Profits earned by transferring capital assets in India will be liable to capital gain tax under income tax act, 1961. The difference between your sale price and cost of acquisition will be treated as capital gain. Computation of capital gain depends upon the nature of capital asset transferred. Capital asset can be of two types;
- Long term
- Short term
If the capital asset is held for a period up to 36 months before its transfer then it will be considered as short term capital asset (STCA). If such holding period is more than 36 months then it will be treated as long term capital asset (LTCA).
In following cases, if the asset is held for more than 12 months then it will be treated as long term capital asset (LTCA) or else it will be treated as short term capital asset (STCA).
- Equity or preference shares in a company whether quoted in stock exchange or not
- Securities quoted in a recognized stock exchange of India
- Units of UTI
- Units of Mutual fund as specified under section 10(23D) of income tax act
- Zero coupon bonds whether quoted or not
Gain on transfer of LTCA will be considered as long term capital gain where as transfer of STCA will be considered as short term capital gain.
Long-term capital gain is taxed at the rate of 20% if certain conditions as specified under income tax act are satisfied. Short term capital gains are taxed at a normal rate as applicable to the person who transferred such asset.
Income tax liabilities can be reduced by deducting the cost incurred for transfer of such asset, cost of acquisition, cost of improvement and available exemption.
Exemption on capital gain
- Exemption for transferring a residential house property – section 54
- Exemption on transfer of land used for agricultural purpose – section 54B
- Exemption on transfer of land and building forming part of an industrial undertaking – section 54D
- Exemption on transfer of long term capital assets – Section 54EC
- Exemption on transfer of assets other than residential house – Section 54F
- Exemption on transfer of assets in case of sifting of industrial undertakings from urban areas – Section 54G
- Exemption on transfer of assets of sifting of industrial undertaking from urban area to any special economic zone – Section 54GA
- Exemption on transfer of long term capital asset – Section 54GB
Steps for computation of capital gain tax
- Derive full consideration received from asset
- Deduct expenditure incurred for such transfer, cost of acquisition and cost of improvement
- From the resulting figure we need to subtract exemption as applicable
- The resulting figure after deducting step 2 and step 3 from step 1 will be your long term/short term capital gain on which you need to pay tax based on the rate applicable to you.
