What Is The Procedure To Calculate The Capital Gain Tax In India

Written by : Knowledge Centre Team

2024-08-02

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What Is The Procedure To Calculate The Capital Gain Tax In India?

Capital gains are described as the profits that you accrue or receive through the sale of capital assets. When you sell any capital asset for an amount, more than you paid for it, your sale accrues capital gains. There are two types of capital gains – long-term and short-term.

Long-term capital assets are those, which you hold for 36 months or more. On the other hand, short-term assets are held for shorter durations. These capital assets include investment products such as stocks or mutual funds, and real estate products including land or house.

Tax on Capital Gains

The calculation of tax depends upon the type of capital gain accrued. Thus, the tax calculation for short-term capital gains is much simpler that on long-term capital gains.

1. Tax on Short-Term Gains

In case of short-term capital gains, you can add the gain amount to your total annual income and then calculate the income tax based on the tax bracket you fall in.

2. Tax on Long-Term Gains

When it comes to long-term capital gains, you have to consider other variables such as inflation (or cost inflation index) and indexation, while computing tax on long-term gains.

What is Cost Inflation Index (CII)?

Cost inflation Index or CII is a fixed value index that depicts the overall rate of inflation throughout the year, and is declared every year by the government of India.

What is Indexation?

Indexation is described as the process of adjusting prices of different assets based on a standard index. Doing this, helps factor-in the inflation rate while calculating the profits earned on sale of capital assets. Indexation is crucial since the prices tend to vary with time and do not remain flat. Hence, if you compute the profits based on the original price of a capital asset, it may not be an accurate measure.

Formulae for Calculating Capital Gains in India

1. To calculate Short-term Capital Gains (STCG) Tax

The computation for STCG is given below:

Short Term Capital Gain= Full Value Consideration – (Cost of Acquisition + Cost of Improvement + Cost of Transfer)

2. To Calculate Long-Term Capital Gain (LTCG) Tax

Long Term Capital Gain = Full Value of Consideration Received or Accruing – (Indexed Cost of Acquisition + Indexed Cost of Improvement + Cost of Transfer)

Here;

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)

FAQ

Income tax in India is based on incremental slab rates. The rate of tax is higher on higher income. You can also avail deductions from your taxable income if you invest in eligible instruments like PPF, NPS, ELSS, ULIPs, etc. Starting AY 2020-21 you have two tax regimes – old and new. The old tax regime has all the deductions from gross total income, while the new tax regime offers a lower rate of tax. So, if you are not investing in tax-saving instruments you can file your tax as per the new tax regime.

You can avail additional tax savings under the following sections other than section 80C:

a) Section 80D: Health insurance premium payments for family and parents up to Rs 75,000
b) Section 80CCD(1B): Self-contribution to NPS Tier-I account above 10% of salary or 20% of income if self-employed up to Rs 50,000
c) Section 80E: Education loan interest paid through the year
d) Section 80EE: Home loan interest paid up to Rs 50,000
e) Section 80G: Charitable contributions to non-profit organisations registered under section 12A up to 50% or 100% of the contribution
f) Section 24B: Interest paid on home loan

You have many tax-saving investment options. You can consider the following popular tax-saving schemes to save tax:

a) Term life insurance plan
b) Health and critical illness insurance plan
c) Life insurance plans such as endowment and moneyback plans
d) Pension plans from life insurance companies
e) Public Provident Fund (PPF)
f) National Pension System Tier-I account (NPS)
g) Employee Provident Fund (EPF)
h) Unit Linked Insurance Plans (ULIPs)
i) Equity Linked Savings Scheme (ELSS)
j) Senior Citizen Savings Scheme
k) Sukanya Samriddhi Yojana
l) 5-Year Tax Saving Fixed Deposits
m) National Savings Certificate (NSC)

Deduction of Rs 1.5 or 2 Lakhs under section 80C is available when you make investments or spend money under the heads mentioned in the Chapter VI A of the Income Tax Act, 1961. All tax-saving investments like PPF, NPS, ULIP, ELSS, etc. and all tax-saving expenses like children’s tuition fees, and registration expenses of a house property are part of Chapter VI A.

You will need to pay taxes on the incomes and gains from your investments. For example, your salary income is Rs 10 lakhs in a year, out of which Rs 7.5 lakhs becomes taxable after deducting exempt perquisites. Out of your income of Rs 10 lakhs, you invest Rs 3 lakhs in various options.

Even if none of your investments is eligible for tax saving under section 80C, your taxable income will remain Rs 7.5 lakhs. However, returns from some of these investments will become taxable in the next financial year when you receive them.

Since AY 2020-21 you have two ways to lower your income tax outflow on higher income – tax-saving investments and a new tax regime. You can stick to the old tax regime and invest your savings into eligible tax saving options. Tax-saving investments can give you a deduction of up to Rs 2 lakhs under sections 80C and 80CCD(1B), and additional deductions of up to Rs 2 lakhs under section 24.

Your deductions will be higher with other sections like 80E and 80G. But these are specific outflows which are not investments.

The best way to reduce your tax outflow legally is to use tax-saving investments and plan your future taxes carefully. Tax-saving investments will help you reduce your taxable income in the present financial year. If you invest in options which enjoy tax exemptions on maturity values, you can also reduce your future tax outflow. For example, Invest 4G ULIP from Canara HSBC Life Insurance allows you to stay invested up to the age of 99. This means that you can start investing at 30, build a corpus by 60 and have a tax-free lifetime pension.

Usually, a receipt is a convenient document to produce while claiming your deductions for expenses. However, the following alternatives are available if you lose the receipt:

a) Avail fuel or petrol expenses with number of kilometres
b) Credit card statement for computer items
c) Credit/debit card statement for stationery items
d) Membership documents to show running membership to claim the fees amount

You can claim HRA exemption with your employer and declare the amount in your ITR-1 form while filing your tax return. You will need to submit your house rent receipts with your employer to reduce your TDS. Use the online calculator to estimate your HRA exemption and claim the amount directly in your ITR.

If you are self-employed or do not receive HRA from your employer but have been paying rent for residence, you can claim a deduction of up to Rs 60,000 under section 80GG.

You can calculate your HRA exemption based on the following conditions. The amount of exempt HRA will be the lowest of the three:

a) HRA you have received
b) 50% of salary (basic + DA + Commission paid as % of turnover) if you are staying in a metro city otherwise 40%
c) Rent paid over 10% of your salary (as defined in step 2)

What is Tax Collected at Source (TCS)

How to E-Verify your Income Tax Return (ITR)?

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