What are capital gains?

The difference between the selling price and the purchase price of an asset, can be termed as capital gains and can be of two types, namely, realised capital gains and unrealised capital gains

10% relief on price-stamp duty variance applies from 2002-03: Mumbai ITAT

The benefit of a higher tolerance band of 10% for the difference between the sale price of a flat and its stamp duty valuation, will apply retrospectively from the financial year 2002-03, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has ordered. The ITAT order comes as a relief for tax payers, who have in the past sold their properties below its stamp duty rate but were forced to pay capital gains tax based on the stamp duty valuation only. Due to a large number of such instances, especially in mega cities, several such cases are pending at various courts in India.

The case

Maria Fernandes Cheryl, a non-resident Indian, sold her flat for Rs 75 lakhs, even though the stamp duty value of the property was over Rs 79.91 lakhs. Her capital gains liability for this transaction was calculated based on the stamp duty valuation, i.e., Rs 7,991,500, keeping in view of the provisions of Section 50C of the Income Tax Act. After her appeals were rejected by various lower bodies, the matter eventually reached the Mumbai bench of the ITAT. In her appeal, Fernandes stated that the difference between the sale consideration and the stamp duty value was only 6.55% and thus, the applicability of Section 50C was unjustified.

Passing its verdict on the matter, the ITAT Mumbai bench ruled that since the difference between the consideration value and the stamp duty value of the property was less than 10%, Section 50C will have no applicability.

What is Section 50C of the I-T Act?

With an aim to control the use of unaccounted money in real estate, Section 50C was introduced in the Income Tax Act, 1961, by the Finance Act-2020 and applies on transactions of land and buildings. Taking effect from April 1, 2003, Section 50C provided that the stamp duty valuation of a sold property will be the basis of capital gains calculation under Section 48, if the ‘apparent sale consideration’ received by the seller is lower than the stamp duty valuation. The seller will, thus, have to pay a higher tax amount on the capital gains made on the transaction, after reducing the indexed cost of the property.

Indexation is the process of adjusting the purchase price of a property for inflation and allows the tax payer to factor in the impact of inflation on the historical cost of acquisition. This effectively lowers the amount of capital gains that would be taxed, if the historical cost would be the benchmark for computations.

See also: Indexation and how it affects long-term capital gains tax calculations 

Amendments in Section 50C

Due to the side-effects it had on genuine home buyers, Section 50C was amended by the Finance Act, 2018. The amendment meant that no adjustment for capital gains calculations would be made, in cases where the variation between the stamp duty value and the sale value was not more than 5%. This limit was further extended to 10% under the Finance Act, 2020.

In their plea to the ITAT, the IT Department stated that the amendments carried out by two Acts came into effect only prospectively and so the enhanced variation rate would apply from financial year 2018-19 in case of the Finance Act 2018 and from financial year 2020-21 in case of the Finance Act 2020. This meant, the extended limit was not applicable in the case of Fernandes, whose tax liability was calculated for the financial year 2010-11.

Rejecting the argument, the ITAT ruled that the provision under the Finance Act 2020, amending the variation rate to 10% was curative and must date back to the introduction of the section itself.

“What holds good in 2021, was also good in 2003. If variations up to 10% need to be tolerated and need not be probed further in 2021 under Section 50C, there were no good reasons to probe such variations in the earlier periods, as well,” the ITAT bench of vice-president Pramod Kumar and judicial member Saktijit Dey ruled.


Under the Indian income tax (IT) laws, sellers have to pay taxes on profits earned through the sale of assets, including stocks, bonds and properties. When the sale of such an asset results in gains, it is known as capital gains, in tax parlance. Capital gains is the difference between the selling and purchase price of an asset. Conversely, capital loss arises when you sell an asset at a price that is less than what you spent on purchasing it.

For better understanding, let us explain with an example. Suppose you buy a property for Rs 1 crore and sell it after a couple of years for Rs 2 crore. Through the process you have earned a profit of Rs 1 crore. This amount is the capital gains in the context of your property purchase. If the owner sells the same property for Rs 95 lakhs, he would suffer capital loss of Rs 5 lakhs.


What are capital assets?

Assets that qualify as capital assets under the Indian laws typically include land, house property, building, vehicles, patents, trademarks, leasehold rights, machinery, jewellery, bonds, debt-oriented mutual funds, etc.


Types of capital gains

Capitals gains are of two types:

Realised capital gains

When the owner of an asset sells the assets and generates a profit through this sale, the transaction amounts to realisation of capital gains. The above-mentioned example fits well in this category. The owner bought a property for Rs 1 crore and sold it for Rs 2 crores. Rs 1 crore is the property’s realised capital gains.

Unrealised capital gains

When an asset still held by the owner has the potential to generate gains through future sale, it is known as its unrealised capital gains. Suppose you bought a property for Rs 50 lakhs but the values in that area have since appreciated, say, because of the launch of a mega infrastructure project (housing projects along the Yamuna Expressway that will be in close proximity to the upcoming Jewar Airport, are a case in point here), you can expect to sell your property at a profit. If rates have doubled in the past year, you can expect the property to fetch at least Rs 1 crore. This way, Rs 50 lakhs would be its unrealised capital gains.


Tax on capital gains

Since the gain or profit is categorised as ‘income’ under the Indian IT laws, the person/s profiting from the sale have to pay tax on the profit amount in the year in which the transfer of the capital asset took place. Capital gains are also categorised into long-term and short-term, to fix the tax liability of tax payers.


What are capital gains?


Short-term capital gains

Transactions, where capital assets are sold within 36 months of their purchase, to generate a profit, are known as short-term capital gains. In the case of real estate, however, the government, from the financial year 2017-2018, has reduced the time limit to 24 months.

Note here that the reduced period is not applicable to movable property. This means that if you sell a house property within two years of its purchase, you will have to pay short-term capital gains on the profit thus earned.

See also: All about short-term capital gains

The holding period for some assets has been kept at 12 months or less, for them to be qualified as short-term capital assets. These include equity or preference shares in a listed company, listed securities, units of UTI, units of equity-oriented mutual funds and zero-coupon bonds.


Long-term capital gains

While an asset that is held for more than 36 months is a long-term capital asset, the time limit is two years in case of property, as mentioned earlier. A property sold for a profit, two years after its purchase, will, thus, attract long-term capital gains. Again, the reduced limit is not applicable on movable assets.


Points to remember

  • Capital gains tax is not applicable on inherited property, because such cases involve transfer of ownership of the property and not sale.
  • No capital gains tax is applicable on assets received as gifts through inheritance or through a Will.

See also: How to save tax on property sale?



What are the two types of capital gains?

The two types of capital gains are realised and unrealised capital gains.

What are unrealised capital gains?

Unrealised capital gains refers to the potential of an asset that is held by the owner, to generate profits through its sale in the future.

What is the tax rate on short-term capital gains?

Short-term capital gains are added to the income of the tax payer and taxed according to his/her tax slab.


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