Selling your old phone, furniture or jewellery? Know when you have to pay tax and what counts as ‘personal effects’

If you make a profit by selling an asset, it it generally treated as a capital gain and income tax would be payable on such gains. The same rule also applies when you sell certain personal assets such as gold or silver jewellery.

However, proceeds from the sale of some other personal belongings, such as furniture, car, scooter or even a dress, are exempt from tax.

This is because of a specific provision in the income tax laws that provides an exemption for gains made on the sale of ‘personal effects’ by an individual. The term refers to a movable property held by a taxpayer for their or a dependent family member's personal or day-to-day use.

Which items are tax-exempt and which are not?

Personal items that can be sold without attracting any tax liability include clothing and apparel, furniture, crockery or utensils, and daily use electronics such as mobile phones or laptops.

However, this definition of ‘personal effects’ do not include jewellery, archaeological collections, drawings, paintings, sculptures or any work of art, and income tax would be payable if the taxpayer makes any profit or gain from the sale of any of these six kinds of articles. Such items are subject to tax even if they were held for personal use.

In this context, it must be noted that the definition of ‘jewellery’ includes ornaments made of silver, gold, platinum or any other precious metal, or any alloy containing one or more such metals. Additionally, precious and semiprecious stones are also classified as jewellery for tax purposes.

What if clothes or furniture have precious stones?

If you have a furniture, utensil or any other article which are embellished with precious metal or semiprecious stones, then proceeds received by the owner after selling them will attract income tax.

Similarly, if any precious metal or semiprecious stones are worked or sewn into any wearing apparel, that article will also be treated as jewellery and gains upon sale will be taxable in the hands of the owner.

Important points to remember while selling jewellery

Taxpayers must note that the applicable income tax on the sale of jewellery is calculated only on the profit, and not on the full selling amount.

If the jewellery was inherited or gifted, the previous owner's cost of acquisition and holding period may also be considered when calculating the capital gain, in line with income tax rules.

For example, if you purchased a gold item for ₹2 lakh and later exchange it for new jewellery at a value of ₹4 lakh, the resulting ₹2 lakh gain may be taxable.

It should be noted that while gains on the sale of personal effects are not taxable, losses incurred on the sale of such personal effects cannot be set off against other capital gains or income. Also, such losses cannot be carried forward.

While selling an item, it's prudent to check whether it qualifies as a personal effect to claim exemption from income tax on the gain you may make. You must also retain sufficient documents in the form of bills or receipts and bank statements, both for purchase and sale, for large transactions.