CAPITAL GAIN TAX LIABILITY

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What is Capital gain tax

  • If you sell a capital asset and incur profit, then it is called Capital Gain (CG).
  • You have to pay income tax on the capital gain amount and this is called Capital Gains Tax (CGT)
  • If you sell a capital asset and incur a loss, then it is called Capital Loss (CL).
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What is capital asset?

For the calculation of capital gains tax, the following capital assets are considered.

  • Listed Shares
  • Unlisted Shares
  • Equity Mutual Funds
  • Debt Mutual Funds
  • Real Estate
  • Gold
  • Listed Bonds
  • Zero-Coupon Bonds
  • Other capital assets, if any

Determination of capital gain

  • Whether a capital gain is a short term or long term is determined by the following.
    • Asset type
    • Holding period
  • Holding period means how long you keep the asset with you before you sell it.
  • For example, if you sell an equity mutual fund unit before a year of purchase, then it will qualify for short term capital gain.
  • If you sell after a year of purchase, it will qualify for long term capital gain.

The following table describes various assets and their holding period for short term and long-term capital gains.

Offset (adjust) Capital loss

  • If you sell a capital asset and incur loss, then it is called capital loss. You need not pay any capital gains tax on the loss amount.
  • The Income Tax department gives you an option of offsetting (or adjusting) the capital loss against a capital gain.
  • It means that you can use capital loss to reduce the amount of tax to be paid on the capital gain.

Note: Capital loss can't be offset against any income under the head "Income".

Example 1:

  • You had a capital gain of Rs. 10,000/- from a sale of a capital asset. Also, you had a capital loss of Rs. 6,000/- from a sale of another capital asset.
  • Now, you can offset (adjust) the loss of 6,000 against the gain of 10,000/-. That is, 10,000 minus 6,000
  • After offsetting, you will have
    Capital Gain = Rs. 4000/-
    Capital Loss = Rs. Zero

So, you need to pay capital gains tax only on 4000/-

Rules about offsetting capital loss

  • There are some rules about offsetting capital loss against capital gain. They are given below.
  • A capital loss should be offset against capital gain only. It should not be offset against any income.
  • A short-term capital loss (STCL) can be offset against short term capital gain (STCG) or long-term capital gain (LTCG).
  • A long-term capital loss (LTCL) should be offset against only long term capital gain (LTCG).

Can an Individual Carry forward capital loss?

  • There may be situations where you can't offset the capital loss against any capital gain. In this case, you can carry forward capital loss to the next financial years.
  • During the next financial year, you can try to offset the capital loss against capital gain, if any.
  • If you are still unable to offset, then you can still carry forward to the next financial year.
  • This way, you can carry forward capital loss to a total of 8 financial years.
  • For this, you will need to do the following.
  • File Income Tax returns with the capital loss mentioned in it.
  • Keep the tax file returns safe.
  • During the next financial year(s), use the previous year's tax returns and try to offset capital loss.

Note - To understand exact Capital Gain/Loss Tax liability and correct Capital Gain tax saving instruments, one can fix meeting with our CA and hire the services.

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