Raj is an engineer from Bangalore, has sold his land in native place for Rs. 75 lacs and wondering what to do with that money. Assumes he owns all the money and there is no liability for him to pay the tax if he has any profit for that transaction. He is not aware of the hefty tax payment on the capital gains. Also he had no clue on how to calculate the tax for capital gains. It is worrisome if income tax authority caught him and put the penalty of non payment of tax. It is the same scenario with many of the working generation who had no experience or learning on the income tax issues.
Capital Gains is one of the tricky trap which would put you in trouble if you are not planning for the tax liability. If you have enough knowledge on the capital gains and tax exemption associated with it, you could avoid the 100% tax on your profit. This article explores the important aspects on the capital gains and various rules involved on taxing the capital gains. Since I have already published many articles on the capital gains, this piece would serve as the compilation of all the articles and add up the missing point on other articles. I would look forward to your thoughts and queries. Please post it in the comments section.
- What is capital gains account scheme?
- Should I pay taxes for capital gains?
- Capital Loss and Tax Calculation
What is Capital Gains?
Any profit from selling the capital assets considered as the capital gains. So it can be shares, units of UTI, debentures and land. Also the following materials considered as the capital assets:
- personal belongings
- agricultural land (subject to certain criteria)
- Special Bearer Bonds, 1991, Gold Deposit Bonds (1999 scheme), 6.5 per cent Gold Bonds, 7 per cent Gold Bonds, National Defence Gold Bonds issued by the Central Government and raw material held for the purpose of business is not termed as a capital asset.
- From the year 1973-74, jewellery is treated as a capital asset.
Different Types of Capital Gains
There is two types of capital gains.
- Short Term Capital Gains
- If you own the capital assets less than three years at the time of selling, then it is considered as the short term capital gains. In case of shares, mutual funds, equities, if you are selling with in one year after the purchase, it is considered as the short term capital gains.
- Long Term Capital Gains
- If you own the capital assets more than three years at the time of selling, then it is considered as the short term capital gains. In case of shares, mutual funds, equities, if you are selling after one year from the date of purchase, it is considered as the short term capital gains.
Capital Gains on Agricultural Land
When Agriculture Land is Capital Asset?
If the agricultural land is treated as the capital asset, then the sale of that land would fetch the capital gains. You must know the rules applied to find a land is whether it is capital asset or not.The following points are important to consider while deciding whether the agricultural land is coming under the capital assets:
- In any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year ; or
- In any area within such distance, not being more than eight kilometers, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanization of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette.
If the land is situated under municipality area where the population is above 10000 or the distance from the municiplaty to the specified land is less than 8 KM, then the land is not agricultural land.
Tax Exemption on Agriculture Land
If you have agriculture land and for the pat two year have been used for the farming activities, the sale of land will not attract the capital gains tax. The following are the list of rules when sale of agricultural land will not attract any capital gains tax.
- The land should have been used by the assessee or his parents with in two years immediately preceding the land sale or transfer date.
- The asses see should have been purchased the agricultural land with in two years immediately preceding the land sale or transfer date.
- The whole amount should have been used for purchasing the new agricultural land. Otherwise the difference amount will be charged for the capital gains tax.
- The new asset purchased should not sold with in three years of time.
- If the agricultural land should have been used for the agriculture purpose.
- Exemption is not available to a Hindu Undivided Famiy (HUF) or any other taxpayer.
Tax Exemptions on Capital Gains
In the above sections, we have learned about the capital gains and when you are liable to pay the capital gains. But, the good thing is that there is laws to help you get the complete tax exemption on your capital gains. Only thing is you should know the process of utilizing the capital gains amount.
To avoid paying the capital gains tax, you must buy a new property within two years or construct new house within three years. For example, if you are selling a capital asset on October 2010, there will be capital gains in the profit arise from the sale. To avoid that, you must buy another property before October 2012 or construct new house before October 2013. Here the problem is that, you must file the IT returns before July 31st of every year. In the above case, you have show the capital gains and pay the tax if you are not invested in buying a new house or constructed one.
Capital Gains Account Scheme
you must create a new Capital Gains Account Scheme in any of the nationalized bank and deposit the amount. This amount must be used for buying the house or constructions before the stipulated time given by the income tax act. If you are not doing so, the amount deposited in the account will be subject to the capital gains tax.
There is two types of accounts under this scheme. One is deposit account A, which is savings account. Second one is term deposit account B which is term deposit account.
- In the first option, the amount withdrawn should be utilized for the purpose within sixty days of the withdrawal. Any un-utilized amount should be redeposited in Deposit Account A. In case the amount deposited is not utilized wholly or partly for the purchase or construction of the new property within the period specified, then the un-utilized amount will be charged as income of the previous year in which the period of three years from the date of the transfer of the original property expires. Interest rates will be give at the savings bank interest rates.
- In the second option, it is similar to the term deposits. It comes with cumulative and non-cumulative. The interest rates would at par with the other fixed deposits offered by the bank.
- Important Points:
- The interest amount on this account is taxable.
- If you are selling the two different asset classes in different time, you need to open the two separate accounts.
- Using this deposit, you can not get any loans.
Are you facing the issues on managing the capital gains, if you need advice please post it in the comments section. This article talks more comprehensive details about the capital gains with various articles published in the site. If you are looking to learn more details on to the subject, please buy the book How to Save Tax on Capital Gains: AY 2013-14 which will be very useful for the beginner.