Capital Gain is the profit made by selling a non-inventory asset which was bought for a lower price and the tax levied on such a profit is referred to as Capital Gain Tax (CGT). Non-inventory assets could be anything from stocks and bonds to precious metals and property. The profits made by selling these assets that qualify for CGT are valid for three years. This includes 1 year of mutual funds and certain listed securities. It should also be known that in most circumstances long-term gains have a lower tax rate as compared to short-term gains.
Ways to qualify for Capital Gains Tax
Property: The types of property that can qualify for Capital Gains Tax include a house that you have taken on a lease but never lived in or a second house and also office properties like a shop or a farm or just spare land.
Shares,Unit Trusts and other investments: Profit made on the sale of shares,unit trust shares and other such investments can qualify for Capital Gains Tax. This could range from stocks in a firm,debentures,bonds other than premium bonds and stocks in unit trust. Certain kinds of security like investments or loans to a company or the government are also liable to CGT.
Personal possession: Personal property,whether they are sold as individual pieces or as a set,qualifies for CGT. This includes antiques and jewelry,furniture,artwork,paintings or even collectors items like a stamp collection or an expensive chess set.
Business assets: Business assets like buildings,equipment,machinery,tools or even a companys reputation (for instance a companys goodwill) are liable for Capital Gains Tax. Shares in a private company or a registered trademark can qualify for Capital Gains Tax.
How is Capital Gain calculated?
Calculation of Capital Gain Tax depends on whether the asset concerned is a long-term asset or short-term asset. As mentioned above,tax incidence is higher in the case of short-term assets as compared to long-term assets.
Computation of short-term CGT: The first thing that needs to be done is to find out the full value of the asset. Then deduct the cost incurred in acquiring and improving the asset. Also subtract the expenses involved in transferring the asset. Then deduct the exemptions (mentioned below) offered on the asset and the resulting amount is the short-term CGT.
Computation of long-term CGT: First,find out the full value of the asset. Instead of deducting the cost spent on the asset,deduct the indexed cost incurred for the acquisition and the improvement of the same. Also subtract the expenses involved in transferring the asset.
Then deduct the exemptions (mentioned below) offered on the asset and the resulting amount is the long-term CGT.
Exemptions on Capital Gains Tax
Long-term capital gains are exempted from taxes if invested in certain kinds of specified assets. This exemption is subject to satisfying certain conditions,a few of which have been mentioned below:
* By selling a residential property and reinvesting the money in more residential property,once can gain an exemption from CGT. The residential property,whether it is a house or a plot of land,has to be chargeable under the head income of the family. However,the exemption from CGT is only if the residential property is a long term asset. The new house has to be purchased a year before or two years after the sale of the old property. In the case where the property is a plot of land,construction of the new house has to be completed within three years of the date of transfer of the old property.
* The cost of purchasing or construction of the new residential property or the amount spent on the business assets,shares or personal property are exempt from Capital Gains Tax. The amount of consideration also need not be included while calculating the CGT.
* If the newly purchased residential property is also sold within three years of the date of transfer then the Capital Gains arising from the first transfer along with the Capital Gains of the second transfer are taxed together in the year of the subsequent sale.
* If the net consideration of the transfer of property is not spent on the purchase of the new property,then it can be exempted from CGT by investing that amount in a bank in the public sector or by investing in any institution which is in accordance with the Capital Gains Amount Scheme (CGAS). The only requirement for such an investment is that within two years of the date of transfer of the original spare residential property the amount invested should be spent in the purchase of a new house or the construction of one.
Author is CEO,BankBazaar.com
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