Capital Gains Tax

Capital gains is the profit that the investor realizes when he sells the capital asset for a price higher than its
purchase price. The transfer of capital asset must be made in the previous year. This is taxable under the head
Capital Gains and there must exist a capital asset, transfer of the capital asset and profit or gains arising from
the transfer.

Capital Gains include any property held by the assesse except the following:

Stock in trade.
Consumable stores or raw materials held for the purpose of business or profession.
Personal effects that are movable except jewellery, archaeological collections, drawings,
paintings, sculptures or any art work held for personal use.
Agricultural land. The land must not be located within 8kms from a municipality,
Municipal Corporation, notified area committee, town committee or a cantonment board with
a minimum population of 10,000.
6.5 percent Gold Bonds, National Defence Gold Bonds and Special Bearer Bonds.
Gold Deposit bonds under Gold Deposit Scheme.

What is Capital Gains Tax?

Capital gains tax is a tax that is charged on the profits that he has made by selling his capital asset. For making
it easy for taxation, the capital assets are classified to Short-Term Capital Asset; and Long-Term Capital
Asset.

Short-Term Capital Asset:

If the shares and securities are held by the taxpayer for a period not more than 36 months preceding the date
of its transfer will be treated as a short-term capital asset.

Long- Term Capital Asset:

If the taxpayer holds the shares and securities for a period exceeding 36 months before the transfer will be
treated as a long-term capital asset.

Equity shares which are listed in a recognised stock exchange, units of equity oriented mutual funds, listed
debentures and Government securities, units of UTI and Zero Coupon Bonds period of holding will be
considered for 12 months instead of 36 months.

Transfer is giving up your right on an asset it includes sale, exchange, compulsory acquisition under any law
and relinquishment.

Capital Gains Tax in India:

In India, the long-term capital gains on stocks and equity mutual funds are not taxed. But, the short term gains
will be taxed at 15 percent. In case of debt mutual funds, both short and long term capital gains are taxed. The
short-term capital gain on debt mutual fund is added to the income and taxed as per the individuals income tax
slab and the long-term capital gains on debt mutual funds are taxed at 20 percent with indexation and 10
percent without indexation. Indexation is adjusting the purchase value for inflation. The indexation increases
the purchase cost and lowers the gain.

The taxpayer can avail the capital gains statement from CAMSOnline and Karvy, they send the statement
through the mail.

Computation of Capital Gains:

The computations for the capital gains are as follows:

Short-term capital gain = Full value consideration- (cost of acquisition + cost of improvement + cost of
transfer)

Long-term capital gain = Full value of consideration received or accruing (indexed cost of acquisition +
indexed cost of improvement + cost of transfer). Where;

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

Cost of transfer is a brokerage paid for arranging the deal, legal expenses incurred, cost of advertising, etc.

For Example:

Mr. Sharma is a resident individual and he sells a residential house on 12/4/2013 for Rs.25,00,000. He had
purchased the house on 5/7/2011 for Rs.5,00,000 and spent Rs.1,00,000 on its improvement during May 2012.
During the previous year, 2013-2014, his income under all heads excluding capital gains was NIL.

Since the asset was held for less than 36 months, it is a short term capital asset and the

Short-term capital gain = 25,00,000 5,00,000 1,00,000

= 19,00,000
In case Mr. Sharma is selling the house on 12.3.2015 for the same price, then he wouldve had the asset for
over 36 months.

The indexed cost of acquisition will be 5,00,000 X 852/711 = 5,99,156

The indexed cost of improvement will be 1,00,000 X 852/785 = 1,08,535

The long-term capital gain = 25,00,000 (5,99,156 + 1,08,535) 707691 = 17,92,309

Capital Gain Index:

It is important to know about the cost inflation index when you are calculating the long-term capital gains. The
long-term capital gain is computed by deducting the indexed cost of acquisition and indexed cost of
improvement.

