Cost Inflation Index : CII Income Tax

Inflation results in rising in prices which reduces the purchasing power of money. It is important to calculate the rise in the cost of goods or services each year due to the effect of inflation. Thus, the taxpayer can take the benefit of indexation to compute the cost of acquisition to calculate Capital Gains Tax. The Indexed Cost is the cost after adding the effect of inflation of each financial year. Thus, Cost Inflation Index i.e. CII helps to estimate the increase in prices each year due to the effect of inflation. The Income Tax Department notifies CII for each financial year.

What is CII (Cost Inflation Index)? Who notifies CII?

Cost Inflation Index i.e. CII is the index used for calculating the cost of acquisition or improvement after applying the effect of inflation over the financial years.

CII = 75% of the average rise in Consumer Price Index (CPI) for the immediately preceding year

Consumer Price Index computes the rise in prices by comparing the current price of a basket of goods and services with the cost of such a basket in the previous year.

The Central Government publishes CII in the official gazette. The Cost Inflation Index for FY 2022-23 (AY 2023-24) is 331 as per the notification dated 14th June 2022 – CBDT Notification.

Cost Inflation Index Chart

Below is the list of CII i.e. Cost Inflation Index as notified by the Income Tax Department on its website.

Financial Year CII
2022-23 331
2021-22 317
2020-21 301
2019-20 289
2018-19 280
2017-18 272
2016-17 264
2015-16 254
2014-15 240
2013-14 220
2012-13 200
2011-12 184
2010-11 167
2009-10 148
2008-09 137
2007-08 129
2006-07 122
2005-06 117
2004-05 113
2003-04 109
2002-03 105
2001-02 100

Base Year in Cost Inflation Index

Base Year is the first year of the Cost Inflation Index with an index value of 100. The CII of all the other financial years is compared to the base year to calculate the increase in the percentage of inflation. If a taxpayer has purchased a capital asset before the base year, he/she can take the cost of acquisition as higher of the actual purchase price or FMV i.e. fair market value on the first day of the base year. The taxpayer can calculate the indexation on this cost of acquisition by using the CII of the base year. FMV is based on the valuation report of a registered valuer.

Change in Base Year of CII changed from 1981 to 2001

Prior to the Finance Act 2017, the base year was 1981-82 as per the Cost Inflation Index Chart for the purpose of calculating indexation. However, the taxpayers were facing issues to get the valuation of the property purchased before 1st April 1981. Further, the tax authorities were not easily relying on the valuation reports. As a result, under the Finance Act 2017, the government shifted the base year from 1981 to 2001 for an easier and more accurate valuation. The Income Tax Department introduced the new Cost Inflation Index Chart with a revision in CII for all financial years. The new base year was now 2001-02 applicable from FY 2017-18.

How to calculate Long Term Capital Gains with Indexation benefit?

Below is the calculation of Long Term Capital Gains with the benefit of indexation.

  Particulars
  Full Value of Consideration
Less Transfer Expenses
  Net Consideration
Less Indexed Cost of Acquisition
Less Indexed Cost of Improvement
  Long Term Capital Gains

How to calculate Indexed Cost of Acquisition and Indexed Cost of Improvement?

The Indexed Cost of Acquisition is the calculation of the cost of acquisition by applying the indexation benefit to compute Long Term Capital Gains.

Indexed Cost of Acquisition = Cost of Acquisition * (CII for year of sale / CII for year of purchase)

The Indexed Cost of Improvement is the calculation of the cost of improvement by applying the indexation benefit to compute Long Term Capital Gains.

Indexed Cost of Improvement = Cost of Improvement * (CII for year of sale / CII for year of improvement)

Note:

  • If the asset is purchased before the base year, take CII of base year i.e. 2001-02 to calculate Indexed Cost of Acquisition
  • If the taxpayer has received the property through a will, take CII for the year in which the property is received and not the actual purchase year
  • If the taxpayer incurs any cost of improvement before 1st April 2001, it should be ignored

Example to calculate Indexed Cost of Acquisition

Mr. A purchased a flat in FY 2018-19 for INR 50,00,000. He sells the flat in FY 2021-22 for INR 80,00,000. Calculate the Capital Gain.

Since the flat is sold after 24 months from purchase, it is a long term capital asset. Thus, the benefit of indexation is available for the calculation of Long Term Capital Gains as per Section 112 of Income Tax Act.

CII for 2018-19 = 280
CII for 2021-22 = 317

Indexed Cost of Acquisition = 50,00,000 * (317/280) = INR 56,60,714

LTCG = 80,00,000 – 56,60,714 = INR 23,39,286

Example to calculate Indexed Cost of Acquisition using Base Year

Mr. B purchased a property in FY 1994-95 for INR 30,00,000. He sells the same in FY 2014-15 for INR 1,30,00,000. The FMV of the property on 1st April 2001 was INR 50,00,000. Calculate the Capital Gain.

Since the immovable property is sold after 24 months from purchase, it is a long term capital asset. Thus, the benefit of indexation is available for the calculation of Long Term Capital Gains as per Section 112 of Income Tax Act.

CII for 2014-15 = 240
CII for 2001-02 = 100

Cost of Acquisition = higher of actual purchase value or FMV as on 1.4.2001 = INR 50,00,000
Indexed Cost of Acquisition = 50,00,000 * (240/100) = INR 1,20,00,000

LTCG = 1,30,00,000 – 1,20,00,000 = INR 10,00,000

FAQs

What is the CII i.e. Cost Inflation Index for FY 2022-23?

CII i.e. Cost Inflation Index is issued by the income tax department for each financial year. The CBDT notified Cost Inflation Index i.e. CII for FY 2022-23 as 331 via a notification dated 14th June 2022. Cost Inflation Index Chart for all financial years is available on the website of the income tax department. Taxpayer can use CII to compute indexed cost of acquisition and indexed cost of improvement for the calculation of LTCG.

What is the CII i.e. Cost Inflation Index for FY 2021-22?

CII i.e. Cost Inflation Index is issued by the income tax department for each financial year. The CBDT notified Cost Inflation Index i.e. CII for FY 2021-22 as 317 via a notification dated 15th June 2021. Cost Inflation Index Chart for all financial years is available on the website of the income tax department. Taxpayer can use CII to compute indexed cost of acquisition and indexed cost of improvement for the calculation of LTCG.

How to calculate the Indexed Cost of Acquisition using CII?

Indexed Cost of Acquisition = Cost of Acquisition * (CII of sale year / CII of purchase year). If the asset is purchased before base year, take CII of the base year i.e. 2001-02 to calculate the Indexed Cost of Acquisition.

How to calculate Indexed Cost of Acquisition if the asset was purchased before 1st April 2001 i.e. FY 2001-02?

If the taxpayer has purchased the capital asset before 1.4.2001, he/she must use the CII of the base year to compute the indexation. Further, the cost of acquisition would be higher of the actual purchase value and FMV of the capital asset as of 1st April 2001. FMV can be derived from the valuation report prepared by a registered valuer.

Section 112 of Income Tax Act : Capital Gain on Long Term Capital Assets

Any income or loss arising on the sale of a capital asset is a capital gain. Based on the nature of the capital asset and the nature of the capital gain, the income tax department has defined the provisions for capital gains tax. Capital Gain arising on the sale of a long term capital asset is a Long Term Capital Gain. As per the Income Tax Act, provisions for tax on Long Term Capital Gains are covered under Section 112 and Section 112A. Section 112 of Income Tax Act is the provision for taxation of capital gains on long term capital assets other than those covered under Section 112A of Income Tax Act.

What is Section 112 of Income Tax Act?

