Capital Gains Tax - Types and Calculation Process Last Updated : 21 Sep 2019

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About Capital Gains Tax

The tax that is levied on long term and short term gains starts from 10% and 15%, respectively. Capital gain can be defined as any profit that is received through the sale of a capital asset. The profit that is received falls under the income category. Therefore, a tax needs to be paid on the income that is received. The tax that is paid is called capital gains tax and it can either be long term or short term.

Under the Income Tax Act, capital gains tax in India need not be paid in case the individual inherits the property and there is no sale. However, if the person who has inherited the property decides to sell it, tax will have to be paid on the income that has been generated from the sale. Some of the examples of capital assets are jewellery, machinery, leasehold rights, trademarks, patents, vehicles, house property, building, and land.

Types of Capital Assets

The two types of capital assets are mentioned below:

  • long term capital asset: In case individuals own an asset for a duration of more than 36 months, the asset is a long term capital asset. Debt-oriented mutual funds, jewellery, etc., that are held for a duration of more than 36 months will come under this category and there is no 24-month reduction period under such circumstances.
  • The below-mentioned assets are considered as long term assets if they are held for a duration of more than 12 months:

    • Zero coupon bonds (not dependent on whether they are quoted or not)
    • Unit Trust of India (UTI) units (not dependent on whether they are quoted or not)
    • Equity-based mutual funds units (not dependent on whether they are quoted or not)
    • Securities that are listed on a stock exchange that is recognised in India. Examples of such securities are government securities, bonds, and debentures.
    • Preference shares or equities that are held in a company that is listed on a stock exchange that is recognised in India.
  • short term capital asset: In case assets are held for a duration of 36 months or less, it can be defined as a short term capital asset. However, for immovable assets such as house property, building, and land, the duration has been reduced from 36 months to 24 months.

Therefore, if an individual wishes to sell a land or house after holding it for a duration of 24 months, the profit that the individual makes from it comes under long term capital gain.

In case the property has been inherited or given as a gift, the amount of time the property was held by the previous owner is also considered when determining whether the property can be considered as a short term capital asset or a long term capital asset.

The date on which the bonus shares were allotted is considered when determining the category under which bonus shares or right shares fall.

How to Calculate Capital Gains?

Depending on the amount of time that the asset has been held, the calculation of Capital Gains will vary. Some of the important points that individuals should know when calculating capital gains are mentioned below:

  • Cost of improvement: If there are any expenses that have been incurred by the seller because of any alterations or additions that have been made to the property. However, any improvements made before 1 April 2001 cannot be considered.
  • Acquisition cost: The amount of money that the seller paid in order to acquire the property.
  • Full value consideration: The amount of money that the seller will receive because of the property transfer. Capital gains are charged from the year the transaction was made even if the money was not received in that particular year.

In certain cases where the capital asset is also the property of the taxpayer, the acquisition cost and the improvement cost of the previous owner will also be included.

How to Calculate Long Term Capital Gains?

The procedure to calculate long term Capital Gains is mentioned below:

  • First, the individual must consider the full value of the asset.
  • Next, the individual must make the below-mentioned deductions:
    • The costs that have been incurred due to the transfer.
    • The amount of money that is spent on the acquisition.
    • The amount of money that is spent on improvement.
  • From the number that has been calculated by following the above steps, the individual must subtract any exemptions that are provided under Section 54B, 54F, 54EC, and 54.

Example to Calculate long term Capital Gains

Given below is an example to calculate long term Capital Gains:

Assumptions:

Price house was purchased for: Rs.30 lakh

Financial Year house was purchased: 2010-2011

Financial Year house was sold: 2018-2019

Amount house was sold for: Rs.50.5 lakh

Inflation adjusted cost: (280/167) x 30 = 50.29 lakh

long term Capital Gains: 50.50 lakh – 50.29 lakh = Rs.21,000 (approx)

How to Calculate Short Term Capital Gains?

The below-mentioned procedure must be followed by individuals in order to calculate short term capital gains:

  • First, the individual must consider the full value of the property.
  • Next, the below-mentioned points must be deducted:
    • Expenses that have been incurred for the improvement of the property.
    • The expenses incurred for acquiring the property.
    • Any expenses that have been incurred for the transfer of the property.
  • The amount that is calculated after the deduction is the short term capital gain.

The formula for the calculation of short term capital gain is the full value consideration minus the expenses that have incurred for the transfer minus the cost for improving and acquiring the property.

