A capital gain is a profit that results from disposing of a capital asset, such as stock, bond or real estate, where the amount realised...
A capital gain is a profit that results from disposing of a capital asset, such as stock, bond or real estate, where the amount realised from the sale exceeds the purchase price. Conversely, a capital loss arises if the proceeds from the sale of a capital asset are less than the purchase price.
Normally, long-term capital gains (LTCG) are taxed at lower rates than short-term capital gains (STCG). The basis of differentiation between the two is the period of holding. Immovable property and unlisted shares become long-term assets when held for more than 36 months; in case of listed shares, the period of holding is just 12 months for the categorisation.
Thus, listed shares have an edge over immovable property in terms of tax treatment and unlisted shares due to lower period for recognition as long-term asset.
LTCG from sale of immovable properties is chargeable to tax at 20%. This is unlike listed securities where LTCG on shares dealt on recognised stock exchange are exempt, provided Securities Transaction Tax (STT) has been paid.
If listed shares are transferred off market, the rate of tax will be 10% without indexation, or 20% with it.
For unlisted shares, LTCG is applicable at 20% after considering the benefit of indexation. If the asset is of short term in nature, STCG on listed securities (on which is STT is paid) is taxable at 15%, while on unlisted securities as well as immovable property, the tax payable is as per slab rate applicable to the taxpayer.
Income from land or building is taxable except for agricultural income, which is specifically exempt. If immovable property is a building, then a flat 30% standard deduction is available from the amount of rent less municipal tax paid on the property. Over and above the same, if an individual is planning to invest from borrowed funds, the interest outgo on funds borrowed for the purchase of house is also eligible for deduction against such rental income received. As against it, dividend received on shares — whether listed or unlisted — is fully exempt from tax in the hands of the recipient if the company distributing it has paid DDT.
Investment in listed equity shares under the Rajiv Gandhi Equity Savings Scheme (RGESS) by a resident taxpayer is eligible for deduction up to a maximum of R25,000, subject to certain conditions.
However, for immovable property, you can avail of tax advantage on investment of the profit earned from the sale of any long-term capital asset into acquisition of residential house. Further, investment of capital gains earned from transfer of a residential property into another would help save capital gains tax.
Also, in case of a loss from house property, an option of setting it off against any income of the taxpayer is available. This tax benefit surely gets amplified when looked at from the angle of salaried individuals.
Note: The tax rate specified in the article is exclusive of surcharge and education cess as applicable.
The writer is partner Deloitte Haskins & Sells LLP. With inputs from Kinjesh Thakkar, assistant manager, Deloitte Haskins & Sells LLP