Section 112 is the income tax provision for tax on long term capital assets. It applies to all taxpayers such as individual, HUF, partnership firm, company, resident, non-resident, foreign company, etc. This section covers capital gains arising from the sale of all long-term capital assets. Long Term Capital Asset covers the following assets:

  • Securities (other than unit) listed on a recognised stock exchange in India
  • Unit of the unit trust of India
  • zero-coupon bond
  • Securities not listed on a recognised stock exchange in India
  • Immovable property being land or building or both
  • Any other capital asset

Section 112 does not apply to the capital gains on the sale of the following long-term capital assets to which Section 112A applies:

  • Listed equity shares where STT is paid on acquisition or transfer 
  • Units of equity-oriented mutual funds where STT is paid on transfer 
  • Units of business trust where STT is paid on transfer

Income Tax on LTCG under Section 112 of Income Tax Act

The income tax rate applicable to different capital assets is based on the nature of the asset and the period of holding. Below are the applicable tax rates for LTCG under Section 112.

Asset Type Period of Holding Tax Rate on LTCG
Listed Securities (other than unit) 12 months Lower of 10% without indexation or 20% with indexation
Zero-Coupon Bonds 12 months Lower of 10% without indexation or 20% with indexation
Unit of Unit Trust of India 12 months 20% with indexation
Unlisted Securities 24 months 20%
Immovable Property 24 months 20% with indexation
Any other asset 36 months 20%

Adjustment of LTCG u/s 112 against Basic Exemption Limit

Taxpayers holding the status of Resident as per the rules to determine the residential status can take benefit of adjusting the special rate income against the basic exemption limit to reduce taxes. Thus, if your total taxable income is less than the basic exemption limit, you can adjust your special rate income such as LTCG u/s 112, STCG u/s 111ALTCG u/s 112A, etc. against the shortfall in the basic exemption limit and pay tax on the remaining income only.

LTCG u/s 112 – Reporting in Schedule CG of ITR

The ITR Form under which the taxpayer needs to report income from capital gains includes ITR-2 and ITR-3. The taxpayer must report the following details for LTCG under Schedule CG of the ITR:

  • Full value of consideration i.e. sales value
  • Deductions under Section 48
    • Indexed Cost of acquisition i.e. purchase value
    • Indexed Cost of improvement
    • Expenditure wholly and exclusively in connection with transfer i.e. transfer expenses
  • LTCG is automatically computed

Set Off & Carry Forward LTCL under Section 112 of Income Tax Act

The loss on sale of a capital asset as per Section 112 held for more than the period of holding is a Long Term Capital Loss. A taxpayer can set off LTCL from one capital asset against LTCG from another capital asset. As per the income tax rules for set off and carry forward of losses, the taxpayer can set off LTCL i.e. Long Term Capital Loss against Long Term Capital Gains only in the current year. The taxpayer can carry forward the remaining loss for 8 years and set off against future LTCG only.

Exemption from LTCG Tax under Section 112

The taxpayer having long term capital gain income from the sale of a specified asset under Section 112 such as listed securities on which STT is not paid, zero-coupon bonds, immovable property, unlisted securities, etc can claim the following capital gain exemptions:

  • Section 54EE – Exemption on sale of any long-term capital asset on investment in units of a specified fund.
  • Section 54F – Exemption on sale of any long-term capital asset (except house) on investment in residential house property.
  • The taxpayer can claim Capital Gain Exemption on the sale of immovable property under Section 54, Section 54EC, Section 54EE, Section 54GB depending upon the nature of the capital asset

A taxpayer can claim the exemption by reinvesting the proceeds from the sale into a specified capital asset. Such exemption would lower the capital gains and save taxes on the same. However, the taxpayer must hold the new asset for the specified period as per the relevant section. However, if he/she sells the asset before the specified time period, he/she must report it as an income in the relevant financial year and pay tax at the applicable rate.

The taxpayer has an option to open an account under the Capital Gains Account Scheme and park the sale proceeds in it till the time they invest in the specified asset to claim the Capital Gains exemption.

Section 112 v/s 112A v/s 111A

  • Section 112 of Income Tax Act applies to all long term capital assets defined under Section 2(29AA) of the Income Tax Act. Different tax rates are defined for long term capital gains on these assets except the ones covered under Section 112A.
  • Section 112A of Income Tax Act is the overriding section of Section 112. Thus, it applies to long term capital gains on sale of specified long term capital assets i.e. equity shares, equity mutual funds, and units of business trust on which STT is paid and are listed on a recognised stock exchange in India.
  • Section 111A of Income Tax Act applies to short term capital gains on sale of equity shares, equity mutual funds, and units of business trust on which STT is paid and are listed on a recognised stock exchange in India.

FAQs

What is the difference between Section 112 and Section 112A of the Income Tax Act?

Section 112A is the provision for tax on LTCG on equity shares, equity mutual funds, and units of business trust on which STT is paid and listed on a recognised stock exchange in India. Section 112 is the provision for tax on LTCG for all assets except those covered under Section 112A.
The tax rate under Section 112A is 10% in excess of INR 1 lac. The tax rate under Section 112 is based on the nature of the capital asset.

Can I claim Chapter VI-A deductions from Section 80C to 80U from LTCG u/s 112?

The Income Tax Act does not allow claiming deduction from Section 80C to 80U against LTCG under Section 112. However, the taxpayer can claim Chapter VI-A deductions on capital gains taxable at slab rates.

How can I save capital gain tax on the sale of a long term capital asset?

Capital gain tax on the sale of a long term capital asset under Section 112 can be saved either by claiming exemption from Section 54 to Section 54GB based on the nature of the capital asset. Further, you can save tax by setting off STCL or LTCL on the sale of any other capital asset against such income.

Capital Gain Tax on Movable Property : Jewellery, Car, Painting

Income from the sale of a capital asset is treated as Capital Gains as per Income Tax. Based on the nature of the capital asset and the nature of the capital gain, the income tax department has defined the provisions for capital gains tax. Movable property such as jewellery, car, painting, work of art, etc has a period of holding of 36 months. Capital Gain Tax on movable property such as jewellery, car, painting, etc is taxed at slab rates in case of Short Term Capital Gain i.e. STCG, and at a rate of 20% with the benefit of indexation in case of Long Term Capital Gain i.e. LTCG.

Capital Gains on Sale of Jewellery, Car, Painting, etc

The Income Tax Department has laid out specified sections for taxation of capital assets such as Section 112A for LTCG on equity shares and Section 111A for STCG on equity shares. Let us understand the capital gains on other capital assets and their tax treatment. Other capital assets include the following:

  • Jewellery – ornaments made of gold, silver, platinum, precious stones, etc
  • Drawings & Paintings
  • Archaeological collections
  • Sculptures
  • Work of art
  • Motor Vehicle i.e. car, bus, motorcycle, truck, etc
  • Any other property held by a taxpayer

Any income or loss arising on the sale of any of the above-listed assets is treated as Capital Gains. Section 2(42A) of the Income Tax Act defines a Short Term Capital Asset and Section 2(29A) defines a Long Term Capital Asset. Based on this definition, the period of holding in the case of other capital assets such as jewellery, car, painting, etc is 36 months. Thus, if such capital asset is sold within 36 months of purchase, the profit or loss is STCG and if sold after 36 months, the profit or loss is LTCG.

Income Tax on Sale of Jewellery, Car, Painting, etc

Capital Gains on sale of movable property such as jewellery, car, painting, etc is taxable based on the nature of capital gain. Following is the tax treatment for capital gains on movable property:

Capital Gain
Description
Income Tax Rate
Long-Term Capital Gain Sold after 36 months from purchase 20% with Indexation u/s 112
Short-Term Capital Gain Sold within 36 months from purchase Slab Rates

Short Term Capital Gain on Sale of Movable Property at Slab Rates

If a movable property such as jewellery, car, painting, etc is sold within 36 months from its purchase, the profit or loss is a Short Term Capital Gain or Short Term Capital Loss. STCG on a movable property is not a special rate income and is taxable at slab rates.

