What is Capital Gain?
During the selling of a property, A term called “Capital Gain” come into the picture. It’s a word that brings happiness and a lot of tension. Capital gains, which are profits or gains from the transfer or disposition of capital assets in the preceding year, will be subject to income tax under the heading Capital Gains unless IT is exempted u/s 54B, 54D or 54E, 54F,54EC, 54F or 54G.
Capital Asset:
This is an important part of Capital Gain. Section 2(14), Income-tax Act 1961, defines a capital asset as any property that an assessee holds, regardless of association with his business or profession. However, certain items such as a consumable store, stock in trade, or raw materials used for his own business, profession, personal effects, and certain agricultural lands do not count. Capital gains would not apply to jewellery that is for personal use. Capital assets include house, flat, penthouse and farmhouse as well as shops/showrooms and land.
Transfer of Capital Asset:
Capital gains are only possible with a transfer of a capital asset. The transfer of capital assets for capital gains is described as sale, exchange, relinquishment, or even an asset’s disposition. Section 5 of 1882’s Transfer of Property Act defines property transfer as the act by which a living individual transfers property to one or more living persons. To transfer property means to do such an act. If the sale price exceeds the market rate, then the sale consideration is subject to stamp duty and capital gain purposes.
Example –
Suppose the sale price is lower than the circle rate, the circle rate on the property being sold will be the deemed sale amount. Section 50C of Income-tax Act 1961 clearly states that the value of a transaction adopted for stamp duty purposes would be the deemed sale consideration for the property to calculate the capital gains due to an assessee. Suppose the assessee claims that the Stamp Valuation Authority or Sub Registrar Office exceeds the property’s fair market value as the sale deed execution. In that case, the Assessing Officer can refer the property to a Valuation Officer.
The transfer would be the date that possession of the immovable property is given to the other party. It will be a sale transaction if there is an agreement between two parties. If payment has been received, but the transfer has not been affected, or the sale deed has not been executed, it will not be considered a sale transaction. The income tax rule clarifies that income tax will only be charged under the head capital gains if a transfer of capital assets in the preceding year. No transfer means no capital gain.
Short-term Capital Gain:
The income earned from the immovable property is a short-term capital gain if it is sold within 36 months of the purchase date. Tax savings are not possible for short-term capital gains. Short-term capital gains would result in a tax liability. This could be calculated by adding short-term capital gains to other taxable income for the year and then calculating the tax liability according to the tax rates on total income.
Capital Gain for Long-Term:
A capital gain derived from a property held for more than 36 months from the date of purchase, sale or deed is a long-term capital gain. Taxes on long-term capital gains are at 20%. Cost Inflation Index is the chart to calculate the amount of capital gains.
This was when the asset was in possession from the date of purchase to the date the owner sold it. It is the most important factor in determining whether the asset is a short-term capital gain or long-term.
Capital Gain Bonds
They are financial instruments that are for investors with long-term capital gain tax liability. REC or PFC can issue these bonds, but they also come in NHAI. This category does not include any other bonds. All investors can eliminate their capital gains tax liability by investing capital gains bonds according to section 54EC under the Income-tax Act of 1961. The net long-term capital gains must be invested in bonds within six months after selling the property.
The lock-in period is for at least five years, w.e.f. 01.04.2020. These bonds allow you to invest a maximum of 50 lakh per financial year. This means that a taxpayer can only invest a limited amount.
Alternative options include investing in residential property for individuals/HUFs in certain situations to avoid capital gains tax. You can carry forward any capital loss, short-term or long-term, and use it for the next eight years.
Capital Gains Tax
Capital gain tax is the name of the tax that you pay on capital gains. Tax @ 20% is charged on long-term capital gains. Selling a residential property, plot, or other assets may result in long-term capital gains.
Section 54F of the 1961 Income Tax Act states that if someone sells capital assets other than a residential house, they can save capital gain taxes by investing all the consideration in a new residential home.
However, the law does not allow for certain conditions.
The condition is that the new residential property must be purchased or constructed within three years of acquisition. If you sell the property before the three years, then the acquisition cost shall be subtracted from the amount of capital gain exempted under section 54 earlier. This transfer will result in a capital gain that is short-term capital gain.
Section 54 of 1961’s Income Tax Act states that Mr X should only purchase property in his name if he wants to avoid capital gains tax. He would not be eligible to save capital gains tax if he bought the property in the name of his spouse or any other relatives. This is a fact you should not forget. This principle applies if you wish to build a residential house on a plot, not in your name or if you plan to buy a vacant plot to build thereon.
Capital gain bonds are only suitable for people who are willing to take some risk in their lives. Capital bonds are not advisable to generate a 12-15 % return through investing in real estate, businesses, and the share market.
So, All individuals are exempt from the Assessment Year 1999-2000 HUF for one residential property and any vacant land with a maximum area of 500 sq. m under Section 5 (vi), 1957 Wealth Tax Act.
Cost Inflation Index (CII).
The cost inflation index can help you save enough tax on long-term capital gains. This index applies only to long-term capital gains and not for short-term capital gains.
How to calculate?
A set formula is there to calculate long-term capital gains.
