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Capital Gains and Taxes : A Complete Guide

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Hiral Vakil

Capital Gains
Income from House Property
Income Source

What is Capital Gain?

Capital Gain is simply the profit or loss that arises when you transfer a Capital Asset. If you sell a Long Term Capital Asset, you will have Long Term Capital Gain and if you sell a Short Term Capital Asset, you will have a Short Term Capital Gain. If the result from sell is negative, you will have a capital loss. The Capital Gain will be chargeable to tax in the year in which the transfer of Capital assets takes place.

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CA Assisted Income Tax Return filing for Individuals and HUFs having long term and short term Capital Gains / Loss from investing.
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ITR for Capital Gains from Investment in Stocks
CA Assisted Income Tax Return filing for Individuals and HUFs having long term and short term Capital Gains / Loss from investing.
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What is a Capital Asset?

Capital Asset means any kind of property owned by you, whether or not connected with your business or profession. It includes movable assets, immovable assets, tangible/intangible assets, rights and choices in actions, etc.

Some of the examples of Capital Assets are House Property, land, building, goodwill, patent, trademark, rights, machinery, vehicles, jewelry, etc.

However, the following assets shall not be considered as Capital Assets:

Meaning of Transfer

Any profit or gain that arises from the ‘transfer’ of a capital asset is a capital gain. Transfer includes:

Note: If any capital asset is transferred by way of gift or will or inheritance, this shall not be treated as transfer. Further, if the asset transferred is not a capital asset, provisions of capital gain shall not apply.

What is Long Term and Short Term Capital Asset?

If a Capital Asset is held by the assessee for more than 36 months prior to its sale, then it is a Long Term Capital Asset. On the other hand, Short Term Capital Asset means the asset held by an assessee for not more than 36 months prior to its sale.

However, in the following cases, the assets will be considered Short Term if they are held for 12 months or less instead of 36 months:

If the above mentioned assets are held for more than 12 months, they will be considered as Long Term Capital Assets.

As per the above discussion it is clear that different assets have different periods of holding to be called short term and long term. The table given below defines period of holding for different classes of asset in order to be classified as short term or long term:

Asset Period of holding Short Term / Long Term
Immovable property < 24 months Short Term
>24 months Long Term
Listed equity shares <12 months Short Term
>12 Months Long Term
Unlisted shares <24 months Short Term
>24 months Long Term
Equity Mutual funds <12 months Short Term
>12 months Long Term
Debt mutual funds <36 months Short Term
>36 months Long Term
Other assets <36 months Short Term
>36 months Long Term

Note: Determination of period of holding is important because it impacts the method of calculating Capital Gains and also the tax rates.

How to determine the holding period if the asset was gifted?

Capital Gain Calculator

Calculation of Capital Gains is different in case of Long Term Capital Assets and Short Term Capital Assets. Here are some of the terms you need to know:

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How to Calculate Short Term Capital Gain Tax?

Particulars Amount
Take full value of Consideration XXXX
Less:​
Expenditure incurred exclusively in connection with the transfer.​​
Cost of Acquisition.
​Cost of Improvement.

​(XXX)

​​(XXX)​
(XXX)
Less: exemption under section 54B (XXX)
Short Term Capital Gain (1-2-3) XXXX

How to Calculate Long Term Capital Gain Tax?

Particulars Amount
Take full value of Consideration XXXX
Less:​
Expenditure incurred exclusively in connection with the transfer.
​​Index* Cost of Acquisition.
Index* Cost of Improvement.

(XXX)
​​
(XXX)
​(XXX)
Less: exemption under section 54, 54EC, 54F, 54B (XXX)
Long Term Capital Gain XXXX
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Capital Gains

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Capital Gains

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Can I claim any expenses as a deduction from the full value of consideration?

Expenses which are wholly and exclusively incurred in relation to the transfer of property, are allowed to be deducted from sales consideration. So here are different sales transactions and the allowable expenses for the same:

Sale of shares/stocks

Sale of House Property

All these expenses are allowed as deduction only for the purpose of calculating the Capital Gains. Please note that these expenses are not allowed as a deduction from any other heads of income.

The cost of acquisition and cost of the improvement is also allowed as a deduction from the sales consideration.

Taxation on Long-term and Short-term Gains

Type of Capital Gain Tax Rate
Long Term Capital Gain (when Securities Transaction Tax is not applicable) 20% + Surcharge and Education Cess
Long Term Capital Gain (when Securities Transaction Tax is applicable) 10% over and above INR 1 lakh
Short Term Capital Gain (when Securities Transaction Tax is not applicable) Normal slab rate applicable to Individuals
Short Term Capital Gain (when Securities Transaction Tax is applicable) 15% + Surcharge and Education Cess

Taxability of gains from the sale of Equity and Debt mutual funds are different. Funds with more than 65% of the portfolio consisting of equities are called Equity Funds.

  Short Term Capital Gain Long Term Capital Gain
Debt Funds Normal slab rate applicable to Individuals 20% with Indexation + Surcharge and Education Cess
Equity Funds 15% + Surcharge and Education cess Exempt

Note: Unlike Equity mutual funds, debt funds have to be held for more than 36 months to qualify as Long Term Capital Assets.

Capital Gain Exemption

The Income Tax Act allows a total / partial exemption from Capital Gains under different sections. It is possible to avail of multiple Capital Gains Exemption under these sections. However, the aggregate amount of exemption cannot exceed the total amount of Capital Gain.

Section Type of Asset Sold Type of Asset Purchased Taxpayer Type
Section 54 House Property (LTCA) House Property Individual/HUF
Section 54F Any asset other than House Property (LTCA) House Property Individual/HUF
Section 54EC Land or Building or both (LTCA) Bonds of NHAI/REC Any Taxpayer
Section 54B Agricultural Land (LTCA/STCA) Agricultural Land Individual/HUF

Documents for Capital Gains

FAQs

Can you apply tax losses against capital gains?

A capital loss can only be offset against any capital gains in the same income year or carried forward to offset against future capital gains. However it cannot be offset against income of a revenue nature.

How many years can you carry forward capital losses?

If you are not able to set off your entire capital loss in the same year, both Short Term and Long Term loss can be carried forward for 8 Assessment Years immediately following the Assessment Year in which the loss was computed.

In case I have sold a house that I had purchased 4 years ago, should I pay tax on any profits that I have earned?

If you sell a house, it comes under long-term capital assets. Therefore, any profit that is made is taxable under Capital Gains.

Which ITR Form should I file if I have only Income from Capital Gain?

There are different ITR forms based on the type and amount of income. “Individuals with income from salary and capital gains or only Capital Gains are required to fill ITR-2 on Income Tax Portal”

Got Questions? Ask Away!

  1. Hey Kunal,

    For capital assets like Equity & preference share, Debentures & Government securities, Units of UTI and equity-oriented mutual funds and Zero-Coupon Bonds where STT is paid

    • If such assets are sold within 12 months of purchase, it is considered short term capital gains
    • If assets are held for more than 12 months, it is considered long term capital gains

    However, the holding period is 36 months for other capital assets like house property, machinery, vehicles, etc

    You can refer to Capital Gains guide on our learn center.