What is Capital Gain Tax? What are their types? How to calculate Capital Gain Tax?

What is Capital Gain?

Simply put, any profit or gain that arises from the sale of a 'capital asset' can be a capital gain. This gain or profit is comes under the category ‘income’, and hence you may got to pay tax for that amount within the year during which the transfer of the capital asset takes place. This is often called capital gains tax, which may be short-term or long-term.

Capital gains are not applied to an inherited property as there is no sale, only a transfer of an ownership. The income tax Act has precisely exempted assets received as gifts by way of an inheritance or will. However, if the one who inherited the asset decides to sell it, capital gains tax are going to be applicable.

Defining Capital Assets

Land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewelry are a number of examples of capital assets. This includes having rights in or in respect to an Indian company. It also includes the rights of management or control or any other right.

The following does not come under the category of capital asset:

1. Any stock, consumables or material, held for the purpose of business or profession
2. Personal goods like clothes and furniture held for private use
3. Agricultural land in rural India
4. 6½% gold bonds (1977), 7% gold bonds (1980) or national defence gold bonds (1980) issued by the central government
5. Special bearer bonds (1991)
6. Gold deposit bond issued under the gold deposit scheme (1999) or deposit certificates issued under the Gold Monetization Scheme, 2015

Definition of the rural area (from AY 2014-15)

Any area which is outside the jurisdiction of a municipality or cantonment board which is having a population of 10,000 or more is taken into account a rural area. Also, it should not fall within a distance (to be measured aerially) given to you below – (population is as per the last census).

Distance	Population
2 kms	from local the limit of municipality or cantonment board If the population of the municipality/cantonment board is over 10,000 but less than 1 lakh
6 kms	from the local limit of municipality or cantonment board, If the population of the municipality/cantonment board is over 1 lakh but less than 10 lakh
8 kms	from the local limit of municipality or cantonment board If the population of the municipality/cantonment board is over 10 lakh

Types of Capital Assets

The two forms of capital assets are mentioned below:

1. Long term capital asset: 

Just in case individuals own an asset for duration of over 36 months, the asset could be a long term capital asset. Debt-oriented mutual funds, jewelry, etc., that are held for a duration of over 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 duration of over 12 months:

• Zero coupon bond (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 unit (not dependent on whether they are quoted or not)
• Securities that are listed on a stock market that is recognized in India. Examples of such securities are government securities, bonds, and debentures.
• Preference shares or equities that are held during a company that is listed on a stock market that is recognized in India.

2. Short term capital asset:

Just in case assets are held for a duration of 36 months or less, it may be defined as a brief term capital asset. However, for immovable assets like house property, building, and land, the duration has been reduced from 36 months to 24 months.

Therefore, if a personal wishes to sell a land or house after holding it for 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 present, the number of time the property was held by the previous owner is additionally considered when determining whether the property may be considered as a brief term capital asset or a long term capital asset.

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

How to Calculate Capital Gains?

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

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

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

How to calculate long term Capital Gains?

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

• First, the individual must consider the total value of the asset.
• Next, the individual must make the below-mentioned deductions:

1. The costs that are incurred because of the transfer.
2. The amount of money that is spent on the acquisition.
3. The amount of money that is spent on improvement.

• From the amount 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

An example to calculate the long term Capital Gains:

Assumptions:-

Price house was purchased for: Rs.30 lakh

Financial Year house was purchased: 2010-2011

Financial Year house was sold: 2018-2019

Amount house was sold for: Rs.50.5 lakh

Inflation adjusted cost: (280/167) x 30 = 50.29 lakh

Long term Capital Gains: Rs.50.50 lakh – Rs.50.29 lakh = Rs.21,000 (approx)

How to calculate long term Capital Gains?

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

• First, the individual must consider the total value of the property.
• Next, the below-mentioned points must be deducted:

1. Expenses that are incurred for the improvement of the property.
2. The expenses incurred for acquiring the property.
3. Any expenses that are incurred for the transfer of the property.

• The amount that is calculated after the deduction is that the short term capital gain.

The formula for the calculation of short term capital gain is that 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

An example of how the 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 spend for improvement of 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

Condition	Tax Rate
Sale of equity shares	10% of the number which is over Rs.1 lakh
Except for sale of equity shares	20%

Short Term Gains tax rate

Condition	Tax Rate
When the transaction tax relies on securities	15%
When transaction tax is not based on securities	The gain is added to the income tax returns that has to be filed, and also the amount are based on the income tax slab