The capital gains tax is one that few people are aware of. Capital gains tax is not paid in India if a person inherits a property and no sale occurred, as per Income Tax Act. If the person who has inherited the property decides to sell it, however, tax will have to be paid on the profit. Some of the examples of capital assets are machinery, Jewellery, leasehold rights, trademarks, vehicles, house property, building, and land.

Simply explained, a capital gain is any profit or gain derived from the sale of a “capital asset.” Because this gain or profit falls under the category of ‘income,’ and hence you will have to pay tax on it in the year in which the capital asset is transferred. This is called capital gains tax, and it can be either short- or long-term. Capital gains are not applicable to an inherited property as there is no sale, only a transfer of ownership. The Income Tax Act has specifically exempted assets received as gifts by way of an inheritance or will. However, capital gains tax will apply if the asset is sold by the person who inherited it.

Land is a Capital Asset, and because it is an appreciated asset, a landowner can make huge capital gains on its sale. However, Agricultural land in a rural part of India, on the other hand, is not considered a Capital Asset. So, no capital gains are applicable on its sale. Before we look into how your capital gains will be taxed, check sure your asset is categorized as a capital asset by Income Tax.

Individuals and Hindu Undivided Families are excluded from long-term capital gains tax (under Section 54 of the Income Tax Act, 1961) on the sale of a residential property if:

• The capital gains are put towards buying or constructing a new home.
• The new house is purchased 1 year before or 2 years after the sale of the old house.
• The new house is built, within three years of the sale of the old house.
• Only one extra house property is bought and built.
• The property being purchased / developed is located within India’s borders.
• You don’t sell your new home for three years after you have it.
• If the new property’s cost is less than the sale price, the exemption only applies proportionally. In less than 6 months, the remaining funds can be re-invested under Section 54EC.

Profits earned from the sale of capital assets are known as capital gains, The two forms of capital gains tax one is long-term and second is short-term.  Short-term capital assets are those held for less than 36 months, whereas long-term capital assets are those retained for more than 36 months.

When you sell a capital asset for a higher price than you bought for it, you earn capital gains. Any investment product, such as mutual funds or stocks, or any real estate product, such as land, houses, and so on, are considered capital assets. A capital gain is an increase in the value of any of these when you sell them. In the same way, a capital loss occurs when the value of an asset falls below its purchase price.

Only when you sell an asset for more than its original purchase price do you have a realised capital gain. a property that has been inherited is not eligible for capital gains. because an inherited property is only a transfer of ownership rather than a sale,  If you sell your inherited property, however, you will be subject to capital gains tax.

• Calculate your basis. This is generally the purchase price plus any commissions or fees paid.
• Calculate your realized amount. This is the sale price less any commissions or fees that may have been paid.
• Subtract your basis (what you paid) from the realized amount (how much you sold it for) to Calculate the difference.
• If you sold your assets for more than you paid, you have a capital gain.
• If you sold your assets for less than you paid, you have a capital loss. Learn how capital losses can be used to offset capital gains.