Computation of Short Term Capital Gains and Long Term Capital Gains

For the computation of Short Term and Long Term Capital Gains, it's important to familiarise yourself with the relevant terminology.

Full Value of Consideration

This refers to the full value of cash/kind that the seller (or transferor) of the asset gains as a result of selling (or transferring) the asset. In the case of an outright sale, the entire amount received by the seller will be considered. In the case of an exchange of an asset, the Fair Market Value of the property or asset will be considered. If the Full Value of Consideration is received in instalments over a few years, the entire value considered will be the Market Value of the property or of the asset given in exchange.

Fair Market Value

This is the price at which the property (asset) would normally be sold, if it was sold on the open market on a particular date.

Expenses on Transfer

These include any direct or indirect expenses that are incurred during transfer, such as - brokerage, advertising, stamp duty, registration fees, legal expenditure, etc. It should be noted that if any expense has already been claimed as a deduction under any other provision of the Income Tax Act, 1961, it cannot be claimed again under Expenses on Transfer.

Cost of Acquisition

This refers to the total cost that the seller of the property had incurred when he acquired the property or asset. Registration and other expenses incurred for the purpose of transferring the title are also totalled up and considered as part of the total Cost of Acquisition. There are also cases where assets / properties are acquired as gifts or as inheritance. In such cases, the Cost of Acquisition will be the cost at which the previous owner of the property acquired it -

1. As a gift, or on the legal demand of a will.
2. As an inheritance, through succession or devolution.
3. As a distributed asset on the liquidation of a business concern.
4. As a distributed asset on the total partition of a Hindu Undivided Family.

In cases where the cost the previous owner of the property paid cannot be established, the previous owner's cost of acquisition will be taken as the fair market value of the asset on the date on which the previous owner acquired it. The interest on credit taken to acquire the capital asset also forms a part of the Cost of Acquisition.

Cost of Improvement

Any additions, alterations or improvements made to the asset by the owner will deductible as the Cost of Improvement. If the asset came to be the property of the owner as a gift or through an inheritance, etc., capital expenditure incurred by the previous owner will also be treated as a cost of improvement.

Indexation Using the Cost Inflation Index

When computing Long Term Capital Gains, the Cost Inflation Index should be used to index the Cost of Acquisition and Cost of Improvement.

Indexed Cost = Actual Cost x Cost Inflation Index in the year of sale / Cost Inflation Index in the year of purchase

If the calculation is being done without indexation, the Long Term Capital Gains tax rate will be 10%.

Rates of Taxation

Short-Term Capital Gains are taxed as per the current Income Tax Slabs.

Long-Term Capital Gains are taxed at 20%.

Computation of Short-Term Capital Gains

Tax shall be payable as per the current Income Tax slab rates on the Short-Term Capital Gains that have been calculated above. 

Example: Ms. Caroline is a salaried employee. In the month of November 2021, she purchased gold worth Rs.9.5 lakh and sold the same in July 2022 for Rs.10 lakh. At the time of the sale of gold, she paid a brokerage of Rs.10,000. What is the amount of taxable capital gain? 

Gold was purchased and sold in a period of less than 36 months which makes it a short-term gain. So, the gain will be computed as follows:

Computation of Long Term Capital Gains

Tax will be paid at the rate of 20% (or 10% in case of no indexation) on the Long Term Capital Gains that have been calculated above, and Advance Tax will also be payable on the Capital Gains.

(*) Indexation is the process of adjusting the cost of acquisition to adjust against inflationary increases in asset value. The Central Government has issued a cost inflation index for this reason. Only long-term capital assets can benefit from indexation. The following criteria must be considered when calculating the indexed cost of acquisition: 

1. Year of transfer 
2. Year of acquisition or improvement 
3. Cost inflation index of the year of transfer 

1. Cost inflation index of the year of acquisition or improvement 

The formula to calculate the indexed cost of acquisition is mentioned below: 

Cost of acquisition × Cost inflation index of the year of transfer of capital asset/Cost inflation index of the year of acquisition 

The formula to calculate the indexed cost of improvement is mentioned below: 

Cost of improvement × Cost inflation index of the year of transfer of capital asset/Cost inflation index of the year of improvement 

The cost inflation indexes provided by the central government are mentioned in the table below: 

Example: Mr. Anand bought a land plot in July 2005 for Rs.90,000 and sold it in May 2021 for Rs.10 lakh. (Brokerage Rs.10,000). What is the taxable capital gain in Mr. Anand's case? 

The capital gain will be calculated as follows: 

1. Cost inflation index for 2005-06: 117 
2. Cost inflation index for 2021-22: 317 

The indexed cost of acquisition is calculated as follows: 

90,000 × 317/117 = Rs.2,43,846 

In the Case of Capital Loss:

In cases where there is a loss on the sale of capital assets, the loss can be set-off against other Capital Gains in that assessment year. If there aren't any Capital Gains against which the loss can be set-off, the loss can be carried forward for 8 years and be set-off against Capital Gains in the future.