CAPITAL GAINS

Capital Gains - Long Term / Short Term


Capital Gain (u/s. 48) means any profit or gain arising from the sale or transfer of a Capital Asset.

Capital Asset means property of any kind held by an Assessee. However, it does not include

• Stock, Stores, Raw Materials held in business
• Gold Bonds
• Rural Agricultural Land
• Personal effects like Furniture, Motor Car, Air Conditioner, Refrigerator etc.

"Jewelry" held for personal use is treated as Capital Asset. The Jewelry includes ornaments made of Gold, Silver, Platinum or any other Precious Metal or Stone.

Capital Assets are of two types

• Long Term Capital Assets
• Short Term Capital Assets

Nature of AssetLong Term
Capital Asset
Short Term
Capital Asset
Shares of a Company, Units of UTI or Mutual FundWhen held for more than 12 monthsWhen held for less than 12 months
All other Assets (Other than above)When held for more than 36 monthsWhen held for less than 36 months


Rate of Tax

Short Term Capital Gains is chargeable to tax at normal slab rate of Income Tax. Long Term Capital Gains is chargeable to tax at a flat rate of 20% and the amount of gain has to be calculated after adjustment for cost of inflation. This inflation adjustment is known as Indexation benefit. Long Term Capital Gain on sale of any listed securities (like share of company and units of Unit Trust of India or Equity oriented Mutual Funds) is totally exempted. Short Term Capital Gains on the above is charged a 15%.


Cost Inflation Index Table


F.Y. Index F.Y. Index F.Y. Index F.Y. Index
1981-82 100 1989-90 172 1997-98 331 2005-06 497
1982-83 109 1990-91 182 1998-99 351 2006-07 519
1983-84 116 1991-92 199 1999-00 389 2007-08 551
1984-85 125 1992-93 223 2000-01 406 2008-09 582
1985-86 133 1993-94 244 2001-02 426 2009-10 632
1986-87 140 1994-95 259 2002-03 447 2010-11 711
1987-88 150 1995-96 281 2003-04 463 2011-12 785
1988-89 161 1996-97 305 2004-05 480 2012-13 852
2013-14 939


Exemptions under Capital Gains

There are certain exemptions in respect of Long term Capital Gains

Profit on sale of residential house (Section 54) :
Capital Gain earned by selling a house meant for residential accommodation whether self-occupied or let-out, is fully exempt subject to following :
• Assessee should be an Individual or HUF.

• The house is held for more than 3 years.

• The Assessee has :
a) Purchased a new house one year before the sale / two years after the sale of original house OR

b) Constructed a new house or has purchased a site & constructed a house thereon, within a period of 3 years after the sale of the Original house.


• If the amount of Capital Gain is not utilized for the above purpose, before the due date of filing Annual Returns, It should be deposited in a Bank under Capital Gains 1988 Account Scheme.

• Cost of new house is equal or more than the Capital Gain earned.

Note :
► If the Capital Gain is more than the cost of the new house, the difference amount is chargeable to Tax at 20% as Long Term Capital Gain of the previous year in which the original house was sold.

► If the new house is sold within 3 years from the date of purchase or construction, the cost of the new house will be reduced by the amount of Capital Gain exempted earlier on the original house and the difference between the sale price of the new house and such reduced cost will be treated as "Short Term Capital Gains" and charged to tax during the year in which the new house was sold.


Profit on sale of any long term capital asset is exempted if the profit or capital gain is invested in long term Specified Assets of NHAI or Rural Electrification Corporation (Section 54EC), subject to the following :

• The Profit / Capital Gain earned/accrued from the sale of a Long Term Capital Asset.

• The Assessee invests the whole or part of the Capital Gain in the Specified Assets, (i.e. Bonds of NHAI or REC with a lock-in period of 3 years) within 6 months from the date of sale of original Asset.

• The investment made is not less than the Capital Gain. If a part of the gain is invested, amount proportionate to the investment only will be exempted and balance is taxable.

• The Assessee has to retain the newly invested Specified Asset for a minimum period of 3 years.


Profit on sale of any Capital Asset (Other than a residential house) is exempt from tax, if the investment is made on a Residential House, Subject to the following (Section 54F) :

• The Assessee is an Individual or HUF.

• The Capital Gain is by sale of Long Term Capital Asset (Other than residential house).

• The Assessee purchases a new house one year before the sale of the Capital Asset or constructs a house within 3 years or purchases a site and constructs a house thereon within 3 years from the date of sale of the Capital Asset.

•The cost of the new house is not less than the entire sale value excluding cost of transfer of original Capital Asset sold. If only a part is invested, the amount invested only will be exempt. The balance is taxable.

• If the full amount of sale value is not utilized for the above purpose before the due date for filing of Returns u/s. 139(1), it should be deposited in a Bank under Capital Gains Scheme 1988 A/c. and from this account it should be utilized for construction or purchase of a house.

• On the date of sale of the original Capital Asset, the assessee

(a) Does not own more than one residential house other than new houses.

(b) Does not purchase within 2 years, or construct within 3 years any other residential house from the date of purchase or construction of the new house.

Note :
Exemption limit to invest in NHAI or REC Bonds is restricted to a maximum of Rs. 50 lakh in a financial year.

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