Capital gains is an increase in the value of a capital asset (investment or real estate) that normally gives it a higher worth than the purchase price of the asset. Any gain or loss arising from transfer of an asset could have substantial tax implication for an individual. Therefore, it is important to understand the implications of the existing provisions within our income tax laws so as to avail the benefit of exemptions available under the law.
Under the tax statute, the profit or gain arising from transfer of an asset will be classified as capital gains. The type of capital gain would depend on whether the asset is long term or short term. An asset qualifies as long-term capital asset if the period of holding of the asset exceeds 36 months from the date of its acquisition preceding its transfer. In case of listed securities, units of equity-oriented mutual fund and bonds, this period is reckoned as more than 12 months to be categorised as long-term capital asset. Normally, a long-term gain (LTCG) is entitled to concessional tax rate unlike short-term capital gain (STCG).
The following outlines some of the ways to reduce the incidence of tax burden arising from gains on transfer of long-term asset:
The benefit of indexation is available while computing LTCG, wherein the cost of acquisition is adjusted against inflationary rise in the value of asset. For this purpose, the Central government notifies cost inflation index (CII) every year. For example if someone purchased a property in February 2007 costing R15 lakh and wants to sell it in March 2016, then by taking the benefit of indexation, this cost will rise to R29.42 lakh (1081/551*15), thereby reducing the quantum of capital gain that has to be offered for taxation.
Tax concession can be availed by investing LTCG on sale of a residential house property. LTCG arising on such transfer can be claimed as exempt to the extent of investment is made in purchase of another residential house in India.
Tax concession can also be claimed on transfer of any asset other than residential house if the amount of gain arising is invested for purchase of a residential house provided individual does not owns more than one residential house, other than the new asset, on the date of transfer. LTCG exemption would be in proportion of the amount invested and the sales consideration.
In above cases wherein tax exemptions are sought to be claimed by investment in house property, it is required to ensure that the new house is purchased within one year before or two years from the date of transfer or constructed within three years from the date of transfer.
In case LTCG is not invested prior to the due date for filing of ITR relating to the year in which the gain has arisen, then LTCG should be deposited in the Capital Gain Account Scheme. By doing so, the individual will not be required to pay taxes till the time house property is purchased.
Furthermore, LTCG arising from transferring of any long-term capital asset can be invested in Long term Specified Assets. Long Term Specified Assets that would qualify for exemption would be the bonds issued by NHAI or REC.
The investment should be made within six months after the date of transfer subject to a limit of
Rs 50 lakh. The said bonds shall be redeemable after three years from their purchase and acquisition.
The Finance Bill 2016 has proposed an amendment that provides for a tax concession on long-term gain arising out of transfer of residential house property, if the capital gain proceeds are invested in the shares of an eligible start-up subject to certain prescribed conditions.
The author is partner Deloitte Haskins & Sells LLP. With inputs from Divya Grover, manager, Deloitte Haskins & Sells LLP