Capital gains tax in India – 3 Rules you may not be aware of

Capital gain tax is a known term for all investors of Equity, Debt or Real estate. The gains made on capital assets are further classified into 2 categories i.e. Long-term Capital gains and Short-term capital gains, based on their holding period.

For Listed Equity, equity mutual funds and Related products the Long-term holding period is 12 months and more, and short term is less than 12 months.

For Real Estate, the holding period required to make it a long-term asset is 2 years and less than 2-year holding is termed as Short term

For Non-Equity Mutual funds like Debt Mutual funds and Gold funds, even for Physical gold, the long-term holding period is 3 years or more and less than 3 years is short term for this asset.

Not only Holding period requirement, but the capital gains tax calculations of these assets also have different rates.

Now for a regular investor, all this seems to be usual things and must be thinking that what’s new in this. I completely agree. But I am here going to share some not so visible rules which are generally not get discussed on common platforms.

Even if you are not that conversant with the Capital gain taxes in India, reading this article may help you make some sense of your investment taxation.

Capital gains tax in India – Important rules to be aware of

1. Tax saving u/s 80C to 80U is not allowed to Capital gains

Tax Breaks under section 80c to 80U is not available to Capital gain Income.

If your Income is comprised of Capital gains that come under a special tax rate, you cannot save on tax outgo on the same by Investing in PPF, Insurance Policies or even ELSS kind of products.

Capital gains that come under special tax rates are –

*  In case of debt funds, From April 1, 2023, all the Long-term capital gains will be treated like short-term capital gains and will be taxed accordingly. If you sell debt funds bought after this date, profits will be added to your income and taxed per your tax bracket. However, for investments before March 31, 2023, the gain is taxed at a flat 20%, with the bonus of indexation benefits.

Let’s understand with an Example:

Mr. Suresh, going to Retire next year, has been investing in the Debt Mutual funds for quite some time, with a point of view of starting with SWP (Systematic withdrawal plan) from next year to supplement his monthly income. He is expected to generate Income of Rs 5 lakh per annum starting next year, which is expected to include Rs 1.5 lakh of Long-term capital gain.

Besides this, he will be earning some Interest income of around Rs 2 lakh from SCSS, MIS and other Interest-bearing Investments. To save income tax he is open to save u/s 80C.

His taxation would be as follows:

Being a Resident Senior Citizen, he claimed the benefit of basic Tax slab (Rs 3 lakh), but could not claim Section 80C benefit as the Income Over and above the basic slab is of Long-term Capital gain.

Now Question arises, Will the taxation be different if Mr. Suresh was an NRI?

2. NRIs Cannot Claim Basic Exemption Slab benefit for Capital gains Income

Yes, this is True. As per Section 111A and 112, NRIs are not allowed to adjust STCG (Except debt) or LTCG against basic exemption Limit. This adjustment is allowed only to Resident Individuals and Hindu Undivided Families (HUF).

Taking the example of Suresh as in Point number 1 above, If he was an NRI, then his Taxable Income would be Rs 1.5 lakh which is full Long term capital gains amount booked on debt mutual funds, he neither would be able to claim basic exemption benefit, nor invest in section 80C Instruments to save on the tax payment.

(Did you know: NRIs are not allowed to take Indexation benefit on Mutual funds?)

However, the Tax saving or I should say tax adjustment can be done if there is some Capital Loss booked by the Investor. This is possible through Set Off rules.

3. Set off the Capital gains with Capital Losses

When there is a restriction on saving on capital gains taxes, the provision of set off capital gains with the capital losses comes to the rescue of Investors.

The Capital Loss in one asset is allowed to set off with the capital gain in Other assets with the below-mentioned conditions:

Short term capital Loss is allowed to set off with both Short term and Long-term capital gain, and

Long term capital Loss is allowed to set off only with the Long-term capital gain

Till 1^st April 2018, Long term capital loss in Equity was not allowed to set off with Long term Capital gain as LTCG In Equity used to be Tax-Free. But starting FY 2018-19, if you have made any Long-term capital Loss in Equity you can set it off with Long term Gain in any other Capital asset, be it Debt, Gold or even Property.

And If there’s no Capital gain available to set it off, then you may carry forward this loss for the next 8 years to be adjusted in future gains if booked.

Conclusion: 

Income Tax is a Technical Subject. Every section comes up with different rules and Interpretation. From Tax planning Point of view, it is important to be in touch with the Professionals so you should not find yourself on the wrong side of law and end up in a soup.

Even me not being a Tax professional, have written this article after going through varied articles and sections on capital gains tax. Before acting on, you should take some tax expert in confidence, as rules keep changing.