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Aruna Bhayana
| Updated: 21 Nov, 2018 | Category: Income Tax

How to Calculate Capital Gain Tax in India


Capital gain tax in India calculates on the short-term capital gain tax and long-term capital gain tax. Today in this article we will explain to you about the calculation of capital gain tax in India.

Under the Income-tax act[1], the profit earned by selling the capital assets for a higher price then it is known as a capital gain. The transfer of the capital assets should be in a previous year falling under “Capital gain tax”. For calculation of capital gain tax, there should be two factors-

  • There should be a capital asset
  • The transfer of capital assets should attract profit or gain.

Capital Gains Exclude –

  • A raw material or consumable stores used for business or profession.
  • Stock in trade
  • Movable Personal things. However, it excludes jewelry, archaeological collections, drawing, painting, sculptures or any artwork, etc held for personal use.
  • Agricultural land, but it should not be located within 8kms from any municipality, Municipal Corporation, notified area committee, town committee or a cantonment board with around 10000.
  • 5% National Defence Gold Bonds, Gold Bonds, and Special Bearer Bonds
  • Gold Deposits bonds under the Gold Deposit Scheme

What is Capital Gain Tax in India?

Capital Gain Tax in India is a tax on the profit or gain earn by selling the capital assets. The capital gain tax is classified as follows –

Short-Term Capital Asset

The shares and securities held by the taxpayer for a period not exceeding 36 months preceding the date of transfer.

Long-Term Capital Asset

Before the transfer of shares, if a taxpayer holds shares and securities for a period of more than 36 months.

Examples of a Long-term capital asset-

  • Listed Equity Shares on the recognized stock exchange,
  • units of equity-oriented mutual funds,
  • listed debentures and Government securities,
  • Units of UTI and Zero-Coupon Bonds.

A transfer is giving up your personal right on an asset to another person. It includes sale, exchange compulsory acquisition under the prescribed law and relinquishment.

Capital Gain Tax on Shares

In India, the long-term capital gain on listed shares exceeding Rs 1 lakh comes under the purview of taxation. They will pay tax at 10% as per the Union Budget 2018. The long-term gains are taxed at 10% and short-term gain is taxed at 15%. However, in the case of debt mutual fund both long term and short term, the capital gain comes under the purview of taxation.

The short-term capital gain on debt mutual fund is computed along with the income and it is taxed as per the Income-tax slab rate.  On the other hand, the long-term capital gain on debt mutual fund is charged at 20% with the indexation and 10% without indexation.   

Indexation means adjusting the purchase value of inflation. The indexation increases the cost of purchase and lowers the gain.

“According to the Union Budget 2018, Long-term Capital Gains on the sale of the listed securities exceeding more than Rs 1 lakh will be taxed at 10% without the benefit of indexation. Furthermore, existing investors can breathe for relief on the exemption amount of capital gains till 31 January 2018. However, the number of gains made thereafter (after 31 January 2018)is taxed. ”

Let’s us understand this with an example-

“On 1 July 2017, Mr. Mohan purchased shares at Rs 200 and then sold it on 31 December 2018 at Rs 250. The value of the stock was Rs 230 on 31st January 2018. Out of the capital gain of Rs 50, Rs 20 is not taxable. The remaining Rs 30 is taxable as Long Term Capital Gain at 1% without indexation.”

How to Calculate Capital Gain Tax

Short-term capital gain= Full value consideration- (Cost of acquisition + cost of improvement + cost of transfer)

Long-term Capital Gain= Full value of consideration accruing or received – (indexed cost of acquisition+ indexed cost of improvement + cost of transfer)

Indexed cost of acquisition = cost of acquisition x cost of inflation index of the year of transfer/cost inflation index of the year of acquisition.

Indexed cost of improvement = cost of improvement x cost inflation index of the year of transfer/ cost of inflation index of the year of improvement.

Cost of transfer includes brokerage paid for arranging the deal, advertising cost or any legal expenses.

Capital Gain Index:

It is very stringent to have a keen knowledge of the cost inflation index when you are calculating the long-term capital gains. It calculates by deducting the indexed cost of acquisition and indexed cost of the improvement.

The concept of indexation was first introduced as the value of a rupee keeps changing due to inflation. If it is fair to pay more for toothpaste over the years, it is fair to pay capital gain tax by incorporating the effect of inflation on your purchase. Indexation lets you clear a higher purchase cost of the capital asset that you bought, this helps to lower your overall profit.

The Cost Inflation Index is used for calculating the acquisition price.

Capital Gain Tax on Sale of Property

The profit from the sale is charge under Income tax and not the whole amount itself.  Furthermore, if you sell the property in 2 to 3 years then it is known as short-term capital gain and liable as per the income tax rule. It usually attracts a flat 20% of tax.

The long-term gain from the sale of capital assets is exempt under 54 and 54F. Therefore, the amount invested in the purchase or construction of a house property subject to certain conditions is also exempt.

So, it is wise to purchase the residential house before 1 year or 2 years after the transfer of the original house. However, the time period for construction of properties is deciding for 3 years from the date of the original transfer. For more information contact us.

Our Recommendation: How to Verify Income Tax Return Filing.

Aruna Bhayana

Aruna is a legal counsel and a passionate writer. She has worked in various Firm as a lawyer after her studies for two years and one year in Legal Service company. Currently, She is working as a contact legal matter expert at corpbiz.

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