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

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

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 -

Capital Gains Tax – FAQs