Computation of Short Term & Long Term Capital Gain Tax in India

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At the time of Sale of any Asset, Tax is liable to be paid on the Gains earned on the sale of Asset. Such Gains could either be Short Term Capital Gains or Long Term Capital Gains. The basis of such Classification in the Income Tax Return has been given below:-

  1. Short Term Capital Gain (STCG): If the Asset is held for less than 36 Months
  2. Long Term Capital Gain (LTCG): If the Asset is held for more than 36 Months

The classification of short term & long term capital gains and their tax rates is different in case of Shares and Mutual Funds. This article focusses on computation of capital gains for all assets except Shares and Mutual Funds. For computation of capital gains on sale of shares and mutual funds refer the following article.

Capital Gain Tax Rate for all Assets except Shares and Mutual Funds

Short Term Capital Gain Tax Rate:             As per normal Income Tax Slabs

Long Term Capital Gain Tax Rate:              20%

Computation of Short Term Capital Gain

Gains arising at the time of sale of Short Term Capital Asset shall be computed in the following manner:-

  Full Value of Consideration    xxx
(Less)   Expenditure incurred wholly and exclusively in connection with such Transfer/Sale    xxx
(Less)   Cost of Acquisition    xxx
(Less)   Cost of Improvement    xxx
  Gross Short Term Capital Gain    xxx
 (Less)  Exemption (if any) available u/s 54B/54D/54G/54GA    xxx
                   Net Short Term Capital Gain    xxx

Tax as per the Income Tax Slab Rates shall be payable on the Short Term Capital Gain computed above

Computation of Long Term Capital Gain

Gains at the time of sale of Long Term Capital Asset shall be computed in the following manner:-

  Full Value of Consideration    xxx
(Less)   Expenditure incurred wholly and exclusively in connection with such Transfer/Sale    xxx
(Less)   Indexed Cost of Acquisition    xxx
(Less)   Indexed Cost of Improvement    xxx
  Gross LTCG    xxx
 (Less)  Exemption (if any) available u/s 54/54B/54D/54EC/54ED/54F/54G    xxx
                   Net LTCG    xxx

 

Tax @ 20% shall be payable on the Long Term Capital Gain computed above and Advance Tax shall also be liable to be paid on such Capital Gain.

In case a loss arises on the sale of an asset, the capital loss can be set-off against other Capital Gains in that year. If the Loss cannot be set-off against capital gain in that year, it can be carried forward for the next 8 years and set-off in the future years. However, loss can only be carried forward if the return was filed before the due date.

long term capital gain Computation of Short Term & Long Term Capital Gain Tax in India

The meaning of the terms mentioned above in the computation of Long Term Capital Gains and Short Term Capital Gains have been explained below

Full Value of Consideration

Full Value of Consideration means what the transferor receives or is entitled to receive as consideration for the Sale of Property /Asset. This Value may be in cash or in kind i.e. in exchange for an Asset.

In case of exchange of an asset, the full value for the computation of Capital Gains shall be the Fair Market Value of the Property (Asset) granted in exchange. Fair Market Value in relation to Capital Gains means the price which the Property (Asset) would normally fetch if sold in the open market on the Relevant Date.

In case, the full value of consideration is received in installments in different years, the entire value of consideration shall be the Market Value of the Property/Asset granted in exchange.

Expenses on Transfer

Expenses on Transfer include any expenditure incurred, whether directly or indirectly, for the purpose of transfer like Advertisement Expense, Brokerage Expense, Stamp Duty, Registration Fees, and Legal Expenses etc. However, any expense which has been claimed as a deduction under any other provision of the Income Tax Act cannot be claimed as a deduction under this Clause.

Cost of Acquisition

Cost of Acquisition is the price which the assessee has paid, or the amount which the assessee has incurred, for acquiring the Property /Asset. The Expenses incurred at the time of completing the title are a part of the cost of acquisition.

In cases where the Capital Asset became the property of the assessee in any of the manners mentioned below, the cost of acquisition shall be deemed to be the cost for which the previous owner of the property acquired it:-

  1. On the Distribution of Assets/ Total Partition of HUF
  2. Under a Gift or Will
  3. By Succession, Inheritance or Devolution
  4. On Distribution of Assets on Liquidation of a Company

Where the cost for which the previous owner of the capital asset acquired the property cannot be ascertained, the cost of acquisition to the previous owner shall be the fair market value of the asset on the date on which the asset became the property of the previous owner. The Interest on money borrowed for acquiring the capital asset will also form a part of the cost of Asset [CIT v Mithlesh Kumari (1973) 92 ITR 9 (Del)]

Cost of Improvement

All Capital Expenditures incurred in making any additions or alterations to the Capital Asset by the Assessee after it became his property or alterations to the capital asset by the assessee after it became his property shall be deductible as the Cost of Improvement. If the Asset was transferred to the assessee under the cases specified immediately above, the capital expenditure incurred by the previous owner shall also be treated as cost of improvement.

However, the Cost of Improvement does not include any capital asset which is deductible in computing the chargeable under head- “Income from House Property”, “Profits or Gains of Business or Profession”, or “Income from Other Sources”. Only the Capital Expenses are considered as a cost of Improvement and routine expenses on Repairs and Maintenance do not form part of cost of improvement.

For the purpose of Computation of Long Term Capital Gain, Indexation using the Cost Inflation Index shall be done to the Cost of Acquisition & Cost of Improvement and the resultant figure shall be the Indexed Cost of Acquisition & Indexed Cost of Improvement for the purpose of computation of LTCG

Indexed Cost     =             Actual Cost *      Cost Inflation Index of the Year of Sale

                                                               Cost Inflation Index of the Year of Purchase

The Assessee also has the option of not opting for Indexation and the Long Term Capital Gain Tax Rate in this case shall be 10%

The Tax on Long Term Capital Gains can also be saved by investing these Gains in specified securities for a certain period of time. For more on how to save Capital Gains Tax, refer the following article.

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