What are Long-term and Short-term Assets?
The period of holding is bifurcated into long-term and short-term. If listed shares are held for 12 months or less, they are short-term assets, else long long-term assets; Other assets, if held for 36 months or less, are short-term assets long term assets.
Type of Asset | Short-term | Long-term |
Listed securities, units of UTI, Zero coupon bonds, and units of equity-oriented mutual funds. | Less than or equal to 12 months | More than 12 months |
Land and building, unlisted shares | Less than or equal to 24 months | More than 24 months. |
Others (including units of debt fund, units of a business trust, unlisted securities other than shares) | Less than or equal to 36 months | More than 36 months. |
Capital Gains Tax India - When and How Taxability Arises?
If you sell any specified asset to another person, then the profits arising from such sale are taxable under this head. Some of the specified assets can be outlined as below:
Property [e.g., House, plot, building, etc.]
Jewellery, archaeological collections, drawings, paintings, sculptures & any work of art
Agricultural land situated in an urban area
Shares and securities
Stock is not covered under the list of assets. So don't worry; no capital gains arise on the transfer of stock-in-trade. There are different tax implications for long-term assets and short-term assets.
How are Capital Gains Calculated?
Calculation of Short-Term Capital Gains Tax
If you have incurred any short-term capital gain, it can be calculated as follows:
Calculate the Full Value Consideration (it is the total sale value of the asset usually mentioned in the sale deed subject to some other provisions of income tax law);
Reduce sale expenses from the full value consideration;
The resultant value is net consideration;
Reduce cost of acquisition and cost of improvement from net consideration;
Resultant value is Short Term Capital Gains;
Reduce the exemptions (if any) from STCG;
Resultant value is Taxable Short Term Capital Gains; calculate the tax on it.
Particulars | Amount |
Calculate the Full Value Consideration (it is the total sale value of the asset usually mentioned in the sale deed subject to some other provisions of income tax law) | XXXX |
(-) Sale Expenses | (-) XXX |
Net Consideration | XXXX |
(-) Cost of Acquisition | (-) XXX |
(-) Cost of Improvement | (-) XXX |
Short-term capital gains | XXXX |
(-) Exemptions (if any) | (-) XXX |
Taxable Short-term Capital Gains | XXXX |
Calculation of Long Term Capital Gains Tax
If you have incurred any long-term capital gain, it can be calculated as follows:
Calculate the full value consideration (it is the total sale value of the asset usually mentioned in the sale deed subject to some other provisions of income tax law);
Reduce sale expenses from the full value consideration;
The resultant value is net consideration;
Reduce indexed cost of acquisition and indexed cost of improvement from net consideration;
Resultant value is Long Term Capital Gains;
Reduce the exemptions (if any) from LTCG;
Resultant value is Taxable Long Term Capital Gains; calculate the tax on it.
Particulars | Amount |
Calculate the Full Value Consideration (it is the total sale value of the asset usually mentioned in the sale deed subject to some other provisions of income tax law) | XXXX |
(-) Sale Expenses | (-) XXX |
Net Consideration | XXXX |
(-) Indexed cost of Acquisition | (-) XXX |
(-) Indexed cost of Improvement | (-) XXX |
Long-term capital gains | XXXX |
(-) Exemptions (Under sections 54, 54F, 54EC, etc.) | (-) XXX |
Taxable Long-term Capital Gains | XXXX |
Remember the following points:
If you have incurred any long-term capital gain, it can be calculated as follows:
Securities Transaction Tax paid is not allowed as a deduction;
Indexed Cost of Acquisition = (Cost of acquisition x Cost inflation index of year of sale) / cost inflation index of year in which asset is first held/purchased.
Indexed Cost of Improvement = (Cost of Improvement x Cost inflation index of the year of sale) / cost inflation index of the year of improvement;
Cost Inflation index for each year is different;
If the asset is acquired before 1-Apr-1981, the cost of acquisition is Fair Market Value as on 1-Apr-1981 or the original cost of acquiring the asset, whichever is higher;
Expenses on any improvement done before 1-Apr-1981 is not deducted from the net consideration.
Indexation benefit is provided to adjust the cost of acquisition and improvement according to inflation raised during the period. The cost Inflation Index (CII) is used for calculating the indexation benefit.
Expert advice: The benefit of indexation is not available for bonds/debentures other than capital indexed bonds issued by Government.
