Capital gains tax for individuals/HUF

What is capital gains? What are the exemptions available for avoiding payment of capital gains tax? This article, helps one understand the basics of capital gains and how to avoid paying capital gains tax.

Section 45 of Income Tax Act, defines capital gains as profits arising out of sale/exchange of capital asset during previous year. Transfer of ownership is pre requisite for capital gain. Capital asset is a property which can generate value over a long period of time. Capital gains is not applicable in case of inheritance of capital asset.

Will/Gift does not attract capital gains tax. Capital assets are house property, jewellery, shares, mutual funds, ornaments, gold/silver coins, utensils, gold watch, archaeological collections, paintings, sculptures etc. Jewellery in any shape is taxable.

Non-capital assets are personal assets like furniture, utensils, car, fridge etc.  Rural agricultural land is also non-capital asset, provided the population is less than 10,000. Also, 8 km around that rural municipality is also treated as non-capital asset.

There are two types of capital gains, Short Term Capital Gain (STCG) and Long Term Capital Gain (LTCG). If the capital asset is sold within a period of 36 months, it is STCG and if it is sold after 36 months, it is LTCG. Section 10(38) exempts capital gains on sale of listed equity shares held for more than 12 months where STT is paid. For unlisted shares, the period is 24 months. With effect from financial year 2017-18, real estate property sold after March 31, 2017, LTCG period is reduced to 24 months from 36 months.

STCG is calculated by taking into account sale price of capital asset minus expenses like brokerages, stamp duty, legal expenses etc., minus cost of acquisition of the asset minus cost of improvement, if any. STCG is taxed as per income tax slab of the investor.

LTCG is calculated by taking into account sale price of the capital asset minus expenses incurred in such a transfer like brokerages etc. minus indexed cost of acquisition of asset minus cost of improvement, if any. LTCG is taxed at 20%.

Indexation
Inflation reduces the value of an asset. Indexation factors the impact of inflation to calculate capital gains tax. The cost inflation index is given by income tax department at http://www.incometaxindia.gov.in/Pages/utilities/cost-Inflation-Index.aspx

Just like capital gains, there is also capital loss. Long-term loss can be offset with long-term gain. Short-term loss can be set off with short-term gain. Capital loss can be carried forward for eight years provided it is declared in the returns.

As per the latest union Budget, sale of property acquired before April 1, 1981, the indexation has been shifted to April 1, 2001 which will benefit individuals, as price appreciation between 1981 and 2001 will become tax free.

Exemptions for payment of capital gains tax
As per Section 54 of Income Tax Act, exemption is available only when one holds the residential house for more than 36 months.  To avail the exemption, the proceeds can be used for buying or constructing a residential house.
The amount of exemption would be LTCG minus cost of new house. In other words, exemption is limited to investment in new house.

The new residential house must be bought within a period of one year/two years after sale of the house. Exemption is allowed even if one buys land and constructs the house or constructs house on land already owned by him within a period of three years. Exemption u/s 54 is allowed for buying or constructing of one residential property only. A house can mean one building having more than one house.

Capital Gains Account Scheme, 1988
In between the period of sale and purchase/construction of residential property, individuals/HUF can deposit capital gains in special bank account called Capital Gains Account Scheme, 1988.

Specified nationalised banks offer these accounts at their selected branches. There are two types of accounts, savings bank and term deposit account. Interest on savings bank account is credited quarterly/ half yearly and term deposit, quarterly. Interest earned in these accounts attracts income tax.

Interest earned in savings bank account up to Rs 10,000 is exempted from income tax.

The account/s has to be opened before last date for filing the income tax return. Withdrawals from these accounts can be utilised for the purpose of purchase of residential house or construction of the house. One can close the account after obtaining NOC from Assessing Officer.

Certain forms are in usage under CGAS. Form A and B are application for opening Savings Bank and Term Deposit Account. Form C is for withdrawals from the account. Form D is for furnishing details of utilisation of money withdrawn.  Form E is for nomination and Form F is for closure of account.

If the withdrawn amount cannot be used for the purpose it is meant, it can be re-deposited in the account within seven days. If the deposited amount is not used for buying the house within two years or construction of the house within three years, the amount of capital gains not utilised would be chargeable to tax as capital gains in the financial year in which the time period expires.

Exemption is allowed even when the capital gain is invested abroad or bought in the name of the spouse. In case of death of the depositor, unutilised amount is not taxable in hands of the legal heirs.

Investment in bonds
If one does not want to buy or construct a house within the stipulated period, then he can claim exemption u/s 54(EC) by investing ‘capital gained’ for period of 36 months in taxable bonds of National Highway Authority of India and/or Rural Electrification Corporation, within six months from sale.

The interest paid is around 5.25% annually and bonds issued in multiples of Rs 10,000 with maximum of Rs 50 lakh. These bonds are non-transferable, non-negotiable and cannot be offered as security for any loan. TDS is exempted.

 (The writer is Assistant Professor at Manipal Academy of Banking, Manipal University, Bengaluru Campus)