Capital Gain Tax and Deduction on Sale of Property

Introduction

Capital gains are nothing but the profits or gains arising from the transfer of capital asset. As per sec 45 of income tax,1961, such capital gains are deemed to be the income of the previous year in which the transfer took place and chargeable to income tax under the head capital gains. To determine capital gain one has to know about capital asset

What is a capital asset?

As per Sec-2(14) of the Income Tax Act,1961, a capital asset is defined as the property of any kind held by an Assesse, whether or not connected with his business or profession and any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with SEBI regulations.

It does not Include-

• Personal effects (excluding jewelry, archaeological collections, drawings, paintings, sculptures or any work of art.)
• Rural Agricultural Land in India
• Specified Gold Bonds ( 6.5% Gold Bond,1977, or 7% Gold Bonds,1980, or National Defence Bonds 1980 issued by Central Government)
• Special Bearer Bonds, 1991
• Gold Deposit Bonds

The capital asset has been categorized as 

• Short term capital asset  and
• Long term capital asset

Short term capital asset and long term capital assets are classified based on the period of holding.

The Period of Holding according to the asset has been listed below:

Unlisted shares & Land or Building or Both

• Short term capital asset- if held for <to 24 months
• Long term capital asset- if held for > 24 months

Security (other than unit) listed in the recognized stock exchange, a Unit of equity-oriented fund/unit of UTI, Zero-coupon bonds

• Short term capital asset- if held for <to 12 months
• Long term capital asset- if held for > 12 months

Unit of the debt-oriented fund, unlisted securities other than shares, Gold, Jewellery and other capital assets

• Short term capital asset- if held for <to 36 months
• Long term capital asset- if held for > 36 months

Modes of Capital Gain 

The income chargeable under Capital gain are segregated as 

• Short Term Capital Gain
• Long Term Capital Gain

Short Term Capital Gain : 

STCG arises when an assessee transfers short Term capital asset as defined under section 2(42A).

Long Term Capital Gain : 

LTCG arises when an assessee transfers Long term capital asset as defined under section 2(29A).

Computation of Capital Gain 

As per section 48 of the Income Tax, 1961, Income chargeable to income tax under head capital gains can be calculated by deducting below items from the sale proceeds, i.e. Full value of Consideration.

• Expenditure incurred wholly and exclusively in connection with such sale or Transfer (brokerage, commission, advertisement expenses, etc.)
• The Cost of acquisition and cost of any improvement thereto.

Note: For the computation of Long term Capital Gain, as per sec-48 of Income Tax Act, 1961, the Indexed Cost of acquisition and indexed cost of improvement shall be considered.

Indexed Cost of acquisition and Indexed cost of the improvement is nothing but the value raised by Cost of Inflation Index (CII).

Exemption of Capital Gain

Exemption under section 10 of the Income Tax Act :

• Capital Gain arising on transfer of a unit of Unit Scheme, 1964 is exempted u/s 10(38). Although, in the Finance Act, 2018, Section 10(38) has been withdrawn and new section 112A is inserted which states that LTCG on equity shares or mutual funds or units of business trust shall be taxed @ 10% without indexation on the gain amount exceeding Rs.1,00,000.

• Capital Gains on compulsory acquisition of agriculture land situated within specified Urban Limits is exempted u/s 10(37) if such individual/HUF assessee used the said agriculture land for at least 2 years from the date of transfer. The considerations shall be determined or approved by RBI/CG.

Note: Agriculture land situated in the Rural area is not itself a capital asset, because it is specifically excluded in the definition of capital asset specified u/s 2(14).

Exemption under section 54/ 54B/ 54D/ 54EC/ 54EE/54F/54G/ 54GA/ 54GB/ 54H.

• The Exemption under above sections can be claimed only if the accruing/earned capital gain or the proceeds received from the sale or transfer of capital assets is being re-invested in specified assets or schemes within specified Time Limit as per terms and conditions specified in the sections.

Below are the exemptions for capital gains on the sale of Property

Section 54 :

Section 54 provides an exemption for individuals & HUF’s on sale of long term residential house property (buildings or land appurtenant thereto) where income from such house should be chargeable under income from house property if following conditions have been fulfilled 

The long term capital gain should be reinvested to

• Purchase one residential house in India within 1 year before or 2 years after the sale of the old house
• Construct within a period of 3 years after the sale of the old house.

Other Conditions :

• Till the amount reinvested in the new house, the assessee can deposit the amount in a special account scheme to avail the deduction.

The capital gain shall be exempted lower of the following:

Capital gain 

Or 

Cost of new assets/Deposit amount.

• If the new asset has been transferred within 3 years of its acquisition or construction then the exempted amount shall be reduced from the cost of the new asset. In simple words, the new house property should be held at least 3 years from the date of acquisition or construction.

Section -54B :

Section 54B provides an exemption for individuals & HUF’s on sale of Urban Agriculture land if the following conditions have been fulfilled

Such land should be used for agriculture purpose by the assessee as either individual or HUF or by his parents in the 2 years immediately prior to the date of sale.

