Guide to file Capital Gain


What is capital gain?

The surplus in disposing an immovable property or equity is called capital gain. Here surplus is the balance amount of selling price after deducting purchase cost and other expenses related to it.


As per Income Tax Act, certain capital gains are subject to income tax, but certain are not. Again the taxability is decided by the type of capital gain viz. long term or short term.


Long term and term classification depends on the duration it held as owner.


I sold my house, constructed 10 years back, and purchased a new flat this year itself. Should I pay any tax ?

Mere sale is not a reason to pay tax. First, check whether the selling price of the first house is more than its purchase or construction cost. If there is a margin in price second step is to be adopted.


If the holding period from purchase to sale of the first house is more than three (3) years, it can be considered as long term capital gain. If the holding period is more than three years, calculate the indexed purchase price of the first house.


Cost inflation Index (CII) is published by the Government of India for each year from 1981. The original purchase price is multiplied with the CII factor. CII factor = CII of the year in which it sold /CII of the year in which it purchased or CII of 1981 whichever is later.


The Indexed purchase price is to be deducted from Sales price. If there is any development or expansion cost prior to the year of sales that should also be indexed and deducted from sales price. The ultimate surplus is considered for tax computation. The tax will be @20%


Exemptions for capital gain


The exemptions of capital gain are awarded to Long term capital gain only. Section 54, 54EC and 54F clearly state the exemptions.


Section 54: Residential property

The capital gain due to an individual or HUF from the sale of residential property (self-occupied or let-out) shall be exempted to an extent to which the capital gain invested in


a) Purchase of a residential property within 1 year before the due date of transfer of the property sold up to the end of 2 years after the due date and / or


b) Construction of the residential property completed within 3 years from the due date of transfer of the property sold


The newly purchased or constructed property should not be disposed off or transferred with in a period of 3 years from the date of acquisition. If sold, the surplus will be treated as short term capital gain.


Amendment Budget 2014

Government of India in its Budget 2014 has announced an amendment in section 54, from financial year 2014-15 (AY 2015-16) the exemption under section 54 is available only if the capital gain is reinvested in one residential property situated in India.


The section 54 exemption is also available for under construction residential property, where the service tax levied on under construction property is to be charged.


Capital Gain Account Scheme

The 2 years or 3 years time given for purchase or construction is again subject to certain conditions.


a) The income tax return for the relevant assessment year is to be filed before the due date


b) Invest the gain in a capital Gain Account in any Bank before the due date of the income tax return of the relevant assessment year


c) Furnish the details of Capital Gain Account scheme along with the return


Important points

1. Allotment of Flat by DDA can be considered under self-finance scheme as construction of the house property. (Circular No.471 dated 15.10.1986)


2. Allotment of house by a co-operative society where the assessee is a member can be considered as construction of the house property. (Circular No.672 dated 16.12.1983)


3. In both the above cases the assessee is eligible for exemption even though the construction is not completed within the statutory limit.


4. In CIT Vs R.C. Sood (2000) 108 Taxman 227 (Del), the assessee is eligible for exemption if the assessee paid a substantial amount to the builder and gained substantial domain over the property but the builder failed to hand over the possession of the property within the stipulated period.


Section 54EC:

The capital gain arising from the sale of long term capital asset is exempted if the capital gain reinvested in the specified bonds issued by Government of India within six months from the due date of transfer for a minimum period of 3 years.


Important Points

The interest earned from the bond is taxable.


Maximum investment limit fixed to Rs.50 lakhs


Section 54F:

Gain arising from the sale of any long term capital asset is exempted from tax if the gain is reinvested in


a) Purchase of a residential property within 1 year before the due date of transfer of the property sold up to the end of 2 years after the due date and / or


b) Construction of the residential property completed within 3 years from the due date of transfer of the property sold


If the investment is partial, the proportionate exemption can be calculated as follows,


Amount exempted = (Capital gain x Amount Invested) /Net sale consideration


I have a house in London and sold this year for a good margin? Should I pay any tax in India?

Under the provisions of the Income-tax Act, 1961, the capital gain from in or outside India is taxable. But the taxability is depends on the residential status of the assessee. If the assessee is a resident the income will be chargeable to capital gain tax.


The taxability on sale of property in your hand would depend upon the residential status in India in the financial year of the sale of property. If you are an NRI or not ordinary resident, the gains, if any, arising from sale of the property located in London shall not be taxable in India, if the Sale proceeds are directly credited to the overseas bank account. If the sale proceeds are directly credited to the Indian bank account, then the gains shall be taxable in India.


But, if you qualify as ordinarily resident of India (if you have spent more than 729 days in India in seven FYs preceding the FY of sale of property), your income shall be taxable in India irrespective of source or place. But the gains arising from sale of the foreign property shall be taxable in India subject to the benefits available under the double tax avoidance agreement between India and UK.


