FAQ on Capital Gains Tax and Capital Gains Exemption 

Q1. What is Capital Gain?

A1: A capital gain is a profit that results from a disposition of a Capital Asset, such as stocks, bonds or real estate, where the amount realized on the disposition exceeds the purchase price. The gain is the difference between a higher selling price and a lower purchase price. Conversely, capital loss arises if the proceeds from the sale of a capital asset are less than the purchase price.

Capital gains may refer to “investment income” that arises in relation to real assets, such as property; financial assets, such as shares/stocks or bonds; and intangible assets such as goodwill.

Q2. What is a Capital asset?

A2: A Capital asset is defined under section 2(14) of the I.T. Act, 1961 as property of any kind held by an assessee such as real estate, equity shares, bonds, jewellery, paintings, art etc. but does not include some items like any stock-in-trade for businesses and personal effects.

Q3. What is Transfer?

A3: Transfer has been defined under section 2(47) to include sale, exchange, relinquishment of asset, extinguishment of rights in an asset, etc. Certain transactions are not regarded as ‘Transfer’ under section 47.

Q4. What is short term capital gain and what is long term capital gain? How they get taxed?

 A4: When Sale or Transfer of a capital asset takes place then capital gain arises. It can be of two types.

One is Short Term Capital Gain (when the capital asset is held for not more than 36 months  except Shares and Units of Mutual Funds because Sale of Shares, Units of Equity Oriented Mutual Fund(Sec 10(23D)),Units of UTI,ZCB should be short term capital gain if assessee holds them not more than 12 months)

Another is Long Term Capital Gain(LTCG) (When the Capital  Asset is held for more than 36 months and in cases of Shares, Units of Equity Oriented Mutual Funds(Sec.10(23D)),Units of UTI,ZCB should be Long Term Capital Gain if assessee holds them more than 12 months)

Tax Rates on Different types of Capital Gains:-

Short Term Capital Gain	As per Normal Income Tax Slabs
Long Term Capital Gain	20%

 

On the assets which are held in the form of Shares (on which STT has paid),Equity Oriented Mutual Fund (Sec. 10(23D)), Units of UTI, Zero Coupon Bond:-

Short Term Capital Gain	15% (Provided that Such transaction is subjected to STT)
Long Term Capital Gain	Exempted u/s 10(38)

 

Q5. What is STT?

A5: STT’s full form is Securities Transaction Tax. This Tax is levied while a person purchases or sells Securities that are listed on the Indian Recognised Stock Exchanges. Securities include Shares, Derivatives or Equity Oriented Mutual Fund.

Q6.  Can I claim deduction of STT from my Capital Gain Income?

A6: No. One cannot enjoy such deduction while computing the chargeable Capital Gains Income. STT will not be considered in both purchasing and selling of securities.

Q7. How Capital loss is to be set off from the income of the financial year? For how many years the loss amount can be carried forward which could not be set off in the previous year?

A7: A Short term Capital Loss arising from the sale of any asset (including shares and mutual funds) is allowed to be set off against any income Long Term or Short Term.

A Long Term Capital Loss arising from the sale of any(including shares and Mutual Funds) is to be set off against only Long Term Income of the previous year.

If a Capital loss cannot be set off from the same head during the same year, it shall be carried forward to the next year and allowed to be set off against Capital Gains arising in the next year. After carrying forward the losses to the next year, set-off would be done in the same manner as mentioned above.

A Capital loss is allowed to be carried forward for 8 years from the end of the year in which the loss was incurred.

Q8. How do I calculate the Capital Gain Tax for the purpose of Real Estate?

A8: For the purpose of Real Estate the Long-term Capital gain would be only if you hold the property for more than three years, then it is subjected to tax @20% only. In case you sell the property in less than three years time then it would become short-term Capital Gain and the same is required to be taxed at the prevailing tax schedule of the rate applicable to the assessee depending on his/her other incomes.

Q9. What are the taxation formalities I need to complete while purchasing a property?

A9: Income Tax Act has not mentioned any formality to follow for purchasing a property.

The buyer should check whether the agreement to sale has been made properly so that title of ownership can be verified whenever required.

Q10. What are the taxation formalities I need to consider while selling any property?

