Capital Gains Taxation – Key Concepts

Capital Gains Taxation – Key Concepts

• Applicability: Capital Gains Tax applies on the transfer of a capital asset.
• Types of Capital Assets: Long-Term Capital Asset (LTCA) & Short-Term Capital Asset (STCA)

Holding Period to Determine LTCG or STCG

Category	Type of Capital Asset	Before 23/07/2024	On/After 23/07/2024
A	i) Listed securities, units of UTI, equity mutual funds, zero coupon bonds	≤ 1 year – STCA > 1 year – LTCA	Same as before
B	i) Unlisted shares ii) Immovable property	≤ 2 years – STCA > 2 years – LTCA	Same as before
C	Any other asset	≤ 3 years – STCA > 3 years – LTCA	≤ 2 years – STCA > 2 years – LTCA

Update: For “Any other asset”, LTCG now starts after 2 years, not 3 years, effective 23/07/2024.

Tax Rates for Capital Assets

Type of Asset	Type of Gain	Tax Rate Before 23/07/24	Tax Rate On/After 23/07/24
Listed Equity Shares / Equity Mutual Funds (STT paid)	LTCG (Sec 112A)	10% on gains > INR 1 Lakh	12.5% on gains > INR 1.25 Lakh
	STCG (Sec 111A)	15%	20%
Immovable Property	LTCG	20% with indexation	20% with indexation or 12.5% without indexation (whichever is beneficial for Individual/HUF) Others: 12.5% without indexation
	STCG	Normal slab rate	Normal slab rate
Others	LTCG	20%	12.5%
	STCG	Normal slab rate	Normal slab rate

Tax Rates for Mutual Funds

Type of Fund	Type of Gain	If Acquired On/Before 01/04/2023	If Acquired After 01/04/2023
Debt Fund	LTCG	20% with indexation	Normal slab rate
	STCG	Normal slab rate	Normal slab rate
Equity Fund	LTCG	10% on gains > INR1.25 lakh*	Same
	STCG	15%	15%

• Equity fund = more than 65% invested in equities.
• Debt mutual funds acquired after 1-Apr-2023 no longer get indexation and are taxed at slab rate.

Important issue stemming from the new capital gains tax regime effective July 23, 2024.

• Rebate under Section 87A : Not available under New Tax Regime for Special Tax Rate incomes. And it is Available under Old Tax Regime.
• Basic Exemption Slabs : Still applicable on Special Tax Rate incomes under both regimes.
• Buyback of Shares : Before 01/10/2024: Exempt under Section 10(34A). and On or after 01/10/2024: Taxable as IFOS under Section 2(22)(f). Purchase consideration will be treated as current year capital loss.

Long-Term Capital Gains (LTCG) on Immovable Property :

• For property sold after 23/07/2024: LTCG tax to be paid at lower of 12.5% or 20% — applicable under both tax regimes.
• For property sold before 23/07/2024: LTCG tax to be paid at 20% with indexation — applicable under both regimes.
• LTCG income (for property sold after 23/07/2024) to be added to Gross Total Income (GTI) based on LTCG without indexation.
• Section 54 exemptions (for property sold after 23/07/2024) will be based on Amount calculated without indexation of LTCG — applies under both regimes.
• Cross-verify tax utility calculations, especially for LTCG and surcharge. & Consider both LTCG options (indexed and non-indexed) to choose the most tax-efficient route.

• Increased exemption limit on equity LTCG from INR 1 Lakh to INR 1.25 Lakh. & Introduction of 12.5% LTCG tax rate (without indexation) for certain capital assets.
• 20% STCG on listed equity shares (previously 15%) – a significant hike. &No indexation benefit on debt funds acquired after 01/04/2023.

