Important Keyword: Capital Gains, Section 112, Tax on Gold, Tax on Motor Vehicle.

Capital Gain Tax on Movable Property, Jewlery, Car

Investing in assets like gold, high-quality cars, and art is a popular practice in India, offering individuals opportunities to diversify their savings beyond traditional avenues. However, it’s essential to understand that these assets are considered capital assets under the purview of the Income Tax Act. Consequently, individuals must be mindful of the tax implications when selling these assets, as they may incur capital gains taxes.

For instance, when selling gold jewelry, luxury cars, or art collections, individuals may trigger capital gains tax liabilities based on the profits earned from the sale. The capital gains tax is calculated by determining the difference between the selling price and the cost of acquisition or improvement of the asset. This taxable gain is then subject to applicable tax rates as per the Income Tax Act.

Therefore, individuals who plan to sell such assets should carefully assess their tax obligations to ensure compliance with the law. Seeking professional advice or consulting tax experts can help individuals navigate the complexities of capital gains taxation and optimize their tax liabilities while divesting from these non-traditional investments. By staying informed and proactive, individuals can effectively manage their tax liabilities and make informed decisions regarding their investment portfolio.

Capital Gain on Sale of Jewlery, Car, Painting, etc.

For capital assets like jewelry, artwork, motor vehicles, and other properties, the Income Tax Act outlines specific provisions for the taxation of capital gain. These assets fall under the category of “other capital assets,” and their sale results in capital gains or losses, subject to taxation rules.

Here’s an overview of how capital gains on these assets are treated:

1. Short Term Capital Gain (STCG) and Long-Term Capital Gains (LTCG):
   • Section 2(42A) of the Income Tax Act defines a Short Term Capital Asset, and Section 2(29A) defines a Long Term Capital Asset.
   • For other capital assets like jewellery, artwork, motor vehicles, etc., the period of holding to determine the nature of capital gains is 36 months.
   • If the asset is sold within 36 months of purchase, any profit or loss incurred is classified as Short Term Capital Gain (STCG).
   • If the asset is sold after 36 months of purchase, any profit or loss incurred is classified as Long Term Capital Gain (LTCG).
2. Taxation of Capital Gain:
   • Capital gain from the sale of other capital assets are taxed based on whether they are short term or long term.
   • Short Term Capital Gain (STCG) are taxed at the applicable income tax slab rates of the taxpayer.
   • Long Term Capital Gain (LTCG) are taxed at special rates as per Section 112 of the Income Tax Act.

It’s important for taxpayers to be aware of these provisions when selling assets like jewellery, artwork, motor vehicles, or other properties. Understanding the distinction between short term and long term capital gains and their respective tax implications can help individuals plan their asset sales strategically and manage their tax liabilities effectively.

Here’s the tax liability calculation for the sale of jewellery by Mrs. X:

For Short-Term Capital Gain:

• Sales Consideration: INR 25,00,000
• Cost of Acquisition: INR 15,00,000
• Short-Term Capital Gain: INR 10,00,000
• Tax liability at slab rates: INR 1,12,500
• Health and Education cess: INR 4,500
• Net Tax Liability: INR 1,17,000

For Long-Term Capital Gain:

• Sales consideration: INR 25,00,000
• Indexed Cost of Acquisition: INR 16,98,214
• Long-Term Capital Gain: INR 8,01,786
• Tax liability at 20% u/s 112: INR 1,60,357
• Health and Education cess: INR 6,414
• Net Tax Liability: INR 1,66,771

In the case of short-term capital gains, where Mrs. X sold the jewellery within 36 months of purchase, her net tax liability is INR 1,17,000.

In the case of long-term capital gains, where Mrs. X sold the jewelry after 36 months of purchase, her net tax liability is INR 1,66,771.

Adjustment of LTCG from movable property against Basic Exemption Limit

Adjusting special rate income against the basic exemption limit can be a smart tax-saving strategy for resident taxpayers like Mrs. X. Let’s explore how this works with an example:

Imagine Mrs. X, a resident of India, sold some jewellery and made a long-term capital gain (LTCG) of INR 8,01,786. Now, let’s say she doesn’t have any other taxable income.

In this scenario, Mrs. X can utilize the basic exemption limit, which is the threshold below which no tax is applicable. As of now, the basic exemption limit is INR 2,50,000 for individuals below 60 years of age.

Since Mrs. X’s total taxable income is less than the basic exemption limit, she can adjust her LTCG against this shortfall. Here’s how it works:

Taxable LTCG = LTCG – Basic Exemption Limit = INR 8,01,786 – INR 2,50,000 = INR 5,51,786

Now, Mrs. X needs to pay tax on this taxable LTCG. The tax rate for LTCG is 20%. So, her tax liability would be:

Tax Liability = Taxable LTCG * Tax Rate = INR 5,51,786 * 20% = INR 1,10,357

By adjusting her LTCG against the basic exemption limit, Mrs. X can significantly reduce her tax liability, saving herself some hard-earned money in the process. It’s a simple yet effective way to optimize tax payments and ensure that she keeps more of her investment gains.

Reporting in ITR

To report capital gains from the sale of movable property such as jewelry, cars, art collections, etc., taxpayers can follow these steps:

Choose the appropriate Income Tax Return (ITR) form, which typically includes ITR-2 or ITR-3, depending on the taxpayer’s specific circumstances and income sources.

Access the Schedule Capital Gain section within the selected ITR form.

Look for the relevant fields where you can input the necessary details regarding the sale of movable property:

a. Enter the full value of consideration, which refers to the sales value or the amount received from the sale of the asset.

b. Deduct any allowable expenses under Section 48 of the Income Tax Act. These deductions may include brokerage fees, legal expenses, or other costs directly related to the sale.

c. Provide the cost of acquisition, which represents the purchase value of the movable property. For long-term capital gain (LTCG), this value may need to be adjusted using the indexed cost of acquisition.

d. If any improvements were made to the property, enter the cost of improvement. Similarly, for LTCG, this value should be adjusted using the indexed cost of improvement.

e. Report any expenditure incurred wholly and exclusively in connection with the transfer of the property. This may include expenses related to advertising, transportation, or documentation associated with the sale.

Navigate to the Schedule Capital Gain

Under Schedule Capital Gain, click on the checkbox for the sale of assets other than all the above-listed items.

Select appropriate option i.e. long term or short term.

Click on continue and on the next page select the option of Short-Term Capital Gain or Long-Term Capital Gain whichever applies to the taxpayer.

Add details

Once the capital gain type is selected, enter the details such as sales value, purchase value, market value, etc.

For example, here Mrs. X has incurred short-term capital gain, so she needs to mention the details asked in ITR utility.

Taxpayers with long-term capital gains from the sale of movable property have options for exemptions:

1. Section 54EE: This provision grants an exemption on the sale of any long-term capital asset by investing the proceeds in units of a specified fund.
2. Section 54F: Another exemption opportunity arises when selling a long-term capital asset (excluding a house) by reinvesting in residential house property.

To avail of these exemptions, taxpayers must reinvest the sale proceeds into the specified capital asset and adhere to the prescribed holding period. Selling the new asset before the specified duration requires reporting the income in the relevant financial year and paying tax at the applicable rate.

Additionally, taxpayers can utilize the Capital Gain Account Scheme, allowing them to park the sale proceeds until they invest in the specified asset to claim the exemption. This option provides flexibility and facilitates tax planning for managing capital gain effectively.

Read More: Section 112: Tax on (LTCG) Long Term Capital Gain

Web Stories: Section 112: Tax on (LTCG) Long Term Capital Gain

Official Income Tax Return filing website: https://incometaxindia.gov.in/