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  • Computation of Short Term Capital Gains and Long Term Capital Gains

    When you buy and sell assets, the profit that you earn is called a Capital Gain. You are liable to pay a tax on profits earned, called Capital Gains Tax. There are two types of capital gains tax that apply on the sale of an asset, depending on the duration of time you’ve held the asset before selling it.

    Short and Long term capital gains are taxed differently, and the benefits you receive or are eligible for while being taxed under these two types of gains are different.

    Short Term Capital Gains are those that you earn when you sell an asset in under 36 months (3 years) from the date on which you acquired the asset.

    Long Term Capital Gains are those that you earn when you sell an asset after 36 months (3 years) from the date on which you acquired the asset.

    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 –

    • As a gift, or on the legal demand of a will.
    • As an inheritance, through succession or devolution.
    • As a distributed asset on the liquidation of a business concern.
    • 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:

    Full Value of Consideration Rs.xxxx
    Less: Expenses on Transfer Rs.xx
    Less: Cost of Acquisition Rs.xx
    Less: Cost of Improvement Rs.xx
    Gross Short Term Capital Gain Rs.xxxx
    Less: Exemptions under section 54B / 54D / 54G / 54GA Rs.xx
    Net Short Term Capital Gain Rs.xxx

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

    Computation of Long Term Capital Gains:

    Full Value of Consideration Rs.xxxx
    Less: Expenses on Transfer Rs.xx
    Less: Indexed Cost of Acquisition Rs.xx
    Less: Indexed Cost of Improvement Rs.xx
    Gross Long Term Capital Gain Rs.xxxx
    Less: Exemptions under section 54 / 54B / 54D / 54EC / 54ED / 54F / 54G Rs.xx
    Net Short Term Capital Gain Rs.xxx

    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.

    In the Case of Capital Loss:

    In cases where there is a loss on 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.

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