Rate of income tax on capital gains

Rate of income tax on capital gains

Capital Gains Tax

Capital gain can be defined as any profit that is received through the sale of a capital asset. The profit that is received falls under the income category. Therefore, a tax needs to be paid on the income that is received. The tax that is paid is called capital gains tax and it can either be long term or short term. The tax that is levied on the long term and short term gains start from 10% and 15%, respectively.

Under the Income Tax Act, capital gains tax in India need not be paid in case the individual inherits the property and there is no sale. However, if the person who has inherited the property decides to sell it, the tax will have to be paid on the income that has been generated from the sale. Some of the examples of capital assets are jewellery, machinery, leasehold rights, trademarks, patents, vehicles, house property, building, and land.

Types of Capital Assets

The two types of capital assets are mentioned below:

  1. Long Term Capital Asset:

    2. In case individuals own an asset for a duration of more than 36 months, the asset is a long-term capital asset. Debt-oriented mutual funds, jewellery, etc., that are held for a duration of more than 36 months will come under this category and there is no 24-month reduction period under such circumstances.

    The below-mentioned assets are considered as long-term assets if they are held for a duration of more than 12 months:

    • Zero-coupon bonds (not dependent on whether they are quoted or not)
    • Unit Trust of India (UTI) units (not dependent on whether they are quoted or not)
    • Equity-based mutual funds units (not dependent on whether they are quoted or not)
    • Securities that are listed on a stock exchange that is recognized in India. Examples of such securities are government securities, bonds, and debentures.
    • Preference shares or equities that are held in a company that is listed on a stock exchange that is recognized in India.
  2. Short Term Capital Asset:

    3. In case assets are held for a duration of 36 months or less, it can be defined as a short-term capital asset. However, for immovable assets such as house property, buildings, and land, the duration has been reduced from 36 months to 24 months.

    Therefore, if an individual wish to sell land or house after holding it for a duration of 24 months, the profit that the individual makes from it comes under long term capital gain.

    In case the property has been inherited or given as a gift, the amount of time the property was held by the previous owner is also considered when determining whether the property can be considered as a short-term capital asset or a long term capital asset.

    The date on which the bonus shares were allotted is considered when determining the category under which bonus shares or right shares fall.

    How to Calculate Capital Gains?

      Depending on the amount of time that the asset has been held, the calculation of Capital Gains will vary. Some of the important points that individuals should know when calculating capital gains are mentioned below:

      • Cost of improvement: If there are any expenses that have been incurred by the seller because of any alterations or additions that have been made to the property. However, any improvements made before 1 April 2001 cannot be considered.
      • Acquisition cost: The amount of money that the seller paid in order to acquire the property.
      • Full value consideration: The amount of money that the seller will receive because of the property transfer. Capital gains are charged from the year the transaction was made even if the money was not received in that particular year.

      In certain cases where the capital asset is also the property of the taxpayer, the acquisition cost and the improvement cost of the previous owner will also be included.

        Calculate Long Term Capital Gains

        The procedure to calculate long term Capital Gains is mentioned below:

        • First, the individual must consider the full value of the asset.
        • Next, the individual must make the below-mentioned deductions:
          • The costs that have been incurred due to the transfer.
          • The amount of money that is spent on the acquisition.
          • The amount of money that is spent on improvement.
        • From the number that has been calculated by following the above steps, the individual must subtract any exemptions that are provided under Section 54B, Section 54F, Section 54EC, and Section 54.

        Example to Calculate long term Capital Gains

        Given below is an example to calculate long term Capital Gains:

        Assumptions:

        Price house was purchased for Rs.35 lakh

        Financial Year house was purchased: 2011-2012

        Financial Year house was sold: 2019-2020

        Amount house was sold for Rs.60 lakh

        Inflation-adjusted cost: (289/184) x 35 = 54.97 lakh

        long term Capital Gains: 60 lakh – 54.97 lakh = Rs.5,03,000 (approx)

        Calculate Short Term Capital Gains

        The below-mentioned procedure must be followed by individuals in order to calculate short term capital gains:

        • First, the individual must consider the full value of the property.
        • Next, the below-mentioned points must be deducted:
          • Expenses that have been incurred for the improvement of the property.
          • The expenses incurred for acquiring the property.
          • Any expenses that have been incurred for the transfer of the property.
        • The amount that is calculated after the deduction is the short term capital gain.

        The formula for the calculation of short term capital gain is the full value consideration minus the expenses that have incurred for the transfer minus the cost for improving and acquiring the property.

        Example for Calculation of short term Capital Gains

        Given below is an example of how short term Capital Gains is calculated:

        Assumptions:

        Price the house was sold for: Rs.55 lakh

        Expenses for brokerage, commissions etc: Rs.30,000

        Net sale consideration: Rs.54,70,000

        Price the house was bought for: Rs.35 lakh

        Amount spent for the improvement of the house: Rs.3 lakh

        Gross short term Capital Gain: Rs.16,70,000

        Tax exemptions under Sections 54, 54B, 54D, 54EC, 54ED, 54F, 54G: Nil

        Net short term Capital Gain: Rs.16,70,000

        Short Term Capital Gains: 30% of Rs.16,70,000: Rs.5,01.000

          Long term Gain Tax Rate

          ConditionTax Rate
          Sale of equity shares10% of the amount which is more than Rs.1 lakh
          Except for sale of equity shares20%

          Short Term Gains Tax Rate

          ConditionTax Rate
          When the transaction tax is based on securities15%
          When transaction tax is not based on securitiesThe gain is added to the income tax returns that must be filed, and the amount will be based on the income tax slab

          Cost Inflation Index Number

          Given in the table below is the CII Number from the financial year 2001-2002 to FY 2021-2022:

          Financial YearAssessment YearCII Number
          2001-20022002-2003100
          2002-20032003-2004105
          2003-20042004-2005109
          2004-20052005-2006113
          2005-20062006-2007117
          2006-20072007-2008122
          2007-20082008-2009129
          2008-20092009-2010137
          2009-20102010-2011148
          2010-20112011-2012167
          2011-20122012-2013184
          2012-20132013-2014200
          2013-20142014-2015220
          2014-20152015-2016240
          2015-20162016-2017254
          2016-20172017-2018264
          2017-20182018-2019272
          2018-20192019-2020280
          2019-20202020-2021289
          2020-20212021-2022301
          2021-20222022-2023317

            Indexed Cost of Improvement and Acquisition

            The cost that is incurred on improvement and acquisition is indexed with the main aim of adjusting inflation for the number of years the property was held. This not only reduces capital gains but also increases the cost base.

            The formula for calculation of indexed tax for improvement: The expenses incurred for improvement x Cost Inflation Index (CII) for the year the property was sold divided by the CII of the year the improvement occurred.

            The formula for calculation of indexed tax for acquisition: The total expenses incurred for acquisition x CII of the year the property was sold divided by the CII of the year the property was initially acquired by the seller (or 2001-2002 whichever is later).





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