Capital Gains Tax on Shares, Land & Buildings Explained When you sell a share or land or a building, realistically, the profit you realize is not simply income, but it may be subject to Capital Gains Tax (CGT). Knowing how CGT works will help you plan your investments and minimize your income tax obligations. This article will take you through capital gains tax on shares, land and buildings in India, rules that apply, exemptions, and planning.
What is Capital Gains Tax A Capital Gains Tax is a tax on the profit that arises from selling a capital asset, such as shares, land, or buildings. A capital asset is anything you own for personal or investment use (There are some exceptions such as personal movable property). The gain is the amount left after deducting the purchase price from the selling price. This gain may also be reduced by expenses, deductions, and exemptions under the Income Tax Act. There are two categories of capital gains that have to do with the period of holding: 1. Short-term Capital Gains (STCG ) Assets are sold at a short holding period,
Shares: Held for 12 months or less,
Land/Buildings: Held for 24 months.
subject to higher tax rates than long-term capital gains.
2. Long-term Capital Gains (LTCG ) Assets are sold after a suitable holding period.
Shares: Held for 12 months or longer,
Land/Buildings: Held for 24 months or longer.
LTCG are subject to concessional tax rates, in the case of real estate, it has the benefit of indexation which adjusts the price paid up for inflation and reduces the taxable gain.
Very basically, it could be as follows: if you sold the asset quickly, the profit is treated as short-term gain and taxed at higher rates, but if you hold the asset longer you will get some tax relief with lower rates, and possible exemptions.
Capital Gains on Shares When you dispose of equity shares or an equity oriented mutual fund, the tax treatment will depend upon the duration of the gain; i.e., whether it is a short-term or long-term gain.
1. Short-Term Capital Gains (STCG) The profit or loss is considered short term when you are selling the listed equity shares and the sale occurs within 12 months of the date of acquisition.
Short-term capital gains are taxed flat at 15% (plus surcharge and cess) provided it was executed on a recognised stock exchange (and paid the Securities Transaction Tax (STT) as described in Section 11A.
If the shares were unlisted or no STT paid, they would likely be taxed at your normal income tax slab rate instead of 15%.
Example: Purchase Price: ₹2,00,000
Sale Price: ₹2,60,000
Profit (STCG): ₹60,000
Tax Payable = 15% of ₹60,000 = ₹9,000 (plus cess)
2. Long-Term Capital Gains (LTCG) If shares are sold after having held the shares for 12 months or more, the profit is long-term.
In accordance with Section 112A, LTCG over ₹1 lakh during a financial year will be taxed at 10%, without any indexation benefit.
LTCG up to ₹1 lakh is fully free of tax, so LTCG is tax-friendly for long-term investors.
Note: The indexation benefit (adjusting the purchase price for inflation) is not available for shares as it is for real estate.
Refer here: Major Changes in ITR Forms for FY 2024-25: What Taxpayers Need to Know
Example: Purchase Price: ₹2,00,000
Sale Price: ₹3,50,000
Profit (LTCG): ₹1,50,000
Exemption: ₹1,00,000
Taxable LTCG = ₹50,000
Tax Payable = 10% of ₹50,000 = ₹5,000 (plus cess).
Capital Gains on Property If you dispose of an asset like land, or an individual building that is owned in your name, a capital gain may arise based on the period you held the land or building asset.
1. Short-term Capital Gain (STCG) When a parcel of land (or individual building) is purchased and sold within 24 months from the date of purchase, the profit you receive may be identified as short-term gain. The STCG you receive will be collapsed into your overall income, and will be subject to the 5%, 20%, or 30% income tax slab rates applicable to you based on the amount of total income you received. For example, if your taxable total income would fall within a 30% tax slab, and you would have little or no other income, and if you disposed of your plot of land in 18 months from acquisition, then your gain will be taxed at 30%.