The concept of indexation was introduced as the value of a rupee keeps changing due to inflation. If it is fair to
pay more for a toothpaste over the years, it is fair to pay capital gain tax with incorporating the effect of
inflation on your purchase. Indexation lets you show a higher purchase cost of the capital asset that you
bought, this helps lower your overall profit.

The acquisition price is indexed by a factor called the Cost Inflation Index (CII).

CII is the CII for year in which the asset is transferred divided by the year in which the asset was acquired. The
CII is then multiplied with the purchase price to arrive at the indexed acquisition cost. The cost inflation index
for the current year 2015-2016 is 1081.

Capital Gain Tax on Property:

Selling a house attracts tax and it is charged on the amount gained from the sale and not on the entire amount
itself. If you sell the property in three years, then it is termed as short-term capital gain and will be taxed
directly as per the income slab you fall under. It attracts a flat 20 percent tax.

The long-term gain arising from the sale of a capital asset is exempt under Section 54 and 54F if invested in
purchase or construction of a house property subject to certain conditions. To get the exemption, the taxpayer
has to purchase the residential house within a period of 1 year before or 2 years after the transfer of the original
house. Under construction properties must be completed within 3 years from the date of transfer of the original
house. The investment on the house property must be situated in India. This will apply to the assessment year
2015-2016 and for the subsequent years.

The advance that will be paid for sale of property will be taxed and it will be later fortified by individuals for
sale of flat if the transaction does not go through. The amount will be taxed in the same year under income
from other sources. Such amount can be reduced from cost of acquisition of the asset in the year of sale of the
capital asset while determining the capital gains.

You can buy or build a house from the capital gain within 2 years of selling the property. You can book a flat
with the capital gain and save the tax. You can also save tax by investing the capital gains in special Capital
Gains Account Scheme (CGAS) with the bank. Another option is to invest in specified bonds such as Rural
Electrification Corp. Ltd. and National Highways Authority of India within 6 months from the date of sale of
the property.
 Remember that with one sale of property, you can invest in only one new asset and you cannot invest in
multiple acquisitions to reduce the tax. If you are selling more than one property, you can invest the cumulative
capital gain amount in only one new property.

Capital Gains Tax Exemption:

Agricultural land in rural area in India is not considered as a capital asset and therefore no
capital gains will be applicable on its sale.
You will not be taxed if you use the entire sale proceed of your capital asset to buy a
house property. You must satisfy the following conditions to avail exemption under Section
54F:
You will have to purchase a house in 1 year before or 2 years after the sale.
Under construction properties must be completed within 3 years from the date of
transfer of the original house.
You will not sell the house within 3 years of the purchase or construction.
The new house must be situated in India.
You must not own more than 1 residential house other than the new one on the
date of transfer.
You do not purchase a new house apart from the new one within 2 years or
construct a residential house within a period of 3 years.
When you satisfy these conditions and when you invest the entire sale proceeds towards the new house, you
wont have to pay any tax on the capital gain.

When you invest in Capital Gains Account Scheme, then you wont have to pay tax on
the capital gains. However you must invest the money for a specified period as specified by
the bank. If you fail to keep the money invested for the specified period, then it will be treated
as capital gain.
By purchasing Capital Gains Bonds, the tax will be exempted. This is applicable only in
case it was a long-term capital asset and the exemption is under Section 54EC. If you dont
intend to invest in another property, then there is no use investing in the Capital Gains Account
Scheme. In that case, you can invest in certain bonds for a specified purpose and these are
redeemable after 3 years. You will be given a period of 6 months to invest in these bonds.

Capital Gains Bonds:

As per Section 54EC, one can claim tax relief by investing the capital gains earned from long-term capital
assets in bonds issued by National Highway Authority of India or by the Rural Electrification Corporation
Limited. The investment in bonds must be done within a period of 6 months. These will not be redeemable
before 3 years. You can earn a guaranteed rate of interest on the bond. The maximum amount that can be
invested in capital gain bonds is Rs.50,00,000 during a financial year. This benefit cannot be availed for a
short-term capital gain.

