Capital Gains – Simply put, any benefit or income resulting in the selling of a ‘capital asset’ is called a capital gain. This benefit or gain falls into the umbrella of ‘income,’ and so on every income, you will have to pay tax on that sum in the year in which the selling of this asset occurred. This is called capital gains tax, and are classified as short or long-term.
Capital gains do not apply to an inherited property since there is no sale, only a change of possession. Here is an article dedicated solely to inherited tax. Especially, the Income Tax Act exempts properties obtained as gifts by the form of inheritance or will. That being said, if the individual who received the property chooses to transfer it, the tax on capital gains would apply.
What is Capital Assets
Land, building, house, patents, trademarks, machinery, and jewelry are only a few instances of capital assets. This involves having rights in or in association with an Indian company. It also requires management or control privileges or some other legal rights.
The below items may not fall within the capital asset:
- Any stock, consumables, or raw materials kept for business or professional purposes.
- Personal items like garments and furniture kept for personal use.
- Agriculture land in rural India.
- 61% Gold Bonds (1977) or 7% Gold Bonds (1980) or National Defense Gold Bonds (1980) issued by the central government.
- Unique Holder Bonds (1991).
- Gold deposit bond authorized under the Gold Deposit Scheme (1999) or deposit certificates provided underneath the Gold Monetization Scheme, 2015.
Defining rural areas (from AY 2014-15) – Any region beyond the authority of a municipality or cantonal council with a resident of 10,000 or above is regarded a rural area. It really should not drop within such a range (to be analysed aerially) provided below – (the population is according to the previous census).
Exemption on Capital Gains
For instance: Manya purchased a house for Rs 20 lakh in May 2008 and the full value of the consideration earned in FY 2018-19 is Rs 1.2 crore. As this house was already owned for more than 3 years, this will be a long-term capital asset. The price is modified for inflation and the purchase price is indexed.
Using the indexed acquisition cost method, the modified price of the building is Rs 80 lakh. The net capital gain shall be Rs 60 lakh. Long-term capital gains were taxed at 20%. For a total capital gain of Rs 60 lakh, the gross tax revenue would be Rs 12,97,800.
There is a large sum of money that has to be charged out in taxes. This can be minimized by seeking advantage of the exemptions given for under the Capital Gains Income Tax Act whenever the gain from the selling is reinvested in the acquisition of some other asset.