A capital gain is made when you sell your property for a higher value than what you had spent on while acquiring it. You may have invested on land, gold, mutual funds, shares or debentures which are not annual accruals, they will be considered separately while taxation. This article will give you a wide knowledge on capital gains and how you compute tax on Capital Gains.
A capital gain is the difference between what you had spent while acquiring the asset and received when you sold the asset. In short, any profit gained from a sale/transfer of a capital asset like land, house, shares, mutual funds, debentures, jewelry etc. are all known as capital gains.
Capital Gains are basically of two types i.e., short term capital gain [STCG] and long term capital gain [LTCG]. It is differentiated mainly by the holding period of the capital asset which determines the asset classification and the profit/ gain arising from it.
Short Term Capital Gain [STCG]:
Any profit raised from a capital asset which was held for 36 months or less before the asset was sold or transferred is known as STCG. However, to classify the profits as STGC in the case of shares, bonds, securities, debentures and mutual funds a holding period of 12 months is required.
Gross STCG = Sale cost of an asset – (cost of purchase + cost of improvement + any other expenses incurred on sale or transfer)
Net STCG = Gross STCG – Tax Exemption (if any) available u/s 54B/54D/54G/54GA
Long Term Capital Gain [LTCG]:
Any Profit raised from a capital asset where the holding period is more than 36 months is known as LTCG. However, in the case of shares, bonds, securities, debentures and mutual funds a holding period exceeding 12 months is applicable.
Gross LTCG = Sale price of an asset – (Indexed cost of purchase + cost of improvement + any other expenses incurred on sale or transfer)
Net LTCG = Gross LTCG – Tax Exemption (if any) available u/s 54/54B/54D/54EC/54ED/54F/54G
It is important for the taxpayers to know that LTCG is calculated after subtracting the indexed cost of purchase and not the actual cost of acquisition, which will help to know the real value of money invested while purchasing of the asset. Due to the increase in inflation, the purchasing power of money will reduce every year,
Example: You purchased a land in 1997 for ₹ 3,000,000 which you sold in the year 2000 for ₹ 6,000,000. Let us see the real worth of profit that you made on it in these 4 years:
|The Cost of purchasing a property in Jan, 1997||₹ 30,00,000|
|Selling price of the property in Dec, 2000||₹ 60,00,000|
|Inflation Index (1997)||305|
|Inflation Index (2000)||406|
|Indexed Purchase cost||30,00,000 * (406/305) = ₹ 3,993,442.62|
|Long Term Capital gain||60,00,000 – 3993442.62= ₹ 2,006,557.38|
As per the example the real profit made after selling the property is not ₹ 3,000,000. But it is worth Rs. 2,006,557.38 only and this amount is applicable for tax.
Let’s understand in brief about the computation of tax on STCG and LTCG.
Tax Implication on Capital Gains
As per the law, whenever the assesee makes a profit by selling any of his properties he is accountable to pay the tax. The tax rate however depends upon the holding period for any asset. Different rates of tax apply for profits on transfer of the short-term and long term capital assets.
• Tax on STCG: Any gains raised on short-term capital asset are taxable as regular income i.e. they will be added to your total annual income and will be taxed as per the tax slab that is applicable in your case. So, after adding the short-term capital profit to your total taxable income and if your slab falls on 30% tax bracket then you must pay the tax at the rate of 30% for all your incomes which are taxable that is including the income from short-term capital gains.
• Tax on LTCG: The long‐term capital gain is generally calculated at 20.6% with indexation or 10.3% without indexation that is whichever is lower. Apart from this the LTCG is also eligible for certain deductions. There are few provisions in income tax to reduce LTCG through indexation or save LTCG tax by capitalizing these profits to other alternatives.
As per the latest announcement of the union budget for FY 2014-15 (AY 2015-16), with effect from 1 April 2015, the 10.3% without indexation is proposed to be taken off. That means the investors will now have to offer long‐term capital gain tax after 3 years at the rate of 20% with indexation (10% with indexation to be removed).