Capital Gains and Taxes : A Complete Guide

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 the sale 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.

Some of the examples of Capital Assets are house property, land, building, goodwill, patent, trademark, rights, machinery, jewellery, car, painting etc.

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

• ​Any stock in trade, consumables, or raw material held for the purpose of business or profession.
• ​Any personal effects like clothes or furniture etc. that the taxpayer holds for their personal use.
• Agricultural land which is not situated within:
  • the jurisdiction of the municipality or cantonment board which has a population between 10,000 and 1,00,000.
  • 6 KMs of municipality or cantonment board which has a population between 1,00,000 and 10,00,000.
  • 8 KMs of municipality or cantonment board which has a population of more than 10,00,000.
• Gold Bonds, Special Bearer Bonds & Gold Deposit Bonds issued by the Government of India.

Meaning of Transfer

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

• Sale, exchange, relinquishment (surrender) of the asset,
• Extinguishment of any rights in the asset (reducing any right on asset).
• Compulsory acquisition of an asset,
• Conversion or treatment of any capital asset into or as stock in trade of a business
• Maturity or redemption of zero coupon bonds
• Any other transaction which allows to take or retain the possession of an immovable property in part performance of the contract as per sec 53A of the transfer of Property Act,
• Any other transaction which has the effect of transferring or enabling the enjoyment of an immovable property whether by way of becoming a member, or acquiring shares in a cooperative society , company or any other association by way of any agreement or arrangement.

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:

• ​Equity Shares or Preference shares
• ​Debentures or Government securities
• Units of UTI
• Units of the equity-oriented mutual fund
• Zero-coupon bonds

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:

Note: From Budget 2024, Assets will now be classified as long-term or short-term based on holding periods of 12 months or 24 months. The 36-month holding period is eliminated.

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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:

• Full Value of Consideration:
  • It is the amount received or to be received by the seller when he sells (transfers) the asset to the buyer. Capital Gain will be chargeable in the year in which the asset is transferred, even though consideration is received later on.
• Cost of Acquisition:
  • It is the purchase price at which the seller acquired the asset.
• Cost of Improvement:
  • It is an expense that is incurred to make any improvements or repairs or enhancements to the asset. Improvement costs will be considered only if they are incurred after 1st April 1981.
• Indexation:
  • It is derived with the help of the Cost Inflation Index. Cost Inflation Index is simply the measure of inflation and it is notified by the Central Government every year. Indexation is a technique to adjust income/payments by means of a price index, in order to maintain the purchasing power of the public due to inflation.

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How to Calculate Short Term Capital Gain Tax?

How to Calculate Long Term Capital Gain Tax?

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

Expenses that 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

• ​Brokerage or sales commission
• ​Securities Transaction Tax (STT) is not allowed as a deduction

Sale of House Property

• ​Commission or brokerage paid to the property agent
• ​Stamp duty paid on transfer of property
• ​Any traveling expenditure incurred in order to complete the sales transaction may be allowed as a deduction
• ​In case the property is transferred as a result of inheritance, any legal charges related to obtaining a succession certificate, executor fees, etc., may also be allowed as a deduction
• ​In the case of compulsory acquisition, litigation expenses for claiming the enhanced compensation are allowed as a deduction

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

The 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.

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.

Documents for Capital Gains

• Income Tax Department (ITD) issues PAN. It is an alphanumeric ID of a taxpayer who is liable to pay taxes. PAN enables the department to link all transactions of the “Person” with his “Income”. Hence it is the most essential document while filing ITR.
• Aadhaar (Aadhaar Card) a 12 digit unique identification number issued by the UIDAI (Unique Identification Authority of India). It is mandatory for Resident Individuals to provide details of Aadhaar while filing ITR.
• Following details are required to calculate Capital Gains and file Form ITR-2 on the income tax website:
  • Purchase date
  • Sale date
  • Period of holding the asset
  • Transaction or brokerage charges (if any)
• Any salaried individual, whose TDS has been deducted from his salary by the employer, receives Form 16 from his/her employer. It is a detailed statement that shows the salary earned during a Financial Year along with deductions, exemptions, and tax deducted from the salary in that year.
• Form 26AS is a consolidated Tax Credit Statement.  It provides the following details to a taxpayer.
  • ​Details of taxes deducted from the taxpayer’s income.
  • ​Details of taxes collected from taxpayer’s payments.
  • Advance Tax, Self Assessment Tax, and Regular Assessment Taxes paid by the taxpayers.
  • Details of the refund received during the year.
  • Details of any high-value transactions (for eg. Shares, Mutual Funds, etc.).
• A taxpayer can claim the deduction of certain Investments and expenses while filing ITR. Investments proofs are required to claim Chapter VI-A deductions. These investments reduce the net taxable income of a taxpayer.

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