Chintan Mehuriya (Left) & Jaya Sharma-Singhania (Right)
As we all know income from capital gains is one of the important part of computation of income of any taxpayer assessee. Hence in this article author is trying to discuss certain things regarding capital gains such as how to calculate indexed cost of acquisition, indexed cost of improvement, what is the latest cost inflation index, certain important exemptions from long term capital gains, etc
Page Contents
Introduction of Capital Gains:
Capital gains are profits that an investor has made from selling asset like stocks and real estate. Capital gains are differentiated as long-term and short-term for taxation purposes. In India, the definition of capital gains for various asset classes is different.
The holding period for capital gains on sale of immovable property being land and building or both will qualify as long term capital gains (LTCG) if holding period is minimum 2 years. The base year for calculation of such capital gains with indexation benefit will be 2001. These steps are expected to reduce the capital gains easier.
Capital Gains Taxation in India:
A capital gains tax (CGT) is a tax on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a cost amount that was lower than the amount realized on the sale. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property. Not all countries implement a capital gains tax and most have different rates of taxation for individuals and corporations.
For equities, an example of a popular and liquid asset, national and state legislation often has a large array of fiscal obligations that must be respected regarding capital gains. Taxes are charged by the state over the transactions, dividends and capital gains on the stock market. However, these fiscal obligations may vary from jurisdiction to jurisdiction.
What is Indexed Cost of Acquisition for calculation of Capital Gains?:
‘‘Indexed cost of acquisition’’ means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assesse.
Indexed Cost of Acquisition:
Cost of acquisition * Cost Inflation Index (CII) of the year of transfer of the asset
Cost Inflation Index (CII) of the year of acquisition of the asset
Indexed Cost of Improvement:
Cost of improvement * Cost Inflation Index (CII) of the year of transfer of the asset
Cost Inflation Index (CII) of the year of improvement
Cost Inflation Index
| SI. No. | Financial Year | Cost Inflation Index |
| 1 | 2001-02 | 100 |
| 2 | 2002-03 | 105 |
| 3 | 2003-04 | 109 |
| 4 | 2004-05 | 113 |
| 5 | 2005-06 | 117 |
| 6 | 2006-07 | 122 |
| 7 | 2007-08 | 129 |
| 8 | 2008-09 | 137 |
| 9 | 2009-10 | 148 |
| 10 | 2010-11 | 167 |
| 11 | 2011-12 | 184 |
| 12 | 2012-13 | 200 |
| 13 | 2013-14 | 220 |
| 14 | 2014-15 | 240 |
| 15 | 2015-16 | 254 |
| 16 | 2016-17 | 264 |
| 17 | 2017-18 | 272 |
| 18 | 2018-19 | 280 |
| 19 | 2019-20 | 289 |
Worldwide impact of Capital Gains:
AUSTRALIA
Australia collects capital gains tax only upon realized capital gains, except for certain provisions relating to deferred-interest debt such as zero-coupon bonds. The tax is not separate in its own right, but forms part of the income-tax system. The proceeds of an asset sold less its “cost base” (the original cost plus addition for cost price increases over time) are the capital gain. Discounts and other concessions apply to certain taxpayers in varying circumstances. From 21 September 1999, after a report by Alan Reynolds, the 50% capital gains tax discount has been in place for individuals and for some trusts that acquired the asset after that time and that have held the asset for more than 12 months; however the tax is levied without any adjustment to the cost base for inflation. The amount left after applying the discount is added to the asses sable income of the taxpayer for that financial year.
For individuals, the most significant exemption is the family home. The sale of personal residential property is normally exempt from capital gains tax, except for gains realized during any period in which the property was not being used as an individual’s personal residence (for example, while leased to other tenants) or portions attributable to business use.
CANADA
Currently, only 50% of realized capital gains are taxable in Canada at an individual’s tax rate. Some exceptions apply, such as selling one’s primary residence which may be exempt from taxation. Capital gains made by investments in a Tax-Free Savings Account (TFSA) are not taxed.
As of the 2013 budget, interest can no longer be claimed a capital gain. The formula is the same for capital losses and these can be carried forward indefinitely to offset future years’ capital gains; capital losses not used in the current year can also be carried back to the previous three tax years to offset capital gains tax paid in those years.
For corporations as for individuals, 50% of realized capital gains are taxable. The net taxable capital gains (which can be calculated as 50% of total capital gains minus 50% of total capital losses) are subject to income tax at normal corporate tax rates. If more than 50% of a small business’s income is derived from specified investment business activities (which include income from capital gains) they are not permitted to claim the small business deduction.
Capital gains earned on income in a Registered Retirement Savings Plan are not taxed at the time the gain is realized (i.e. when the holder sells a stock that has appreciated inside of their RRSP) but they are taxed when the funds are withdrawn from the registered plan (usually after converting to a registered income fund.) These gains are then taxed at the individual’s full marginal rate.
Capital gains earned on income in a TFSA are not taxed at the time the gain is realized. Any money withdrawn from a TFSA, including capital gains are also not taxed. Unrealized capital gains are not taxed.
HONG KONG:
In general Hong Kong has no capital gains tax. However, employees who receive shares or options as part of their remuneration are taxed at the normal Hong Kong income tax rate on the value of the shares or options at the end of any vesting period less any amount that the individual paid for the grant.