2. Long-Term Capital Gains (LTCG) When the holding period is stated to be longer than 24 months, the gain qualifies for Long Term Capital Gains tax. Long term Capital Gains (LTCG) applies a 20% tax to the gain with indexation benefits used to reduce the capital gain under Section 112 of the Income Tax Act. The indexation benefit allows the taxpayer to monitor the acquisition price and report the price as adjusted for inflation using Cost Inflation Index (CII). If you are asking about inflation, the CII provides an adjustment that recognizes the effect of inflation so that you can report the lowest taxable capital gain possible. The taxpayer can also claim exemptions under Section 54, 54EC , and 54F if the gains are reinvested.
Exemptions Available 1. Section 54 grants an exemption to the seller of a residential property in case the seller reinvests the proceeds into another residential house in India. For the exemption to apply, the person must have either purchased the new house within one year prior to the sale or two years after the date of sale.
2. Section 54EC is used when land or buildings are sold, and the gains are reinvested in redeemable bonds of National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC ) which are specified bonds. The responsible person must reinvest within 6 months from the date of sale. Any bonds in excess of ₹50 lakh in any financial year are not eligible for exemption.
3. Section 54F allows for exemption when a long-term asset other than a residential property is sold (land, shares or gold) and the proceeds will be reinvested in a residential house property in India. In order to obtain the full exemption, the wholesale consideration must be reinvested in the residential house property - if only a part of it is reinvested, the exemption is allowed on a proportionate basis. However, at the date of transfer, the seller must not own more than a single residential house (other than the new residential house) in order to qualify.
Tax Planning Tips Hold the Investments Longer: If you keep shares for more than 12 months and land/buildings for more than 24 months, you may be eligible to pay lower long-term capital gains (LTCG) tax rates on these investments. This will reduce your tax outgo and will go hand in hand with building wealth.
Use Indexation Benefits for Property When you sell real estate you apply on selling, the Cost Inflation Index (CII) to adjust the purchase price for inflation. This will reduce your taxable gains and lower your effective tax burden.
Strategically Plan the Timing for Sale If you are close to the long-term holding period, waiting a few months to complete that holding period may allow your asset to qualify as a LTCG, which would mean a significantly reduced tax bill.
Consider set-off of losses You can set off short-term capital losses and long-term capital losses against capital gains; and if there are unutilized losses, they can be carried forward for a maximum of 8 years to reduce future tax liability.
GST Impact on Restaurants & Consumers Asset Type Holding Period (STCG vs. LTCG) Short-Term Capital Gains (STCG) Tax Long-Term Capital Gains (LTCG) Tax Exemptions & Benefits Shares / Equity Mutual Funds STCG: Held < 12 months LTCG: Held ≥ 12 months 15% (u/s 111A if sold through recognized stock exchange & STT paid) 10% on gains exceeding ₹1 lakh (u/s 112A, without indexation) - Exemption up to ₹1 lakh LTCG per year - Set-off & carry forward of losses Land & Buildings STCG: Held < 24 months LTCG: Held ≥ 24 months Taxed as per income tax slab rates 20% with indexation (u/s 112) - Section 54: Reinvestment in another residential property - Section 54EC: Invest in NHAI/REC bonds in 6 months - Section 54F: Purchase a new residential house from the sale proceeds of other assets
Conclusion Capital Gains Tax is a part of life, but with some wise planning and knowledge of exemptions you can significantly reduce your exposure. Shares or real estate, whatever assets it is you are planning for, you really should know short term versus long-term rules.
Suggested Read: Capital Gain Tax Exemption Under Section 54F: A Complete Guide
FAQs 1. What is the tax on capital gains on shares in India? You would pay short-term capital gains Tax at 15% whereas on long-term gains over Rs. 1 lakh, you would pay tax at 10% with no indexation.
2. How is capital gains tax calculated on land or buildings? For short-term, we add to the income slab. For long-term, 20% tax with indexation benefits.
3. Is it possible to avoid capital gains tax on property? Yes, if you reinvest tax proceeds to another house (as per Section 54) or by buying specified bonds (Section 54EC).
4. Is there a limit for exemption on capital gains for shares? Yes, for long-term capital gains, gains up to Rs. 1 lakh in a particular financial year is tax-free.
5. Do I need to pay advance tax on capital gains? Yes, if your tax liability crosses Rs. 10,000 rupees, you must pay advance tax during each installment during the financial year.
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