Long Term Capital Gain on Sale of Movable Property under Section 112

If a movable property such as jewellery, car, painting, etc is sold after 36 months from its purchase, the profit or loss is a Long Term Capital Gain or Long Term Capital Loss. LTCG on a movable property is a special rate income taxable under Section 112 of the Income Tax Act.

Section 112 of the Income Tax Act is the provision for tax on long term capital gains. A resident individual or HUF is liable to pay tax at the rate of 20% with the benefit of indexation. Thus, long term capital gain tax on the sale of movable property such as jewellery, car, painting, etc is taxable at 20% with indexation.

Example

Mrs X, a resident in India, bought some jewellery in February 2019 for INR 15,00,000. He sold the same in March 2021 for INR 25,00,000. Calculate the tax liability.

To determine the nature of capital gain, the period of holding for jewellery is 36 months. Since Mrs X sold out the jewellery within 36 months of purchase, this will be treated as a short term capital gain. Below is the tax liability:

  Particulars Amount (INR)
  Full value of consideration or Sales consideration 25,00,000
Less Cost of Acquisition 15,00,000
  Short Term Capital Gains 10,00,000
  Tax Liability (slab rates) 1,12,500
Add Health & Education Cess (4%) 4,500
  Total Tax Liability 1,17,000

If in the above example, if she sold the jewellery in March 2022 i.e. after 36 months from purchase, this will be treated as a long term capital gain. Below is the tax liability:

  Particulars Amount (INR)
  Full value of consideration or Sales consideration 25,00,000
Less Indexed Cost of Acquisition (15,00,000 * 317/280) 16,98,214
  Long Term Capital Gains 8,01,786
  Tax Liability (20%) 1,60,357
Add Health & Education Cess (4%) 6,414
  Total Tax Liability 1,66,771

Adjustment of LTCG on movable property against Basic Exemption Limit

Taxpayers holding the status of Resident as per the rules to determine the residential status can take benefit of adjusting the special rate income against the basic exemption limit to reduce taxes. Thus, if your total taxable income is less than the basic exemption limit, you can adjust your special rate income such as LTCG u/s 112, STCG u/s 111A, LTCG u/s 112A, etc. against the shortfall in the basic exemption limit and pay tax on the remaining income only.

In the above example, if Mrs X had only LTCG income and no other income, the calculation of tax liability would be in the following manner:

Since Mrs X is a resident and the basic exemption limit is not utilised, she can take benefit of adjusting the special rate income against the basic exemption limit. Thus, taxable LTCG = 8,01,786 – 2,50,000 = INR 5,51,786. Tax Liability = 5,51,786 * 20% = INR 1,10,357.

Capital Gain Tax on movable property – Reporting under Schedule CG of ITR

The ITR Form under which the taxpayer needs to report income from capital gains includes ITR-2 and ITR-3. Taxpayer must report STCG on other assets under A5 and LTCG on other assets under B9 of Schedule CG of the ITR. The taxpayer must report the following details:

  • Full value of consideration i.e. sales value
  • Deductions under Section 48
    • Cost of acquisition i.e. purchase value (indexed COA for LTCG)
    • Cost of improvement (indexed COI for LTCG)
    • Expenditure wholly and exclusively in connection with transfer i.e. transfer expenses
  • STCG or LTCG is automatically computed

Set Off & Carry Forward STCL under Section 111A of Income Tax Act

The loss on sale of movable property such as jewellery, car, painting, etc can be a Short Term Capital Loss or Long Term Capital Loss. As per the income tax rules for set off and carry forward of losses, STCL i.e. Short Term Capital Loss can be set off against both Short Term Capital Gains and Long Term Capital Gains in the current year. The taxpayer can carry forward the remaining loss for 8 years and set off against future STCG and LTCG only. Further, Long Term Capital Loss can be set off against Long Term Capital Gains only. The taxpayer can carry forward the remaining loss for 8 years and set off against future LTCG only.

Exemption from Capital Gain Tax on jewellery, car, painting, etc

The taxpayer having long term capital gain income from the sale of movable property such as jewellery, car, painting, etc can claim the following capital gain exemptions:

  • Section 54EE – Exemption on sale of any long term capital asset on investment in units of a specified fund.
  • Section 54F – Exemption on sale of any long term capital asset (except house) on investment in residential house property.

A taxpayer can claim the exemption by reinvesting the proceeds from the sale into a specified capital asset. Such exemption would lower the capital gains and save taxes on the same. However, the taxpayer must hold the new asset for the specified period as per the relevant section. However, if he/she sells the asset before the specified time period, he/she must report it as an income in the relevant financial year and pay tax at the applicable rate.

The taxpayer has an option to open an account under the Capital Gains Account Scheme and park the sale proceeds in it till the time they invest in the specified asset to claim the Capital Gains exemption.

FAQs

How can I save capital gain tax on the sale of jewellery?

Capital gain tax on movable property such as jewellery, car, painting, etc can be saved. In the case of STCG, the Income Tax Act does not provide any specific exemption. You can save tax by setting off STCL on the sale of any other capital asset against such income. Further, you can claim chapter VI-A deduction from Section 80C to 80U. In the case of LTCG, you can claim a capital gain exemption under Section 54EE or Section 54F of the Income Tax Act.

Do I have to pay income tax on the sale of a car?

Income from the sale of a car is a Capital Gains and is taxable as per income tax. STCG on sale of car within 36 months of purchase is taxable at slab rates. LTCG on sale of car after 36 months of purchase is taxable at 20% with the benefit of indexation as per Section 112.

Can I claim Chapter VI-A deductions from Section 80C to 80U from LTCG u/s 112?

The Income Tax Act does not allow claiming deduction from Section 80C to 80U against LTCG under Section 112. However, the taxpayer can claim Chapter VI-A deductions on capital gains taxable at slab rates.

Short Term Capital Gain Tax on Shares : Section 111A

The income from capital gains is taxable at special rates under Income Tax. Income Tax on Equity Share Trading can be treated as Long Term Capital Gains or Short Term Capital Gains based on the period of holding. Section 111A of Income Tax Act covers provisions for tax on short-term capital gain on the sale of listed equity shares, equity mutual funds, and units of business trust on which STT (Securities Transaction Tax) is paid. Gain or loss from the sale of listed equity shares and other equity instruments held for less than 12 months is a Short Term Capital Gain. Such gain is taxable at 15% (plus surcharge and cess) under Section 111A.

What is Short Term Capital Gain Tax under Section 111A?

The profit or loss on the sale of a capital asset held for less than the specified holding period is a Short Term Capital Gain i.e. STCG or Short Term Capital Loss i.e. STCL. Section 2(42A) of the Income Tax Act defines a Short Term Capital Asset. Based on this definition, the period of holding in the case of listed equity shares and equity mutual funds is 12 months. Thus, if the listed equity share of a domestic company is sold within 12 months of purchase, the profit or loss is Short Term Capital Gain i.e. STCG, or Short Term Capital Loss i.e. STCL.

Section 111A of the Income Tax Act is the provision for taxation of STCG at a rate of 15% on the sale of:

Section 111A covers the following transaction even if STT is not paid on it:

  • STCG on the sale of equity shares, equity mutual funds, or units of business trust listed on a recognised stock exchange in an International Financial Services Centre (IFSC) and if the consideration is paid or payable in foreign currency.

STCG on sale of unlisted shares and securities, debt mutual funds, bonds, debentures, immovable property, motor vehicle, jewellery, etc is taxable at slab rates and not as per special rate u/s 111A.

