How to Calculate Capital Gains?

Calculate Capital Gains

Capital Gain Definition:

Capital gains are the    profits accrued through the sale of capital assets. Gains arising from sale of long-term capital assets are termed as long-term capital gain and Gains that arise from the sale of short term capital assets are termed as short-term capital gain.

  1. Long Term Capital Assets are those which are held for more than 36 Months., movable property such as jewelry, debt-oriented mutual funds, etc

In case of Immovable Property such as Land, Building, House Property etc., if the Asset is held for more than 24 Months then it is termed as Long Term Capital Assets (provided that property is sold after 31st March 2017).

Some Capital Assets such as listed equity or preference Shares, Debentures, Bonds, Equity Oriented Funds, Zero Coupon Bonds and Units of UTI held for more than 12 months are termed as Long Term Capital Assets.

  1. Short Term Capital Assets are those which are held for a shorter duration i.e., 36 Months or Less.

Capital Assets such as listed equity or preference Shares, Debentures, bonds, Equity Oriented Funds, Zero Coupon Bonds and Units of UTI held for Less than 12 months are termed as Short Term Capital Assets.

In case of Immovable Property, if the Asset is held for Less than 24 Months then it is termed as Short Term Capital Assets.

 

Tax Rate on Long Term Capital Gain (LTCG) & Short Term Capital Gain (STCG)

Type of Capital Gain

Condition Tax Rate

LTCG

Sale of units of equity Oriented Fund / Equity Shares Above Rs. 1,00,000 @ 10%*

LTCG

Except on sale of units of equity Oriented Fund / Equity Shares

20%

STCG When STT* is not applicable

STCG is taxed as per  Income Tax Slab

STCG When STT* is applicable

15%

 

Note:

  1. STT* = Securities Transaction Tax
  2. LTCG accrued from selling of units of equity Oriented Fund / Equity Shares are exempt from tax up to Rs 1 lakhs and Rebate u/s 87A is not available.

Calculation of Long Term Capital Gains

To calculate the Long-Term Capital Gains (LTCG), the computation is mentioned below:

Long Term Capital Gain (LTCG) = Full Sale Value – (indexed cost of acquisition + indexed cost of improvement + cost of transfer), where:

Indexed cost of acquisition = cost of acquisition x cost inflation index of the year of transfer / cost inflation index of the year of acquisition.

Indexed cost of improvement = cost of improvement x cost inflation index of the year of transfer / cost inflation index of the year of improvement.

Cost Inflation Index = Cost Inflation Index is calculated to match the prices to the inflation rate. In other words, an increase in the inflation rate over time will lead to a rise in the prices.

Note:

  1. The Cost Inflation Index (CII) for the financial year 2021-22 is 317.
  2. Cost Inflation Index in case of property received in the will has to be taken for the year in which the property is received. Actual purchase year of the property has to be ignored.

Let us understand the computation of Long Term Capital Gains with the help of instances mentioned below:

Calculation of LTCG Tax by using Indexation:

Mr.X bought a house for Rs. 30,00,000 in the year 2011. After 10 years i.e. on 04 October 2021, Mr. X sold off his house for Rs. 60,00,000.

As the house is long term capital Asset because it is held for more than 2 Years (24 Months) i.e., for 10 years.

Long Term Capital Gain (LTCG) = Selling Price (SP) – Indexed Cost (IC)

Selling Price = Rs. 60,00,000

Indexed Cost (IC) = Cost Inflation Index (CII) x Purchase Price (PP)

Purchase Price = Rs. 30,00,000

Cost Inflation Index= Index for FY 2021-22 / Index for FY 2011-2012

i.e., equals to 301/184 = 1.64

Indexed Cost (IC) = CII x Purchase Price

i.e., equals to 1.64 x 30,00,000 = 49,20,000

LTCG = SP – IC

i.e., equals to 60,00,000 – 49,20,000 = Rs.10,80,000

Tax on capital gain = 20% of 10,80,000 = 2,16,000

Long Term Capital Gain (LTCG) on sale of House Property is Rs. 10,80,000 &Tax on LTCG is Rs. 2,16,000.

Calculation of LTCG Tax without using Indexation

Mr. X invested in an equity oriented fund worth Rs. 2,00,000 in October 2018 at Net Asset Value (NAV) of Rs. 20. All the equity-oriented funds were redeemed in October 2021 at NAV of Rs. 40.

Mr. X has earned LTCG on equity oriented funds as the investment was held for more than one year. Mr. X was having 10,000 units (Rs.2,00,000 / Rs. 20) in October 2018.

Sale Value (10,000 units @ Rs 40)          =                      Rs. 4,00,000

Less: Cost of Acquisition                           =                    (Rs. 2,00,000)

LTCG                                                             =                      Rs. 2,00,000

Tax Rate = 10% (sale of equity funds above Rs. 1,00,000)

Tax on Long Term Capital Gain above Rs. 1,00,000 (2,00,000-1,00,000)

1,00,000*10% = 10,000

Thus, LTCG on Equity Funds is Rs. 2,00,000 & Tax on LTCG is Rs. 1,00,000.

Calculation of Short Term Capital Gains

In case of Short Term Capital Gains (STCG), the computation is mentioned below:

Short-term capital gain (STCG) = Full Sale Value – (Cost of Acquisition + Cost of Improvement + Cost of Transfer)

Let us understand the computation of Short Term Capital Gains with the help of instances mentioned below:

Mr. X invested Rs. 1,00,000 (1000 Equity shares @ Rs. 100 per share) in December 2020. He sold all the shares after 6 months at the rate of Rs. 120 per share and earned Rs. 20,000 as profits. The brokerage Charge at the time of share transfer was Rs. 100 (I.e.,0.5%)

Sale Value (1000 units @ Rs 120)           =                     Rs. 1,20,000

Less: Cost of Acquisition                         =                     (Rs. 1,00,000)

Less: Brokerage Charge                         =                     (Rs. 100)

STCG                                                      =                       Rs. 19,900

Tax Rate = 15% (Assuming STT is applicable)

Tax on Short Term Capital Gain 19,900*15% = 2985

Thus, STCG on transfer of equity shares is Rs. 19,900 & Tax on STCG is Rs. 2985.

 

In case of any Query related to Capital Gain (LTCG as well as STCG), Contact your Trustworthy Advisor Manthan Experts.

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