According to the Income Tax Act, 1961 for the hassle free and accurate computation of Income Tax, the Income Tax Department has classified the income earned by the people under certain categories of Income Heads.

There are five such categories of Income Head under which the income earned by the people of India are classified.

• Income from Salary
  Income from salary includes the income earned from pension, gratuity, commission, profits, contribution made towards Employee Provident Fund, Annual bonus, etc. There are some allowances which can be grouped under the category of salary and are taxable apart from some exceptions like HRA, LTA, and Medical Allowances which qualify for tax deductions.

• Income from House property
  This category consists of rental income obtained from the properties owned by a person. The exceptions under this category are those properties which are occupied by the owner himself and will not be considered as income from house property. If the property is vacant then a notional income can be included under this Income Head.

• Income from Capital Gains
  Income under Capital Gains consists of those profits or gains that have been earned by an assessee by the sale or transfer of capital assets such as mutual funds, shares, etc.

• Income from Business and other profession
  Income from business and other profession usually includes the profits earned from business entity, any interest; income earned when the individual is self- employed or work as a freelancer. Income earned by professionals like Chartered Accountants, LIC agents, tuition teachers, etc. can be considered under this income head.

• Income from other sources
  This category includes income earned from fixed deposit interest, savings bank account interest, prize money, lottery awards, card games, etc.
  
  Based on these Income Heads and the Income Tax slabs, the Income tax rates are determined and taxes are computed accordingly.

Now, let us know about Capital Gain and Capital Assets in details.

What are Capital Gains and its types?
Capital gain can be defined as any profit or gain which is obtained due to the sale or transfer of a capital asset. This profit which is earned is classified under category ‘Income from Capital Gains’ and hence is taxable. Moreover, Capital Gain is the underlying difference between the sale consideration and the cost of acquisition of an asset.

Capital Gains are of two types i.e. Short Term Capital Gains and Long Term Capital Gains.

Short Term Capital Gains is defined as the gain obtained in the sale of an asset before the expiry of a defined time period is known as Short term Capital gain.

A capital gain is said to be long term capital gain if the asset is held for a time period greater than the specified time period. This time period is different for different assets like it is 3 years in case of debt funds or other assets, 2 years for real estate and 1 year in case of stocks, mutual funds or units of UTI, etc. 

What are Capital Assets and its types?
Capital Assets are land, building, patents, trademark, house property, machinery, leasehold rights, etc. Also, capital assets can include rights in relation to a company or the rights of management or control or any other legal right.

Some exceptions in Capital Assets are agricultural land in rural India, personal goods such as clothes and furniture, Special bearer bonds, any stock or raw materials for business, etc.

Capital Assets are classified into two broad categories.

• Short term capital assets or the shares and securities
• Capital assets other than securities also known as Long Term capital assets

Moreover, those assets which are held for a time period of fewer than 36 months can be said to be as short term capital assets and now this time period of 36 months has changed to 24 months for immovable properties. On the contrary, if an asset is held for more than 36 months it is known as Long term capital assets.

Capital Gains Tax
The taxes that are related to Capital Gains or the taxes which are levied on the profit earned by the sale of capital assets are known as the Capital Gains Taxes.

On the basis of the holding period of capital assets, capital gain taxes have been classified into two categories mentioned below.

• Short Term Capital Gain taxes (STCG)
•  Long Term Capital Gain taxes(LTCG) 

Now, let us have a detailed study on how to calculate LTCG. 

The Finance Act 2018 has made amendment in taxation of Long Term Capital Gains on shares and securities. 

Earlier, till Financial Year 2017-18 (Assessment Year 2018-19), capital gains on sale of shares and securities which were held for more than 12 months and Securities Transaction Tax (STT) was paid were exempt under section 10(38) of Income Tax Act, 1961. From Financial Year 2018-19 (Assessment Year 2019-20), such long term capital gain exceeding Rs. 1 lakhs will be taxed at the rate of 10% (without indexation).

• How will cost of acquisition for assets acquired on or before 31/03/2018 be determined?

The assets purchased up to 31/01/2018 will be grandfathered. In other words, the cost of acquisition of such assets will be determined as under:

The Cost of Acquisition will be higher of:

1. Actual Cost of Acquisition AND
2. Lower of:

• Fair Market Value (FMV)* of such asset as on 31/01/2018 OR
• Sale value of such asset

Fair Market Value of an asset is the price at which an asset would sell in the current market. Fair Market Value of an asset can be lower, higher or equivalent to the price at which you had bought the asset.