Income Tax on Short Term Capital Gain under Section 111A

As per Section 111A of Income Tax Act, short term capital gain tax on equity shares and mutual funds is taxable at a special rate of 15%. Cess and Surcharge are additionally applicable.

Example

Mr. A, a resident in India, bought 10,000 equity shares of A Ltd in December 2021 at INR 100 per share. He sold the shares in April 2022 at INR 135 per share through BSE. He paid brokerage of INR 1 per share and STT of INR 1500. Mr. A also has a salary income of INR 8,40,000. What will be the tax liability of Mr. Ashok?

Mr. A sold the equity shares within 12 months and thus its a Short Term Capital Gain. Since it was a listed equity share with STT paid, STCG is taxable at 15% under Section 111A. Let’s calculate the short term capital gain tax on shares.

  Particulars Amount
  Full value of consideration or Sales consideration (10,000 * 135) 13,50,000
Less Transfer Expenses (10,000 * 1) (10,000)
  Net Sale Consideration 13,40,000
Less Cost of Acquisition (10,000 * 100) 10,00,000
  Short Term Capital Gains 3,40,000
  STCG Tax Liability (3,40,000 * 15%) 51,000

Salary Income is taxable at slab rates and tax liability = INR 80,500. Thus total tax liability = 80,500 + 51,000 = INR 1,31,500. Health and Education Cess of 4% is applicable on this tax liability.

Adjustment of STCG u/s 111A against Basic Exemption Limit

Taxpayers holding the status of Resident as per the rules to determine the residential status can take benefit of adjusting the special rate income against the basic exemption limit to reduce taxes. Thus, if your total taxable income is less than the basic exemption limit, you can adjust your special rate income such as STCG u/s 111A, LTCG u/s 112A, etc. against the shortfall in basic exemption limit and pay tax on the remaining income only.

In the above example, if Mr. A had income from capital gains and no salary income, the calculation of tax liability would be in the following manner:

Since Mr. A is a resident and the basic exemption limit is not utilised, he can take benefit of adjusting the special rate income against the basic exemption limit. Thus, taxable STCG = 3,40,000 – 2,50,000 = INR 90,000. Tax Liability = 90,000 * 15% = INR 13,500.

STCG on Shares – Reporting under Schedule CG of ITR

The ITR Form under which the taxpayer needs to report income from capital gains includes ITR-2 and ITR-3. Taxpayer must report income from capital gains in A2 under Schedule CG of the ITR. The taxpayer must report the following details:

  • Full value of consideration i.e. sales value
  • Deductions under Section 48
    • Cost of acquisition i.e. purchase value
    • Expenditure wholly and exclusively in connection with transfer i.e. transfer expenses
  • Short Term Capital Gain i.e. STCG on shares is automatically computed

Set Off & Carry Forward STCL under Section 111A of Income Tax Act

The loss on sale of listed equity shares and mutual funds held for up to 12 months is a Short Term Capital loss. A taxpayer can set off STCL from one capital asset against STCG and LTCG from another capital asset. As per the income tax rules for set off and carry forward of losses, STCL i.e. Short Term Capital Loss can be set off against both Short Term Capital Gains and Long Term Capital Gains in the current year. The taxpayer can carry forward the remaining loss for 8 years and set off against future STCG and LTCG only.

If the taxpayer has income from the sale of some listed equity shares and securities, and profit from other listed equity shares and securities, only net gains are taxable at 15%. Further, the taxpayer can set off the net STCL under Section 111A of income tax act against STCG and LTCG on the sale of shares, securities, property, jewellery, car or any other capital asset. The taxpayer can carry forward the remaining loss for 8 years.

FAQs

I sold equity shares on BSE at a profit of after holding them for 10 months. What is the applicable income tax rate?

If you have sold equity shares after holding them for upto 12 months, it is a Short Term Capital Gain. STCG on shares that are listed on a recognised stock exchange and on which the investor pays STT are taxable at 15% under Section 111A. Your Taxable STCG = Sell Value – Buy Value. Income Tax on STCG = 15% of Taxable STCG.

How can I save STCG on shares?

The Income Tax Act does not provide any specific exemption for STCG on sale of listed equity shares & equity mutual funds. However, here are some ways of saving STCG tax on shares:
1. STCL i.e. Short Term Capital Loss on sale of any capital asset can be adjusted against STCG from sale of equity shares and equity mutual funds
2. If you’re a resident in India and other taxable incomes are less than INR 2.5 lacs, you can adjust the STCG against basic exemption limit and pay tax at 15% on the remaining amount only.

Can I claim Chapter VI-A deductions from Section 80C to 80U from STCG u/s 111A?

The Income Tax Act does not allow claiming deduction from Section 80C to 80U against STCG taxable under Section 111A. However, the taxpayer can claim Chapter VI-A deductions on STCG other than those taxable under Section 111A.

Section 54GB of Income Tax Act : Capital Gain Exemption on sale of residential property

A taxpayer can claim a capital gain exemption under Section 54GB of the Income Tax Act to reduce Capital Gains Tax on the sale of a residential property (long-term capital asset). Section 54GB exemption is available on the sale of a residential property i.e. house or plot of land which is a long-term capital asset if the taxpayer invests the sale consideration for subscription in equity shares of an eligible company. The amount of exemption under Section 54GB will be as below:

Exemption = Cost of new asset x Capital Gains / Net Consideration

Maximum Exemption is up to Capital Gains

Who can claim an exemption under Section 54GB of Income Tax Act?

A taxpayer can claim an exemption under Section 54F if he/she fulfills all the below conditions:

  1. The taxpayer must be an Individual or HUF. The benefit of exemption is not available to the company, LLP, or Firm.
  2. The asset sold is a Long Term Capital Asset (LTCA). LTCA should be a residential property i.e. house or plot of land.
  3. Taxpayer uses the net consideration for subscription in equity shares of an eligible company.
  4. The taxpayer uses the net consideration for subscription before the due date of filing the Income Tax Return u/s 139(1).
  5. The eligible company should utilise the funds for purchase of new assets within 1 year from the date of subscription.

Taxpayer can claim the capital gain exemption under Section 54GB while filing ITR in that particular financial year. The taxpayer needs to file ITR-2 on the income tax website on or before the due date of 31st July.

Meaning of Terms – Eligible Company and New Asset

Eligible Company

The company that satisfies the following conditions is an ‘eligible company’ as per Section 54GB. 1st April 2017 onwards, the definition of an eligible company also includes an eligible start-up.

  • The company is incorporated in India.
  • Company is incorporated during the previous year in which the taxpayer earns capital gain upto the subsequent financial year up to the due date of furnishing of ITR.
  • Company is into the business of manufacturing an article or a thing.
  • The taxpayer has more than 50% share capital or more than 50% voting rights after he/she invests into the subscription of equity shares of the company.
  • The company is a medium or small enterprise under the Micro, Small and Medium Enterprises Act, 2006 or it is an eligible start-up.

New Asset

Net Asset means new plant and machinery. However, it does not include the following:

  • Plant or machinery installed in any office premises or any residential accommodation.
  • Plant or machinery which has been previously used by any other person within or outside India.
  • Any vehicle or office appliances including computer or computer software. In the case of an eligible startup, the new asset shall include computers or computer software.
  • Plant or machinery where the actual cost is allowed as a deduction in computing the income under PGBP.

What is the amount of exemption available under Section 54GB of Income Tax Act?

As mentioned above, the amount of exemption under Section 54GB will be available as per the following formula:

Exemption = Cost of new asset x Capital Gains / Net Consideration

Maximum Exemption is up to Capital Gains.