Example for Calculation of short term Capital Gains

Given below is an example of how short term Capital Gains is calculated:

Assumptions:

Price the house was sold for: Rs.55 lakh

Expenses for brokerage, commissions etc: Rs.30,000

Net sale consideration: Rs.54,70,000

Price the house was bought for: Rs.35 lakh

Amount spend for the improvement of house: Rs.3 lakh

Gross short term Capital Gain: Rs.16,70,000

Tax exemptions under Sections 54, 54B, 54D, 54EC, 54ED, 54F, 54G: Nil

Net short term Capital Gain: Rs.16,70,000

Short Term Capital Gains: 30% of Rs.16,70,000: Rs.5,01.000

Long term Gain Tax Rate

Condition Tax Rate
Sale of equity shares 10% of the amount which is more than Rs.1 lakh
Except for sale of equity shares 20%

Short Term Gains Tax Rate

Condition Tax Rate
When the transaction tax is based on securities 15%
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

Cost Inflation Index Number

Given in the table below is the CII Number from the financial year 2001-2002 to FY 2018-2019:

Financial Year Assessment Year CII Number
2001-2002 2002-2003 100
2002-2003 2003-2004 105
2003-2004 2004-2005 109
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

Indexed Cost of Improvement and Acquisition

The cost that is incurred on improvement and acquisition is indexed with the main aim of adjusting inflation for the number of years the property was held. This not only reduces capital gains but also increases the cost base.

Formula for calculation of indexed tax for improvement: The expenses incurred for improvement x Cost Inflation Index (CII) for the year the property was sold divided by the CII of the year the improvement occurred.

Formula for calculation of indexed tax for acquisition: The total expenses incurred for acquisition x CII of the year the property was sold divided by the CII of the year the property was initially acquired by the seller (or 2001-2002 whichever is later).

News About Capital Gains Tax

  • Capital Gains Tax Relief on the Cards for Investors Withdrawing from Startups

    In an effort to attract more funds into the sector, the Indian Government has considered a tax exemption on the total accrued capital gains whenever they are exiting a startup. The Department for Promotion of Industry and Internal Trade (DPIIT) considered two alternatives in the past to execute this incentive – the first one will be a blanket exemption, and the second will be a conditional exemption, which shall be based on the funds that have been redeployed. The latter is very similar to the mechanism currently in place in the UK. The department has made this decision after much consideration and it was finally determined that these investors shall be exempt from capital gains tax, if they are exiting a nascent firm or organisation. After this incentive has been implemented, the Government of India will then look into the various regulatory issues of startups and decide their taxation. Currently, startups in India are receiving two sets of exemptions that are with respect to the capital gains tax. Under Section 54GB of the Income Tax Act, 1961, such investors receive a tax exemption from capital gains that arise from the sale of a residential plot or house.

    30 April 2019

  • 10% Long Term Capital Gains Tax on Capital Gains Above Rs.1 Lakh Introduced in Budget 2018

    Arun Jaitely, the Finance Minister of India introduced long term capital gains tax on the sale of a number of prescribed securities. For the gains to be taxed, they have to be more than Rs.1 crore. The benefit of indexation will not be allowed on the tax either. However, the gains accrued until January 31 shall be grandfathered, while short term capital gains will remain the same at 15%.

    2 February 2018

  • 10% Long Term Capital Gains Tax on Capital Gains Above Rs.1 Lakh Introduced in Budget 2018

    Arun Jaitely, the Finance Minister of India introduced long term capital gains tax on the sale of a number of prescribed securities. For the gains to be taxed, they have to be more than Rs.1 crore. The benefit of indexation will not be allowed on the tax either. However, the gains accrued until January 31 shall be grandfathered, while short term capital gains will remain the same at 15%.

    2 February 2018

  • No capital gains tax on stock trading in the 2017-18 Budget

    Tax exemption on long-term capital gains was declared in 2004, in India. Last month, Prime Minister Narendra Modi said that taxpayers profiting through financial markets should make a fair contribution through taxes to help the nation grow. Following his remarks, many expected the government to impose tax on long-term capital gains in the 2017-18 Budget. However, that may not be the case. There is no imposition of capital gains tax on stock trading but there could be a change in the time limit of long-term capital gains. Currently, the time limit on the capital gains tax relief is 1 year. In the 2017-18 Budget, the time limit may be extended to 3 years, keeping with the amended DTAAs that India had signed with Singapore and Mauritius.

    In case the new time limit is implemented, retail and institutional investors may have to pay 15% capital gains tax if the stock is sold within 3 years. The extended time limit may prevent retail investors from selling stocks during volatile market conditions caused by external factors. However, the new rule could cause a huge shuffle in institutional investment portfolio and result in reduced funds for the stock market.

