Capital Gains: Types, Method of Computation, Formula, Taxation, Exemptions and More
Capital Gains refer to the amount of increase in a capital asset’s value at the time of selling that asset at a much higher price than its original purchase price. The sum of capital gain is calculated by subtracting the asset’s original purchase price from its current selling price.
Capital gains are applicable to every capital asset, comprising goodwill, bonds, inventory, etc. In this context, we will discuss the computation of Capital Gains.
How to Calculate Capital Gains?
A capital gain arises from selling capital assets at a higher price than the base purchase price. There are two types of capital gains. They are Short-term and Long-term capital gains. The time interval for holding a short-term capital asset is one year or less. On the other hand, the holding period for a long-term capital asset is 3 years or more.
You can calculate Capital gains by deducting the asset’s original purchase price from the price at which it is sold. Capital assets include products like mutual funds (MF), inventory, houses, etc. If the selling price is more than the purchase price, you will get capital gain. In the same way, if your asset’s selling price is lesser than the purchase amount, it will end with a Capital loss.
When it comes to inheriting properties like land, building, automobiles, etc., there is no scene of capital gain. Under such circumstances, only there is a transfer of ownership at the time of selling.
Taxation of Capital Gains
Capital gains can be taxable at a particular time interval on various conditions. The table would help you to get a better idea on the topic.
| Type of tax | Conditions | Taxable |
| Short-term capital gains | Securities transaction tax is applicable | 15% |
| Short-term capital gains | Securities transaction tax is not applicable | The amount is added to a taxpayer’s income tax return, and it will be taxed on the basis of his income tax slab. |
| Long-term capital gains | Selling equity shares/equity-oriented fund units | 10% alongside exceeding Rs. 1 lakhs |
| Long-term capital gains | Except for the sale of equity shares/equity oriented fund | 20% |
Computation of Long Term Capital Gain Tax – Formula
The formula for Long Term Capital Gain Tax is:
Long term capital gain = Final Selling Price (FSP) – (indexed acquisition cost + indexed improvement cost + transfer cost), in which:
Final Selling Price (FSP) = Final price at which the asset is sold.
Indexed cost of purchase = acquisition cost x cost inflation index of the year of transfer/cost inflation index of the year of purchase.
Indexed cost of improvement = improvement cost x cost inflation index of the year of transfer/cost inflation index of the year of improvement.
Computation of Short term Capital Gain Tax – Formula
The formula for Short Term Capital Gain Tax is:
Short term capital gain = Final Selling Price (FSP) – (acquisition cost + home improvement cost + transfer cost)
Computation of Capital Gains Calculator
Capital gains tax can be calculated by using various available online tools. Out of them, the most popular one is the Capital Gains Calculator. Here are the details you have to enter in order to view your result:
- Selling price
- Purchase price
- Purchase details (including date, month and year of purchase)
- Selling details (including date, month, and year of selling)
- Investment details like shares, equity funds, debt funds (Only if there are any)
After entering the details, the following particulars will appear for calculating your taxable capital gains:
- Investment type
- Gain type (either short term or long-term)
- Purchased index cost
- Cost inflation index (CII) of the purchase year
- Cost inflation index (CII) of the selling year
- The time interval between the purchasing and selling
- Amount difference between the Purchase price and sale price
- Long-term capital gain with indexing
- Long-term capital gain without indexing
Calculating Capital Gains Tax Using CII (Cost Inflation Index)
Cost Inflation Index or CII helps compute long-term capital gains tax. Persons should use CII for calculating their capital gains besides finding out the indexed acquisition cost. The net capital gains will come after subtracting the purchase price from the current selling price.
The CII is applied to acquisition cost, which later becomes the indexed acquisition cost. Later the formula for the computation of capital gain on shares, property, mutual funds, assets, land, etc., is applied.
Moreover, a deduction can be claimed by indexing the acquisition cost and improvement cost while selling a long-term asset.
Example of Capital Gains Tax
Capital Gains Tax refers to anything purchased and sold in investment fields. For example, automobiles, property, inventory, etc.
Tax Exemptions on Capital Gains
There are several government exemptions for computation of Capital Gains. They are as follows:
- As per Section 54 of the Income Tax Act, an individual is entitled to a tax exemption on profit made if the total amount is used to buy another house. The seller can purchase a new house within two years from the date of the property’s sale.
- According to Section 54 EC Income Tax Act, an individual is entitled to tax exemption if the total amount of capital gain is invested in bonds provided by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC). The maximum amount to be exempted under this section is Rs.50 lakh.
- If you want an exemption but don’t have an accurate plan, you can attain it by investing gains in a public bank’s CGAS or Capital Gains Accounts Scheme. Later, this sum of money will be claimed for tax exemption. But don’t forget to invest the money as per the date mentioned by the bank. Otherwise, it will be considered a capital gain, and a tax deduction will be applicable.
- While selling agricultural land, the tax will not be imposed on the capital gain if it is not confined within a civic authority.
- For investing in small industrial works, capital gains are not applicable. But it is mandatory to purchase plant and machinery within six months from the date of sale.
Final Words
From the above content, it is quite clear that you can get an idea about the profit you make while selling an asset at a higher price than its purchase price from the computation of capital gains. Similarly, while computing, if you find that you have made a loss on selling the asset, you will get an alert.
FAQS on Capital Gains
Ans. For capital gain on the sale of property, the formula is:
For short-term: Final sale price – (the cost of acquisition + house improvement cost + transfer cost).
For long-term: Final sale price – (transfer cost + indexed acquisition cost + indexed house improvement cost).
Ans. No. It is because long-term capital gains are not taxable, and current profit remains inside the total taxable income. With the profit surpassing the total taxable income, it becomes taxable.
Ans. The factors to keep in mind while computing capital gains to sell a house are:
Home Loans
Short-term Capital Gains
Long Term Capital Gains
Ans. Capital Gains = Total selling price of the mutual fund investment units – total of the cost of sale, acquisition units price, and improvement costs.
Ans. Examples of capital assets are houses, cars, investment property, inventory, bonds, etc.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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