Understanding capital gains tax: How you are taxed on property sale, mutual funds

First Published 3, Nov 2017, 8:24 PM IST
Understanding capital gains tax How you are taxed on property mutual funds
Highlights
  • Capital gains as the term suggests is the profit that an investor gets when he sells capital assets like stocks, bonds or real estate at a higher price than its buying price.
  • Capital gains tax is levied on any income which has been derived from selling any capital asset.

Capital gains as the term suggests is the profit that an investor gets when he sells capital assets like stocks, bonds or real estate at a higher price than its buying price. Capital gains tax is levied on Capital Gains or any income which has been derived from selling any capital asset. Capital gains tax are further categorised as Long Term Capital Gains (LTCG) and Short Term Capital Gains (STCG) depending on the number of years of investment in the associated asset class.

Let us understand the types of capital gains and how you are taxed.

Types Of Capital Gains Tax

As mentioned earlier, Capital gains taxes are broadly classified into two distinct types namely Long Term Capital Gains and Short Term Capital Gains.  Long term capital gains are applicable if the asset is held by an individual or HUF for more than its minimum stipulated period. The minimum holding period varies as per the asset class. For example, if investing in equities a period of 1 year is the minimum holding period beyond which long term capital gains tax would be levied. Similarly, if you as an individual have invested in physical gold, the minimum holding period is fixed at 3 years. For real estate investments the minimum holding period was fixed at 36 months or 3 years, which has now been reduced to 24 months from FY2017-18 for immovable property or house property.

Asset Class

Minimum holding period (beyond which long term capital gains tax is applicable)

Equity instruments

1 year

Debt instruments

1 year

Government bonds

1 year

Gold

36 months for physical gold, 12 months for e-gold

Real estate

36 months (reduced to 24 months from FY 2017-18)

 

Taxation aspects on short term and long term capital gains

For asset classes where a securities transaction tax is applicable like equity instruments a short term capital gains tax is levied at the rate of 15% +surcharge and education cess. For asset classes where no such security transaction tax (STT) is applicable, the short term capital gain amount is added to the overall income as an individual and is taxed as per the associated income tax slab.

Capital gains tax and Mutual Funds

Type of Fund

Minimum holding period

STCG

LTCG

Equity Fund

1 years

15% + surcharge and education cess

Nil

Debt Fund

3 years

Tax applicable as per tax slab

20% with indexation.

 

Capital gains tax and real estate

Investment Type

Minimum holding period

STCG

LTCG

Real estate including immovable property or house property

36 months (reduced to 24 months from FY 2017-18)

Gains from sale added to annual income and taxed as per your tax slab rate.

20% with indexation.

 

Possible exemptions from capitals gains tax

Short term capital gains taxes are applicable as per the invested asset type and the minimum holding period as specified. However, there are certain provisions under which you can save or reduce your long term capital gains tax.

Long term capital gains tax arising on account of sale of a residential property can be exempted under Section 54 of the IT Act. Under the provisions, the individual must purchase another residential repartee within 1 year earlier or 2 years after the date of sale of property. Alternatively, you can open a CGAS savings account under Capital Gain Account Scheme (CGAS) and deposit the entire sum of proceeds from your sale. Withdrawals are permitted only for a purchase of residential property or construction of house.

To save long term capital gains tax on capital assets like shares and equity instruments, an individual must invest the proceeds of the capital gains in various long term Tax Free Bonds as specified by the government for a minimum stipulated period of 3 years under Section 54EC.

Investing in various capital assets knowing the long term and short term tax implications should be a part of your overall financial investment plan to ensure optimum investment.

BankBazaar is a leading online marketplace in India that helps consumers compare and apply for Credit Card,Personal Loan,Home Loan,Car Loan and insurance.

(The author is CEO of Bank Bazaar)

loader