Since the property has been held by you for more than 36 months since its purchase, the gains, if any, arising from sale shall be taxable as long-term capital gains (LTCG). Cost Inflation Index can also be calculated if applicable. The LTCG re-invested can also be claimed as exemption from tax. The investment in the residential apartment or specified bonds has a lock-in period of three years also qualify exemption.


Sold house in London, and bought in India. What is the taxability?

The taxability on sale of property in your hand would depend upon the residential status in India in the financial year of the sale of property. If you are an NRI or not ordinary resident, the gains, if any, arising from sale of the property located in London shall not be taxable in India, if the Sale proceeds are directly credited to the overseas bank account. If the sale proceeds are directly credited to the Indian bank account, then the gains shall be taxable in India.


What is Cost Inflation Indexing (CII)?

If the holding period from purchase to sale of the first house is more than three (3) years, it can be considered as long term capital gain. If the holding period is more than three years, calculate the indexed purchase price of the first house.


Cost inflation Index (CII) is published by the Government of India for each year from 1981. The original purchase price is multiplied with the CII factor. CII factor = CII of the year in which it sold /CII of the year in which it purchased or CII of 1981 whichever is later.


The Indexed purchase price is to be deducted from Sales price. If there is any development or expansion cost prior to the year of sales that should also be indexed and deducted from sales price.


If the investment is partial, the proportionate exemption can be calculated as follows,


Amount exempted = (Capital gain x Amount Invested) /Net sale consideration


Financial Year CII Financial Year CII
1981-82 100 1999-2000 389
1982-83 109 2000-01 406
1982-83 109 2000-01 406
1983-84 116 2001-02 426
1984-85 125 2002-03 447
1985-86 133 2003-04 463
1986-87 140 2004-05 480
1987-88 150 2005-06 497
1988-89 161 2006-07 519
1989-90 172 2007-08 551
1990-91 182 2008-09 582
1991-92 199 2009-10 632
1992-93 223 2010-11 711
1993-94 244 2011-12 785
1994-95 259 2012-13 852
1995-96 281 2013-14 939
1995-96 281 2013-14 939
1996-97 305 2014-15 1024
1997-98 331 2015-16 1081
1998-99 351 2016-17 Not yet announced

What is long term capital gain and short term capital gain ?


The surplus in disposing an immovable property or equity is called capital gain. Here surplus is the balance amount of selling price after deducting purchase cost and other expenses related to it.


As per Income Tax Act, certain capital gains are subject to income tax, but certain are not. Again the taxability is decided by the type of capital gain viz. long term or short term.


Long term and term classification depends on the duration it held as owner.


The immovable property and capital assets can be classified into two. Building and land is coming under a single classification, but the equity or other related capital assets are classified as the second one.


If the lad or building purchased and held under ownership for more than three years is called long term assets and the gain received from the disposal or sale is called long term capital gain. If it is held for less than 3 years are called short term capital gain. Both are subject to tax and exemption.


If the equity or related capital assets held for a period more than 1 year is called long term assets and the gain in called long term capital gain. If the equity is listed in stock exchange and it is purchased from the secondary market (from stock exchange) is completely tax free. If the assets are held less than one year is short term capital assets and the gain is taxable under short term capital gain.


I have sold my mutual funds after 3 years any capital gain tax ?


If it is an equity mutual fund or not a Systematic Investment Plan (SIP) the full amount is tax free.


The long term capital gain from sale of stock and mutual funds are tax free. If it is short term capital gain it is taxable at the rate of 15%. In case of long term mutual funds, the gains from debt mutual funds the entire gain will be taxable whether it is long term of short term. The holding period of the stock or mutual funds is more than one year and gain is called long term capital gain.


In the case of debt equity mutual funds Cost Inflation Indexing (CII) can be applied. If the Cost Inflation Indexing is applied then the balance gain will be taxed at the rate of 20% and if it is without indexing it will be taxable at the rate of 10% only.


Calculating Cost Inflation Index is not so easy. For example, in the systematic Investment Plan (SIP), the investments are sometimes monthly or other regular intervals. After the maturity period (normally 36 months) the investor can expect a decent income from it. Mostly there will be short term capital gain portion also. This portion is to be separated and the balance long term should again classify into different years also. This is possible only through a detailed investment statement. Now the facilities like CAMSonline or the investing company mail back system provides the same.


How to set off my capital gain loss?


The short term capital loss can be set off against any capital gains (long term or short term) in the same year. But the loss from Long Term Capital gain is to be set off from Long Term Capital gain in the same year only.


The net loss under capital gain in a year cannot be set off against any other income in the year or future years. The unabsorbed loss can be classified as short term and long term capital gains and the same can be carried forward to the next year. The short term capital gain can be set off against any capital gain in the next year itself. But long term capital gain can only be settled against long term capital gain only.


Normally the loss can be carried forward to the next eight years to set off the same.


Can I carryforward Capital gain loss ?


Both Shot term and long term capital gains can be carried forward to the next eight assessment years. Short term capital gain can be set off against from any capital gain the future assessment years. But Long Term Capital Gain can be from Long term capital gain only.