Capital Gain Tax in India – LTCG Tax, STCG Tax

Understanding Capital Gains Tax in India

When you sell a capital asset such as real estate, stocks, or bonds and make a profit, the income you earn is known as Capital Gains.
These gains are taxable under Indian law and are categorized into
short-term and long-term, depending on how long you hold the asset.
Understanding the tax implications of these gains is crucial for
effective financial planning and ensuring compliance with tax
regulations.

In this blog, we’ll break down everything you need to know about Capital Gains Tax
in India, including how it is calculated, the rates applicable to
different types of assets, and the various exemptions available to help
you minimize your tax liability.

What is Capital Gains Tax?

Capital Gains Tax
is the tax imposed on the profit made from the sale of a capital asset.
This tax is levied when the selling price of the asset exceeds its
purchase price. Capital assets include property, stocks, bonds, mutual
funds, gold, and more.

There are two main types of capital gains:

• Short-Term Capital Gains (STCG): Earned from assets held for a shorter duration.
• Long-Term Capital Gains (LTCG): Earned from assets held for a longer period.

The tax rates and exemptions available differ for short-term and long-term capital gains.

Short-Term vs. Long-Term Capital Gains

1. Short-Term Capital Gains (STCG)

• Definition:
  Gains from assets sold within 12 months for listed securities like
  stocks, and within 24 months for other assets like real estate or
  unlisted shares.
• Tax Rate:
  • Listed securities (like equity shares and mutual funds) attract a 20% tax rate.
  • Other financial and non-financial assets are taxed according to your income tax slab rate.

2. Long-Term Capital Gains (LTCG)

• Definition:
  Gains from assets held for more than 12 months for listed securities,
  and more than 24 months for other assets like real estate or gold.
• Tax Rate:
  • For listed securities, gains exceeding ₹1.25 lakh per year are taxed at 12.5%.
  • For other assets
    (like real estate, gold, and bonds), the tax rate is 12.5%, with an
    option for taxpayers to choose between indexation benefits and a higher
    tax rate in specific cases (explained below)

How is Capital Gains Tax Calculated?

Capital
gains are calculated by subtracting the acquisition cost (purchase
price), cost of improvement (if applicable), and any expenses related to
the sale of the asset from the sale price.

For long-term capital gains, taxpayers can either:

• Pay 12.5% tax without indexation (which adjusts the purchase price for inflation), or
• Pay 20% tax with indexation, particularly for assets purchased before July 23, 2024.

Exemptions and Deductions for Capital Gains Tax

Several
exemptions and deductions under Indian tax laws allow you to reduce the
tax on your capital gains. Some of the popular sections include:

1. Section 54 (For Residential Property)

• This
  section provides an exemption if you reinvest the proceeds from the
  sale of residential property into buying or constructing another
  residential property within 2-3 years of the sale.

2. Section 54F (For Non-Residential Property)

• You
  can claim an exemption on capital gains from the sale of
  non-residential property (such as land) if you reinvest the entire sale
  proceeds into purchasing a residential property.

3. Section 54EC (Investment in Specified Bonds)

• You can save tax on long-term capital gains by investing up to ₹50 lakh in specified bonds (e.g., NHAI or REC bonds) within 6 months of the sale. These bonds come with a lock-in period of 5 years.

4. Section 54B (For Agricultural Land)

• If
  you sell agricultural land and reinvest the proceeds in purchasing new
  agricultural land within 2 years, you can claim an exemption under this
  section.

How Does the New Tax Rate Affect Different Assets?

As per the current framework, the taxation structure for different types of assets has been streamlined:

• Listed Securities: Long-term gains over ₹1.25 lakh are taxed at 12.5%, while short-term gains attract a 20% tax.
• Real Estate and Other Non-Financial Assets:
  Long-term gains are taxed at 12.5%, but taxpayers can opt for the
  previous 20% rate with indexation if the property was purchased before
  July 23, 2024.
• Other Financial Assets: Continue to be taxed based on their classification as short-term or long-term, with corresponding tax rates applied.

These
revised rates simplify the calculation but may impact investors in the
short term, particularly those in the equity market.

Filing Capital Gains Tax in India

To file your capital gains tax in India, follow these steps:

• Determine Your Capital Gains: Identify whether the gain is short-term or long-term based on the holding period of the asset.
• Use ITR-2 Form: If you have capital gains from the sale of assets, you must file your income tax return using ITR-2, which is specifically designed for reporting capital gains.
• Advance Tax Payment: If your capital gains lead to a tax liability exceeding ₹10,000, you are required to pay advance tax to avoid interest penalties under Sections 234B and 234C.

Conclusion

Capital
gains tax is an integral part of financial planning, especially when
selling high-value assets like real estate or equities. The new tax
rates and simplified asset classification system for FY 2024-25 make it
essential for investors to stay informed and plan accordingly.

Understanding
the holding period, choosing the right exemptions, and knowing the
applicable tax rates can help reduce your tax burden and ensure smooth
tax compliance. Whether you are investing in the stock market or
planning to sell a property, it’s wise to consult a financial advisor or
tax expert to navigate the intricacies of capital gains tax and make
the most of available deductions.