Short-term Capital Gain Tax Rates
Tax rates on STCG are calculated as per the rates given below:
In the case of all assets (except equity shares) = STCG x applicable slab rates.
On transfer of Equity shares on which Securities Transaction Tax (STT) has been charged = 15% x Short Term Capital Gains.
Long-term Capital Gain Tax Rates
Tax rates on LTCG are calculated at the rate of 20% of LTCG in all cases except those mentioned below:
If you transfer any equity shares and LTCG arises on it, then no tax is charged on such LTCG if Securities Transaction tax is paid;
Tax on LTCG arising on listed shares (in case of STT not paid) shall be calculated at the rate of 10% of Capital Gains (Net Consideration (minus) cost of acquisition without indexation) or 20% of Capital Gains (Net Consideration (minus) Indexed Cost of acquisition) whichever is lower.
What is Capital Gain Tax on Sale of House Property?
If you are going to purchase a house property of Rs. 50,00,000 or more, then you are required to deduct tax at the time of making payment(s) to the seller.
You have to deduct TDS @ 1% of the payment made to the seller under Section 194-IA.
You should follow the procedure given below:
Make the payment to the party and deduct TDS @ 1% of the payment made;
Pay the tax to the government;
File the return in Form-26QB;
Download form 16B (Certificate of TDS deducted) and give it to the seller for his records.
The following expenses are deductible from sale amount of house property at the time of computing capital gains:
Brokerage or Commission paid;
Stamp Paper expense;
Expenses attached with events related to inheritance/gift/will.
If you have sold an asset (house property/other asset) and then purchased the new house property, claim the exemption in Capital Gains.
When you sell a property, remember that if the sale amount is less than the stamp duty value calculated by Stamp Valuation Authority, then stamp duty value shall be deemed to be Full Value Consideration."Let's under the concept with the help of an illustration:"
Sale price of the land = Rs. 7,00,000
Land was acquired on 01-10-1997 for Rs. 1,50,000
Valuation as per Stamp Valuation Authority = Rs. 13,00,000
Full Value of Consideration | Rs. 13,00,000 |
Less: Indexed Cost of Acquisition (150000-1081-1331) | Rs. 4,89,879 |
Long Term Capital Gains | Rs. 8,10,121 |
Avoid cash transactions. Whether you receive money or pay it, do it via account payee cheque or account payee bank draft.
What are the Tax Exemptions on Capital Gains?
Capital Gain exemption on Sale of House Property
Capital gains arising on the sale of house property are not chargeable to tax if:
A property held for more than 3 years (i.e., a long-term house property) is sold
A new house is purchased 1 year before or within 2 years of the sale of house property
You can also construct a new house, but same should be constructed within 3 years of sale;
Don't sell the new house property till 3 years from the date of purchase.
Quantum of Exemption: Amount of Capital Gains or amount invested in new house property, whichever is less.
Expert Advice: If you can't utilize the sale amount for the purchase/ construction of a house property till the date of filing ITR, then deposit the unutilized amount in Capital Gains Deposit Account Scheme
Let's understand the concept with the help of an illustration:Shikha acquired a residential house in March 2000 for 10,00,000 and made some improvements by way of additional construction to the house, incurring expenditure of 2,00,000 in December 2004. She sold the house property in November 2015 for 75,00,000. She acquired a residential house in February 2015 for 25,00,000.
Full Value of Consideration | Rs. 75,00,000 |
Less: Indexed Cost of acquisition (100000-1081-389) | Rs. 27,78,920 |
Less: Indexed Cost of Improvement (200000-1081-480) | Rs. 4,50,417 |
Long Term Capital Gains | Rs. 42,70,663 |
Less: Exemption u/s 54* | Rs. 25,00,000 |
Taxable Long Term Capital Gains | Rs. 17,70,663 |
*Since a residential house has been purchased within 1 year before the sale of the house property, hence exemption u/s 54 is allowed for the amount invested or the amount of capital gains, whichever is lower, i.e., 25,00,000.
Exemption on sale of assets other than House Property
If you sell a long-term asset (other than house property) and purchase a new house property within 1 year before or after 2 years from the date of sale of the asset, then exemption of capital gains is calculated as follows:
Exempted Capital Gains = (Amount Invested in New AssetנCapital gains)/Net Sales Consideration*
Expert Advice: Ensure that you own only 1 house (other than the new house to be bought) as on date of sale.
*Net Sale consideration means [Total Sale value expenses on sale]
Hope this article helped you understand the tax implications on capital gains income from different sources.
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