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. The tax that is levied on long term and short term gains starts from 10% and 15%, respectively.
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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 jewelery, 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:
- 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 recognized 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 recognized in India.
- Short Term Capital Asset:
- 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.
- 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, Section 54F, Section 54EC, and Section 54.
- 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.
- What are the different types of income that are taxable under Capital Gains?
- Why are capital gains classified into long-term and short-term?
- In the case of a short-term capital asset transfer, is there any indexation benefit when computing capital gain?
- In case I have sold a house that I had purchased 4 years ago, should I pay tax on any profits that I have earned?
- Should I file any form in case I want to withdraw from the Capital Gain Account?
- Can I file for ITR 1 if my income falls under capital gains?
- What is the taxation rate of capital gains of mutual funds?
- How to calculate indexation?
- What is the period for debt mutual funds to be categorized as long term?
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, jewelery, 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:
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:
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.
Calculate Long Term Capital Gains
The procedure to calculate long term Capital Gains is mentioned below:
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.35 lakh
Financial Year house was purchased: 2011-2012
Financial Year house was sold: 2019-2020
Amount house was sold for: Rs.60 lakh
Inflation adjusted cost: (289/184) x 35 = 54.97 lakh
long term Capital Gains: 60 lakh – 54.97 lakh = Rs.5,03,000 (approx)
Calculate Short Term Capital Gains
The below-mentioned procedure must be followed by individuals in order to calculate short term capital gains:
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 2021-2022:
| 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 |
| 2019-2020 | 2020-2021 | 289 |
| 2020-2021 | 2021-2022 | 301 |
| 2021-2022 | 2022-2023 | 317 |
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).
FAQs on Capital Gains Tax
Under Capital Gains, any profit that is made from a capital asset transfer during the year is taxable.
Depending on the nature of the gain, the amount of tax that must be paid will vary. In order to determine the tax that must be paid, capital gains are differentiated into long-term capital gain and short-term capital gain. Therefore, the computation process varies for short-term capital gains and long-term capital gains.
No, the benefit of indexation is provided for only long-term capital assets and not for short-term capital assets.
If you sell a house, it comes under long-term capital assets. Therefore, any profit that is made is taxable under Capital Gains.
Depending on the account you want to withdraw from, the form that must be filed will vary. In the case of Account-A, Form C must be deposited. In the case of Account-B, the amount must be transferred from Account-B to Account-A. This can be done by submitting Form B.
No, you cannot file for ITR 1 if your income falls under capital gains. Instead, you can report the details of your income in ITR 2.
The capital gains derived from selling debt mutual funds are taxed at the rate of 20% after indexation.
You can visit the official income tax website and use the Cost Inflation Index (CII) to calculate indexation.
Debt mutual funds can qualify as long-term gains if they are held for more than 36 months.
