All of us are aware that income in any form usually attracts tax. Capital assets are wealth created over a lifetime and the choice of selling these assets is made with an intention to increase existing wealth in the form of gains. Tax on capital gains directly affects investment decisions. However, there are various options available under the law to counter the tax arising at the time of sale, some of which have been articulated below to help you pick options of your liking.
CATEGORISING YOUR GAINS
Capital asset is defined to include property of any kind excluding stock-in-trade, personal effects, agricultural land and certain specified bonds. However, jewellery, archaeological collections, drawings, paintings, sculptures or any work of art although may be for personal use are also covered under the definition of 'capital asset'. Capital gain is computed by deducting the cost of acquisition, cost of improvement and any expenditure incurred in connection with transfer from the sale consideration. Capital gains can be classified into long-term (LTCG) and short-term (STCG) depending on the period for which the capital asset has been held by the transferor before the date of suchtransfer. It is important to remember the category in which the capital gain falls because it will eventually impact the rate at which it is taxed and the tax benefits which can be enjoyed on re-investment of such gains/consideration.
STCG is earned on sale of a capital asset which has been held for not more than 36 months immediately preceding the date of its transfer. In case of any security listed on a recognised stock exchange in India or a unit of the Unit Trust of India or a unit of equity-oriented mutual fund or a zero-coupon bond, the period of holding for the gain to qualify as STCG is twleve months. The Income tax law has recently been amended to provide that the unlisted securities and a unit of mutual fund (other than an equity-oriented mutual fund) shall be a short-term capital asset, if it is held for not more than 36 months (which was 12 months in the erstwhile provisions). Any "capital asset" held for more than 36 months before its transfer (more than 12 months in case of listed securities, units of UTI or equity-oriented mutual fund) will qualify as a long-term capital asset and gains realised on its sale will qualify as a LTCG.
LTCG is taxed at a beneficial rate of 20%, plus a cess of 3%, subject to fulfilment of certain conditions. Besides the concessional rate of taxes available on sale of capital assets, there are also certain exemptions provided under the Income tax law for capital gains arising from sale of long-term capital asset.
LTCG is exempt for an individual or HUF on sale of a residential house property, if such gains (not the whole consideration) is utilised to purchase or construct another residential house. It should be noted that the new house should be purchased within one year before or two years after the date of transfer. In case of construction, the new house should be constructed within three years from the date of transfer. Exemption will be limited to the capital gains or the cost of the new house, whichever is lower
LTCG is exempt for an individual or HUF where it is realised on sale of any capital asset, not being a residential house, if the net consideration (not merely the gains) is invested in purchase or construction of a residential house. The timeline for purchase or construction is the same as mentioned above. However, to avail this benefit, the assessee should not own more than one house other than the new asset on the date of transfer. As per the recent clarifications made in Finance Act, 2014, the purchase of house property to claim such exemption has been restricted to one residential house property situated in India. Exemption in this case will be proportionate to the amount invested in relation to the net sale consideration.
The exempt amount is calculated by multiplying the capital gain with the number arrived by dividing the amount invested with the net sale consideration. Although LTCG is required to be invested as per the timelines mentioned in Income Tax law (i.e. two/ three years from the date of transfer), it is possible that such investment may not be made before the due date of filing of return.
Accordingly, the unutilised amount of capital gain or net consideration can be deposited in a separate account maintained with a nationalised bank under the Capital Gain Account Scheme (CGAS). Such investment needs to be made before the due date of filing of return of income in order to claim exemption and should be utilised only for specified purposes within the stipulated time period. In case the amount deposited in CGAS is not utilised within the specified period, it shall be charged as LTCG of the year in which the time limit for making the requisite investment expires.
LTCG can be claimed as exempt in case the gains are invested in bonds of National Highways Authority of India and Rural Electrification Corporation within six months from the date of transfer. However, the exemption is limited to Rs 50 lakh in such a case. It has been recently clarified in the Finance Act 2014 that the limit of Rs 50 lakh is in aggregate and applies to total investment. The exemption up to Rs 50 lakh can be claimed only in one financial year, even if the specified period of six months covers two financial years
It is important to remember that staying well informed of beneficial tax provisions always helps in saving substantial tax liability. All that is required is to make prudent investments at the right time. This will help in enjoying the fruits of one's labour without taking a cut on the pocket in the form of tax.
The author is Divya Baweja-Partner, Deloitte Haskins & Sells LLP