Example: Ajay sold residential property in FY 2021-22 for Rs. 70,00,000. It was purchased in FY 2016-17 for Rs. 20,00,000. And Ajay invested into equity shares of eligible company for Rs. 55,00,000 in FY 2021-22. Ajay will be able to claim a deduction under Section 54GB as follows:

Particulars Amount
Sales Consideration 70,00,000
Less: Index Cost of Acquisition (20,00,000*317/264) (24,01,515)
Long Term Capital Gains 45,98,485
New House Property Purchase Price 55,00,000
Section 54F Exemption Amount (35,00,000*7,77,500/15,00,000) = 18,14,167 or 7,77,500 45,98,485
Refer Index Cost from here.
When full Net Consideration/Sales Value is invested, the full amount of Capital Gains is exempt under section 54GB of the Income Tax Act.
Tip
When full Net Consideration/Sales Value is invested, the full amount of Capital Gains is exempt under section 54GB of the Income Tax Act.

What happens to Section 54GB exemption if taxpayer sells the equity shares?

The lock-in period of 5 years is applicable when the taxpayer claims exemption under Section 54GB of income tax act. And the following situations can arise:

Situation 1: Sale of shares and new assets before 5 years

When the taxpayer sells the equity shares or the company sells the new assets within 5 years from the date of acquisition.

Consequences: The exemption under Section 54GB is withdrawn. And the amount of exemption availed will be taxable in the previous year in which the taxpayer sells the equity shares or the company sells the new assets.

Situation 2: Sale of shares and new assets after 5 years

When the taxpayer sells the equity shares or the company sells the new assets within 5 years from the date of acquisition.

Consequences: The exemption under Section 54GB is not withdrawn. The taxpayer will be able to claim the index cost of acquisition while calculating capital gains tax on sale of equity shares. And capital gains will be taxable at 20%.

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CGAS Scheme for claiming exemption under Section 54GB of Income Tax Act

Under Section 54GB, the taxpayer can take benefit of the CGAS Scheme to claim the exemption. If a taxpayer is unable to utilize the whole or part of the sales consideration to invest in the equity shares of an eligible company till the due date of submission of ITR, then he/she should deposit the funds in the Capital Gains Deposit Account Scheme (CGAS). The taxpayer can claim exemption of the amount already spent on the purchase of equity shares along with the amount deposited in CGAS.

However, it is important to note that if the taxpayer is unable to utilise the amount deposited in the Capital Gains Account Scheme within the time limit of 1 year, then it shall be taxable as income of the last year.

FAQs

What is Net Consideration under Section 54GB?

Net Consideration is the full sales value or consideration received on the sale of residential property reduced by any expense incurred in connection with the transfer.
Net Consideration = Sales Value – Transfer Expenses

What will be the tax rate on capital gains earned if the taxpayer does not claim an exemption under Section 54GB?

Capital Gains on Sale of Residential Property being a Long Term Capital Asset LTCA is taxed at the rate of 20% with the benefit of Indexation. The taxpayer has an option to claim an exemption under Section 54GB by investing in equity shares of an eligible company.

Section 54D of Income Tax Act : Capital Gains Exemption on Compulsory Acquisition

When the government acquires private rights in land through compulsory acquisition, the owner of such land is liable to pay tax on such capital gains income from compulsory acquisition. The income tax department issued Section 54D of Income Tax Act to provide an exemption from Capital Gains Tax on the compulsory acquisition of land or building forming part of an industrial undertaking. Thus, a taxpayer can claim a capital gain exemption on income from compulsory acquisition of land or building that they used for business purpose if they invest such funds into land or building for shifting or reestablishing such industrial undertaking. The amount of capital gain exemption under Section 54EE will be lower of:

  1. The cost of new asset i.e. new land or building of industrial undertaking
  2. The capital gains on the compulsory acquisition of old land or building of industrial undertaking

Who can claim an exemption under Section 54D of Income Tax Act?

A taxpayer can claim a capital gain exemption on the compulsory acquisition of land or building forming part of an industrial undertaking under Section 54D if he/she satisfies all the below conditions:

  1. Any taxpayer i.e. Individual, HUF, Company, LLP, Firm, etc can claim an exemption under Section 54D of Income Tax Act.
  2. The taxpayer has received compensation for the compulsory acquisition of land or building or any right in land or building.
  3. The taxpayer had used the land or building for industrial purpose for at least 2 years before the compulsory acquisition.
  4. Taxpayer invests Capital Gains within 3 years from the date of receipt of compensation.
  5. Taxpayer invests in land or building for shifting or re-establishing the industrial undertaking.

The taxpayer can claim the Capital Gains Exemption under Section 54D while filing ITR for that particular financial year. The taxpayer needs to file ITR-2 on the income tax website on or before the due date of 31st July.

What is the amount of exemption available under Section 54D of Income Tax Act?

As mentioned above, the amount of exemption under Section 54D will be lower of the following:

  • Cost of new asset i.e. new land or building of industrial undertaking,
  • Capital Gains on the compulsory acquisition of old land or building of industrial undertaking

Example: Ravi sold a house property in FY 2021-22 for Rs. 60,00,000. He purchased the property in FY 2016-17 for Rs. 30,00,000. And he purchased a new house property worth Rs. 45,00,000 in another city. Ravi will be able to claim a deduction under section 54 as follows:

Particulars Amount
Sales Consideration 60,00,000
Less: Index Cost of Acquisition (30,00,000*317/264) (36,02,272)
Long Term Capital Gains 23,97,728
New House Property Purchase Price 45,00,000
Section 54 Exemption Amount 23,97,728
Refer Index Cost from here.
Index Cost Calculator
You can calculate the Index Cost of acquisition of property from here.
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Index Cost Calculator
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What happens to Section 54D exemption if the taxpayer sells the new industrial undertaking?

The lock-in period of 3 years is applicable when the taxpayer claims an exemption under Section 54D of income tax act. And the following situations can arise:

Situation 1: Sale of new industrial undertaking before 3 years

When the taxpayer sells the new residential house within 3 years from the date of purchase or construction and the cost of the new house purchased is less than Capital Gains.

Consequences: The exemption under Section 54D is withdrawn. And the total sales value of new house property will be taxable as capital gains. Here the cost of acquisition will be NIL.

Situation 2: Sale of new industrial undertaking before 3 years

When the taxpayer sells the new residential house within 3 years from the date of purchase or construction and the cost of the new house purchased is more than Capital Gains.

Consequences: The exemption under Section 54D is withdrawn. However, the taxpayer will be able to claim the cost of acquisition (Total Purchase Price – Exemption u/s 54D) while calculating capital gains.

Situation 3: Sale of new industrial undertaking after 3 years

When the taxpayer sells the new residential house after 3 years from the date of purchase or construction.

Consequences: The exemption under Section 54D is not withdrawn. The taxpayer will be able to claim the index cost of acquisition while calculating the capital gain on sale of new industrial undertaking. He/she must pay income tax on capital gains at the rate of 20%.

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CGAS Scheme for claiming exemption under Section 54D of Income Tax Act

Under Section 54D, the taxpayer can take benefit of the CGAS Scheme to claim the exemption. If a taxpayer is unable to utilize the whole or part of the sales consideration for the purchase or construction of a new industrial undertaking till the due date of submission of ITR, he/she should deposit the funds in the Capital Gains Deposit Account Scheme (CGAS). The taxpayer can claim exemption of amount already spent on construction or purchase of property along with the amount deposited in CGAS.

However, it is important to note that if the taxpayer is unable to utilise the amount deposited in the Capital Gains Account Scheme within the time limit of 3 years, then it shall be taxable as income of the last year.

FAQs

Can I invest in Capital Gains Account Scheme (CGAS) and claim an exemption under Section 54D?

Yes. The benefit of the CGAS Scheme is available to claim a capital gain exemption under Section 54D. You can park your funds from compensation received on compulsory acquisition in the CGAS Scheme. You must later utilise this money for the purchase or construction of a new industrial undertaking within the time limit of 3 years.

