Capital Gain Tax in India

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In India the capital gain taxes are a type of direct tax. These are paid by both individual and institutional investors. These taxes are normally collected by the national government and the primary area of taxation is the capital gained from the sale of these assets.

The term capital gain primarily means the difference between the price at which a property was bought and one at which it was sold. The Indian government has now widened the definition of capital asset to include properties such as archeological property, paintings, drawings, and sculpture and similar art work.

The term capital gain also takes into consideration the profits made from transferring a capital asset and is categorized into long term and short term capital gain.

Long and Short Term Capital Gain Taxes in India

The long term capital gain taxes come into play when an asset is owned in excess of 3 years. In case of stocks and securities that are traded at well known stock exchanges and mutual funds, a time limit of 12 months is considered as long term.

If these assets are held for a lesser period they are subjected to the short term capital gain taxes. The long term capital gain are taxed at concession rates. However, in case of the short term capital gain the conventional rates for corporate income taxes are applied.

Corporate Capital gain Taxes in India

These taxes are applicable for all domestic companies. The short term capital gain are normally subjected to basic rates applicable for income taxes. The rate for the long term capital gain varies between 10 and 20 percent.

Companies need to pay a tax of 15 percent on the short term gain made from selling units of equity based funds. Conversely, long term profits accrued from similar sources are not subjected to taxes.

Capital Gain Taxes for Foreign Institutional Investors

For the foreign institutional investors (FIIs) operating in India, the rate is 15.84 percent for short term capital gain that arise from transactions, which can be charged as per the Securities Transaction Tax.

In case of other short term capital gain, a rate of 31.67 percent is applied. For long term capital gain of the FIIs that are not subject to the Securities Transaction Tax the rate is 10.56%.

Collection of Capital gain Taxes in India

The capital gain taxes are normally collected in the immediately next assessment year. These taxes are only collected if there are no exemptions as per the sections 54, 54ED, 54B, 54F, 54D, 54G, and 54EC. However, such a tax can only be implemented if the capital asset has been transferred by an assessee, and there has been a profit from the transaction.

The Section 2 (47) of the Income Tax Act states that for a transfer to be treated as a capital gain the previous owner must relinquish all the rights on the said property. If the property is used as a share it will be regarded as a capital gain as well.

Exemptions from Capital gain Taxes - Section 54EC and Section 54

This section of the Income Tax Act states the exemptions that are provided in case of transfer of long term assets. Every assessee is eligible to receive exemptions as per this section, which differs from the exemptions provided under Section 54.

As per Section 54 the gain resulting after transferring a residential property are exempted from taxes if they are invested again in purchasing another one. However, these benefits are only provided to Hindu Undivided Families and individual tax payers.

If a tax payer wishes to avail the exemptions granted under the Section 54EC they need to invest the whole amount or certain part of their long term capital gain in a specified instrument. However, this needs to be done within a period of 6 months after the asset was transferred so that the assessee can claim an exemption.

The exemptions are provided on the basis of the amount of profit invested or the expense incurred in acquiring that asset - the lower amount of the two is taken into consideration in these cases.

How to save Capital Gain Taxes

Tax payers can save their capital gain taxes by investing in bonds issued by any of the following entities:
  • National Bank for Agriculture and Rural Development (NABARD)
  • Rural Electrification Corporation (REC)
  • National Highway Authority of India (NHAI)
These bonds are provided on a tap basis, which means they are always available for sale. In case of the NABARD and NHAI bonds, tax payers can invest their long term capital gain. They also need to ensure that the minimum lock in period of these bonds is 3 years. The interest earned on these investments is taxable though.

Last Updated on 6/22/2015

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