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Capital Gains Tax – Types, Rate & Calculation

What is Capital Gains Tax?

Capital Gains tax is a tax that is levied when a person sells an asset (the capital asset) that has appreciated in value. The basic idea behind capital gains tax is that a taxpayer should pay tax on his gain, if and only if, his capital gains exceed the depreciation of his capital assets.

Any profit derived from the sale of a capital asset is referred to as a capital gain. The profit earned falls under the category of income. As a result, a tax must be paid on the income earned. The tax is known as capital gains tax, and it can be either long-term or short-term. The tax on long-term and short-term gains begins at 10% and 15%, respectively.

Shares and stocks, housing property, building, jewellery, machinery, leasehold rights, trademarks, patents, automobiles, and land are some examples of capital assets. One need not pay capital gains tax if they inherit a property and there is no sale. However, if the person who has inherited the property decides to sell it, tax must be paid on the money obtained from the sale.

Types of Capital Gains Tax

There are 2 types of Capital Gains Tax – Long Term Capital Gains & Short Term Capital Gains.

Long-Term Capital Gains Tax

  • An asset that is held for more than 36 months is known as ‘Long Term Capital Asset’
  • Debt-oriented mutual funds, jewelry, and other items kept for more than 36 months fall into this category, and there is no 24-month reduction period in such cases.
  • Certain assets are classified as long-term capital assets even when they are held for more than 12 months:
  • Zero Coupon Bonds (not dependent on whether they are quoted or not)
  • Units of the Unit Trust of India (UTI) (not dependent on whether they are quoted or not)
  • Units of equity-based mutual funds (not dependent on whether they are quoted or not)
  • Securities that are listed on a regulated Indian stock market. Government securities, bonds, and debentures are examples of such securities.
  • Preference shares or stocks held in a corporation that is listed on a recognized Indian stock exchange.

Capital Gains Tax Calculation

ConditionTax Rate
Sale of equity shares10% of the amount which is more than Rs.1 lakh
Except for sale of equity shares20%

Short-Term Capital Gains Tax

  • An asset held for less than 36 months is categorized as ‘Short-term Capital Asset’.
  • For immovable assets such as house property, building, and land, this duration has been reduced from 36 months to 24 months.
  • When a person decides to sell a piece of land or a house after holding it for 24 months, the profit is classified as long-term capital gain.
  • If the property was inherited or given as a gift, the duration of time the previous owner possessed the property is also considered when assessing whether the property is a short-term capital asset or a long-term capital asset.
  • For transactions involving bonus shares, the date on which the bonus shares were issued is taken into account when establishing which category they belong to.
  • Short-term Capital Gains Calculation
ConditionTax Rate
When the transaction tax is based on securities15%
When transaction tax is not based on securities The gain is added to the income tax returns that must be filed, and the amount will be based on the income tax slab

How Is Capital Gains Tax Calculated?

Capital gains tax is calculated differently for long-term assets and short-term assets. Here are some basics you need to know before we learn how to calculate capital gains tax -

Full value consideration - The amount of money received or to be received by the seller as a result of the transfer of his capital assets. Even if no compensation is received, capital gains are taxable in the year of transfer.

Cost of acquisition - The price at which the seller purchased the capital asset.

Cost of enhancement - Capital expenses incurred by the seller in making additions or adjustments to the capital asset.

Calculating Long-Term Capital Gains Tax

One usually starts with the full value of consideration and then deducts the following components:

  • Expenditure incurred wholly and exclusively in connection with such transfer
  • Indexed cost of acquisition
  • Indexed cost of improvement

Exemptions offered by sections 54, 54EC, 54F, and 54B are subtracted from this total. As a mathematical formula, it would be as follows –

Long-Term Capital Gain = Full Value Consideration – [Expenses Incurred Exclusively For Such Transfer + Indexed Cost Of Acquisition + Indexed Cost Of Improvement + Expenses That Can Be Deducted From Full Value For Consideration]

Points to note:

LTCG on sale of shares - Long-term capital gains on the sale of equity shares/units of equities oriented funds realized after March 31, 2018 will be exempt up to Rs. 1 lakh per annum (Budget 2018). Furthermore, a 10% tax would be charged on LTCG on shares/units of equity oriented funds that exceed Rs. 1 lakh in a fiscal year without the advantage of indexation. You may be able to deduct the following expenses:

  • Broker's commission on shares sold
  • Securities transaction tax (STT) is not deductible

LTCG on sale of house property – You can deduct these expenses from the total sale price:

  • Brokerage or commission paid to get a buyer
  • Stamp paper cost
  • Travel expenditures related to the transfer - these may be incurred even after the transfer has been completed.
  • Where property has been inherited, expenses incurred in connection with the will and inheritance, obtaining a succession certificate, and expenditures of the executor may be granted in some situations.

In the case of a jewellery sale - such costs can be deducted if a broker's services were used to find a buyer. The amount deducted from the sale price of assets, on the other hand, is not considered for calculating capital gains under any other head of income tax return.

Calculating Short-Term Capital Gains

The calculation of short-term capital gains is quite easy. Begin with the full consideration value and deduct the following –

  • Expenses incurred entirely and solely in conjunction with such transfer
  • Acquisition cost
  • Cost of enhancement

That's it for your short-term capital gains.

Capital Gains Tax - Cost Inflation Index Number

CII Number from the financial year 2001-2002 to FY 2021-2022. This is necessary while calculating your capital gains -

Financial YearAssessment YearCII Number
2001-20022002-2003100
2002-20032003-2004 105
2004-2005 2005-2006 113 
2005-2006 2006-2007 117 
2006-2007 2007-2008 122 
2007-2008 2008-2009 129 
2008-2009 2009-2010 137 
2009-2010 2010-2011 148 
2010-2011 2011-2012 167 
2011-2012 2012-2013 184 
2012-2013 2013-2014 200 
2013-2014 2014-2015 220 
2014-2015 2015-2016 240 
2015-2016 2016-2017 254 
2016-2017 2017-2018 264 
2017-2018 2018-2019 272 
2018-2019 2019-2020 280 
2019-2020 2020-2021 289 
2020-2021 2021-2022 301 
2021-2022 2022-2023 317

Capital Gains Tax – FAQs

1. What is capital gains tax? Who has to pay capital gains tax?

Capital Gains tax is a tax that is levied when a person sells an asset (the capital asset) that has appreciated in value. The basic idea behind capital gains tax is that a taxpayer should pay tax on his gain, if and only if, his capital gains exceed the depreciation of his capital assets.

2. What are the types of capital gains tax in India?

Capital gains tax are of two types – Long-term Capital Gains Tax & Short-term Capital Gains Tax.

3. What is Long-term Capital Gains Tax?

Long-term Capital Gains Tax is levied when you sell an asset that has been held for more than 36 months. Debt-oriented mutual funds, jewelry, and other items kept for more than 36 months fall into this category, and there is no 24-month reduction period in such cases.

4. What is Short-term Capital Gains Tax?

Short-term Capital Gains Tax is levied when you sell an asset that was held for less than 36 months. However, for immovable assets such as house property, building, and land, this duration has been reduced from 36 months to 24 months.

5. Is there any indexation benefit when calculating capital gain in the case of a short-term capital asset transfer?

No, the benefit of indexation is not available for short-term capital assets. You can avail them for long-term capital assets only.

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