Capital Gain Tax Calculator:

Capital gain calculators are easily available online to help you ascertain the capital gain that you have made on
the sale. You will have to fill in the following details:
 Purchase price
Sale price
Number of units
Purchase details like the date, month and the year it was purchased on.
Sale details like the date, month and the year it was sold on.
Investment detail. You can invest the capital gains toward share, debt mutual funds,
equity mutual funds, real estate, gold and fixed maturity plan.
On hitting the calculate capital gain button, you will be provided the following details:

Investment type.
Time between the purchase and the sale.
Gain type, if it is a short-term capital gain or a long-term capital gain.
Difference between the sale and purchase price.
Cost inflation index of the year of purchase.
Cost inflation index of the year of sale.
Purchased index cost.
Difference between the sale and the indexed purchase price.
Long-term capital gain without indexation.
Long-term capital gain with indexation.
The long-term capital gains on stocks and equity mutual funds are not taxed whereas the short term gains are
taxed at 15 percent. The short-term capital gain on debt mutual fund is added to the income and taxed as per
the individuals income tax slab and the long-term capital gains on debt mutual funds are taxed at 20 percent
with indexation and 10 percent without indexation.

Explore Capital Gains Tax Related Articles:

News About Capital Gains Tax
Singaporean PM Cautions India Against Withdrawal of Exemption on Capital Gains

Singapore recently conveyed its concerns to India on the issue of Capital Gains tax, saying that a withdrawal
on the exemption would impact investor sentiment and alter the outlook of the Indian tax regime in the eyes
of Singapore investors. In a recent meeting where the Singaporean Prime Minister met PM Modi, he
cautioned India on its intention to withdraw the exemption on Capital Gains, a move India has already
implemented in Mauritius to prevent routing of cash by Indian firms. This move goes back to the 2006 tax
treaty that India signed with Singapore wherein any tax regime modification in the Mauritius treaty will
hold good for Singapore too. Over the last one decade, investments worth almost $100 Billion have come
from Singapore.

10th October 2016

 Capital Gains Tax to be levied on investments through Cyprus

The Double Taxation Avoidance Agreement (DTAA) with Cyprus was approved by the Union Cabinet on
Wednesday. This will enable Indian authorities to levy capital gains tax in the country for investments
originating in Cyprus.

Similar to the recent amendment of the DTAA with Mauritius, this update has also lead to the provision of
residence-based taxation on capital gains. These changes are in subsequence to the assumption of power by
the NDA government and their sustained efforts in narrowing down tax evasions and round-tripping of
funds.

The proposed DTAA with Cyprus will prevent the misuse of beneficial provisions of the agreement and the
distortion of financial flows that create challenges in tax collection.

30th August 2016

Exemption on Long-Term Capital Gains Tax on Purchase of Multiple Houses

Indian tax laws state that a tax assesse can exemption on long-term capital gains tax if he or she purchases a
residential house on sale of another asset or property. Although the Section 54 and 54F amendment states
that capital gains tax will only be exempted if the investment is on one residential property, you can still
claim the tax exemption if you purchase multiple houses. The claim is legal when the purchases flats or
houses are used as a single residential unit by the assessee or his or her family.

In another decision made by a Special Bench of the Mumbai Tribunal, if the tax payer has purchased
multiple houses in different locations, the tax exemption can be claimed for only one house.

8th August 2016

Panel Examines Problem Areas in India-Mauritius DTAA

The committee examining Indias revised Double Taxation Avoidance Agreement (DTAA) with Mauritius
has found problems in the new rule that capital gains tax wont be applicable on equity bought before April
1, 2017.
 Among the ambiguous areas in the DTAA discovered by the panel consisting of officials from SEBI,
Central Board of Direct Taxes, HSBC and Franklin Templeton are: mergers, conversions of securities and
American Depositary Receipts (ADRs), and bonus stocks. The key question is whether any change in
ownership in case of stocks, or conversion of securities after April 1, 2017 but bought before that time,
would attract capital gains tax or not.