Can I claim 54D exemption for compensation received on compulsory acquisition of agricultural land?

Rural agricultural land is not a capital asset as per Income Tax Act and thus the transfer of rural agricultural land is not taxable. Further, capital gains on compensation received on compulsory acquisition of urban agricultural land are exempt from tax under Section 10(37) of the Income Tax Act. Thus, compensation received for compulsory acquisition of agricultural land (rural or urban) is exempt from income tax.

My land was taken away under compulsory acquisition for road widening in return for compensation. Is this taxable?

Capital Gains are exempt from tax for compensation received on compulsory acquisition of:
1) Urban agricultural land – exempt from income tax as per Section 10(37) of Income Tax Act
2) Rural agricultural land – exempt from income tax since it is not a capital asset as per Income Tax Act
3) Non-agricultural land – exempt from income tax as per the RFCTLARR Act and the CBDT Circular issued in 2016

Section 54EE of Income Tax Act : Capital Gains Exemption on Investment in units of Specified Fund

The income tax department introduced a new Section 54EE of Income Tax Act with effect from 1st April 2017. Section 54EE provides for exemption from Capital Gains Tax on the sale of any long-term capital asset by investing into units of specified funds. The amount of capital gain exemption under Section 54EE will be lower of:

  1. The cost of new asset i.e. units of specified fund
  2. The capital gains on the sale of long term capital asset

Who can claim an exemption under Section 54EE of Income Tax Act?

A taxpayer can claim an exemption u/s 54EE if he/she fulfills all the below conditions:

  1. Any assessee i.e. Individual, HUF, Company, LLP, Firm, etc can claim an exemption under Section 54EE.
  2. The asset sold is any Long Term Capital Asset (LTCA)
  3. The taxpayer invests Capital Gains within 6 months from the date of transfer of the original asset.
  4. Taxpayer invests in units of funds notified by the Central Government on or before 1st April 2019 to finance startups.
  5. The investment amount can not be more than INR 50 lakhs during any financial year.
  6. The investment amount can not be more than INR 50 lakhs during the current and succeeding financial year.

The taxpayer can claim the Capital Gains Exemption under Section 54EE while filing ITR for that particular financial year. The taxpayer needs to file ITR-2 on the income tax website on or before the due date of 31st July.

What is the amount of exemption available under Section 54EE of Income Tax Act?

As mentioned above, the Amount of Exemption under Section 54EE of the Income Tax Act will be the least of the following:

  1. The investment amount in new assets i.e. units of specified fund
  2. The capital gains on the sale of long term capital asset
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Example: Arjun sold commercial property in FY 2021-22 for Rs. 60,00,000. It was purchased in FY 2016-17 for Rs. 30,00,000. He purchased units of specified funds INR. 45,00,000 in FY 2021-22. Arjun will be able to claim deduction under section 54EE as follows:

Particulars Amount
Sales Consideration 60,00,000
Less: Index Cost of Acquisition (30,00,000*317/264) (36,02,272)
Long Term Capital Gains 23,97,728
Cost of Specified Investment 45,00,000
Section 54EE Exemption Amount 23,97,728
Refer Index Cost from here.
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Index Cost Calculator
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What happens to exemption if taxpayer sells the 54EE specified investment?

The lock-in period of 3 years is applicable when the taxpayer claims an exemption under Section 54EE of Income Tax Act. And the following situations can arise:

Situation 1: Sale of specified investment before 3 years

When the taxpayer sells the specified investment within 3 years from the date of purchase.

Consequences: The exemption under Section 54EE is withdrawn. The amount of exemption that the taxpayer avails will be reduced from the cost of the asset. Thus, Capital Gains will be the total sales value minus the cost of the asset.

If the taxpayer takes a loan or advance on the security of the specified investment, the asset is deemed to have been sold on the date of such loan or advance. Thus, the exemption under Section 54EE would be withdrawn if such loan or advance is taken within 3 years from the date of purchase.

Situation 2: Sale of specified investment after 3 years

When the taxpayer sells the specified investment after 3 years from the date of purchase.

Consequences: The exemption under Section 54EE is not withdrawn. A taxpayer will be able to claim the index cost of acquisition while calculating Capital Gains on the investment sold.

FAQs

What are Long Term Specified Assets under Section 54EE?

As per Section 54EE, long term specified asset means units issued before 1st April 2019, of a fund notified by the Central Government. If an investor selling long term capital asset, invests into these units, he can claim exemption from capital gains tax.

Which funds are notified as Long Term Specified Assets under Section 54EE?

Section 54EE was introduced in Budget 2016. The taxpayer can save tax on capital gains on investment in long term specified asset i.e. units of a fund notified by the government. However, the government did not notify any eligible investment and as a result no taxpayer could take benefit of this capital gain exemption.

Can I invest in Capital Gains Account Scheme (CGAS) and claim an exemption under Section 54EE?

No. The benefit of investing in CGAS is not available under Section 54EE. The taxpayer needs to invest in a specified investment within 6 months of the date of transfer of the long-term capital asset.

Tax on gifting Crypto, NFT, VDA in India

In India, cryptocurrency is defined as a Virtual Digital Asset i.e. VDA. Under Budget 2022, the finance minister announced the provisions for taxation on cryptocurrency, NFT (non-Fungible Token), and other VDA (Virtual Digital Asset). Further, they also introduced provisions for tax on gifting crypto, NFTs, etc. As per the Income Tax Act, gift of cryptocurrency, NFTs, etc shall be taxable in the hands of the recipient.

Forms of Gifting Crypto

A crypto trader or investor can gift cryptocurrency through the cryptocurrency exchange using gift cards, crypto paper wallet, crypto token, etc.

  • Crypto Gift Cards – Crypto traders can buy gift cards from the cryptocurrency exchange for the purpose of gifting them to friends and relatives.
  • Crypto Paper Wallet – A crypto trader can also gift a crypto paper wallet i.e. a piece of paper with a single private key and bitcoin address.
  • A Crypto Token – A crypto trader can gift a crypto token i.e. a virtual currency token or a denomination of a cryptocurrency.

Tax on Gifting Crypto

Section 56 of the Income Tax Act levies provision for taxation of gifts of immovable property, cash, and specified movable assets such as shares, jewellery, etc. Under Budget 2022, the finance minister amended Section 56 for taxation of gifts to include ‘Virtual Digital Asset’ in the definition of property i.e. movable assets. A Virtual Digital Asset i.e. VDA includes cryptocurrency, NFT, and any other notified digital asset. Below is the tax treatment on the gifting of crypto, NFT, and other VDAs. It is taxable in hands of the receiver applicable from FY 2022-23:

Type Taxability
VDA Gift with value up to INR 50,000 Exempt from tax
VDA Gift with value exceeding INR 50,000 received from relative Exempt from tax
Gift of VDA with value exceeding INR 50,000 received from non-relative Taxable in hands of receiver
Received on occassion of marriage, via inheritance or will or in contemplation of death Exempt from tax

Definition of relative for tax on gifting crypto – spouse, children, parents of individual or spouse, brother/sister of individual or spouse, brother/sister of parents of individual or spouse.

Tax on giving a Crypto gift

Check the tax provisions for the giver of crypto gift on giving the gift and on sale of such gift by the receiver.

Tax on transfer of crypto gift for giver

As per Section 2(14) of the Income Tax Act, a virtual digital asset is a Capital Asset. The transfer of a Capital Asset is taxable as Capital Gains. However, the definition of ‘transfer’ as per Section 47 specifically excludes gifts. Thus, the gift of cryptocurrency, NFT, and other VDA is not taxable in the hands of the sender.

