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What are Capital Gains?
As per the income tax regulations in India, for the purpose of income tax computations, the profit arising from the sale of a capital asset falls under the income head - capital gains.As per income tax regulations, a capital asset can be any of the following:
- A physical asset, such as jewellery, artwork, or a car used for personal use, that may or may not be tied to the taxpayer's business.
- Stocks and other financial assets are covered by SEBI regulations.
For the purposes of calculating income tax , stock in trade, personal belongings or movable property used for personal purposes aside from those listed above, as well as the majority of agricultural lands, are not regarded as capital assets.This article is a quick guide on the tax regulations and tax benefits surrounding short-term capital gains. But first, let us understand when the sale of a capital asset is categorised as short-term capital gains.
Criteria for Short-Term Capital Gains
- If an equity share is sold within a year of purchase (12 months), short-term capital gains are attracted.
- If an immovable asset, such as a house or piece of land, is sold within 24 months of purchase, short-term capital gains are attracted.
- If any other capital asset is sold within 36 months of purchase, short-term capital gains are attracted.
According to Indian Income Tax regulations, there are two categories of short-term capital gains : those that are subject to Section 111A of the Income Tax Act and those that are not.Section 111A applies to the short-term capital gains from the following assets:
- Equity shares of a business.
- Equity-oriented mutual fund units wherein 65% or more of the assets of the mutual funds are invested in equity shares of domestic (Indian) companies. In this case, Section 111A applies only if the units are transacted through a recognised stock exchange and if they have been subjected to STT (Securities Transaction Tax).
- Units of business trusts.
- Any of the assets mentioned above are traded on an International Financial Service Centre through a foreign currency.
How are Short-Term Capital Gains Calculated?
Income tax is calculated only after adding the short-term capital gain to the total income. After this, income tax is based on the tax bracket the assessee falls into. Capital gains can be calculated using online tools like capital gains calculators. The following information is needed to calculate the short-term capital gains through a calculator effectively.
- Purchase price
- Sales price
- Purchase details like date, month and year of purchase.
- Sales details like date, month and year of sale.
- Investment details such as capital gains from shares, mutual funds , gold, real estate, debt funds , or fixed maturity plans.
Once this information is provided, the following details will be generated for capital gains payable:
- Type of investment.
- The purchase price minus the selling price.
- The time between purchase and sale.
- Purchased index costs.
For calculating short-term capital gains, the computation is as follows:Short-term capital gains = final sale price - any expenses like brokerage to complete the sale undertaken by the seller - the cost of acquisition (purchase price) - the cost of transfer (if any) - any additional cost paid to complete the purchase.
Taxability of Short-Term Capital Gains
Short-term Capital Gains can be taxed in two different ways depending on the nature of the transaction.When the transaction is based on securities, the rate of taxation is 15% (plus applicable cess and surcharge). This 15% is directly applied to the gains, which is the selling price minus the purchase price.If the transaction tax is not based on securities, then the rate of taxation is based on the income slab of the taxpayer. It is added to the total taxable income and taxed as per the regular slab rates applicable.Further, suppose a taxpayer’s basic exemption limit is not utilised from other sources of income. In that case, short-term capital gains can be adjusted against the balance basic exemption to reduce the total taxable income.For example, a taxpayer below the age of 60 had Rs. 1.5 lakh salary income and Rs. 1 lakh as short-term capital gains from the sale of equity shares (which falls under Section 111A) and Rs. 3.5 lakhs as short-term capital gains from the sale of a gold coin.The basic exemption for this taxpayer is Rs. 2.5 lakhs as per the old tax regime. Even though adjusting the STCG from equity shares against the balance basic exemption limit may save more tax, the income tax rules clearly state that STCG from non-financial assets has to be adjusted against the basic exemption limit first.Therefore, after adjusting the STCG against the balance basic exemption limit, the taxpayer will pay STCG on the sale of stock at 15% on Rs. 1 lakh and as per slab rates on Rs. 2.5 lakhs on the sale of a gold coin (Rs. 1 lakh adjusted).The rate applied will be 15% on the taxable income of Rs. 1 lakh from the sale of stocks, bringing the tax amount to Rs. 15,000.The tax slabs attract a progressive rate which is nil up to Rs. 2.5 lakhs (basic exemption limit) and 5% between 2.5 lakhs to Rs. 5 lakhs. The total taxable income subject to be taxed as per slab rates, in this case, is Rs. 1.5 lakhs salary income plus Rs. 3.5 lakhs income from the sale of a gold coin, which totals Rs. 5 lakhs.Therefore, there will be no tax on the first Rs. 2.5 lakhs and 5% on the remaining Rs. 2.5 lakhs which comes to Rs. 12,500.The final tax amount will be Rs. 15,000 + Rs. 12,500 = Rs. 27,500. The applicable cess will be added to the tax amount to provide the final tax to be paid.
