxes accordingly.

LONG TERM CAPITAL GAIN: - If assets are sold more than 3 years from the date of purchased the gain of that sale will be called Long term capital gain. In the case of share of securities the tenure is more than 1 year after which the gain will be called long term capital gain. Long term capital gain is calculated after deducting from the net sale of assets the indexed cost of acquisition and the indexed cost of the improvement of the assets.

The central government issued cost inflation index every year. The indexed cost of acquisition is calculated by multiplying the actual cost of acquisition with C.I.I of the year in which the capital asset is sold and divided by C.I.I of the year of purchase of capital asset. Similarly the indexed cost of improvement can be calculated by using the C.I.I of the year in which the capital asset is improved. Where the capital asset was acquired before the year 1981 then the cost of acquisition shall be the fair market value or the actual cost of its acquisition which ever is higher. The Fair market value of a capital asset can be known by the valuation of the registered value.

If the assets are depreciable assets then the indexing calculation will not be in effect.

Plot & building will be calculated separately in the long term capital gain case too

Calculation of long term capital gain: - Long term capital gains are taxed at the rate of 20% after deducting the cost inflation index adjustment benefits, but no section 80C or 80U are available in long term capital gain except individual or H.U.F. where one can adjust the long term capital gain to basic exempt limit where the income is short to basic exempt limit of an assesses.

The Long term capital gain on shares and securities which are sold after 1 year to the date of purchased are exempt for the income tax as per u/s 10(38).

Section 50(C):- Section 50C is very important in contest to capital gain. In this section if value of any sale of assets is less than  assessed value or the value of stamp duty(when stamp duty is paid for the purpose of transferring such assets) in this case the value of such assets will be treated according to stamp value and not the sale value mentioned by the assesses. If the assess says that the stamp valuer authority claims the value of the assets higher than the actual, registered valuer will look this case and if the value of the valuer is high to the assess value, the tax will be deduct on the valuer value and not the assesses value.