Capital Gains Tax- How it is calculated

Capital gain is a kind of gain you are getting through the sale of the capital asset. The profit one is earning falls under the income category. Therefore, a tax needs to be paid on the income that is received. The capital gain might be long-term or short-term. Usually, it starts from 10% to 15% respectively.

According to Income Tax Act, Capital gain taxes in India is not applicable in scenarios where the individual is inheriting the property and there is no sale. In case, the individual is planning to sell off the property, in that scenario tax is applicable on the income that is generated from the sale. Some examples of Capital Assets are machinery, jewelry, house property, leasehold rights, patents, trademarks, house property, buildings, and land.

Types of Capital Assets :

Long-Term Capital Assets : In case an individual is holding the asset for more than 36 months, the asset is considered a long-term asset like jewelry or any mutual funds, zero coupon bonds, equity-based mutual funds, securities, or any kind of preference shares.

Short-Term Capital Assets : Assets an individual held for a maximum of 36 months or less, can be defined as Short Term Capital Assets. For immovable properties, the duration has been reduced to 24 months. So, if an individual wish to sell land or a house after 24 months, the profit earned from the property is counted as a capital gain. If 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 a short-term capital asset or a long-term capital asset.

Steps to calculate Capital Gains :

Based on the amount of time the asset has been helping, capital gain tax calculation takes place. Certain points to keep in mind while calculating the capital gain tax are as follows:

  • Cost of Improvement :
    • Expenses incurred on the alterations or addition of any property, will not be considered. Made before 1 April 2001.
  • Public Provident fund :
    • It is one of the popular instruments as it offers assured returns. Interest earned on provident fund is compounded annually. The maturity period of Public Provident Fund scheme is 15 years. The minimum investment one can make in public provident fund us Rs 500 and the maximum allowed Rs 1.5 Lakh.The amount you contribute towards PPF is eligible for tax deductions under Section 80C of the Income Tax Act.
  • Acquisition cost :
    • The amount seller is paying to acquire property.
  • Full Value Consideration :
    • Amount the seller is getting at the time of property transfer. Capital gains are charged from the year transaction was made. 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.

For example : Property Cost- Rs 35 Lakh
Financial Year house was purchased: 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.)

Steps to calculate Short -Term Capital Gains :

Firstly, an individual has to evaluate the full value of the property. Next, the below- mentioned points are to be deducted:

  • Expenses that have been incurred on property alterations
  • The expenses incurred for acquiring the property.
  • Any expenses that have been incurred on property transfer
  • The amount that is calculated after the deduction is the short-term capital gain.

Example for Calculation of short-term Capital Gains :

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

For example : The house sold at a price Rs 55 Lakh for brokerage, commission, etc. The expenses incurred for brokerage commission is Rs 30,000. So, after expenses, amount spend for improvement of house is Rs 3 Lakh. Gross Short-term Capital gain is Rs 16,70, 000. Tax exemptions under this section 54, 54B, 54D, 54EC, 54ED, 54F,& 54G are allowed.

Frequently Asked Questions

  • What is different form of income taxable under Capital Gains?
    Under Capital Gains, any profit earned via capital asset transfer during the year is taxable.
  • Why are capital gains classified into long-term and short-term?
    Based on the nature of gain, tax is being calculated. To determine the same, capital gain is categorized into two Long term capital gain and short-term capital gain. Therefore, the computation process varies for short-term capital gains and long-term capital gains.
  • How to withdraw from capital gain account?
    Based on the account you want to withdraw, you need to fill the form. In case of Account-A, Form C must be deposited. In case, Account B, transfer the account from B to A. This can be done by submitting Form B.
  • Can I file for ITR 1 if my income falls under capital gains?
    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.
  • What is the taxation rate of capital gains of mutual funds?
    The capital gains derived from selling debt mutual funds are taxed at the rate of 20% after indexation.