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 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.

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]
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]

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:

  • ​Any stock in trade, consumables, or raw material held for the purpose of business or profession.
  • ​Any personal effects like clothes or furniture etc. Which is held for your 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 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 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:

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?

  • 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.
Income Tax Calculator
Calculate income tax liability for FY 2020-21. Compare tax liability as per New vs Old Tax Regime.
Explore
Income Tax Calculator
Calculate income tax liability for FY 2020-21. Compare tax liability as per New vs Old Tax Regime.
Explore

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
File Your ITR for
Capital Gains

India’s fastest growing Tax Filing Platform

[Rated 4.8 stars by customers like you]

File Your ITR for

Capital Gains

India’s fastest growing Tax Filing Platform

[Rated 4.8 stars by customers like you]

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

  • ​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

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

  • 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 calculated Capital Gains and file ITR:
    • 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 Taxes, Self Assessment Taxes 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.

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.

  2. Hi @Ridhima_Sharma @TeamQuicko

    I bought 500 shares at 100 rupees each on May 05, 2020, thereby investing 50,000 in a company. When the share price appreciated to Rs. 200 each, I sold 250 shares on Feb 15, 2021, thereby taking my initial investment of 50k.

    As I have ONLY taken my initial investment out & not profit, will I be taxable under STCG ?

    Pl advise

  3. Hey @Abdul_Kaleem_shah, yes, you will have to file ITR 2 as the income you have received from selling the shares is considered as capital gains income and since you have sold it before holding them for 12 months it will be considered as STCG. You can read more about capital gains from here:

  4. If my Long term capital gains is below 1Lakh in a year, do I need to file ITR2 or I can just file ITR1 as usual (simple salaried with some interests). I read in few places, only over 1Lakh LTCG I’m liable to pay 10% taxes.

    My Scenario: I have few old shares, which are very good priced at the current bull market. Now if I sell them, I might make a bit profit. But my investment is so low, I don’t want to take the headache by going into ITR2 for the next 8 years. I have no intraday or short term share trades. Maybe the overall gain will be just a mere 3-4 thousands (even amount to withdraw is just 14k or so).

  5. Hey @sajalb, it is required that you file ITR 2 since you need to disclose the source of the income even though your profits are not taxable. Also, you do not have to file ITR 2 for 8 years in order to keep carry forwarding your losses.

  6. Thanks for the prompt reply. I understand it now. I hope I can cope up with the ITR2, feel very daunting to leave the comfort of ITR1.