Capital Gains Tax in India - Types, Calculation, Exemptions & More

With the updation in the Union Budget 2024, there are significant changes in the capital gains tax structure. These changes can easily impact both the businesses and the individual taxpayers. All taxpayers should have knowledge about the changes and the taxation rules of capital gains tax, if you are willing to sell your capital assets. The new budget also has many critical changes, especially for the exemptions and rates. Capital gains are the profits earned on the sale of capital assets, such as bonds, stocks, property, etc.

In this blog, we have explained everything about the capital gains tax. We have also mentioned its types, the exemptions you can get, and the ways to calculate them. It is important to know about the taxes to stay compliant with the Income Tax laws. You can read this blog till the end to understand the basics of the capital gains tax. 

Understanding Capital Gains Tax

The capital gains tax in India is the tax that is applied to the profits earned by selling the capital assets, such as stocks, mutual funds, property, etc. The profits/gains are considered as income, and they are completely taxable in the year of asset transfer. There are two types of capital gains tax, which are short-term capital gains tax and long-term capital gains tax.

Types of Capital Gains Tax

There are two types of capital gains tax:

1. Short-Term Capital Gains (STCG): These are the gains obtained from the sale of the assets that you keep for a short period of time. This holding period is typically less than 24 months for real estate and less than 12 months for stocks and securities. 
2. Long-Term Capital Gains (LTCG): These are the gains obtained from the sale of the assets that you hold for a longer period. The holding period is typically more than 24 months for the estate and more than 12 months for stocks and securities. 

Primary Changes in the Union Budget 2024

There are some key changes made in the capital gains tax, which has been introduced by the Union Budget 2024. Those changes are given below:

1. Sudden increase in Short-Term Capital Gains Tax: Equity Investments

In the case of equity investments, there are some important changes made in the short-term capital gains tax by the Union Budget 2024. It has increased since 2024. Before these changes, the STCG applied to the equity shares and equity-related mutual funds at the rate of 15%. As per the new budget introduced on July 23, 2024, this rate has been increased to 20%. 

2. Introducing New Holding Period: Real Estate

The Union Budget 2024 has also introduced an updated holding period for the real estate capital gains and their classification. As per the old rules, if you hold a property for more than 36 months, then long-term capital gains will be applicable. Although, as per the new budget rules, this holding period has been reduced to 24 months. 

Ways of Calculating Capital Gains

There are different ways of calculating the assets that are held for a longer period or time and the assets held for a shorter period of time. 

Some Important Terms:

• Full value Consideration: It is the consideration that is received or to be received by the seller of capital assets for his transfer. There will be taxes applicable to the capital gains in the year of its transfer, even if there is no consideration has been received yet.
• Cost of Improvement: The expenses of a capital nature that come with making some alterations or additions to the capital asset by the seller.
• Cost of Acquisition: It is the cost for which the capital asset was acquired by the seller. 

Steps to Calculate Short-Term Capital Gains

Here are the steps:

1. Start calculating with the full value of consideration.

2. Subtract the values of the following:

• Expenditure occurred completely for the transfer.
• Cost of Improvement
• Cost of Acquisition

3. From the obtained number, you need to deduct all the exemptions that come under sections 54B/54D.

4. The remaining amount is considered the short-term capital gain, which needs to be taxed. 

Steps to Calculate Long-Term Capital Gains

1. Start calculating with the full value of consideration.

2. Now, deduct the following from this:

• Expenditure incurred completely and exclusively for this type of transfer.
• Cost of improvement
• Cost of acquisition 

3. For the number which is obtained, deduct exemptions mentioned under sections 54, 54D, 54EC, 54F, and 54B. 

Capital Gains Tax Exemption 

Here is the list of various exemptions on capital gains tax in India that are available to claim:

• Section 54: It includes the exemption on those capital gains that come from the sale of a residential property. You can claim it if you reinvest those gains again in building or buying any other residential property within a fixed time period.
• Section 54B: It includes the exemption on the capital gains which are obtained by the sale of an agricultural land, only if you use the gains to buy any other agricultural land within a specified time period.
• Section 54EC: It includes the exemption on the capital gains if you have invested in a few specific bonds within the six months of their sale. It includes, National Highway Authority of India (NHAI) or the Rural Electrification Corporation (REC).
• Section 54F: It includes the exemptions on the capital gains obtained from the sale of any asset except the residential property, only if you reinvest the money to buy a residential property within a fixed duration.
• Section 54EE: It includes the exemptions on the long-term capital gains if you invest in the units of some specified funds mentioned by the government. It should be within six months of the date of transfer.
• Section 54D: It includes the exemption on the capital gains that came from the mandatory acquisition of the buildings and land for industrial purposes.
• Section 54G: It includes the exemptions on the capital gains obtained from the transfer of the assets, such as shifting an industrial undertaking, from an urban area to a rural area. It is available only if the gains are used to purchase the new assets in the rural areas.
• Section 54GA: It includes the exemption on the capital gains that are used to transfer the industrial undertaking from an urban area to a Special Economic Zone (SEZ) by buying the new assets.
• Section 54GB: It includes the exemption on capital gains obtained from the sale of a residential property only if you finance the returns in the equity shares of a start-up company (eligible). Also, the gains from the investment should be used in purchasing the new assets.

Why Choose Visament?

It is crucial to have a good understanding of taxes, their exemptions, and all other related terms and conditions when you want to redeem your capital gains tax. The taxpayers should always stay updated about the recent changes made by the Income Tax department and in the Union Budget 2024. You can also seek professional guidance from the experts if you don't have much knowledge about capital gains taxation. With the expert advice, you can stay legally compliant with all the laws of Income Tax.

At Visament, there is a team of experts who can provide you with the right assistance for the capital gain tax exemption and how you can use the laws to decrease your tax liability. You can file your taxes and gain deductions by using our affordable tax filing services. Our experts have a combined experience of more than 30 years, and they will help you throughout the process. You can contact our customer support anytime for help, as they are available 24/7.