Legal & Tax

The capital gain tax is one that few people are aware of. Capital gain tax is not paid in India if a person inherits a property and no sale occurred, as per Income Tax Act. If the person who has inherited the property decides to sell it, however, tax will have to be paid on the profit. Some of the examples of capital assets are machinery, Jewellery, leasehold rights, trademarks, vehicles, house property, building, and land.

Simply explained, a capital gain is any profit or gain derived from the sale of a “capital asset.” Because this gain or profit falls under the category of ‘income,’ and hence you will have to pay tax on it in the year in which the capital asset is transferred. This is called capital gains tax, and it can be either short- or long-term. Capital gains are not applicable to an inherited property as there is no sale, only a transfer of ownership. The Income Tax Act has specifically exempted assets received as gifts by way of an inheritance or will. However, capital gains tax will apply if the asset is sold by the person who inherited it.

Capital gain tax refers to any gain or profit that is earned by the individual from the sale of a capital asset. The profit arises from the sale of the capital asset is taxed under the head of ‘Income from Capital Gain’. The profit is earned by selling the capital asset at a higher price than what it was bought for. Capital gains tax is not applicable to the inherited property, as there is an only transfer of ownership and no sale. Any asset which is received as a gift by way of will or inheritance is totally exempted from the Online Income Tax Act 1961. However, CGT will be applicable if the individual who inherits the asset decides to sell it.

Capital gain tax is chargeable on the profit earned from the selling of house property, however, the tax is not charged on the entire amount itself. In case, a person sells the property in the time period of three years then it will be taxed directly according to the income tax slab the person falls under and will be termed as a short term capital gain tax. Short term capital gain attracts a flat 20% tax.

Income tax exemption is applicable on the long-term gain which occurs from the sale of a capital asset under section 54 and 54F of IT Act if the investment is made in construction and purchase of house property, subject to specific conditions. In order to avail tax exemption, the individual should buy the residential house within the tenure of 2 years after or 1 year before the transfer of the original house. Any under construction properties should be completed in the time period of 3 years from the transfer date of the original house. It is important to keep in mind that the investment made on the house property should be situated in India.

The advance that is paid for the sale of the house property is taxed and it is later fortified by the person for sale of flat in case the transaction does not go through. Under the head of ‘income from other sources,’ the advance amount that is paid is taxed in the same year. At the time of determining the capital gains, the advance amount can be reduced from the acquisition cost of the asset in the year the capital asset is sold.

An individual can build or purchase a house from the capital gains in the time period of 2 years from selling the house property. Moreover, the individual can also book a flat and save on taxes with the capital gain. Besides this, the individual can also avail tax benefit by investing the capital gains in banks Capital Gains Account Schemes (CGAS). Apart from this one can also invest in specific bonds like National Highway Authority of India and Rural Electrification Ltd. within 6 months from the date of sale of the property.

However, capital gain tax on the property offers tax exemption, it is important to keep in mind that with one sale of property one can invest only in one new asset and cannot an investment in multiple assets to minimize the tax. In case, a person is selling more than one property then they can invest the accumulative capital gain amount in only one new property.

• No capital gain is applicable to the sale of agriculture land in the rural areas of India and the agricultural land in rural areas is not considered as a capital asset.
• In case an individual uses the entire sale proceeds of the capital asset to purchase the house property they will not be taxed.
• The assessment must satisfy the below-mentioned conditions in order to avail tax benefit under Section 54F:
• An individual requires buying a house within 2 years after or 1 year before the sale.
• Any under construction properties should be completed in the time period of 3 years from the transfer date of the original house.
• The individual cannot sell the house property within 3 years of the buying or construction.
• It is important to keep in mind that the investment made on the house property should be situated in India.
• The individual should not own more than 1 residential house property other than the new one on the date of transfer.
• The individual will not have to pay tax in capital gain if they invest in CGAS (capital gains account scheme). However, the person should make an investment for a specific time period as stated by the bank. If the taxpayer fails to make the investment for a specific time period, then it will be considered as a capital gain.

Land is a Capital Asset, and because it is an appreciated asset, a landowner can make huge capital gains on its sale. However, Agricultural land in a rural part of India, on the other hand, is not considered a Capital Asset. So, no capital gains are applicable on its sale. Before we look into how your capital gains will be taxed, check sure your asset is categorized as a capital asset by Income Tax.

Individuals and Hindu Undivided Families are excluded from long-term capital gains tax (under Section 54 of the Income Tax Act, 1961) on the sale of a residential property if:

• The capital gains are put towards buying or constructing a new home.
• The new house is purchased 1 year before or 2 years after the sale of the old house.
• The new house is built, within three years of the sale of the old house.
• Only one extra house property is bought and built.
• The property being purchased / developed is located within India’s borders.
• You don’t sell your new home for three years after you have it.
• If the new property’s cost is less than the sale price, the exemption only applies proportionally. In less than 6 months, the remaining funds can be re-invested under Section 54EC.

Profits earned from the sale of capital assets are known as capital gains, The two forms of capital gains tax one is long-term and second is short-term.  Short-term capital assets are those held for less than 36 months, whereas long-term capital assets are those retained for more than 36 months.

When you sell a capital asset for a higher price than you bought for it, you earn capital gains. Any investment product, such as mutual funds or stocks, or any real estate product, such as land, houses, and so on, are considered capital assets. A capital gain is an increase in the value of any of these when you sell them. In the same way, a capital loss occurs when the value of an asset falls below its purchase price.

Only when you sell an asset for more than its original purchase price do you have a realised capital gain. a property that has been inherited is not eligible for capital gains. because an inherited property is only a transfer of ownership rather than a sale,  If you sell your inherited property, however, you will be subject to capital gains tax.

• Calculate your basis. This is generally the purchase price plus any commissions or fees paid.
• Calculate your realized amount. This is the sale price less any commissions or fees that may have been paid.
• Subtract your basis (what you paid) from the realized amount (how much you sold it for) to Calculate the difference.
• If you sold your assets for more than you paid, you have a capital gain.
• If you sold your assets for less than you paid, you have a capital loss. Learn how capital losses can be used to offset capital gains.