A10: The following points should be noted:-

1. Selling a property within 3 years of it’s acquisition would result in Short Term Capital Gain/Loss and Selling a property after 3 years of it’s acquisition would result in Long Term Capital Gain/Loss.

2. Tax on Short Term Capital Gain/Loss will be taxed in the same manner as any other income.

3. Tax on Long Term Capital Gain from selling a residential house property can be avoided or minimize by investing in any residential house property within 1 year before the sale or within 2 years after the purchase.(Sec. 54)

4. Tax on Long Term Capital Gain from selling any property except a residential house property can be avoided or minimize by investing in any residential property within a period of 1 year before the sale or 2 years after the date of sale. (Sec.54F)

5.  If you are not willing to buy a new residential house property to enjoy Tax deduction from Capital Gains then you can also save the Tax by investing in specific bonds of National Highway Authority of India or Rural Electrification Corporation Limited (Sec. 54EC)

6. Sale Proceeds for the purpose of Tax calculation will be regarded to the value adopted by the State Stamp Duty and Registration Authorities and not the amount mentioned in the Deed of Conveyance. This is intended to cover cases where part of the sale price is received in unaccounted cash by the seller.

7. Long Term Capital Gains will be computed by deducting cost of acquisition as increased by cost of living index from the sale proceeds. Capital Gains will be taxed @ 20% (Sec. 112 and Sec. 55)

Q11. Can I avail tax benefits for buying land? I want to invest in land rather than flats and I will avail bank loan for the same. Can I avail a tax benefits for this loan?

A11: If you want to invest only in land then no income-tax benefit will be available to you. However, you buy the land and thereafter you construct your house on the same then the total value of your residential property will comprise of cost of land as well as the cost of construction. In this event, you will be able to enjoy the tax benefits on the full amount of the property inclusive of the cost of the land. Please contact your nearest bank for obtaining details about the loan on the land. Generally speaking, a bank will give you loan for construction of the property on the land owned by you. There are options even available where you can obtain loan even on the land.

Q12. Is there any way I can be exempted from paying Capital Gain Tax?

A12: Innumerable ways and options are available for saving capital gains. For example, in the first place invest in a residential house property or a flat to make investment so as to see that capital gains are exempted. Likewise, if a person were to make the investment in REC or NHAI bonds then also he enjoys complete exemption from the long-term capital gain payable by him in respect of capital gains due.

Q13. Can I include following in cost of a property:-
a) Interest paid during construction period
b) Loan processing fee
c) Brokerage paid
d) Stamp duty paid
e) Misc. other direct/indirect expenses related to purchase of property i.e. travel, conveyance, hotel stay, telephone calls etc

A13: Interest paid during the construction period would enjoy tax benefit in total five years as per Sec.24 of the I.T. Act, 1961. The Loan processing fee, the brokerage, the stamp duty can be added to the cost of the property. The misc. expenses if they can be attributed directly to the purchase of the property then they would form part of the cost of the property.

Q14. According to Income Tax laws, when is a person considered to own a house – at the time of allotment or at the time of possession?

A14: The ownership for Income Tax purpose would be when a person receives the possession. Even if payment is not made but possession is received, it will be treated as a sale transaction.

Q15.Who can benefit from CGAS?

A15: Individuals and members of HUF (Hindu Undivided Family) can benefit from Capital Gains Account scheme (CGAS). Basically, all those taxpayers who want to buy or construct a residential property to save income tax can benefit from CGAS 1988. If any investment with respect to purchase of a property is made within two years from the date of sale of a property, the taxpayer can save on tax on capital gain.

Taxpayers can avail exemptions under the CGAS only when the amount of capital gain, or net consideration, is deposited by the last date for filing the income tax return.

Deposit Account Type A

All deposits into this account are in the form of savings. This account is suitable for taxpayers who want to construct a house over a long period as withdrawals are permitted according to the provisions of the scheme.

Deposit Account Type B

This account is similar to a term deposit as it is payable after a fixed time duration. The depositor can opt to keep the deposits cumulative or non-cumulative and withdrawals from this account can be made only after a stipulated duration.

Q16. How to open a CGAS Account?

A16. Every taxpayer keen to open a CGAS account needs to apply to the bank and fill a form in which the type of account (A or B) should to be specified. In case of account type B, they need to mention whether the account will be cumulative or non-cumulative. The proof of the deposit needs to be given with income tax returns.

