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Capital Assets and Capital Gains

Capital Asset is property of every kind held by an individual, and for the purpose of taxation, includes shares, debentures, government securities, bonds, units of UTI and Mutual Funds, immovable property, etc. The following do not come under the purview of capital assets:

  • Personal effects like electronic items, apparel, furniture etc.
  • Agricultural land
  • Some specified bonds e.g. 6.5% Gold Bonds 1977, 7% Gold Bonds 1980
  • National Defence Gold Bonds 1980, Special Bearer Bonds 1991, Gold Deposit Bonds 1999

Capital Gain
Capital Gain is the profit or loss arising from the transfer of a capital asset.

Types of capital gains
Capital gains are classified as long term and short term depending upon the duration for which the asset is held by the person. These are:

  • Short-term capital asset: An asset, which is sold within a period of 36 months after its purchase is a short-term capital asset.
  • Long-term capital asset: Any asset, which is sold after 36 months of its purchase, is a long-term capital asset. However, this criterion of holding period is relaxed to 12 months in case of the following assets:
  • Equity and preference shares, debentures or any other financial instrument listed on a recognized stock exchange in India
  • Units of UTI or any other Mutual Fund
  • Zero coupon bonds

Rates of tax for long term and short-term capital gains

Type of asset Rate of tax deduction at source (TDS) Exemption available (only for long term capital gains)
  Long term Short term  
A) Assets purchased in Indian currency      
Equity share in listed companies and Securities Transaction Tax is paid Nil 10.2% (11.22% if the total income exceeds Rs 10 lakh) Not applicable as long term capital gain is fully exempt
Unit of equity oriented mutual fund Nil 10.2% (11.22% if the total income exceeds Rs 10 lakh) NA as long term capital gain is fully exempt
B) Specified assets purchased by remitting foreign currency to India
- Equity shares in Indian companies
- Debentures and deposits in Indian public companies
- Central Government securities
10.2% (11.22% if the total income exceeds Rs 10 lakh)
30.6% (33.99% if the total income exceeds Rs 10 lakh)
Capital gains proportionate to the amount of net consideration which is reinvested in the specified assets in column 1.(See example 1 below)
C) Other Assets
If the assets are not included in any of the special categories above
e.g house property, land and building, jewelry, development rights etc.
20.4%
(22.24% of the income exceeds Rs 10 lakh)
30.6% (33.99% if the total income exceeds Rs 10 lakh)
If the amount of capital gains is invested in bonds of National Highways Authority of India or Rural Electrification Corporation, then the entire capital gains is exempt, else the proportionate
gain is exempt.
See Example 2 below
As per the financial budget 2007-08, a cap of Rs. 50 lakh has been imposed on capital gains from the sale of property.

Example 1: If the net consideration from the sale of an asset is Rs 100,000 and the NRI re-invests the entire proceeds in a new specified asset, then the entire capital gain on the sale is exempt from tax. If he invests Rs 80,000, then 80% of the capital gains is exempt.
However there is a cap of Rs. 50 lakh on tax exemptions for long-term capital gains from the sale of property.

Example 2: If a fresh investment of only the capital gain is made, then the entire capital gain is exempted. If the investment is only 50% of the capital gain, exemption is granted in equal proportion.

Filing income tax returns in India
If the only income of the NRI in India is the long term capital gains on specified asset as mentioned in category B in the table above or the investment income from such assets, then there is no need to file a return of income in India. If the NRI also has some other income like rent, salary, professional income and income from non-specified assets, then he will have to file an income tax return by the 31st of July.

Gains against Losses
When a NRI has incurred a loss on the sale of one set of shares and a profit on another, he can set off the loss against the gain and claim a tax benefit, provided both deals are made in the same financial year. In this case, the NRI can apply for a tax exemption certificate prior to the sale of shares of the second lot where he has capital gains to ensure a set - off and apply for nil or lower deduction of tax.

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