If part of the vesting period is spent outside Hong Kong then the tax payable in Hong Kong is pro-rated based on the proportion of time spent working in Hong Kong. Hong Kong has very few double tax agreements and hence there is little relief available for double taxation. Therefore, it is possible (depending on the country of origin) for employees moving to Hong Kong to pay full income tax on vested shares in both their country of origin and in Hong Kong. Similarly, an employee leaving Hong Kong can incur double taxation on the unrealized capital gains of their vested shares.
The Hong Kong taxation of capital gains on employee shares or options that are subject to a vesting period, is at odds with the treatment of unrestricted shares or options which are free of capital gains tax.
For those who do trading professionally (buying and selling securities frequently to obtain an income for living) as “traders”, this will be considered income subject to personal income tax rates.
Exemptions from Capital Gain:
Capital gain on sale of certain assets is exempted on purchase/ construction of specified assets under section 54, 54B, 54EC, 54F subject to few conditions. These exemption has been tabulated on the basis of following points.
- Who can claim exemption?
- Eligible assets sold;
- Assets to be acquired for exemption;
- Time limit for acquiring the new assets;
- Exemption Amount;
- Whether “Capital gain deposit account scheme” applicable
So it is easy to understand this exemption at a glance. Further these exemption are in depended to each other and person can claim combination of two, if he is eligible otherwise.
| Long Term Capital Gain – Exemption | u/s 54 | u/s 54B | u/s 54EC | u/s 54F | |
| a. | Who can claim exemption | Individual / HUF | Individual / HUF | Any person | Individual / HUF |
| b. | Eligible assets sold | A residential House property (minimum holding period 3 year) | Agriculture land which has been used by assesse himself or by his parents for agriculture purposes during last 2 years of transfer | Land or Building or both | Any long term asset (other than a residential house property) provided on the date of transfer the taxpayer does not own more than one residential house property from the assessment year 2001-02 (except the new house) |
| c. | Assets to be acquired for exemption | Residential house property | Another agriculture land (urban or rural) | Investment in any bond redeemable after 5 years which has been notified by Central government in this behalf | Residential house property |
| d. | Time limit for acquiring the new assets | Purchase :1 year back or 2 year forward, construction: 3 year forward | 2 year forward | 6 months forward | Purchase :1 year back or 2 year forward, Construction: 3 year Forward |
| e. | Exemption Amount | Investment in the new assets or capital gain, whichever is lower | Investment in the new assets or capital gain, whichever is lower | Investment in the new assets or capital gain, whichever is lower (Max. Rs. 50 Lakh in Financial year in which the original asset is transferred and in subsequent financial year) | Investment in the new assets / Net Sale Consideration X capital Gain |
| f. | Whether “Capital gain deposit Account scheme applicable | Yes | Yes | Not applicable | Yes |
Long-Term Investments under Capital Gains:
Any profit booked after three years of buying the property is considered a long-term gain. The calculation is the same as that for short-term gain, except that the cost of acquisition and improvement is adjusted for inflation
Let’s assume you buy a property for Rs 25 lakh and sell it after five years for Rs 35 lakh, making a profit of Rs 10 lakh. However, your actual gain will be lower after indexation. Long-term capital gains from real estate are taxed at 20%.
You cannot claim regular tax deductions against long-term capital gains. Tax on such gains has to be computed separately. If you’re total income is below the tax exemption limit (Rs 2 lakh for individuals other than senior citizens), only the part of long-term capital gains above the exemption limit will be taxed (at 20%). Unlike in short-term gains, losses from long-term assets can be set off only against gains from long- term assets.
Capital Gains Account Scheme:
As per the Income Tax Act, the taxpayer is allowed to invest the capital gains in specified instruments. However, in many cases the due date for filing income tax returns for the year in which the capital gains arises is before the expiry of the specified period.
To avoid such issues, the income tax act prescribes that the taxpayer should deposit the amount of capital gains in the capital gains account scheme on or before the due date of filing of income tax returns which can be easily withdrawn at the time of investment in the specified instrument.
Opening of Capital Gains Account:
The Capital Gains Account Scheme was introduced in the year 1988, and as per the Capital Gains Account Scheme the amount of capital gains to be claimed as an exemption should be either be re-invested or deposited in the Capital Gains Account before the due date of filing of returns.
The Government has notified banks which can open the Capital Gains Account on behalf of the Govt. All branches of these banks except Rural Branches are authorized to open the capital gains account.
To deposit the amount in the capital gains account, the taxpayer would first be required to apply for opening the account by making in application in duplicate Form A. He would also be required to submit the following documents along with Form A – Proof of Address + Copy of PAN Card + Photograph.
Such deposit can be made either in lump-sum or in installments.
If the deposit is being made by way of cheque or demand draft then, subject to the cheque or draft being realized, the effective date of deposit for the purpose of claiming exemption will be the date on which the cheque or draft is received in the deposit office along with the application form.
A taxpayer intending to avail the benefit under more than 1 Section of the Income Tax Act shall make separate applications in the same manner for opening an account under different sections of the Income Tax Act.
Contributed By:
Ms. Jaya Sharma-Singhania
Mr. Chintan Mehuriya
Jaya Sharma and Associates, Practicing Company Secretary Firm, Mumbai.
Bibliography:
- wikipedia.org
- business-standard.com
- incomtax.com
- moneycotrol.com
(Republished with Amendments)
Author Bio
Rs.50.00 Lakhs exemption in a financial year by way of investment in specified Bonds has been modified to overall 50.00 Lakhs irrespective of the Financial Year.
Earlier one could claim 50.00 lakhs ine one Financial Year and another in the the next Financial Year for properties sold in or after November, by investing 50.00 Lakhs before March and another 50.00 Lakhs in April.
Now it is NOT possible