The Capital gain should be reinvested in the purchase of other agriculture land either in a rural or urban area within 2 years of the transfer.

The following conditions are similar to section 54 :

• Till the assess purchase new agriculture land, he can deposit the amount in a special account scheme to avail the deduction.

The capital gain shall be exempted lower of the following :

Capital gain 

Or 

Cost of new assets/Deposit amount.

• If the new asset has been transferred within 3 years of its purchase then the exempted amount shall be reduced from the cost of the new asset.

Section-54D :

Section 54B provides an exemption for all assesses in case of compulsory acquisition of industrial land & Buildings of an industrial undertaking if the following conditions have been fulfilled

Such land & Building should be used for the purpose of Industrial Undertaking by the assessee in the 2 years immediately prior to the date of sale.

The Capital gain should be reinvested in purchase/construction of land & Building for shifting or re-establishing of existing undertaking or establishment of a new undertaking within 3 years from the date of receipt of compensation.

The exemption limit is same as of section 54 or 54B i.e. lower of capital gain or cost of the new asset.

Also if the new asset is transferred within 3 years from the date of purchase then the cost of new assets shall be reduced by the capital gain amount.

Section-54EC :

Section 54EC provides an exemption for all assesses in case of sale long term capital asset (land or Building or both) if the following conditions have been fulfilled

The capital gain should be invested in any of the bonds of NHAI, REC, PFCL, IRFCL within 6 months from the date of sale.

Such Bonds should not be sold or converted or held as security for a period of 5 years.

If the new asset is transferred within 5 years from the date of purchase then the exempted capital gain shall be taxable in the year of transfer.

The maximum amount of exemption is Rs. 50,00,000.

The capital gain shall be exempted lower of the following :

Capital gain amount

or

Cost of new asset

Section-54F :

Section 54F provides an exemption for Individual or HUF in case of sale of long term capital asset (not being a residential house) if the following conditions have been fulfilled

The sale Proceeds should be reinvested in 

• Purchase one residential house in India within 1 year before or 2 years after the sale of the old house
• Construct within a period of 3 years after the sale of the old house.

The amount of exemption can be calculated as per the following formula :

Cost of new House * Capital gains/Net Consideration

If the new asset is transferred within 3 years from the date of acquisition or construction then the exempted capital gain shall be taxable in the year of transfer and treated as long term capital gain.

Section 54G :

Section 54G provides an exemption for any assessee in case of capital gains (short term or Long term) arising on shifting of Industrial Undertaking from Urban areas to any other areas other than Urban area if the following conditions have been fulfilled.

The capital gain (Short term or Long term) should be utilized for the below purposes within 1 year before or after 3 years from the date of transfer

• purchase of new plant & machinery for the purpose of Industrial Undertaking
• acquisition of land or building or construction of building for the purpose of Industrial Undertaking
• expenditure incurred on shifting of the Industrial Undertaking from Urban areas to Other areas
• any other such expenditure as specified by the central government.

The capital gain shall be exempted lower of the following

Capital gain amount 

                or

Cost of new asset plus expenses incurred for shifting

Section 54GA :

Section 54GA provides an exemption for any assessee in case of a capital gain on certain capital assets arising on shifting of Industrial Undertaking from Urban area to any SEZ (Special Economic Zone) if the following conditions have been fulfilled

The capital asset should be either plant & machinery or building or land or any rights in building or land which is used for the purpose of Industrial Undertaking Business situated in an urban area.

The capital gain should be utilized for the below purposes within 1 year before or after 3 years from the date of transfer

• purchase of plant & machinery for the purpose of Industrial Undertaking in SEZ
• acquisition of land or building or construction of building for the purpose of Industrial Undertaking in SEZ
• expenditure incurred on shifting of the Industrial Undertaking from Urban areas to SEZ
• any other such expenditure as specified by the central government.

The capital gain shall be exempted lower of the following :

Capital gain amount  

                or

Cost of new asset plus expenses incurred for shifting

Section 54GB :

Section 54GB provides an exemption for Individual or HUF in case of Long term capital gain arising on sale of residential (house or land) property if the following conditions have been fulfilled

The proceeds of Sale consideration should be re-invested before the due date of furnishing return of income u/s 139(1) in subscription of equity shares of an eligible start-up company which utilizes the consideration for the purpose of purchase of new plant & machinery within 1 year from the date of subscription of equity shares.

Amount of Exemption shall be whichever is lower

Cost of New Plant & Machinery

                       or

LTCG  *Amount invested in new Plant & Machinery / Net Consideration

Note: The Exemption under this section is no longer available for the residential properties sold after 31/03/2019.

Section 54EE :

Section 54EE provides an exemption for any assessee in case of Long term capital gain arising on sale of long term capital asset if the following conditions have been fulfilled

The Capital Gain should be invested in below purpose within 6 months from the date of transfer

• Invested in notified Units of Specified Funds (issued before 01/04/2019) as may be notified by the Central Government.

Amount of Exemption shall be whichever is lower

Investment in notified Units of Specified Funds

       or

Capital Gain