Tax Liability on Capital Gains
Gains or losses arising on transfer of property are subject to tax under the head of ‘capital gains’.
According to the Income Tax Act, a ‘capital asset’ means property of any kind held by a person, irrespective of whether it is connected to his business or profession.
It does not include certain items like stock-intrade, consumable store or raw material for business, personal effects, and certain agricultural land.
Any real estate, including a flat, site, farmhouse, commercial property, etc, are all subject to capital gains on sale or transfer.
It is not only sale of property that attracts capital gains. Even certain specified transfers are deemed as sale and any gain arising is subject to capital gains tax. Transfer of property means conveying property, in present or in future, to one or more people.
The income arising on transfer of a capital asset is subject to capital gains tax — if there is a transfer of a capital asset during the previous year. Transfer will be deemed to have taken place on the date on which the possession is handed over. In case the payment has been received, but the transfer not effected yet, it will not be treated as a sale transaction.
Under the income tax laws, a capital asset may be a long-term capital asset or a short-term capital asset. In case a property is held for more than 36 months, the capital gains arising from it are treated as longterm capital gains. In case a property is transferred or sold after holding it for less than 36 months, the income will be treated as shortterm capital gains, and vice versa for capital loss.
It is to be noted that this is different from the provisions applicable to securities including shares and mutual fund units, where the qualifying period for long-term capital gains is over 12 months.
The period of holding determines taxability — whether it is a long-term capital asset or a shortterm capital asset — and accordingly whether you have incurred a long-term or short-term capital gains or loss.
The amount of capital gains is arrived at by applying the concept of Cost Inflation Index (CII). The index is published by the I-T department. The present worth of a property is arrived at by applying the CII to the cost of the property as well as any improvements made to it. This is deducted from the consideration amount received to arrive at the capital gains.
If the amount of the capital gains is equal to or less than the cost of the new property, the capital gains will not be charged to tax. For the purpose of computing, in respect of the new property, any capital gains arising from its transfer within a period of three years of its purchase or construction, the cost will be reduced by the amount of the capital gains.
A capital loss, whether short-term or long-term, can be carried forward and set off for the next eight years. After eight years, it lapses and cannot be carried forward any more.
You may save tax in respect of long-term capital gains by investing the gains in a residential property or in capital gains bonds. It needs to be ensured that the conditions prescribed under the relevant section are strictly complied with. Otherwise, the amount claimed as exempt can be made subject to tax.