Capital gains on any financial transaction is taxable. Earning through equities, property, mutual funds are considered as capital gains. There are two types of capital gains: Long term capital gains and short term capital gains. They are both taxed at different rates as per income tax laws. There are some special cases as well when these gains are taxed at different rates.
LONG TERM CAPITAL GAINS–
Long term capital gains are taxed at 20%. These gains are not eligible for deductions under Section 80C, 80D, and so on. If you have made any investments or contributions in tax-saving instruments, you must deduct that amount from your gross income, excluding long term capital gains. Furthermore, If your taxable income after all deductions is less than the maximum exempt limit under slab rates for people that is Rs2,50,000 for AY 2018-19, you can deduct the difference between Rs2,50,000 and your taxable income without these gains, and the rest will be taxed at 20%. There are some special rates for shares and stocks for LTCG. Long-term capital gains on debt mutual funds are taxed at 20% with indexation and at 10% without indexation.
Your total gross income (including sale of property, salary, business, income interest) = Rs 5,00,000
You invested in tax saving financial instruments = Rs 3,00,000
Your total taxable income = Rs 2,00,000
Therefore your total taxable income is less than the exemption limit in your tax slab which is Rs 2,50,000
Now, assume You also have Rs 10,00,000 in long-term capital gains from the sale of an asset, which would be taxed at 20%
Now your total gain = Rs 5,00,000 – Rs 3,00,000 + Rs 10,00,000 = Rs 12,00,000
Exemption limit = Rs 2,50,000
Your tax will be calculated on Rs 12,00,000 – Rs 2,50,000 = Rs 9,50,000
Eventually, you will save tax by Rs 10,300 (20.6% of Rs 50,000). A person with no other income whatsoever, apart from these capital gains, can save his tax by a maximum of Rs 51,500 (20.6% on Rs 2,50,000).
In case of LTCG
- Sales of equity shares and equity-oriented mutual funds held for more than one year will be subject to a 10% tax plus a 4% cess.
2. Capital gains generated through March 31, 2018 will also be tax-free. As a result, while filing your ITR for the fiscal year 2017-18, you will not have to pay tax on capital gains from the sale of stocks and mutual funds.
3. You must pay tax on your LTCG at a rate of 10% without regard to indexation if you are an NRI, rather than 20% after indexation. This rate is only applicable if the LTCG is due to the sale or transfer of unlisted securities, such as private company shares.
SHORT TERM CAPITAL GAINS
Short term capital gains from the sale of equity shares or equity-oriented mutual funds on which Securities Transaction Tax is imposed on the sale transaction is taxed at 15% (plus education cess) rather than the standard slab rates.
People who are in the 10% tax bracket, will have to pay a higher tax rate on these earnings, this 15% special rate will benefit people who are in the 20% or 30% tax bracket. Cess has also been raised from 3% to 4% in this fiscal year. You also won’t be able to deduct any of these gains under Chapter VI-A (such as Section 80C, 80D, and so on).
Short-term gains for stocks and mutual funds are taxed at 15%.
Short-term capital gain on debt mutual funds is taxed as per the income slab of the individual.
FORMULAS TO CALCULATE CAPITAL GAINS
While calculating capital gains, you will hear about Indexation and CII. Indexation is used to calculate capital gains on long-term investments. The Cost Inflation Index (CII) is a phrase used when discussing long-term capital gains. This index is set and announced by the government every year.
There are several methods to calculate capital gains and tax on capital gains but it is simplified into simple formulas
Long-term capital gain = full value of consideration received or accruing – (indexed cost of acquisition + indexed cost of improvement + cost of transfer)
Indexed cost of acquisition = cost of acquisition x cost inflation index of the year of transfer/cost inflation index of the year of acquisition.
Indexed cost of improvement = cost of improvement x cost inflation index of the year of transfer/cost inflation index of the year of improvement.
In the case of short term capital gains, the computation is as given below:
Short-term capital gain= full value consideration – (cost of acquisition + cost of improvement + cost of transfer).
RATE OF CAPITAL GAINS
- In the case of long-term capital gains, individuals are taxed at 20.6% including education cess with no deductions.
- Short-term gains for stocks and mutual funds are taxed at 15%.
- Short-term capital gain on debt mutual funds is taxed as per the income slab of the individual.
- Long-term capital gains on debt mutual funds are taxed at 20% with indexation and at 10% without indexation.
- Capital gains upto Rs 1 Lakh in a single financial year is tax free
EXEMPTIONS FOR CAPITAL GAINS
- Stocks, consumables, or raw materials to be used for business purposes.
- Assets for personal use like clothes or furniture.
- Agriculture land in India.
- 6½% Gold Bonds, 7% Gold Bonds, or National Defence Gold Bonds.
- Special Bearer Bonds.
- Gold Deposit Bonds
- If an Indian person under the age of 60 has a profit or total taxable income of less than Rs.2.5 lakh, he or she is exempt from paying short-term capital gain tax.
- If the income is less than Rs.5 lakh, citizens over the age of 80 will be excused from paying capital gain tax.
- If the total taxable income is less than Rs. 2.5 lakh, Hindu Undivided Families (HUFs) and Non-resident Indians (NRIs) will be excused from paying short-term capital gain tax.
- Senior persons aged 60 to 80 are exempt from paying any tax if their total taxable income does not exceed Rs.3 lakh.
HOW TO AVOID CAPITAL GAINS
- By investing your capital gains in Capital Gains Account Scheme(CGAS)
- If you took out a home loan, capital gains are free from taxation if you utilised the money to pay off the loan.
- You will be excluded from paying capital gain tax if you sell a property and reinvest the proceeds in another property by buying or building at least two houses. However, the capital gains on the sale of the property must not exceed Rs.2 crore in order to qualify for the exemption. This perk is only available once in your lifetime.