While opening this account, a taxpayer should ensure that CGAS is mentioned in the account. Many taxpayers forget mentioning CGAS and later use the money for buying or constructing residential property. However, according to the income tax law the money to be used for this purpose should be kept exclusively under a CGAS scheme. The deposits in these bank accounts can be made in installments or in a lump sum.

A CGAS account cannot be opened with all banks and their branches with only 28 Government recognised banks that can receive a deposit under this scheme. These include SBI, CBI, Dena Bank, Indian Overseas Bank, Andhra Bank and Canara Bank among others. Rural branches are not authorised to receive and maintain deposits under CGAS.

The interest rate is dictated by the RBI at regular intervals and is allowed every month on the lowest balance in account A. In case of Account B, the interest amount accrued is reinvested and for non cumulative deposits, the interest amount is payable quarterly.

Transfer of CGAS A/c

The account holder can transfer the account from one deposit office to another of the same bank. The amount can be transferred from Type B to Type A. However, this is subjective to other provisions of the scheme. If the account is converted from A to B or vice versa, the interest in the newly opened account shall be calculated w.e.f the date of opening these accounts

Withdrawal from CGAS

Withdrawal from account A is subjective to the scheme provisions. The bank entertains a request after receiving the deposit request and, thereby, approves withdrawal. Withdrawals can only be made from type A account with a declaration that the amount withdrawn will be exclusively used for the intended purpose. If the amount is more than Rs 25,000, the bank issues a crossed demand draft in favour of the person to whom the payment is to be made. If the request is made to withdraw money from the Type B account before the expiry of the term, it is considered as a premature withdrawal from the account.

Q17. When and how to Open a CGAS A/C?

A17: You can deposit the capital gains amount in a CGAS before the due date of filing tax returns (July 31) to save LTCG tax. But treat CGAS as a parking place, where you can deposit money until you find a house that suits you, but of course within a time limit. The amount has to be parked in CGAS with the intention to use the funds to buy a new house within two years or to construct one within three years.

If you fail to buy or construct a new house within the stipulated period, the entire amount is treated as LTCG and you will have to pay tax on it.

For instance, let’s say, you sold a property in April 2010. The capital gain made should be used to either buy a house by April 2012 or construct a house by 2013. Until then, you can deposit the money in a CGAS account before the date of filing returns, which in this case was be July 31 2011, to save tax.

If you do not acquire the new property till April 2013, the LTCG would be taxable in the fiscal year 2013-14.

Q18. I do not want to buy a house property still can I have any other option open to get tax exemption from capital gains?

A18: You can still get tax exemption, but you will have to invest the amount in specific bonds that fall under section 54EC of the Income-tax Act. These bonds are issued only by the National Highways Authority of India and Rural Electric Corporation Ltd.

To get the tax benefit, you have to hold these bonds for at least three years. Keep in mind that as per the said section, capital gains have to be invested in the bonds and the benefit is allowed to the extent of the amount invested. Therefore, if you’ve made LTCG of, say, Rs.50 lakhs and have invested it in one of these bonds, the amount will be exempt from tax. But if you invest only a part, say, Rs.10 lakhs, you will get an exemption only on that part and will have to pay LTCG tax on the remaining Rs.40 lakhs.

Q19. If within three years, I am unable to find another house then what kind of capital gains will I be charged on that amount? Can then the money be parked in NHAI and REC kind of bonds and escape tax? Or does one need to pay the tax for three years?

A19: No, then you cannot park further. In that case whatever tax was saved earlier, will have to be paid now.

Q20. In future, from fourth year onwards, can a person put the money in NHAI, REC types or does he lose the option?

A20: No, because NHAI or REC bond that a person will buy may save only tax, but after three years he is suppose to buy a property. So, now he cannot withdraw money for further use. Even if he can use the money he will have to pay capital gains tax which was postponed earlier.

Q21. I have sold a house of Rs 40 lakh and I am using Rs 10 lakh for some personal use. How can I use the remaining Rs 30 lakh to save my tax?

A21: Firstly, you will have to see whether this property is long-term or short-term, in case it was bought before three years or within three years from the date of sale. So if it is a short-term property, you cannot save tax. If it is a long-term, you can save tax by investing capital gain. So, if it is very long-term and you take index benefit I am sure that your capital gain will be less than 40. Rs 40 lakh is due to sales consideration, this is not a profit or a capital gain.

