Calculation of short term and long term capital gain tax

Written by : Knowledge Centre Team

2024-08-02

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Calculation of short term and long term capital gain tax

If you are planning on selling an asset in the near future or have sold one within the last fiscal, you should be aware of the fact that you need to pay capital gains tax on the profits made. This tax needs to be computed and paid when filing your ITR for the financial year. We have mapped out the entire procedure for you along with a how-to on capital gains tax calculation.

Let's begin with defining Capital Gains Tax.

When you sell an asset, you will have made a profit. This corresponds to a sort of income or earning and is therefore taxable. The tax paid on the profit made from the sale of an asset is Capital Gains Tax.

Capital gains tax is divided into two categories

Short term capital gains tax: If you are selling an asset less than three years (36 months) after you bought or acquired it, the gains or profits incurred on its sale are referred to as short term capital gains. However that in the case of a equity share/security listed in a recognized stock exchange in India or a unit of the UTI or a unit of an equity oriented fund or a zero coupon bond, is being sold not more than 12 months from its date of purchase will be considered short capital assets and further, in the case of a share of a unlisted company, or an immovable property, being land or building or both, is being sold not more than 24 months from its date of purchase will be considered short term capital asset. Accordingly, you need to do a short term capital gain tax calculation.

Long term capital gains tax: Conversely, if you are selling an asset other than short term capital assets referred to as long term capital assets and profit or gain over the sale of such asset will be termed as long capital gain .Accordingly, you need to do a long term capital gain tax calculation.

It is important to note that calculating capital gains tax is not as simple as deducting the buy price from the sell price. If you bought an asset for Rs 1 crore and sold it at Rs 1.4 crore, your capital gains tax is not calculated by simply deducting Rs 1 crore from Rs 1.4 crore, giving you a taxable gains amount of Rs 40 lakh. Fortunately, the calculation takes into consideration the spends likely to be incurred by the tax-payer in the process of acquiring and maintaining the asset.

So in addition to cost of acquisition, you will consider:

1. Cost of improvement: If the property owner has since acquisition spent any money to alter or improve the asset, or if he has somehow added to it or expanded on it in any way, then the spends towards this are deductible. In other words that sum will be deducted from the profit amount before calculating tax. Cost of improvement is straightforward as described above for short term capital gain tax calculation. However for long term capital gains, the calculation takes inflation into account. To calculate long term capital gains you need to first calculate the Indexed Cost of Improvement. The formula for arriving at this value is:

Actual cost of improvement x cost inflation index during the year of improvement spends ÷ cost inflation index during the year of sale.

2. Expenses on transfer: Considerable costs are incurred while setting the sale of an asset into motion. Maybe u had a broker, or a whole army of brokers on your payroll trying to find a suitable buyer. Mayne you travelled or hosted the travel of a few potential buyers. You certainly paid registration. Maybe even stamp value. In some cases, people also play legal fees. All of these expenses are deductible from your profit.

3. Exemptions if any applicable: When it comes to capital gains tax, very much like income tax, there are several exemptions. Some of these are:

If The seller's is individual resident than basic exemption limit will be available as below but such adjustment is possible only after making adjustment of other income:
- Rs 2.5 lakh per annum (for people under 60 years)
- Rs 3 lakh per annum (for people under 80 years)
- Rs 5 lakh per annum (for people above 80 years)

However, if The seller individual enjoys NRI status than the basic exemption limit is not available on the capital gain
The capital gains arise from the transfer of a long-term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust are exempt from tax maximum upto Rs 1L in a financial year.
Also Read: Capital gains accounts scheme

What if you received the house as a gift or as your inheritance? That means there was no cost of acquisition - would that make the value of the entire asset taxable? Fortunately, no. What will be considered instead, is the Fair Market Value or the value that the asset would be sold at under normal circumstances.

So maybe you inherited the house from your parents and therefore paid Rs 0 but you would have had to pay Rs 1.2 crore for the house otherwise then you use the fair market value in lieu of the cost of acquisition.

Additionally, if you have inherited or been gifted the house the expenses incurred by the previous owner on improvement, will also be deducted from your profit.

What if only a part of the amount is being paid to the seller? And what if it's more of a barter than a sale?

Maybe you're selling to a friend or business partner or for whatever reason have extended the buyer party the benefit of paying in installments. Or perhaps you're exchanging one asset for another. How does cost of acquisition work then?

The calculation utilises Full Value Consideration or the total amount of cash as well as whatever is exchanged as barter that the seller receives in exchange for the asset being sold. If it is paid over installments then it is simply the total value of all the installments.

Now that we have covered all the key concepts, let us get down to how exactly the calculation is done:

Short term capital tax calculation

Full value of consideration
Minus transfer expenses
Minus improvement expenses = short term capital gain
Minus exemptions if any applicable

Tax is applied on the final amount after exemptions at prescribed rate for the fiscal and the asset/ capital gain in question and the seller's income tax slab.

Long term capital tax calculation

Full value of consideration
Minus transfer expenses
Minus indexed improvement expenses = long term capital gain
Minus exemptions if any applicable

Tax is applied on the final amount after exemptions at prescribed rate for the fiscal and the asset/ capital gain in question and the seller's income tax slab.

If you are looking to save on tax, you should consider ULIPs. They come under the Exempt-Exempt-Exempt tax regime, giving you a wide range of tax benefits. A good example is the Invest 4G ULIP offered by Canara HSBC Life Insurance which makes you eligible for tax deductions of up to Rs 1.5L under Section 80C. Moreover since we're on the subject of taxes - upon maturity, neither the maturity amount nor the interest is taxable. If ULIP with amount of premium payable for any of previous year during the term of policy exceeds Rs. 2,50,000 then the income/return on maturity regarded as capital gain and taxed appropriately under section 112A. However, the annual premium ceiling of Rs. 2.5 lakh will only apply to plans purchased on or after 1ST February, 2021.

Keep a track of everything you are spending on your asset and do ensure you invest in order to benefit from exemptions in order to take home as much as possible of your capital gains.

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