The new DTAA also states that investors from Mauritius will be liable to pay short-term capital gains tax in
India at half the prevailing rate for two years from April 1, 2017. From April 1, 2019, they will have to pay
the full rate.

28th July 2016

From April 2017, Cyprus will no more enjoy capital tax waiver

Cyprus, the European island country which is also a major FDI investor in India will no more enjoy capital
tax waiver on investments made in India. The change is to get rolled out from April 2017. Since a long time
India has been putting pressure on the island country to do away with the tax-free status enjoyed by it on
investments made in India. However, Cyprus always got away citing the same status enjoyed by Mauritius
and Singapore.

With the recent India-Mauritius DTAA, Singapore and Mauritius both have lost the tax-free status on capital
gains made on investments in India. This gave more negotiating power to India. As a result of these tax
treaties, Indian will be able to reign in round-tripping of Indian funds and tax evasion in general.

5th July 2016

Capital Gains Tax Goes Up Over Lower Inflation Rates

If you are claiming long-term capital gains this year, be prepared to pay a higher tax. The Cost Inflation
Index (CII), which is the basis of computing long-term capital gains, has been reduced for the year 2016-17
by the Central Board of Direct Taxes (CBDT).

The CBDT has increased the CII for 2016-17 by 4.07 percent, reducing the margin of profit an individual
can make on sale of a long-term asset.
 Adjusting for inflation helps determine how much profit you make on the sale of a property in real-time. CII
is used to arrive at the current price of a property that has been purchased more than 3 years ago. So if the
inflation is lower, the current price of a property may be lower than it would have under a higher inflation
figure, which makes the profit you make on a sale higher. Long-term capital gains tax has to be paid on this
profit that you make.

22nd June 2016

New Draft Rules on Capital Gains of MNCs in India

The Income Tax Department has introduced draft rules to bring out some clarity on taxes on capital gains
and on indirect transfer of shares. The rules are meant for assessing the assets value earned by multinational
companies in the country and abroad. These rules are expected to prevent disputes in the future.

Apart from bringing clarity to taxes on these transactions, the rules might also make the reporting
requirements for the Indian arm of the global entities more time consuming. The last years budget stated
that overseas capital gains will be taxable if more than 50% of the assets was in the country. According to
the present draft rules, the tax department has now clarified on the calculation of fair market value. A
multinational company making capital gains is also required to reveal all account statements of the foreign
entity or company holding assets within the country.

10th June 2016

US Foreign Portfolio Investors request Capital Gains Tax Treaty to be amended

Foreign Portfolio Investors from US have requested the Indian government to look into and revise the terms
and conditions of the Capital Gains Tax treaty and exempt them from paying tax on capital gains. The
argument given by these firms is that since they cannot claim any credit for these taxes in the US, their cost
increases as a result of which their return to investors too suffer.

There is no provision in the US India tax treaty which would allow tax credit to investors for capital gains
that they pay in India. To top this, the recent amendment in the Mauritius treaty will ensure that these
investors get taxed twice for the same capital gains.
 31st May 2016

Mauritius Tax Treaty to include right to Tax Capital Gains for India

Its been quite a while India has been in talks with Mauritius to get certain parts of the tax treaty amended in
order to reign in issues like round-tripping and other treaty abuses. India has finally managed to get an
amendment made to the India-Mauritius tax treaty signed in the year 1983. With this amendment, India will
now be able to tax capital gains on investments that are routed through Mauritius.

The amendment will come into play April 2017 onwards and will shut two most lucrative investment routes
for investors; one Mauritius and the other, Singapore. The government conceded that the move has been
made to cut tax evasion, round-tripping etc. The changes will have the most stark effect on investors who
route their money through either Mauritius or Singapore to avoid paying capital gain tax in India.

17th May 2016

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