When you calculate capital gain it will be much less and you have to invest only in capital gain amount not the full consideration. Rs 10 lakh that has been used for other reason will not make any difference, provided you invest your capital gain amount in a new residential house or capital gain bonds. So, if you are not buying a house, invest that money in REC or NHAI bond for three years in order to save tax. The limit is Rs 50 lakh and because you are investing less than that, you have to invest within 6 months from the date of sale.

Q22. How can I save Long Term Capital Gain Tax by investing my Capital gains into NHAI bonds?

A22: National Highways Authority of India’s (NHAI) 54EC bonds come up as a decent option when it comes to parking your LTCG money. The instrument is open till March 31, 2014.

With a coupon rate of 6%, you can invest a minimum of Rs10,000 and a maximum of Rs50 lakhs in these bonds. The money invested stays locked for three years. If you withdraw the amount before the maturity, the tax benefit goes. You also need to invest the money in the bonds within six months from the sale of the property.

Q23. In case of sale of a residential flat or house what are the conditions for claiming exemption u/s 54 in respect of long term capital gains?

A23. Investment is to be made in another residential house or property within 1 year before or 2 years after the date of transfer. If new construction is done then it should be completed within 3 years from the date of transfer.

Q24. Whether for claiming exemption u/s 54 the same money received as consideration,is to be utilized or assessee may utilize even the borrowed funds?

A24. It is not necessary to acquire the new property to claim exemptions u/s 54 and 54F by spending the money from the exact source of the sale of that property. The Kerala High Court in the case of ITO v. K.C. Gopalan [2000] has held that law does not insist the sale consideration obtained by assessee itself should be utilized for purchase or construction of new house property. Assessee is entitled to exemption u/s 54/54F , even though for the purchase or construction of new house, the amount that was received by way of sale of his old property/asset as such was not utilized.

Q25. Whether after purchase of a residential house, expenditure made on making the house habitable within the prescribed time would qualify for deduction u/s 54 or 54F?

A25: Yes. Section 54/54F talks about buying a new Residential House Property. An inhabitable premise cannot be equated with a residential house. In case of semi-finished house the purchaser will have to invest on flooring, wooden work, sanitary work etc. to make it habitable.

Q26. After selling a residential house if assessee purchases two residential houses within the prescribed time ,will he be entitled for deduction u/s 54 with respect to cost of both the houses?

A26: No because the assessee can claim deduction u/s 54 in case of investing in not more than one Residential house. The Bombay High Court in the case of K.C. Kaushik v. P.B. Rane [1990] held that deduction u/s 54 will be available only against one house of assessee’s choice.

Q27. An assessee sold his residential house property and purchased another house property in joint name with his father, but paid the entire consideration himself. Is he entitled to full consideration u/s 54?

A27: Yes the assessee can claim the exemption u/s 54. Purchase in the joint name shall not disentitle the assessee for claiming the entire exemption.

Q28. Whether for the purpose of sections 54 and 54F the construction of a new house must be completed within 3 years?

A28: If substantial investment is made in the construction of the house but the house property has not been completed , it shall amount to construction of house property for the purpose of sections 54 and 54F as decided in the case of Smt. Sashi Verma v. CIT[1997](MP).

Q29. Where the shares in India were purchased in Indian currency by a foreign company, whether the long term capital gain on sale of shares including bonus shares, should be taxed at the rate of 10% u/s 112 or at the rate of 20%?

A29: If the shares are purchased in foreign currency by the non-resident, long term capital gain on sale of such shares will be taxed at the rate of 20%.

Q30. What deduction is available to a non-resident Indian on long term capital gain arising on transfer of specified assets?

A30: Exemptions are allowed in case of investment made in any specified asset or in National Saving Certificates within 6 months from the date of transfer.

Specified Capital asset means:-

1. Shares in an Indian Company
2. Debentures of an Indian Public limited Company
3. Deposit with an Indian Public limited Company
4. Central Government Securities

Q31. An assessee sold a residential unit and purchased the portion of another residential unit (but not the whole residential unit) within the specified time. Whether the assessee can avail the benefit of section 54?

 A31: Yes, the assessee may avail the benefit of exemption from capital gain u/s 54 even by purchasing or constructing a portion of residential unit and not the whole.

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