Most of us invest our monetary surplus in assets such as shares, bonds, immovable property, precious metals, etc. Income from these assets is taxable in the hands of all taxpayers, including individuals, as capital gains tax.

Here, we look at the basic concept of capital gains taxation with regard to individual taxpayers.

Investments made by individuals in aforesaid assets can either be held for use or to earn profits by selling them later at a higher price. Generally, for capital gains to arise, there should be disposal of a ‘capital asset’ as more specifically defined under tax regulations. Any gain arising on disposal of such assets could be taxed as capital gains.
Capital gains can be either short-term or long-term in nature, depending upon the time period for which the disposed asset is held by the seller. The significance of identifying the nature of capital gains is two-fold: Firstly, to check the possibility of claiming benefit of enhanced cost of acquisition to compute the amount of gains and, secondly, to determine the tax rate applicable on such gains. Here is a snapshot on taxability of gains on following capital assets:

Immovable properties

Specified agricultural land is not considered as a capital asset and, hence, no capital gains tax liability arises on its transfer. For other properties, excess of sale proceeds over the cost of its acquisition is taxable as capital gains. If the property is held for more than three years immediately before the date of transfer, the tax rate will be 20% after applying benefits of enhanced cost; else the entire gain will be taxed at normal slab rates, without any benefit of enhanced cost.

Shares in a company

Profit arising on shares traded on a recognised stock exchange on which Securities Transaction Tax (STT) is paid is exempt if such shares were held by the investor for a period exceeding a year. Otherwise, a special tax rate of 15% is applicable. In case of unlisted shares, long-term gains (where the period of holding exceeds one year) are taxable at 20% whereas short-term gains are taxed normally.

Other capital assets

In all other cases, long-term gains (where the period of holding of the asset exceeds one year or three years depending upon the nature of asset) are taxable at 20% whereas short-term gains are taxed normally.

Specific exemptions from capital gains taxation are available for taxpayers who invest the sale proceeds in certain assets such as residential property, capital gains tax-saving bonds and specified assets and securities. The eligibility and quantum of exemption in such cases need to be checked in each individual case. Further, if the assessee is unable to invest in such schemes before the due date of filing return or actual tax filing, whichever comes earlier, the surplus money should be deposited in a special bank account under the Capital Gains Account Scheme to make payment towards the purchase of the new property in future. It is important, therefore, to carefully evaluate the tax consequences on such transactions and enjoy advantages of careful tax planning on your hard-earned money.
* The writer is managing partner at Nangia & Co. Inputs from Nikhil Goenka