Interest Deduction Limits

• Old Tax Regime: Self-occupied: INR 2 lakh/year cap on interest deduction (if construction completed in 5 years; else INR 30,000) & Let-out: No cap on interest, but only INR 2 lakh can be set off annually and Excess loss carried forward for 8 years (house property only)
• New Tax Regime: Deduction for home loan interest allowed only on let-out properties & Interest can be capitalized to reduce capital gains (if not claimed earlier)
• we needed to Ensure valid invoices, bills, and supporting documentation & ITD uses AI tools to flag suspicious/fraudulent claims also Backdated/fake invoices may lead to scrutiny, penalties, or rejection

• NRIs must be cautious — they cannot claim indexation after 23 July 2024. And If overcharged due to surcharge misapplication, consider filing a grievance with the CPC or escalating through a rectification request.
• From 23 July 2024, NRIs are not eligible for indexation benefit on property sales. However, they can still claim: Valid capital improvement expenses & Brokerage, legal costs, home loan interest (if not previously deducted)

Capital gains: check expense eligibility : Eligible Capital Gains Expenses (In a Nutshell)

Expense Category	Allowed
Brokerage/Commission	✔️
Structural Renovation (e.g., rebuilding)	✔️
Painting (if part of renovation)	✔️*
Routine repairs and maintenance	✘
Property tax / society charges	✘
Tenant eviction compensation	✘
Legal & paperwork charges (at sale)	✔️
Home loan interest (if not claimed as deduction)	✔️**
Mortgage repayment	✘

* Only permitted if part of a larger renovation project
** Allowed only if not previously claimed as a deduction under Section 24(b)

What About Furniture: Furniture for personal use is a “personal effect” Not considered a capital asset; Hence, no capital gains tax applies on sale of such items & Maintain original invoices as proof of ownership

Property gains tax: benefit or burden

Situation : Mr. A sold property purchased before July 23, 2024

• Property Sale Price: INR 2.05 crore
• Indexed Cost (with indexation): INR 2.33 crore → Loss of INR 28 lakh
• Non-Indexed Cost (actual cost): INR 1.8 crore → Gain of INR 25 lakh
• Tax Options for LTCG (before July 23, 2024) : 20% with Indexation & Results in loss, hence no LTCG tax.
• 12.5% without Indexation : Gain: INR 25 lakh → Tax = INR 3.1 lakh

Salaried Income Impact

• Salary: INR 30 lakh  Less: Standard Deduction INR 75,000 → INR 29.25 lakh and Income Tax on salary: INR 5.67 lakh, Surcharge @10%: INR 56,750, 4% Cess: INR 24,970, Total Tax Payable: INR 6.49 lakh

The Technical Glitch (Error in Tax Utility)

• Even if taxpayer chooses 20% with indexation (and shows loss),
  → the system still includes the non-indexed gain (INR 25 lakh) in gross income to check surcharge applicability.
• This incorrectly increases gross income > INR 50 lakh, triggering 10% surcharge, even though actual taxable income is lower.

Surcharge Applicability as per New Tax Regime

Gross Income Slab	Surcharge Rate
INR 50 lakh to INR 1 crore	10%
INR 1 crore to INR 2 crore	15%
Above INR 2 crore	25%

Capped at 15% for income from dividends, listed equity gains, real estate gains, FPI income, and AOPs.

Important for NRIs: NRIs are not eligible for indexation benefit on sale of property after July 23, 2024 & This makes their LTCG tax exposure significantly higher.

This issue arises from a software mismatch, not a legal amendment. Ideally, surcharge should apply on taxable gains, not notional or non-indexed ones. Supreme Court has flagged this earlier, but a fix is yet to be implemented.

Capital Gains on Sale of Ancestral Jewellery

1. Taxability : Jewellery, whether self-acquired or inherited, is a capital asset under section 2(14) of the Income-tax Act. Sale of inherited jewellery by a legal heir attracts Capital Gains Tax. Since it is inherited, the gain is always treated as Long-Term Capital Gain (LTCG) [section 49 read with section 2(42A)].

2. Cost of Acquisition : The cost is taken as the cost to the previous owner (ancestor). and Indexation benefit is available from the year the ancestor first acquired the jewellery.

3. Clarification on “500 grams exemption” : The CBDT circular (1994) provides a relaxation during income-tax search/seizure operations — officers shall not seize up to:

   • 500 grams per married lady,

   • 250 grams per unmarried lady,

   • 100 grams per male.

   • This is only for seizure relief and does not provide any exemption from capital gains tax.

4. Exemptions Available :  Section 54F: Invest net consideration in a residential house property (subject to  conditions). & Section 54EC: Invest capital gains in specified bonds (NHAI/REC, etc.) within 6 months (max ₹50 lakhs). capital gains apply on sale of ancestral jewellery. No blanket exemption of 500 grams exists for taxation purposes.Full value of consideration minus indexed cost of acquisition = taxable LTCG.