First, determine the financial year when you purchased the house. Write down the cost of purchasing/acquisition (purchasing price including registration charge and brokerage charge) and cost of inflation index for that year. Write down the cost inflation index for the year that you sold the asset. Now multiply the acquisition cost by the cost inflation of the year of asset transfer or sale. Divide the result by the cost inflation for the year of the asset acquisition/purchase
If the purchase of the house were before 01/04/2001, then its fair market value would be the acquisition cost of the property. The cost inflation index for that asset would be used to determine the cost inflation of 2001-02, or it should be considered that the property was purchased on the 1st of April 2001.
* You can purchase a plot of land and then build a house. Sometimes you buy a one-storey house, then later build another. This means that any costs incurred for improving an asset must be adjusted similarly using the cost inflation index.
First, by multiplying the cost of improvement with the cost inflation index of the year, the asset is transferred. Then this is divided by the cost inflation index for the year when improvement/construction to the asset was made.
The Government of India publishes the cost inflation index each year.
The following is the Cost Inflation Index Chart from 2001-02 through 2019-20
Financial Year–0000-0000
Cost inflation index – 0
Financial Year–2010-2011
Cost inflation index – 167
Financial Year–2001-2002
Cost inflation index – 100
Financial Year–2011-2012
Cost inflation index – 184
Financial Year–2002-2003
Cost inflation index – 105
Financial Year–2012-2013
Cost inflation index – 200
Financial Year–2003-2004
Cost inflation index – 109
Financial Year–2013-2014
Cost inflation index –220
Financial Year–2004-2005
Cost inflation index – 113
Financial Year–2014-2015
Cost inflation index – 240
Financial Year–2005-2006
Cost inflation index – 117
Financial Year–2015-2016
Cost inflation index – 254
Financial Year–2006-2007
Cost inflation index – 122
Financial Year–2016-2017
Cost inflation index – 264
Financial Year–2007-2008
Cost inflation index – 129
Financial Year–2017-2018
Cost inflation index –272
Financial Year–2008-2009
Cost inflation index – 137
Financial Year–2018-2019
Cost inflation index – 280
Financial Year–2009-2010
Cost inflation index – 148
Financial Year–2019-2020
Cost inflation index – 289
You may be eligible for section 80C or 24 if you borrow a home loan to purchase a residence. EMIs with interest are payable during the loan term. You may wonder if you can combine your interest with the property’s purchase price when you sell it. You cannot, as you already received the income tax benefit from the interest on your loan under section 24.
Capital gain tax does not apply to home loan interest payments. The cost inflation index does not provide a benefit for capital gains or losses that are short-term.
Therefore, if you sell a residential property within three years of the purchase date it is a short-term capital loss or gains. Non-resident Indians are not eligible for the cost inflation index.
Capital Gain Accounts Scheme
The Government of India launched the Capital Gain Accounts Scheme on 22 June 1988. The design of This scheme is to benefit people who only earn long-term capital gains. This is available to individuals, NRIs, Proprietorship Firms, and HUF. This scheme does not provide short-term capital gains.
This scheme is for people who have made long-term capital gains and want to buy a property in two years or build a house in three years.
There are several provisions in the Income Tax Act, 1961 that are useful to avoid capital gains tax. One of these provisions is that you must invest in either acquiring new residential property or building a house within three years of the date of the sale.
Capital Gain Accounts should only be opened in authorized banks. Rural branches of these designated banks cannot open Capital Gain Accounts.
Hence,The government has selected banks that will accept capital gain deposits under the Capital Gain Accounts Scheme 1988. SBI, PNB and Bank of Baroda are the banks that accept capital gains deposits. The Capital Gain Accounts Scheme deposit can only be by the list of banks given above.
Two kinds of deposit accounts are available.
Deposit Saving Account A is the first Type of deposit account. This account allows you to deposit in the form of a saving deposit—banks issue Passbooks.
The Term Deposit Account B allows you to keep the deposit as either “cumulative” with interest reinvested, also known as DRC or Deposit Reinvestment Receipt (Deposit Rebillment Receipt), or as noncumulative (interest shifting to a savings account). These deposits can be in one lump sum or monthly instalments at any time before or after furnishing an income tax return. Initially, only type A accounts are allowed for those who want to open capital gains accounts. The person can then open type B accounts.
You should only open a capital gain account by filling out form-A. Confirm with your bank officer that this is a capital gains account. You could face problems in the future if you do not confirm. To save capital gains, the majority of Indians open a savings account.
Process –
The depositor can withdraw from Deposit account ‘A’ at any time. Normally, to transfer from Type A deposit to type B is possible. However, on maturity or prematurity, you can transfer the term deposit to a Type A deposit Account. The nomination facility form –E is a requirement. If the depositor needs money to pay for residential property, he must fill out Form C. Remember that you must use the withdrawal amount within 60 calendar days of the withdrawal date for construction or purchase.
The depositor can withdraw money to purchase a new property. Still, if there is a delay in finalizing the deal, He may deposit the amount in account A within 60 calendar days. The amount to be withdrawn from a depositor’s account -B must first be transferred to his account A.
After that, the depositor may withdraw the amount exactly as from A. Cross demand draft will allow the withdrawal of more than 25000/– to the person who the depositor wishes to pay. For all subsequent withdrawals, you must use a duplicate of Form -D .