    16 January 2017

  • Singaporean PM Cautions India Against Withdrawal of Exemption on Capital Gains

    Singapore recently conveyed its concerns to India on the issue of Capital Gains tax, saying that a withdrawal on the exemption would impact investor sentiment and alter the outlook of the Indian tax regime in the eyes of Singapore investors. In a recent meeting where the Singaporean Prime Minister met PM Modi, he cautioned India on its intention to withdraw the exemption on Capital Gains, a move India has already implemented in Mauritius to prevent routing of cash by Indian firms. This move goes back to the 2006 tax treaty that India signed with Singapore wherein any tax regime modification in the Mauritius treaty will hold good for Singapore too. Over the last one decade, investments worth almost $100 Billion have come from Singapore.

    10 October 2016

  • Capital Gains Tax to be levied on investments through Cyprus

    The Double Taxation Avoidance Agreement (DTAA) with Cyprus was approved by the Union Cabinet on Wednesday. This will enable Indian authorities to levy capital gains tax in the country for investments originating in Cyprus.

    Similar to the recent amendment of the DTAA with Mauritius, this update has also lead to the provision of residence-based taxation on capital gains. These changes are in subsequence to the assumption of power by the NDA government and their sustained efforts in narrowing down tax evasions and round-tripping of funds.

    The proposed DTAA with Cyprus will prevent the misuse of beneficial provisions of the agreement and the distortion of financial flows that create challenges in tax collection.

    30 August 2016

  • Exemption on Long-Term Capital Gains Tax on Purchase of Multiple Houses

    Indian tax laws state that a tax assesse can exemption on long-term capital gains tax if he or she purchases a residential house on sale of another asset or property. Although the Section 54 and 54F amendment states that capital gains tax will only be exempted if the investment is on one residential property, you can still claim the tax exemption if you purchase multiple houses. The claim is legal when the purchases flats or houses are used as a single residential unit by the assessee or his or her family.

    In another decision made by a Special Bench of the Mumbai Tribunal, if the tax payer has purchased multiple houses in different locations, the tax exemption can be claimed for only one house.

    8 August 2016

  • Panel Examines Problem Areas in India-Mauritius DTAA

    The committee examining India’s revised Double Taxation Avoidance Agreement (DTAA) with Mauritius has found problems in the new rule that capital gains tax won’t be applicable on equity bought before April 1, 2017.

    Among the ambiguous areas in the DTAA discovered by the panel – consisting of officials from SEBI, Central Board of Direct Taxes, HSBC and Franklin Templeton – are: mergers, conversions of securities and American Depositary Receipts (ADRs), and bonus stocks. The key question is whether any change in ownership in case of stocks, or conversion of securities after April 1, 2017 but bought before that time, would attract capital gains tax or not.

    The new DTAA also states that investors from Mauritius will be liable to pay short-term capital gains tax in India at half the prevailing rate for two years from April 1, 2017. From April 1, 2019, they will have to pay the full rate.

    28 July 2016

  • From April 2017, Cyprus will no more enjoy capital tax waiver

    Cyprus, the European island country which is also a major FDI investor in India will no more enjoy capital tax waiver on investments made in India. The change is to get rolled out from April 2017. Since a long time India has been putting pressure on the island country to do away with the tax-free status enjoyed by it on investments made in India. However, Cyprus always got away citing the same status enjoyed by Mauritius and Singapore.

    With the recent India-Mauritius DTAA, Singapore and Mauritius both have lost the tax-free status on capital gains made on investments in India. This gave more negotiating power to India. As a result of these tax treaties, Indian will be able to reign in round-tripping of Indian funds and tax evasion in general.

    5 July 2016

  • Capital Gains Tax Goes Up Over Lower Inflation Rates

    If you are claiming long-term capital gains this year, be prepared to pay a higher tax. The Cost Inflation Index (CII), which is the basis of computing long-term capital gains, has been reduced for the year 2016-17 by the Central Board of Direct Taxes (CBDT).

    The CBDT has increased the CII for 2016-17 by 4.07 percent, reducing the margin of profit an individual can make on sale of a long-term asset.

    Adjusting for inflation helps determine how much profit you make on the sale of a property in real-time. CII is used to arrive at the current price of a property that has been purchased more than 3 years ago. So if the inflation is lower, the current price of a property may be lower than it would have under a higher inflation figure, which makes the profit you make on a sale higher. Long-term capital gains tax has to be paid on this profit that you make.

    22 June 2016

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