Tax on sale of crypto gift for giver

  • The sale of crypto gifted to the receiver is not taxable in the hands of the sender of the gift.
  • Clubbing of Income – If the receiver of the gifted crypto is a spouse or minor child, any income that arises directly or indirectly from such asset is clubbed with the income of the giver of the crypto gift.

Tax on receiving a Crypto gift

Check the tax provisions for the recipient of crypto gift on receiving the gift and on sale of such gift.

Tax on transfer of crypto gift for receiver

Crypto gift is taxable for the receiver if the monetary value exceeds INR 50,000 and is received from a non-relative. Further, crypto gift received on occasion of marriage or inheritance or in contemplation of death is not taxable. Such gift is taxable at slab rates under the head IFOS (Income from Other Sources).

Tax on sale of crypto gift for receiver

Capital Gains tax would arise on the sale or conversion of cryptocurrency. To calculate the tax on gifted crypto, here are important points to consider:

  • Period of Holding – Calculate the holding period from the date of purchase by the previous owner i.e. sender of gift to the date of sale by the receiver of the gift.
  • LTCG – Virtual Digital Asset (VDA) held for more than 36 months from date of purchase by the sender to date of sale.
  • STCG – Virtual Digital Asset (VDA) held for up to 36 months from date of purchase by the sender to date of sale.
  • Purchase Date – The date of purchase by the previous owner i.e. sender of the gift
  • Purchase Value – The value of the purchase of the previous owner i.e. sender of the gift
  • Sale Date – The date of sale by the receiver of the gift
  • Sale Value – The value of the sale by the receiver of the gift
  • Tax Liability – Tax rate on sale of cryptocurrency is 30% without claiming deductions for cost of acquisition, cost of improvement, or transfer expenses
Transaction Sender Receiver
Gift of Virtual Digital Asset Not taxable Exempt Income or IFOS Income
Sale of Virtual Digital Asset Not taxable Capital Gains

Clubbing of Income – If the receiver of the gifted crypto is a spouse or minor child, any income that arises directly or indirectly from such asset is clubbed with the income of the giver of the crypto gift.

FAQs

What are the Tax Implications for gifting cryptocurrency in India?

Under Budget 2022, it was announced that the gift of crypto shall be taxable in the hands of the receiver. Based on the changes in Finance Bill 2022, the tax normal income tax provisions as per Section 56 apply to the gift of cryptocurrency too. Therefore, the gifting of cryptocurrency, NFT, or other Virtual Digital Assets is taxable in the hands of the receiver if received from a non-relative for a value exceeding INR 50,000.

Can I give cryptocurrency as a gift?

Yes. You can give cryptocurrency as a gift. However, there are tax implications for the same. The receiver of the gift is liable to pay tax on a crypto gift received from a non-relative in excess of INR 50,000. The giver of the crypto gift is not liable to pay any tax on the same.

Do I need to report a gift of cryptocurrency on my taxes?

Yes. If you have received a gift of cryptocurrency from a person other than a relative of value exceeding INR 50,000, you must report it under the head IFOS in the ITR and pay tax at slab rates. Further, when you sell the crypto gift, you must report it under the head Capital Gains and pay tax at 30%.

GST on Supply of Cryptocurrency, NFT, VDA (Virtual Digital Asset)

The taxation of cryptocurrency and other digital assets has been a point of discussion amongst traders for many years. Under Budget 2022, the finance minister brought clarity on the taxation of cryptocurrency by defining it as a Virtual Digital Asset i.e. VDA. Income Tax on crypto, NFT, and other digital assets is leviable at the rate of 30% under Section 115BBH. Further, TDS on crypto transfer is leviable at the rate of 1% under Section 194S of the Income Tax Act. However, there is no clarity on the applicability of GST on cryptocurrency, NFT, and other Virtual Digital Assets (VDA). Let us understand if GST is applicable to crypto as per the GST rules and regulations.

The GST Council is planning to levy a 28% GST on cryptocurrency and digital assets. This idea is to tax cryptocurrency just like income from lottery, betting, casinos, or horse racing.

What is a cryptocurrency or digital asset under GST Act?

The GST Act does not define cryptocurrency or digital assets. However, as per the Finance Bill 2022, a Virtual Digital Asset i.e. VDA means any information, code, number, or token generated through cryptographic means providing a digital representation of value exchanged and can be used in any financial transaction. Such assets can be stored or transferred electronically. VDA also includes a non-fungible token i.e. NFT and any other digital asset notified by the Central Government.

Is the sale of cryptocurrency taxable under GST?

Let us understand if VDA can be classified as a good or service based on the definition as per the GST Act.

Definition of Goods, Services, Money & Securities as per GST Act

As per Section 2(52), Goods mean any movable property except money and securities. The definition of Services means anything other than goods, money, and securities. However, services do include the conversion of money from one currency to another by charging a separate consideration such as brokerage, commission, or interest.

Money means a legal tender, foreign currency, cheque, electronic remittance, or any other instrument recognised by RBI to settle an obligation. Securities mean bonds, debentures, shares, derivatives, government securities, or instruments of similar nature.

Is cryptocurrency a good or service as per GST Act?

As per the above definition, Virtual Digital Assets (VDA) cannot be classified as money or securities. Further, it can also not be classified as Service as per GST Act. However, considering it as movable property, it can be classified as Goods as per GST.

Is the sale of crypto exempt under GST?

The list of exemptions under Schedule III of the GST Act does not cover the sale of cryptocurrency, NFT, or digital assets. Thus, it is not a transaction exempt from GST. Therefore, the sale of crypto, NFT, and VDA is taxable under the GST Act.

Is crypto exchange liable to pay GST on its services?

Yes. Services provided by crypto exchanges are taxable services under GST. Thus, the crypto exchanges are liable to collect GST from the traders and deposit the same with the GST department. GST is included in the trading fee that is added to the buying price of ether, bitcoin, ripple, etc. In the case of a crypto exchange located outside India, the place of supply of service is the location of the service recipient i.e India. Therefore, the service recipient i.e. crypto trader is liable to pay GST on a reverse charge basis.

Who needs to pay GST on supply of cryptocurrency and digital assets?

The seller of cryptocurrency or digital assets must collect GST from the buyer and deposit it with the government. There is no defined HSN Code and GST Rate for digital assets. Thus, HSN Code 960899 under the category ‘others’ with a tax rate of 18% can be used for reporting the sale of crypto.

The seller is liable to register under GST Act if the Aggregate Turnover exceeds the threshold limit of INR 40 lacs during the financial year. Once the seller of crypto registers under GST, they must collect and pay GST on each sale transaction.

The seller can claim Input Tax Credit of the following:

  • GST paid on the purchase of cryptocurrency, NFT, VDA
  • GST paid on services used for the business of crypto trading such as consultancy services, software expenses, broker commission, mining cost, etc

The GST department has not yet clarified the taxability of cryptocurrency and other digital assets. Crypto traders and crypto exchanges should comply with the existing GST provisions until the GST Council clarifies the taxability of cryptocurrency.

FAQs

Is GST applicable to sale of cryptocurrency in India?

Cryptocurrency falls under the definition of goods as per the GST Act. Thus, the sale of crypto is taxable under GST. Further, the sale of cryptocurrency or digital assets is not covered under the list of GST exemptions. Thus, GST is applicable to the sale of cryptocurrency in India.

Is GST applicable to cryptocurrency trading in India?

Cryptocurrency trading i.e. sale of crypto is taxable under the GST Act since it is not specifically exempted from GST. Further, the crypto exchanges are liable to pay GST on their services. They include the GST in the trading fee charged to the crypto traders. Therefore, crypto traders are liable to pay GST on crypto trading.

Who is liable to pay GST on the sale of cryptocurrency in India?

