About Capital Gains Tax

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

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

Types of Capital Assets

The two sorts of capital assets are mentioned below:

    • long term capital asset: Just in case individuals own an asset for a duration of more than 36 months, the asset might be 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’s no 24-month reduction period under such circumstances.

The below-mentioned assets are considered as long-term assets if they’re held for a duration of over 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 hooked in to whether or not they are quoted or not)
    • Securities that are listed on a stock market that’s recognized in India. Examples of such securities are government securities, bonds, and debentures.
    • Preference shares or equities that are held during a company that’s listed on a stock market that’s recognized in India.
  • short term capital asset: Just in case assets are held for a duration of 36 months or less, it will be defined as a short term capital asset. However, for immovable assets like house property, building, and land, the duration has been reduced from 36 months to 24 months.

Therefore, if a person 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 might be considered as a brief 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 quantity of your time that the asset has been held, the calculation of Capital Gains will vary. Some of the details that individuals should know when calculating capital gains are mentioned below:

  • Cost of improvement: If there are any expenses that are incurred by the vendor due to any alterations or additions that are made to the property. However, any improvements made before 1 April 2001 cannot be considered.
  • Acquisition cost: The amount of cash that the vendor paid so as to accumulate the property.
  • Full value consideration: The quantity of cash that the vendor will receive due to the property transfer. Capital gains are charged from the year the transaction was made albeit the cash wasn’t received therein particular year.

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

How to Calculate Long Term Capital Gains?

The method to calculate long-term Capital Gains is mentioned below:

  • First, the individual must consider the complete 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 future 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.21,100 (approx)

How to Calculate Short Term Capital Gains?

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

  • First, the individual must consider the complete 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’s calculated after the deduction is that the short term financial gain .

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

Example for Calculation of short term Capital Gains

Below given 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.4 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 15% of the amount which is more than Rs.1.5 lakh
Except for sale of equity shares 20%

Short Term Gains Tax Rate

Condition Tax Rate
When the transaction tax is based on securities 20%
When transaction tax is not based on securities The gain is added to the income tax returns that must be filed, and the money 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 incurred on improvement and acquisition is indexed with the most aim of adjusting inflation for the number of years the property was held. This not only reduces capital gains but also increases the value base.

Formula for calculation of indexed tax for some change: 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 entire 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 vendor (or 2001-2002 whichever is later).

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