How to calculate capital gain for computing taxes? I have seen many people committing mistake while calculating capital gain tax. Many people believe that calculation of capital gain tax is complex. So, let’s try to simplify this calculation by understanding Capital Gain and Capital Gain Tax.
What is Capital Gain?
My friend recently sold property purchased by his father. This property was purchased at the cost of 25 lac in 2010. He sold this property in 50 lac recently. What will be profit 25 Lac simple right? If you are thinking it is 10 Lac you are wrong! Continue reading you are going to learn lot of things today.
Ideally capital gain is gain arising from sale or transfer of capital assets like property, shares, mutual funds, bonds etc. However when it comes to capital gains in taxes above definition of capital gain is not true.
Capital gains is divided into two types (1) Short-term Capital Gain and (2) Long-term Capital Gain. This classification is based on holding period of assets.
How to Calculate Capital Gain Tax for Property?
Short Term Capital Gain Tax on Property
You can get calculate Gross Short Term Capital Gain by subtracting cost of purchase, expense on transfer/sell and cost of improvement from sale price.
Gross Short Term Capital Gain =
“Fair Market Value or Sale Price – Expense on Transfer – Cost of Purchase – Cost of Improvement”
- Sale Price is price on which you have sold your property.
- Expense on Transfer includes any cost incurred for selling this property i.e stamp duty, advertisement, legal expense etc.
- A Cost of Purchase is amount paid by owner at the time of acquiring property.
- A Cost of Improvement includes any cost incurred on improving or altering property since its acquisition.
You can get calculate Net Short-Term Capital Gain by subtracting Gross Short Term Capital Gain from Exemption.
Net Short-Term Capital Gain =
“Gross Short Term Capital Gain – Exemption (If any) (54B/54D/54G/54GA)”
- 54B – Transfer should be of agricultural land. One should purchase New Agriculture land in 2 years from capital gain.
- 54D – Property acquired for Industrial purpose. One should purchase new Industrial property within 3 years from capital gain.
- 54G – Transfer should be of Machinery building or plant. Transfer should be due to shifting to any area other than an urban area.
- 54GA – Transfer should be of Machinery building or plant. Transfer should be due to shifting to any Special Economic Zone.
Once you obtain this value calculate tax on this value as per normal income tax slabs, that amount will be your short term capital gain tax on property.
Long Term Capital Gain Tax on Property
Long Term Capital Gain Tax rate is 20%.
You can get calculate Gross Long Term Capital Gain by subtracting index cost of purchase, expense on transfer/sell and index cost of improvement from sale price.
Gross Long Term Capital Gain =
“Fair Market Value or Sale Price – Expense on Transfer – Index Cost of Purchase – Index Cost of Improvement”
- Index cost of purchase is process by which the cost of purchase or acquisition is adjusted against inflationary rise in the value of asset. For this purpose Central Government notify cost inflation index (CII) every year.
Index cost of Purchase = Actual cost * CII for Year of Sale/ CII for Year of Purchase
Index cost of Improvement = Cost of Improvement * CII for Year of Sale/CII for Year of Improvement
How to Calculate Capital Gain Tax for Shares & Mutual Funds?
Short Term Capital Gain Tax on Shares & Mutual Funds
Short Term Capital Gain Tax applicable on Transfer of shares and mutual funds is flat 15%, provided transaction is taking place at the recognize exchange and Security Transaction Tax (STT) is paid.
Short Term Capital Gain = Sale Price – Expense on Transfer – Cost of Purchase – Cost of Improvement
- Sale price is price at which you have sold the shares or mutual funds.
- Expense on Transfer in this case is brokerage charged by AMC or brokerage house.
- Cost of purchase is purchase price of shares or mutual funds.
Long Term Capital Gain Tax on Shares and Mutual Funds
Long-term capital gains arising on account of sale of equity shares listed in a recognized stock exchange or mutual fund is exempted under section 10(38). However, it is expected that you disclose this amount at the time of filing income tax returns.
Mr. Punit is a salaried employee. In the month of January, 2014, he purchased 100 units of ABC Mutual fund @ Rs. 100 per unit. The mutual fund is an equity oriented mutual fund. These units were sold through BSE in March, 2015 @ Rs. 125 per unit (securities transaction tax was paid at the time of sale). What will be the nature of capital gain in this case?
Units were purchased in January, 2014 and were sold in March, 2015, i.e., sold after holding them for a period of more than 12 months and, hence, the gain will be long-term capital gain. In the given case, units were of equity oriented mutual funds which were sold after holding them for a period of more than 12 months. These units were sold through recognized stock exchange and the transaction was liable to STT, hence, the LTCG on sale of such units will be covered under section 10(38) and will not be charged to tax.
Important Points –
- Since long term capital gain tax is exempted, long-term capital loss shall have no tax treatment and it cannot be set off against any income.
- In case the shares and mutual funds are purchased at different dates. Share purchase first is considered as sold first (FIFO).
- If any Bonus share is given by company cost of purchase is considered as NIL.
- Future and Options is also considered under Capital Gain Tax.
Hope you find above information useful. Do share your query about LTCG and STCG into comment section!