Capital Gains: India vs. USA
Capital gains refer to the profit made from selling a capital asset at a higher price than its cost. These assets can include shares, immovable assets (such as land and buildings), and movable assets (such as jewelry and paintings). Both the USA and India allow for indexing adjustments for cost inflation while calculating capital gains.
Capital Gains in India
Classification:
Short Term Capital Gain (STCG): Applies if an immovable asset is held for less than 24 months.
Long Term Capital Gain (LTCG): Applies if the asset is held for at least 24 months. For shares or mutual fund units, the period is 12 months. The default period for other capital assets is 36 months.
Tax Rates:
STCG: Taxed at normal income tax rates.
LTCG: Taxed at a lower rate of 20%.
Exemptions:
Section 54: Exemption on capital gains from the sale of residential property if reinvested in another residential property.
Section 54EC: Exemption if the capital gains are invested in specified bonds (e.g., NHAI or REC bonds) within 6 months of the sale.
Section 54F: Exemption on capital gains from the sale of any asset other than a house if reinvested in a residential property.
Refer to the India Income Tax website for more details and practical examples.
Capital Gains in the USA
Classification:
Short Term Capital Gain (STCG): Applies if the asset is held for less than 1 year.
Long Term Capital Gain (LTCG): Applies if the asset is held for more than 1 year.
Tax Rates:
STCG: Taxed at normal income tax rates.
LTCG: Taxed at 15% or 20%, depending on income levels. Higher income levels may incur an additional 3.8% investment tax, making the effective rate 23.8%.
Exemptions:
Primary Residence Exclusion: Exclusion of $250,000 for single filers and $500,000 for married couples filing jointly, provided the taxpayer has lived in the property for at least 2 of the last 5 years before the sale.
Capital gains are reported on Form 1040 Schedule D. For more details, refer to IRS website topic 409.
Commonalities and Differences
Deductions: Both countries allow for the setoff of capital gains with capital losses and permit the carry-forward of losses to subsequent years.
Double Taxation Relief: When an asset sale is taxed in both India and the USA due to foreign income taxability, double taxation relief can be sought under the respective country’s tax laws and Double Taxation Avoidance Agreements (DTAAs).
