When you file the income tax returns (ITR) for the assessment period (AY) 2018-19, the deadline for filing is July 31st. Don’t just glance at the Form 16 you receive from your employer, regardless of whether you’re a salaried person. Make sure you report any gains and losses you have made through the sale of shares or redemption of the mutual funds (MF) units, or selling property or jewelry.
Whatever the amount that is gained or lost, one is required to disclose capital gains and losses when filing the ITR. This article will help you determine capital gains from various assets and how to report them when filing an ITR.
Calculating capital gains
The gains or profits that result from the transfer of capital assets like gold, property, bonds, shares, and shares are classified as capital gains, and are taxed under the income heading “capital gains”. The gains come in two kinds: long-term and short-term, based on the duration of their holding. Capital gains can be calculated by subtracting the cost of purchasing an asset and subtracting its sales value. The rules vary for various assets.
Real estate: Gains derived by the transfer of immovable property (land property, home apartments, house) between two and three years from the date of purchase are referred to as short-term capital gains (STCG). After 2 years, they are capital gains that are long-term (LTCG). It is estimated that the LTCG tax rate of 20% plus indexation, whereas STCG is taxed at a slab rate.
To calculate LTCG to calculate LTCG, first determine the cost of acquisition, indexed by multiplying the cost of acquisition by the notified cost inflation index (CII) for the year of sale and dividing this by the CII of the year of purchase,” said Sandeep Sehgal, director-tax and regulatory at Ashok Maheshwary & Associates LLP, which is a chartered accounting firm. If the asset was acquired before 2001, then you have to calculate an estimate of the fair market value (FMV) at 1 April 2001, and then determine the cost of acquisition indexed. If, for instance, the property was purchased in 1995, it is necessary to determine the property’s FMV as of April 1, 2001, and then calculate the cost of the acquisition. Find out more information on how to determine FMV and the indexed cost of acquisition by clicking here.
The rules differ for property that is gifted or inherited. In this case, we are referring to there is a “cost of acquisition incurred by the previous owner and his or her period of holding is considered to compute gains,” Sehgal said. Sehgal.
The cost of any expense that is incurred during the asset’s acquisition or transfer could be incorporated into the cost of the acquisition. Examples include the stamp duty or registration fees, brokerage fees, and legal costs.
You can, however, get around having to pay LTCG tax on property transfers or minimize the tax implications to a certain extent by investing the capital gains in an investment property, such as a residential one or infrastructure bonds, within a time frame.
Mutual funds and shares. Gains from transfers of equity-oriented shares and mutual funds within one year of purchase are deemed STCG. Once they have been accumulated for a period of time, it is considered LTCG. In the current year of 2018-19, STCG tax on these assets is 15 percent. While LTCG of equity assets is tax-free.
From the next AY, i.e., the years 2019-20, LTCG is taxed. Due to the Finance Act, 2018 withdrew the exemption was withdrawn in 10(38). 10(38). A new section, 112 A, was added with effect from the 1st of April, 2018. “It provides that LTCG from equity exceeding Rs 1 lakh per year shall be taxable at the rate of 10% (plus applicable surcharge and cess) without any indexation benefit,” stated Taranpreet Singh, partner, TASS Advisors, a chartered accounting firm. Also, there is a grandfathering provision.
In the event of a small-term capital loss (STCL), it is possible to set off against another STCG. It is also possible to carry forward to future financial years for offset. Long-term capital losses (LTCL) are not permitted to be offset as well as carried forward.
The expenses incurred when trading the sale of shares, or units in equity mutual funds, could be deducted when calculating capital gains.
For debt-oriented funds, the time period of holding and tax implications differ. Profits earned from selling units of debt-oriented funds within the first 36 months of holding are regarded as STCG and are taxed at the slab rate. “Sale of fund units that are oriented towards debt can trigger tax on LTCG when the period of holding is longer than 36 months. Tax rate is 20 percent (plus the applicable surcharge and cess) and includes indexation benefits,” Singh said. Singh.
Gold and bonds: “Jewellery or bullion are chargeable to capital gains tax, irrespective of the method of acquisition–self-purchased, gifted or inherited,” said Sehgal. If sold prior to three years after the purchase date, gains are deemed STCG or LTCG. STCG generated by the sale of gold is taxed at a slab rate; in addition to LTCG is taxed at 20%, with indexation.
There are various rules applicable to bonds based on the issuer as well as other characteristics. For example, corporate bonds that are listed are deemed short-term when they are you sell them before one year after the day of acquisition. STCG can be taxed at a slab rate. If the bonds are sold in the following year and the proceeds are deemed an LTCG tax and are assessed at an amount of 10 percent, without indexation. In addition, certain Tax-free bonds (listed or not listed) are protected under section 10(15) in the Income Tax Act and are exempt from tax.
Disclosure of gains in ITR
Once you’ve determined the amount of capital gains or losses and what they are, you must record the information on the ITR form. Various ITR forms are based on the nature and amount of income. “Individuals with income from salary and capital gains are required to fill ITR-2,” Singh said. Singh.
In the AY 2018-19, you must include the information and breakdown of all incomes in your tax return, which includes capital gains. “The conditions for capital gains on ITR-2 are complex and rely on the kind of asset sold and the time period for holding, depending on whether it’s a capital asset for long-term use as well as a capital asset for short periods of time. In general, the information that must be provided includes when the asset was sold, the purchase price as well as the sales consideration, the kind of asset, transfer costs, and more. If the asset you are selling is secured, you have to provide additional details, such as whether STT has been paid or not. Also and whether it’s listed or not,” said Sehgal.
Additionally, the expenses incurred when calculating capital gains must be clearly stated. For example, “brokerage and other expenses in connection with transferring to compute the capital gain, also need to be mentioned,” Singh said. Singh.
Even if capital gains are tax-free, they must be declared on the tax return. There is a separate section within the ITR for mentioning the details of exempt income. “It is also recommended to report all forms of tax-exempt income, such as capital gains exempt from taxation. Exempt incomes must be reported in Schedule EI,” stated Sehgal.
Through the years, Tax authorities have grown cautious and are now able to track every transaction and compare it with returns submitted by the individual. Incorrectly reporting or not reporting income could be identified and be punished with a fine and penalty. If you’ve made transactions with capital assets or have other kinds of income, you aren’t sure the best way to report it, and you seek the assistance of qualified chartered accountants as well as tax return preparation experts to assist in filing your ITR.
