This is a two-part series looking at Capital Gain Tax in India, This is the first part and we will cover the basics of capital gain tax and details about Long/short terms capital gains tax.
The Government of India(GOI) via Income Tax Act describe capital asset as “any kind of property held by tax payer” how ever Personal effects are excluded with few exceptions.
Personal Effects: Movable property held for personal use of taxpayer or for any member of his family dependent upon him. However, jewellery, costly stones, and ornaments made of silver, gold, platinum or any other precious metal, archaeological collections, drawings, paintings, sculptures or any work of art shall be considered as capital asset even if used for personal purposes;
What is a capital gain or loss: Any gain or loss arising from the transfer of a ‘capital asset’.
Type of Capital Assets:
- Short term capital assets
- Long term capital assets
The classification of different types of capital assets based on their period of holding is explained in the table below:
Tax rates for Short term / Long term capital gains
One of the important aspect which generally missed out while calculating the capital gain or loss in intra-head adjustments, the income tax law allows taxpayers to offset gain/loss from one source of income against gain/loss from other source.
Restrictions pertaining to intra-head adjustment (i.e. offsetting of capital losses from one source against capital gains from another source)
- Long term losses can be offset only against long term gains. –There is, however, no restriction on offsetting short term losses against long term gains.
Restrictions pertaining to inter-head adjustment (i.e. offsetting of capital losses against income from other heads)
- Where net result under the head ‘capital gains’ is a loss, such loss cannot be offset against any other head of income.
- Such loss should be separated into short term and long term capital loss and can be carried forward for 8 years.
Let’s understand with the example:
Year 1: Mr. XYZ has following income and capital gains
- Salary income: Rs 1000000/-
- Short term capital gain: Rs 50000/-
- Long term capital loss: Rs 60000/-
Total income calculation which will be considered is as follow
Here Long term capital loss can’t be offset against short term capital gain or any salary / business income.
Year 2: Mr. XYZ has following income and capital gains
- Salary income: Rs 1000000/-
- Short term capital loss: Rs 80000/-
- Long term capital gain: Rs 70000/-
The remaining short term capital loss of Rs 60000 cannot be offset against business income pursuant to the second restriction above. You carry that forward to the next year.
Offsetting of losses from other heads of income, against capital gains:
So far, we discussed different scenarios with losses under the head ‘capital gains’ and the related restrictions on the set off. The question that invariably pops up now is can losses under other heads of income be offset against capital gains?
The answer is fortunately – Yes. There are no specific restrictions on offsetting losses from other heads of income against capital gains. There are however few general restrictions, such as losses from speculative business(Future and Options in stock markets) not permitted to be offset against any other income, restricting the loss from house property to INR 2,00,000 etc. These general restrictions are applicable to every head of income including capital gains.
Will be writing part 2 of this article soon:-)