Term Of The Day: Capital Gains

Capital gains is the difference between the selling price of an asset and the price at which it was purchased. Assets may include stocks, bonds or real estate.

PropTiger Explains Capital Gains

Capital gains are realized when real estate assets like a home, a ranch or a farm is sold at a higher price than the price at which it was purchased. In India, while selling real estate assets, capital gains are called short term when the asset is held for three years or less. Capital gains are called long term when the asset is held for more than three years. But, if the value of a capital asset appreciates, the gains will not be taxed if the owner holds the asset, without selling it.

When you sell your home, short-term capital gains are taxed according to the income tax slab under which you fall. Long-term capital tax gains are taxed at 20%, with a cess of 3% and surcharge. Long-term capital gains tax are also indexed for Inflation. Long-term capital gains are usually taxed at a lower rate to encourage greater investment and entrepreneurship. In this aspect, the tax treatment of capital gains in India is different from that of countries like the United States. In the US, when you pay capital gains tax, you pay taxes not just on the real gains in purchasing power, but also on the gain that should ideally be attributed to inflation.

In India, capital gains taxation is one of the primary reasons why the price of homes are understated in official papers. Economists tend to agree that even if the government abolishes stamp duty and other taxes, sellers would still nudge home buyers to understate the value of the property to evade capital gains tax. There are many ways to claim tax exemptions on capital gains tax, like investing the gains in another home a year prior to, or two years after the sale, or by constructing a home within three years after the sale. Another way is to invest in capital gains bonds of the National Highway Authority of India (NHAI) or the Rural Electrification Corporation.

Economists consider capital gains tax pernicious because it discourages capital formation, which leads to greater investment in machinery and capital assets, thereby raising productivity and wages. There is a general agreement that capital gains taxation lowers tax revenues by lowering productivity and wages.

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