Capital Gains and Taxes : A Complete Guide

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Hiral Vakil

Capital Gains
Income from House Property
Income Source

Index

What is Capital Gain?

Capital Gain is simply the profit or loss that arises when you sell 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.

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.

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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:

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.

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?

In case the asset was acquired as a gift, or through a will, succession or inheritance, the period of holding by the previous owner will also be included to determine the total holding period.

For eg., A gifted a watch to B on 01/12/2015. This watch was acquired by A on 01/12/2013. So for B, the total period of holding the watch will be from 01/12/2013 until the sale of the watch.

In case of bonus shares or right shares, the period of holding will be calculated from the date they were allotted.

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?

ParticularsAmount
Take full value of ConsiderationXXXX
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?

ParticularsAmount
Take full value of ConsiderationXXXX
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
File Your ITR for
Capital Gains

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File Your ITR for

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

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LTCG Tax on Shares - Equity Shares & Equity Mutual Funds
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Sale of House Property

Capital Gain Tax on Sale of Property / Land
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Capital Gain Tax on Sale of Property / Land
Refer to this article to know more about capital gain tax on sale of property
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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.

Capital Gains on Sale of Property before Possession
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Capital Gains on Sale of Property before Possession
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Long Term Capital Gain Tax Rate and Short Term Capital Gain Tax Rate

Type of Capital GainTax 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)Exempt
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 GainLong Term Capital Gain
Debt FundsNormal slab rate applicable to Individuals20% with Indexation + Surcharge and Education Cess
Equity Funds15% + Surcharge and Education cessExempt

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

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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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.
[Rated 4.8 stars by customers like you]

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.

SectionType of Asset SoldType of Asset PurchasedTaxpayer Type
54House Property (LTCA)House PropertyIndividual/HUF
54FAny asset other than House Property (LTCA)House PropertyIndividual/HUF
54ECLand or Building or both (LTCA)Bonds of NHAI/RECAny Taxpayer
54BAgricultural Land (LTCA/STCA)Agricultural LandIndividual/HUF
Do not see the Capital Gains Exemption looking for?
Here is an extensive list of all the capital gains exemption available under the Income Tax Act.
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Do not see the Capital Gains Exemption looking for?
Here is an extensive list of all the capital gains exemption available under the Income Tax Act.
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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”

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