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5 Most Important Things You Should Know about Capital Gains Tax 

1-What is a Capital Asset?

Here are some examples of capital assets: land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewelry.
This includes having rights in or in relation to an Indian company. It also includes rights of management or control or any other legal right.
The following are not considered capital assets:
Personal goods such as clothes and furniture held for personal use.
Agricultural land in rural India.
Any stock, consumables or raw material held for the purpose of business or profession.
Gold deposit bond issued under the gold deposit scheme (1999).
6½% gold bonds (1977) or 7% gold bonds (1980) or national defense gold bonds (1980) issued by the central government.
Special bearer bonds (1991).

2- Saving tax on long-term capital gain

The Income Tax Act has laid out exemptions under Section 54 and Section 54F to help taxpayers save tax on capital gains.
(1)An exemption under Section 54 is available on long-term Capital Gain on sale of a House Property.
(2)An exemption under Section 54F is available on long-term Capital Gain on sale of any asset other than a House Property.
To reiterate, both the exemptions are available only on long-term capital gains.
Common requirements between the two Sections:
A new residential house property must be purchased or constructed to claim the exemption
The new residential property must be purchased either 1 year before the sale or 2 years after the sale of the property/asset.
Or the new residential house property must be constructed within 3 years of the sale of the property/asset
If you are not able to invest the specified amount in the manner stated above before the date of tax filing or 1 year from the date of sale, whichever is earlier, deposit the specified amount in a public sector bank (or other banks as per the Capital Gains Account Scheme, 1988).
Only ONE house property can be purchased or constructed.
Starting FY 2014-15 it is mandatory that this new residential property must be situated in India. The exemption shall not be available for properties bought or constructed outside India to claim this exemption.

3- Business income is not a capital gain.

If you operate a business that buys and sells items, your gains from such sales will be considered business income and taxed as business income rather than capital gains.
For example, many people buy items at any stores and garage sales and then resell them in online auctions. Do this in a businesslike manner and with the intention of making a profit, and the IRS will view it as a business.

The money you pay out for items purchase is a business expense, the money you receive is business revenue and the difference between them is treated as income, subject to the same taxes as income from Business.

4- Capital losses can offset only from capital gains.

As anyone with much investment experience can tell you, things don’t always go up in value. They go down, too. If you sell something for less than its value, you have a capital loss. Capital losses from investments but not from the sale of personal property can be used to offset capital gains. So if you have Rs. 5,00,000 in long-term gains from the sale of one stock, for example, but Rs. 2,00,000 in long-term losses from the sale of another, then you may only be taxed on Rs. 3,00,000 worth of long-term capital gains.
If capital losses exceed capital gains, you may be able to use the loss to offset of other income. If you have more amount of capital losses, the excess can be carried forward to future years to offset income in those years.

5- Your residential house is exempt, Many Time

Section 54 of the Income Tax Act gives relief to a taxpayer who sells his/her residential house and from the sale, proceeds acquire another residential house with the intention of shifting residence. In such a case, the person wanted to enter into a property sale transaction not for earning income by sale of the old house but to acquire another suitable house. Hence, in such cases, the seller is not liable to pay income-tax on capital gains arising on sale of an old house.

Eligibility Criteria

To be eligible for the capital gains exemption, the income tax assessee must be an individual or HUF (not a company or LLP or partnership firm or other types of legal entities). Further, the asset transferred should be a long-term capital asset – a residential house property.

Within a period of one year before or two years after the date of transfer of old house, the taxpayer should acquire another residential house or should construct a residential house within a period of three years from the date of transfer of the old house. Finally, the taxpayer can claim capital gains exemption for only one residential house property purchased/constructed in India. If more than one house is purchased or constructed, then exemption will be provided for one house only.

Prohibition on Sale

If a person has claimed benefits under Section 54 during the sale and purchase of new residential property, then he/she has certain restrictions on the sale of the new house. If a taxpayer transfers the new house within a period of 3 years from the date of its acquisition/completion of construction, then the benefit granted under section 54 will be withdrawn.

Jitendra Kumar Sharma
(Commerce GuruG)