The seller of cryptocurrency or digital assets must collect GST from the buyer and pay it to the government. The seller is liable to register under GST Act if the aggregate turnover exceeds the threshold limit of INR 40 lacs during the financial year. Once the seller of crypto registers under GST, they must collect and pay GST on each sale transaction. They can claim Input Tax Credit of GST paid on the purchase of crypto or other related services.

Income Tax Notice for Crypto Trading under Section 148

The Income Tax Department had sent out notices to multiple crypto traders under Section 148A(b) of the Income Tax Act. The ITD issued income tax notices to taxpayers who had indulged in cryptocurrency trading but did not report them in the ITR and pay tax on cryptocurrency trading. Under the tax notice, the department asked the assessee to explain the transactions with supporting documents and books of accounts. The intention is to track the sources of income used for crypto transactions. This is a show-cause notice where the taxpayer needs to justify why the AO should not issue a notice to them u/s 148 for income escaping assessment. Let us understand the tax notice for crypto trading, how to respond, and the penalty if you have not reported crypto income in the ITR.

What is Section 148 of the Income Tax Act?

The ITD has issued notices under clause (b) of Section 148A of the Income Tax Act. Section 148A is the section for conducting inquiry and providing opportunity before issue of notice under Section 148. Clause (b) of Section 148A seeks to provide the taxpayer an opportunity of being heard by serving a show cause notice. The taxpayer needs to explain why the tax authority should not issue a notice under Section 148.

The tax authority issues notice under Section 148 of Income Tax Act where the income has escaped assessment. This is a time bound notice and the taxpayer needs to submit a response within the specified time period. The Assessing Officer i.e. AO can issue notice u.s 148 if:

  • The AO has information that the taxable income of the taxpayer has escaped assessment, and
  • The AO has taken prior approval from the specified authority to issue such notice

Tax Notice for Crypto Trading under Section 148A(b)

Tax notice under Section 148A(b) for crypto trading was issued to multiple traders for FY 2015-16, FY 2016-17, and FY 2017-18. The tax notice comprised of the following information:

  • Value of transactions in crypto trading
  • Relevant financial year
  • The income from crypto transactions was not reported as LTCG or STCG

The bitcoin traders were asked to do the following:

  • Attend the ITD office with books of accounts and other relevant documents.
  • To produce the bank statements of all bank accounts of themselves and family members
  • Submit computation of gain or loss arising out of investments done in the relevant financial year
  • Share investment details in India and abroad, the source of income, and trading details of bitcoin and other cryptocurrencies
  • Declare crypto wallet details in India and abroad, transactions through wallets, and source of money deposited in these wallets
  • Submit a response to the notice within the given time period

How does Income Tax Department know about my cryptocurrency trading?

The cryptocurrency exchanges ask for the PAN of the traders while setting up their accounts for crypto trading. The Income Tax Department collated and analysed this data of bitcoin users from major cryptocurrency exchanges in India. Later, they issued tax notices to crypto traders having significant crypto transactions.

Further, the Income Tax Department received data of crypto trading through the VRU/CRIU functionality on the Insight Portal of Income Tax. CBDT issued a circular on 10th December 2021 to commissioners of income tax to upload information on Insight portal. The Circular had instructions to upload information on VRU/CRIU functionality for issue of notice u/s 148 of Income Tax Act. VRU i.e. Verification Report Upload is a functionality on Insight Portal of Income Tax where information of income escaping assessment is uploaded. CRIU i.e. Case Related Information Upload is a functionality where information of bulk nature such as penny stock transactions, etc is uploaded. On the basis of this information, the ITD issued notices to multiple crypto traders under Section 148A(b) of Income Tax.

Penalty on tax notice for crypto trading u/s 148

A trader having income from trading cryptocurrency, NFT (Non-Fungible Token), or VDA (Virtual Digital Asset) is liable to pay tax at 30% u/s 115BBH. Section 115BBH was introduced in Budget 2022 and is applicable from FY 2022-23. Thus, a crypto trader must report income from crypto trading as capital gains in the ITR and pay tax of 30% on profits.

However, in the absence of any provision in the earlier years, many traders did not report income from crypto trading and did not pay tax. The AO has the authority to open the case for assessment or reassessment by issuing a notice under Section 148 of the Income Tax Act. The AO may also impose a penalty of 50% of tax payable in the following cases:

  • If the income assessed by AO exceeds the income reported by the crypto trader in the ITR
  • If the income assessed by AO exceeds the basic exemption limit if the crypto trader has not filed the ITR

In addition to the tax liability, the AO also has the authority to impose penalty on the failure of compliance at the taxpayer’s end. Below is a summary of penalty that the AO can impose.

Section Description Interpretation Penalty Imprisonment
Sec 272A(1) Refusal or failure to give evidence or produce books of accounts, etc in compliance with summons under Section 131(1) If assessee does not produce books of accounts and relevant documents as asked for by AO for notice u/s 148A INR 10,000 for each failure or default No Imprisonment
Sec 276CC Failure to furnish ITR in response to notice u/s 148 If assessee fails to file ITR in response to the notice under Section 148 No Limit 6 mth to 7 yrs – If tax liability exceeds INR 25 lacs
3 mth to 2 yrs – other cases

Reply to tax notice under Section 148 for crypto trading

The crypto trader must respond to the income tax notice within the stipulated time period. You can submit a response as per the instructions mentioned in the tax notice. Submit a response either through email or from the option of e-proceedings on your account on the income tax website.

Section 115BBH for taxation on virtual digital assets would be effective from 1st April 2022 i.e. FY 2022-23 onwards. Since there was no specified tax provision for tax on income from crypto trading for the earlier years, the taxpayer should consider the following while submitting a reply to the tax notice:

  • To submit response to notice under Section 148A, justify the nature of transactions and source of income. Further, provide the relevant documents and books of accounts to the tax officer.
  • Treat the income as Capital Gains or Business Income based on the trader’s intention and the frequency of transactions. Thus, if there were significant trading transactions or the intention is to earn profits, report the income as business income. However, if there were few transactions or the intention is to invest for long-term appreciation, report the income as capital gains.
  • If you had reported the crypto trading income in your ITR and paid tax on it, you can submit a response explaining the nature of transactions and their treatment in the ITR.
  • If you had not reported the crypto trading income in your ITR, you must now file an ITR in response to the notice under Section 148, report all your income, and pay tax on it.

FAQs

Is crypto trading legal in India?

In the Budget 2022 speech, Nirmal Sitharaman clarified that taxing cryptocurrencies do not give them legal status in the country. Thus, the legality of cryptocurrency in India is still under question. However, the government introduced Section 115BBH for the taxation of income from virtual digital assets. Thus, crypto traders must report the trading income in ITR and pay tax at 30% u/s 115BBH.

What is VRU/CRIU in Income Tax?

The income tax officers were asked to upload the information of the crypto trading transactions on the VRU/CRIU functionality on the Insight Portal. VRU i.e. Verification Report Upload is the functionality using which the AOs upload information and verification results for the taxpayers having income escaping assessment from AY 2013-14 to AY 2017-18.
CRIU i.e. Case Related Information Upload is the functionality using which the AOs upload information of bulk nature such as penny stock transactions, beneficiaries in case of entity operators, etc.

What happens if I don’t file my cryptocurrency taxes?

Income from trading in cryptocurrency is a taxable income and must be reported in the Income Tax Return. FY 2022-23 onwards, crypto income must be reported as Capital Gains and tax should be paid at 30% under Section 115BBH of the Income Tax Act. Further, crypto traders cannot claim a deduction of any expenses other than the cost of acquisition. They cannot carry forward the loss to future years.
In the earlier years, if you have not reported your income from crypto trading, the taxman may issue a notice under Section 148 for income escaping assessment.