Amendments to Section 54 has been announced in the Central Budget, 2019, to the effect that Tax Assessees can enjoy exemption in case the sales proceeds of the made long term capital gains like house property is invested in the purchase of up to two house properties as against the previous provision of investing in one house property, subject to same conditions. Provided the capital gains from the sale of house property do not exceed Rs 2 crores.

Capital Gain: What is it?

In simple words, it is the profit/ gain arising out of the sale of a capital asset. It is categorized as income thus attracts tax for the amount for the year during which the capital asset transfer has occurred. This tax is termed as capital gains tax and can be both, short-term or long-term in nature.

Capital gains are not related to any property that has been inherited since no sale is involved, there has been only ownership transfer. Income Tax Act has particularly exempted assets gifted by way of being inherited or acquired by a will having been executed. However, when there is a sale of such an inherited property by the person who has acquired it, capital gains tax becomes applicable. The Capital Assets can be the following; building, Land, house property, patents, vehicles, trademarks, leasehold rights, jewellery or machinery, to name a few. It does not include any consumables or raw material, or stock for business purpose, Personal goods for personal use; like furniture and clothes, Agricultural land situated in rural India and a few more.

Short-term capital assets are those that are held for 36 months or less. From FY 2017-18 this criterion, of 36 months has become 24 months in case of immovable properties like land, house property and building.

Long-term capital assets are those that are held for greater than 36 months.

The following are categorized as long-term capital assets if possessed for more than 12 months:

  • Equity or preferential shares of a company that is listed on a valid Indian stock exchange
  • Securities (like Govt. securities bonds, debentures, etc.) listed on a valid Indian stock exchange
  • UTI Units
  • Equity Oriented Mutual Fund Units
  • Zero-Coupon Bonds,

Calculation of Capital Gains is different for assets that are held for a period longer and separate for assets that are held over a period shorter in duration.

Calculation Methods for STCG & LTCG

Method of Calculating Short-Term Capital Gains:-

Step 1: Take in to account the total value sales consideration

Step 2: From that deduct the following:

  • Expenses made exclusively for transfer of assets
  • Cost of acquiring Asset
  • Cost of any improvement made to the asset.

Step 3: The amount derived after the above calculation is to be considered as a short-term capital gain

Method of Calculating Long-Term Capital Gains:-

Step 1: Begin with the full consideration value of the sales

Step 2: Deduct from that the following:

  • Expenses made exclusively for transfer of assets
  • Indexed cost for acquisition
  • Indexed cost for asset improvement

Step 3: From the above amount derived, deduct those exemptions U/s 54, 54EC, 54F, and 54B

For the sale of house property:

The expenses that are deductible from the total sale proceeds are:

  • Commission or Brokerage paid
  • Stamp paper Cost
  • Expenses on travelling for transfer of property.
  • For inherited property, expenses made towards inheritance and will, succession certificate, costs of the advocate in certain cases.

For the sale of shares following expenses may be permitted to be deducted:

  • Commission paid to a broker for the sale of shares
  • Though, deduction of Securities transaction tax, STT, is disallowed

When there is a sale of jewellery: the cost of the broker’s service, if any, for getting a buyer.

The method of calculating the Index Cost for computation of LTCG is a little cumbersome and it would be advisable to engage a professional with the updated latest knowledge of changes/amendments to the IT Regulations, for filing ITR where Capital Gain(s) is/are involved. Engaging the services of the top professional CA firm like the GCC Filings would be prudent since GCC Filings are one of the leading CV firms that have all the expertise in the area.

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