Capital gains arise when you sell a capital asset for an amount that is more than what you paid for it. Capital assets are any investment products like mutual funds, stocks or any real estate product like land, house etc. An increase in the value of any of these when you sell them is termed as capital gain.
Types of Capital Gains:
Capital gains can broadly be classified into two types:
- Long-Term Capital Gains: Depending upon the type of asset, if it is held for more than 36 months it is termed as a long-term capital asset and the gain on selling it is termed as long-term capital gains. For mutual funds and equities, this period is 12 months.
- Short-Term Capital Gains: Any asset that is sold within 36 months of purchasing it, is termed as a short-term asset and the gain on selling the same is termed as short-term capital gain.
Tax on Capital Gains:
Calculation of tax is dependent upon the type of capital gain.
- Calculation of tax on short-term capital gains is simpler than that on long-term gains. For short-term gains, the gain is added to the total income and then the Income Tax is calculated based on the tax bracket that you fall in.
- Calculation of tax on long-term capital gains is a slightly trickier business. Since long-term capital assets are held for longer periods, inflation also factors in while computing tax on long-term capital gains.
Cost Inflation Index (CII):
Cost inflation Index is a term that comes into play when we talk about long-term capital gains. This index is fixed and is declared every year by the government. For calculating capital gains on long-term assets, indexation is used.
Capital Gains Calculator
Calculating capital gains tax can be done using one of the online tools designed for the purpose. When calculating capital gains tax using a calculator, the following information is to be entered:
- Sale price.
- Purchase price.
- Details of the purchase such as the date, month and year of the purchase.
- Sale details such as the date, month and year of sale.
- Investment details, if any. The capital gains could have been invested in shares, debt funds, equity funds, real estate, gold or fixed maturity plans.
Once you have entered the information, the following details will be generated towards the calculation of your capital gains payable:
- The type of investment.
- Type of gain (whether short or long-term).
- Cost inflation index of the year of purchase.
- Cost inflation index of the year of sale.
- Difference between the purchase price and sale price.
- Time between the purchase and sale.
- Purchased index cost.
- Long-term capital gain without indexation.
- Long-term capital gain with indexation.
Calculate Capital Gains Formula
Short-term Capital Gains Tax:
In the case of short term capital gains, the computation is as given below:
Short-term capital gain= full value consideration – (cost of acquisition + cost of improvement + cost of transfer).
Long-term Capital Gains Tax:
To calculate the long-term capital gains tax payable, the following formula is to be used:
Long-term capital gain = full value of consideration received or accruing – (indexed cost of acquisition + indexed cost of improvement + cost of transfer), where:
Indexed cost of acquisition = cost of acquisition x cost 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 inflation index of the year of improvement.
Capital Gains Rate
The rate at which capital gains is calculated varies from year to year. In the case of long-term capital gains, individuals are taxed at 20.6% (including education cess). There are no deductions that can be availed under capital gains tax.
Short-term capital gains tax is levied at the tax slab under which the individual falls under.
Capital Gains Shares
In the case of shares and stocks, the rates differ from long-term and short-term capital gains tax. The capital gains rate for the financial year 2016-2017 is as given below:
Short-term gains for stocks and mutual funds are taxed at 15%.
Short-term capital gain on debt mutual funds is taxed as per the income slab of the individual.
Long-term capital gains on debt mutual funds are taxed at 20% with indexation and at 10% without indexation.
On February 1, 2018, Finance Minister Arun Jaitley announced the introduction of a long-term capital gain tax on sale of equity shares over Rs.1 lakh. The capital gains rate as per the Union Budget 2018 can be given as below:
Long-term capital gains on equity shares are taxed at 10% without any indexation benefit.
Tax Exemptions On Capital Gains
The government provides a number of exemptions which can be claimed on capital profits made. Here is a list of all the exemptions that can be claimed with respect to gains from capital assets.
- Section 54 of the Income Tax Act entitles a person to tax exemption on profit earned if that entire profit amount is used to buy another house. The seller can buy a new house within 2 years from the date of sale of his previous property or construct a new house within 3 years from the date of sale.
- Section 54 EC entitles an individual for tax exemption if the entire capital profit is invested in bonds issued by NHAI that is National Highway Authority of India or REC which is Rural Electrification Corporation. There is a limit to exemption under 54 EC and is Rs.50 lakh.
- In case you can’t find the right property to buy and you are unable to come up with a concrete plan in 2-3 years, you still can save tax on the capital profit earned. This can be achieved by investing gains in the Capital Gains Accounts Scheme (CGAS) in any public sector bank. This amount can then be claimed for tax exemption. However, you are required to invest this money within the period stated by the bank else the deposit is treated as capital gain and tax is deducted on it.
- In case you sell an agricultural land which is not within the limits of a civic body then tax is not levied on capital gain arising out of it.
- Capital gains is not applicable to sale of the property if the entire amount is invested to set up a small scale or a medium scale industry. However, to avail tax exemption, the tools and machinery for manufacturing should be bought within 6 months from date of sale.