There are many assets such as real estate, gold, silver, etc. in which one invests. The gains from these investments are called capital gains. These assets are taxed differently. One should know the tax liability of the gains arising from these assets which affects income tax returns.
Definition of “Capital Gains”:
An increase in the value of a capital asset like stocks, bonds or real estate, which gives it a higher value than the purchase price, is denoted as “capital gains”. The gain is not realized if the asset is not sold. The amount by which the selling price of an asset is more than its cost price is the “capital gains”.
Capital gains are often referred to as “investment income” that arises in connection with real assets, like property, financial assets like shares, bonds, etc. as well as intangible assets like goodwill.
Capital gains should be claimed on income taxes.
Types of capital gains:
“Capital gains” are of two types –
1. Short term capital gain when the capital asset is held for a period of one year or less, and
2. Long term capital gain when the capital asset is held for a period of more than one year.
In general capital gains are a taxable obligation for any investor. However long-term capital gains are generally taxed at a lower rate than normal income to encourage investment in the economy.
Definition of “Capital assets”:
Capital asset refers to any kind of property except the following:
i) Stock-in-trade or raw-materials held for any business purpose;
ii) Personal articles such as wearing apparel, furniture, motor cars, etc. held for personal use of the assessee or his dependent family members.
But jewellery, archaeological collections, paintings, sculptures etc. are considered as “Capital assets”.
What is “property”?
There is no particular definition of “property” in the Income Tax Act. However it has been held by the courts that a property is a collection of rights which an owner can rightly exercise to the exclusion of any stranger and has the right to use and enjoy according to his own wishes provided he does not violate any law of the country.
If something is declared as property, it becomes a capital asset unless it belongs to the category of the exceptions or the Capital Gains are categorically exempted.
What is “transfer”?
The term “Transfer” includes:
iii) Relinquishment of a capital asset.
Definition of “sale”:
“Sale” takes place when all the rights in the property are transferred for consideration. The sale may not be voluntary. An involuntary sale of a property of a debtor affected by any court at the instance of a decree holder is also held as the transfer of a capital asset.
Definition of “exchange”:
An exchange of capital asset occurs place when the title in one property is transferred in consideration of the title of another property.
Definition of “Relinquishment”:
Relinquishment of a capital asset takes place when the owner gives his rights in property in favor of another person.
Transactions not amounting to transfer:
The following transactions are not treated as transfer for the purpose of computing Capital Gains:
• Transfer of a capital asset by means of gift or will or an irrevocable trust;
• Distribution of capital assets through partition of a HUF;
• Transfer of an asset by a company to any of its subsidiary company.
Rate of tax in case of both kinds of capital gains except shares on which Securities Transaction Tax has been paid:
Short Term Capital Gain – According to the Normal prevailing slab of
Long Term Capital Gain – 20%
Carrying forward of capital gain and loss:
A short term Capital Loss arising from the sale of any asset can be set off against any income, whether it is long term or short term.
A long term Capital Loss arising from the sale of any asset can be set off against only long term Income of the previous year.
If a Capital loss cannot be set off from the same income within the same year, it can be carried forward to the following year and can be set off against Capital Gains of the following year. Thereafter for carrying forward the losses to the subsequent year, set-off can be done in the like manner.
A Capital loss can be carried forward for a period of eight years from the end of the year in which the loss took place.
Calculation of capital gains:
In case of transfer of a Real Estate the long term Capital gain, one is liable to pay tax if he holds the property for a period of more than three years at the rate of 20%. If he sells the property within three years, it would be treated as short term Capital gain and shall be taxed at the prevailing tax rate applicable to the assessee depending upon his income.
Computation of Long term capital gains (LTCG):
Long Term Capital Gains (LTCG) is computed as follows:
LTCG = Total consideration received – (indexed cost of acquiring the asset + indexed cost of improvement of the asset + expenses incurred for the transfer)
Tax liability on LTCG is calculated at the rate of 20%.
Computation of Short Term Capital Gains (STCG):
Short Term Capital Gains is computed as below:
STCG = Total consideration – (Cost of acquiring the asset + cost of improvement + expenses incurred for the transfer)