Investments made on stocks, mutual funds, or real estate such as a land, house, etc., are known as capital assets. When you sell these capital assets, the resulting profits constitute capital gains. On the other hand, if you sell a capital asset at a lower price than its purchase price, it results in a capital loss.

Types of Capital Gains

Depending on the period you hold the capital assets, you can classify the capital gain (or loss) into two categories:
  • Short-Term Capital Gain or STCG
  • Long-Term Capital Gain or LTCG

While there are many types of capital assets, here is a broad classification of a few important types of assets into STCG and LTCG.

Type of Gain Type of Capital Assets Holding Period
STCG Equity Shares Less than 12 Months
Equity-oriented Mutual Funds Less than 12 Months
Debt-oriented Mutual Funds Less than 36 months
Land / House / Building Less than 24 months
LTCG Equity Shares More than 12 months
Equity-oriented Mutual Funds More than 12 months
Debt-oriented Mutual Funds More than 36 months
Land / House / Building More than 24 months

Capital Gain Computation

To calculate capital gains, you need to familiarise yourself with a few important terms: 
  • Cost of Acquisition (CoA): It is the value or price at which the asset was acquired. For calculating capital gains of assets where indexation benefit is allowed, Indexed Cost of Acquisition is considered.
  • Cost of Improvement (CoI): The money spent on making alterations or improvements to an asset. This is only applicable if such expenses were made after April 1 2001. In the case of some assets such as immovable property, the indexed cost of the improvement is considered.
  • Cost of Inflation Index (CII): It is the measure of inflation which impacts the value of a long-term asset. The CII is released by the government and is required to calculate the indexed cost of acquisition or indexed cost of the improvement wherever indexation benefit is allowed.
  • Cost of Sale (CoS): It is the expenses made that are essential to the sale of an asset. The expenses that can be taken as cost of sale varies according to the type of asset. For instance, in the case of equity shares, brokerage charges and Securities Transaction Tax (STT) are considered to be the cost of sale. For land, it could be brokerage commission, stamp duty, travelling expenses, and certain inheritance charges.

Once you know this, it becomes easier to calculate capital gains depending on whether it is LTCG or STCG.

Calculation of STCG

If the asset sold/transferred comes in the category of STCG, it is calculated in the following way

Capital Gain = Asset Value (at the time of selling) - CoS (As and if applicable) - CoI (as and if applicable) - CoA

Calculation of LTCG

While calculating LTCG, it is important to know whether the asset is allowed indexation benefit. If indexation benefit is not allowed, the formulae remain same as above. The only exception is you can further lessen the applicable deductions as and if applicable.

For assets with indexation benefit,

Capital Gain = Asset Value (at the time of selling) - Indexed CoS (As and if applicable) - Indexed CoI (as and if applicable) - Indexed CoA - Deductions (as and if applicable)

Capital Gain Taxation

As per the Income Tax Act, capital gains come under the “income” category, and you must pay tax at applicable rates on the profits in the year you dispose of the capital asset. Depending on the type of capital gain, you have to calculate the income tax accordingly.

  1. Tax Calculation for Short-Term Capital Gain:
  2. For short-term capital gain, the calculation of income tax is straight forward. The capital gain gets added to your taxable income, and depending on your tax slab, you have to calculate the income tax. To calculate the short-term capital gain of property, subtract the purchase value, including the cost of improvement and transfer from its sale value.

    For example - Consider a person with a net taxable income of Rs. 12 Lakhs from his salary. He buys a flat worth Rs. 35 Lakhs in the year 2018 and sells it at Rs. 40 Lakhs in the year 2019. Since he held the property for less than 24 months, this income of Rs. 5 Lakhs forms short-term capital gain gets added to his taxable income of Rs. 12 Lakhs from his salary for calculation of tax in the year 2019.

    However, there is one exception to this rule. For equity and equity-oriented mutual funds, short-term gains are taxed at 15% irrespective of the tax slab you are in. However, for income less than Rs 2.5 lakhs in a year, you can offset the short-term gains against the taxable income until it reaches Rs 2.5 lakhs. On the rest of the gains, a 15% tax is applied.

  3. Tax Calculation for Long-Term Capital Gain:
  4. Calculating the tax implication of long-term capital gain is a bit trickier. It depends on the type of asset. Here is a broad classification of how taxes are calculated for different types of assets.

    • Taxation on Mutual Funds: Mutual funds are of two types; debt-oriented funds or equity-oriented funds. Since Arbitrage funds have maximum equity exposure, they too are calculated as equity-oriented funds for taxation purposes.

    • Type of Fund Indexation Benefit LTCG Tax
      Equity-oriented funds Not Allowed 10% on gains above Rs 1,00,000 in a financial year
      Debt-oriented funds Allowed 20% on Indexed Gains

    • Taxation on Equity and Shares: The tax calculation is same as equity-oriented mutual funds.
    • Taxation on Property Sale: For property sale, a tax of 20% is applied on the indexed gains. However, there are certain exceptions to this rule. You don’t have to pay any long-term tax on property sale if you satisfy a few conditions. Essentially, if the gains are used to build another property within a stipulated time which you hold for at least 3 years, you don’t have to pay tax on gains.

Calculation of Capital Gains with a Professional Advisor

Calculating capital gains and its tax implications is fairly easy if you follow the right steps. However, to benefits from the exemptions allowed, it is best to consult a professional advisor before making a sale, especially when it is long-term gains and the asset is of high-value.

DISCLAIMER

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.



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