Assets Taxable Under Wealth Tax in India

 Capital Gains

Capital Gain is the profit earned from the sale of a capital asset, such as property, stocks, bonds, or other investments. It is the difference between the selling price of the asset and its purchase price or cost of acquisition. Capital gains are typically subject to taxation, and they are classified into two main types based on the holding period of the asset: short-term capital gains and long-term capital gains.

Types of Capital Gains

1. Short-Term Capital Gain (STCG):
• Occurs when a capital asset is sold within a short period from the date of acquisition.
• For most assets (excluding securities), this period is typically less than 36 months (or 3 years).
• For securities (such as listed stocks or equity mutual funds), the short-term period is less than 12 months.
• Short-term gains are usually taxed at a higher rate than long-term gains and are added to the individual's regular income and taxed according to their income tax slab. However, certain assets like equities have a fixed rate.
2. Long-Term Capital Gain (LTCG):
• Arises when a capital asset is held for a longer period and then sold.
• The holding period for long-term assets is generally more than 36 months. For securities like listed stocks and equity-oriented mutual funds, the period is more than 12 months.
• Long-term capital gains often benefit from a lower tax rate than short-term gains, and certain exemptions or deductions may apply.

Calculation of Capital Gains

1. Short-Term Capital Gains Calculation:

STCG=Sale Price−Cost of Acquisition−Cost of Improvements (if any)−Expenses on Transfer\text{STCG} = \text{Sale Price} - \text{Cost of Acquisition} - \text{Cost of Improvements (if any)} - \text{Expenses on Transfer}STCG=Sale Price−Cost of Acquisition−Cost of Improvements (if any)−Expenses on Transfer

2. Long-Term Capital Gains Calculation:

LTCG=Sale Price−Indexed Cost of Acquisition−Indexed Cost of Improvements−Expenses on Transfer\text{LTCG} = \text{Sale Price} - \text{Indexed Cost of Acquisition} - \text{Indexed Cost of Improvements} - \text{Expenses on Transfer}LTCG=Sale Price−Indexed Cost of Acquisition−Indexed Cost of Improvements−Expenses on Transfer

• Indexation adjusts the purchase cost based on inflation, which reduces the overall capital gain amount, leading to a lower tax liability on long-term gains.

Tax Rates on Capital Gains in India

• Short-Term Capital Gains (STCG):
• For equity assets, STCG is taxed at a flat 15% under Section 111A of the Income Tax Act.
• For other assets, STCG is added to the individual’s regular income and taxed as per the applicable tax slab.
• Long-Term Capital Gains (LTCG):
• For listed equity shares and equity mutual funds, LTCG exceeding ₹1 lakh in a financial year is taxed at 10% without the benefit of indexation.
• For other assets, LTCG is generally taxed at 20% with the benefit of indexation.

Exemptions on Capital Gains

Several exemptions are available under the Income Tax Act for reinvesting the gains in certain specified assets:

1. Section 54 – Exemption for long-term capital gains from the sale of a residential property if reinvested in purchasing or constructing another residential property.
2. Section 54F – Exemption on capital gains from the sale of any long-term asset other than a residential property if the gains are invested in purchasing a residential property.
3. Section 54EC – Exemption on long-term capital gains if invested in specified bonds, such as those issued by the National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC), within six months of the transfer.

Important Points to Consider

• Cost of Acquisition: Includes the initial cost of buying the asset and any additional costs incurred for improvements or transfer expenses.
• Indexed Cost of Acquisition: Applicable for long-term gains only, where the cost of acquisition is adjusted for inflation using the Cost Inflation Index (CII).
• Set-Off and Carry Forward: Capital losses can be set off against gains and, if not fully utilized, can be carried forward for up to 8 years to offset future gains.

Practical Example

Suppose an individual bought a property for ₹10 lakh 15 years ago, and they sold it for ₹50 lakh today. Due to inflation adjustments (indexation), the indexed cost of acquisition might be calculated as ₹30 lakh. Therefore, the capital gain would be:

LTCG=Sale Price−Indexed Cost of Acquisition\text{LTCG} = \text{Sale Price} - \text{Indexed Cost of Acquisition}LTCG=Sale Price−Indexed Cost of Acquisition =₹50 lakh−₹30 lakh=₹20 lakh= ₹50 \text{ lakh} - ₹30 \text{ lakh} = ₹20 \text{ lakh}=₹50 lakh−₹30 lakh=₹20 lakh

If the individual decides to reinvest this gain in another residential property, they might be able to claim an exemption under Section 54 and reduce their tax liability on this gain.

Conclusion

Understanding capital gains is essential for effective tax planning, especially for those who frequently deal with the sale of assets or investments. By planning the holding period and making use of exemptions, taxpayers can minimize their tax liability on capital gains.