A Guide to Capital Gains tax and How It is Calculated

House property, buildings, land, vehicles, machinery, trademarks and patents, and jewellery are a few types of capital assets. To better understand what a capital asset is, it’s easier to define what is NOT a capital asset:

• Raw material, consumables, and stocks that are held for a profession or business
• Personal items like furniture, clothes, household appliances that you use for personal use
• Agricultural land located in a rural area
• Gold bonds issued by the central government like the 7% bonds of 1980 or the national defence bonds of 1980
• Gold deposit bonds like the Gold Deposit Scheme of 1999 or the Gold Monetisation Scheme of 2015
• Special bearer bonds issued in 1991

1. Short-term Capital Asset As the name implies, these are assets that you hold for a short time, not more than 36 months (or 12 months).
2. Long-term Capital Asset As the name implies, these assets are held for a long time, usually more than 36 months. Units of equity mutual funds and stocks are considered long-term assets if held for more than a year. Property is regarded as a long-term asset if held for more than two years.

When you transfer a capital asset, you have to pay capital gains tax . Let’s say, you sold an ancestral house in the FY 2019 – 20. The income you generated from this sale must be included in your income for the year as a capital gain. It's chargeable under the head capital gains.Here are a few points to keep in mind, regarding the capital gains tax :

• Short-term capital gain – As a result of transferring a short-term capital asset
• Long-term capital gain – As a result of transferring a long-term capital asset

• Capital gains are classified into:
• You are charged a capital gains tax when you are the owner of a capital asset and gained a profit from the transfer of the asset.
• The capital gains are added to your taxable income on the year of transfer.
• Indexation is considered while calculating the tax on capital gains. Let’s explain this with an example – assume you purchased a flat for Rs. 20 lakhs ten years ago. The value of the property today is Rs. 50 lakhs. You don’t have to pay tax on the gain you made from the sale – Rs. 30 lakhs. The income tax department allows for indexation – which increases the purchase price of the capital asset for today, adjusted for inflation.
• Indexation is calculated based on CII (Cost Inflation Index), which is determined by the income tax department.

If you have made a profit by selling a capital asset, make sure to include it under the head capital gains while paying your taxes to avoid penalties.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.