Applicability of Chapter VI-A Deductions Against Short-Term Capital Gains
Deductions of Chapter VI-A ( Section 80C to Section 80U) are available to reduce the tax burden of the taxpayer by either incurring certain necessary expenses or making tax-saving investments. These include life insurance premiums paid, monthly contributions to pension funds by the employer, home loan instalments and many more investment options.Short-term Capital Gains from assets falling under the ambit of Section 111A cannot be reduced by Chapter VI-A deductions.However, suppose the taxpayer has Short-term Capital Gains from assets other than those mentioned under Section 111A. In that case, they can claim Chapter VI-A deductions to reduce their tax liability further. Short-term Capital Gains that are categorised under Section 111A have been discussed above.
FAQS - FREQUENTLY ASKED QUESTIONS
How to avoid paying short-term capital gains ?
Some ways of avoiding short-term capital gains are as follows:
For senior citizens above 80 years of age, income from capital gains should be within 5 lakhs to be exempted from paying capital gains tax.
For senior citizens between 60 and 80 years of age, the total taxable income should be within 3 lakhs.
For citizens below 60 years, the total taxable income should be below Rs. 2.5 lakhs to get an exemption from paying short-term capital gains tax.
If the income is more than the basic exemption limit, then some strategic investments can be made to claim deductions. These deductions can be availed under Section 80C to Section 80U under the Income Tax Act.
Short-term capital gains from securities transactions are added to the annual income of the taxpayer and taxed as per the slab rate. It is imperative that the taxpayer invest wisely so that the capital gains and taxable income are less than the basic tax exemption limit.
If the taxable income exceeds after adding the short-term capital gains from the securities, the investor could think of changing the strategy by holding it for a longer period. One could also book some losses to offset gains. Another way could be to take advantage of tax-deferred retirement plans.
If a property is sold within 2 years of its purchase, it will be considered short-term capital gains, which is taxable. Such types of short-term capital gains can be avoided by:
Reinvesting in residential property (purchase or construction of new property)
Investing in notified capital gain bonds issued by REC, IRFC, PFC, and NHAI.
The funds must be deposited under the Capital Gains Account Scheme (CGAS) for a specified period of time.
How should I show short-term capital gains in ITR ?
Individuals with salary and short-term capital gains are required to fill in ITR-2. Taxpayers can follow these steps:
Visit the government-managed website of the Income Tax Department.
The taxpayer can log in with their unique credentials.
Click on the e-file, then income tax returns and then file income tax returns.
Here one needs to click on assessment year, status and type of form.
After this, select the ITR filing reason. Select the option of ‘taxable income is more than the basic exemption limit’.
After this, on the next page, there are 5 options available. Here the individual should select ‘General’ - ‘Income Schedule’ - 'Schedule Capital Gains’.
To file short-term capital gains, click on ‘Add details.’
Enter the purchase amount and the amount earned from the sale of short-term capital assets.
What happens if a taxpayer skip paying capital gains tax ?
Some individuals may forget to include capital gains and interest income while filing their ITR. Such individuals can rectify their negligence by filing revised ITR forms. In such a case, the Income Tax Department may impose a fine as per the relevant rules of Income Tax. 50% of tax is payable as a fine for underreporting. To avoid such hefty penalties, it is vital to file income tax correctly.
In some cases, wrong information is deliberately provided to the Income Tax Department. Such individuals try to evade taxes by providing wrong information. The Income Tax Department has become very vigilant these days. Such people, in extreme cases, may be imprisoned. Along with this, a penalty is imposed under Section 277 of the Income Tax Act.
In not-so-extreme cases, underreporting or misreporting can attract a hefty penalty of 200% of the tax payable. However, the Assessing officer may consider not penalising the assessee if the assessee gives a satisfactory explanation.
How to claim a refund of short-term capital gains tax ?
The first thing to know about refunds of short-term capital gains tax is that there is a deadline for it. In order to claim a refund, the ITR must be filed within the stipulated period (the assessment year is the financial year following a previous financial year).
The taxpayer needs to submit proof that the tax deducted at source is more than the tax liability. The amount of eligible refund is calculated automatically once all the details are filed in the ITR form. The taxpayer just needs to click on taxes paid and verification. The refund due will be reflected in the refund row based on the information submitted.
There is also the option of refunding any TDS collected from short-term capital gains by the Income Tax Department. This can happen if a property is sold within 2 years of purchase and TDS is deducted on selling. The refund can be claimed while filing tax returns.
What is the one-time capital gains exemption ?
Every taxpayer has the option of exercising a one-time capital gains exemption once in their lifetime. This can be availed if the long-term capital gains do not exceed Rs. 2 crores. The option to claim a one-time capital gains exemption has to be filed under Section 154 of the Income Tax Act.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
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