The Finance Act 2018 has made amendment in taxation of long Term Capital Gains on shares and securities.

Earlier, till Financial Year 2017-18 (Assessment Year 2018-19), capital gains on sale of shares and securities which were held for more than 12 months and Securities Transaction Tax (STT) was paid were exempt under section 10(38) of Income Tax Act, 1961. From Financial Year 2018-19 (Assessment Year 2019-20), such long term capital gain exceeding Rs. 1 lakh will be taxed at the rate of 10% (without indexation).

• How will cost of acquisition for assets acquired on or before 31/03/2018 be determined?

The assets purchased upto 31/01/2018 will be grandfathered. In other words, the cost of acquisition of such assets will be determined as under:

The Cost of Acquisition will be higher of:

1. Actual Cost of Acquisition AND
2. Lower of:

• Fair Market Value (FMV)* of such asset as on 31/01/2018 OR
• Sale value of such asset

*FMV, in case of listed shares or units will be the highest value on recognised stock exchange of such share or unit on 31/03/2018. If there is no trading on 31/01/2018, then FMV will be the highest value on recognised stock exchange on day immediately preceding 31/01/2018 on which it has been traded. FMV in case of unlisted unit will be the net asset value of such unit on 31/01/2018.

Let us understand the above with examples:

• What will be the taxability on Long Term Capital Gains on sale of equity shares and unit?
  The tabular representation mentioned below gives necessary details on taxability on long term capital gains i.e. taxability on LTCG on equity shares sale.

• When will tax be charged on such Long term Capital Gains?

 Tax will be charged only on transfer of such equity share or unit on or after 01/04/2018.

• Will the benefit of indexation be available?

 The benefit of indexation will not be available in computing such Long Term Capital Gains.

• What is the date from which the holding period will be counted?

 The holding period will be counted from the date of acquisition.

• Whether TDS is to be deducted in case of gains earned by resident taxpayer?

TDS is not required to be deducted from the payment of Long Term Capital Gains to a resident taxpayer. 

• What will be the cost of acquisition in the case of bonus shares and right shares acquired before 1st February 2018?

The FMV of the bonus shares and right shares as on 31/01/2018 will be taken as cost of acquisition and hence, the gains accrued upto 31/01/2018 will continue to be exempt.

• What will be the treatment of long-term capital loss arising from sale done between 1/02/2018 and 31/03/2018?

Since the exemption under section 10(38) will be available for sale done between 1/02/2018 and 31/03/2018, loss arising during this period will not be allowed to be set off or carried forward.

• What will be the treatment of long-term capital loss arising from transfer made on or after 1st April, 2018?

Loss arising from sale done on or after 1/04/2018 can be set-off against any other long term capital gains and balance loss can be carried forward to subsequent eight years for set-off against long term capital gains. 

According to the tax laws of India, it is important to pay Income tax on time and also file for Income Tax Returns on time. Now, with reference to LTCG, it is a common query amongst taxpayers i.e. is it mandatory to enter LTCG in ITR?

Yes, it is  necessary to disclose your income from Capital Gains while filing for ITR.

Then, how to include details of LTCG in ITR? 

This can be done by filing for your Income Tax Returns using ITR-2. As said earlier, the Income Tax computations are done on the basis of Income heads and Tax slabs. So, ITR-2 can be filled by all those taxpayers who come under the Income Heads like

• Income from house property,
•  Income from Capital Gains/Capital Losses i.e. both Long Term and Short Term
•  Income from Salary/Pension,
•  Income from other sources

For filling about LTCG, taxpayers need to select ‘Schedule CG’ and file their Income Tax Returns.  

Conclusion

Hence, the profit or gains obtained under Capital gains i.e. Short term capital gains or Long term capital gains are taxable according to the Income Tax slabs and should also be disclosed while filing for Income Tax Returns.

FAQs

1. Is it required for an NRI to pay taxes on gains made by selling land in India?
   Any property which is sold in India is subject to deductions of tax. If the property which is being sold is a short term asset then the buyer should deduct taxes at a rate which is applicable to the income slab of the NRI. Suppose, the property is a long term asset then an LTCG tax of 20% is applicable. Moreover, it is also necessary for the NRI to make sure that taxes are deducted on the capital gains that are made and not on the sale proceeds.
   
   
2. Is it feasible to set off capital losses against any other Income Head?
   It is a known fact that capital losses can be set off against capital gains. It is feasible to set off short term capital losses against short term capital gains and long term capital gains as well. But in case of long term capital losses, you can only set them off against long term capital gains.