Taxes on Capital Gains and Agricultural Income
Capital Gains Tax
Capital gains refer to the profit earned from the sale of capital assets such as property, stocks, or bonds. The Income Tax Act, 1961, classifies capital gains into two categories: short-term capital gains (STCG) and long-term capital gains (LTCG).
Short-Term Capital Gains (STCG)
STCG is the profit earned from the sale of a capital asset held for a short period:
- Equity Shares and Mutual Funds: If held for less than 12 months, STCG is taxed at 15%.
- Other Assets: If held for less than 36 months, STCG is added to the individual's income and taxed as per the applicable income tax slab rates.
Long-Term Capital Gains (LTCG)
LTCG is the profit earned from the sale of a capital asset held for a longer period:
- Equity Shares and Mutual Funds: If held for more than 12 months, LTCG exceeding ₹1 lakh is taxed at 10% without the benefit of indexation.
- Other Assets: If held for more than 36 months, LTCG is taxed at 20% with the benefit of indexation.
Exemptions on Capital Gains
- Section 54: Exemption on LTCG from the sale of a residential property if the proceeds are reinvested in another residential property.
- Section 54EC: Exemption on LTCG from the sale of any asset if the proceeds are invested in specified bonds (NHAI or REC) within 6 months.
- Section 54F: Exemption on LTCG from the sale of any asset (other than a residential property) if the proceeds are reinvested in a residential property.
Agricultural Income
Agricultural income is exempt from tax under Section 10(1) of the Income Tax Act, 1961. However, it needs to be considered for rate purposes while computing the total income for individuals with both agricultural and non-agricultural income.
Definition of Agricultural Income
- Income from renting or leasing agricultural land.
- Income from agricultural operations such as the sale of crops.
- Income from a farmhouse used for agricultural purposes.
Partial Integration of Agricultural Income
If the individual's total income, excluding agricultural income, exceeds the basic exemption limit, agricultural income is added to the total income for rate purposes:
- Compute tax on the aggregate of agricultural income and non-agricultural income.
- Compute tax on the aggregate of basic exemption limit and agricultural income.
- The difference between the above two amounts is the tax payable on non-agricultural income.
Note: While agricultural income is exempt from tax, it is important to maintain proper records and documentation to substantiate the income as agricultural. Non-agricultural activities conducted on agricultural land may be subject to tax.