Gains or profit that you receive by selling a capital asset is termed capital gains. The amount is taxed under the ‘Income from Capital Gains’ head and is known as capital gains tax. How much tax do you have to pay? What are the tax rates and how to calculate capital gains tax? This post provides all the information on capital gains tax. Keep reading!
There are two types of capital gains tax based on the types of capital assets that you earn from. These are as follows:
The tax that you need to pay for any profit that you earn from a long-term capital asset is known as long-term capital gains tax. Long-term capital assets are those that you hold for a period of more than 36 months before selling.
However, some assets will be considered long-term assets if you hold them for more than 12 months. These include the following:
Any asset that you hold for less than 36 months is a short-term capital asset. The taxation on the income earned from the sale of a short-term capital asset is called short-term capital gains tax (STCG tax).
However, since the financial year 2017-2018, this holding period of 36 months has been reduced to 24 months for immovable assets such as land or house property. For instance, if you own land for more than 24 months before selling, the income will be long-term capital gains. This has been applicable for the sale of an asset after March 31, 2017.
If you receive an asset in the form of succession, inheritance or will, then the period for which the previous owner held the asset will also be considered in determining the type of asset it is.
The rate at which capital gains taxation takes place is displayed through the following presentation:
Tax Type | Rate of Taxation | Condition |
Long-Term Capital Gains Tax | 20% | Except in the case of selling equity shares or units of any equity-oriented mutual fund |
Long-Term Capital Gains Tax | 10% LTCG tax for gains exceeding Rs. 1 lakh in one financial year | For the sale of equity shares or units of any equity-oriented mutual fund |
Short-Term Capital Gains Tax | 15% | When STT (Securities and Transaction Tax) is applicable |
Short-Term Capital Gains Tax | The hort-term capital gains will be added to your ITR and then taxed as per the respective income tax slab rate | When STT is not applicable |
Also Read: Capital Gains Tax on Sale of Property: Meaning, Calculation And Tips To Get Tax Exemption
If you are into mutual fund investment, you should know that profits earned from debt and equity mutual funds are taxed differently. Here’s about the capital gains tax rate on gains from debt-oriented and equity-oriented mutual funds:
Type of fund | Rate from July 11 2014 | Rate on and before July 10 2014 | ||
Short-Term Gains | Long-Term Gains | Short-Term Gains | Long-Term Gains | |
Equity funds | 15% | 10% for gains over Rs. 1 lakh without indexation benefits | 15% | Nil |
Debt funds | At individual tax slab rate | 20% with indexation benefits | At individual tax slab rate | 10% without indexation or 20% with indexation, whichever would be lower |
Capital gains taxation takes place at certain rates as mentioned in the table above. To find the capital gains tax, you need to determine the capital gains you obtain from an asset or a fund.
Before finding the capital gains amount, you should be aware of the following terms:
To calculate short-term capital gains, take the full value into consideration and deduct the following:
To calculate long-term capital gains, use the formula given below:
Full value consideration – (Cost of acquisition + Cost of transfer+ Cost of improvement)
You can calculate your capital gains tax using any online capital gains tax calculator.
Here’s an example to help you have a better understanding:
Let’s assume, Mr. Verma bought a plot of land for Rs. 10 lakh in 2005 and sold it off at Rs. 40 lakh in 2015. Here’s how his long-term capital gain would be calculated:
The Cost of Inflation Index or CII would be (Index for FY 2014-15 / Index for FY 2005-06) = 1024/480 i.e. 2.13
So, the inflation adjusted cost of the plot would be= 2.13 x Rs. 10 lakh i.e. Rs. 21.3 lakh
LTCG = Rs. 40 lakh – Rs. 21.3 lakh i.e. Rs. 18.7 lakh
His long term capital gains tax would be = 20% of Rs. 18.7 lakh i.e. Rs. 3.74 lakh
Let’s assume Mrs. Sharma bought a house for Rs. 30 lakh and is selling it at Rs. 55 lakh. The brokerage fees and commissions stand at Rs. 30,000. So, the net sale consideration stands at Rs. 54,70,000.
She spent Rs. 3 lakh on its improvement. So, the gross short term capital gains would be:
Rs. 54,70,000 – (Rs. 30,00,000 + 3,00,000) = Rs. 21,70,000
STCG tax = 30% of Rs. 21,70,000 = Rs. 6,51,000
Also Read: Section 54EC: Applicable Exemptions, Capital Assets, And Bonds
If you receive income from capital assets, then make sure to learn about the capital gains tax rate. You can refer to the above-mentioned guide to get a clear knowledge of capital gains tax and how to calculate it. This will help you to file income tax returns accordingly.
Capital assets include House, Land, Building, Financial securities, Vehicle, Machinery, Jewellery and Patents. However, there are certain entities that are not included under the category of capital assets. These include rural land, gold bonds, gold deposit scheme, personal items, special bearer bonds, and others.
If the property is a short-term capital asset, then taxation will take place as per the tax slab rate. However, if the property is a long-term capital asset, it will attract an LTCG tax of 20%.
You can set off the short-term capital losses against incomes under both short-term and long-term capital gains. However, keep in mind that you are allowed to set off long-term capital losses against long-term capital gains only.
Here are some of the exemptions on capital gains:
Capital gains tax is not applicable for the sale of agricultural land in rural areas.
You do not need to pay capital gains tax if you invest in CGAS (Capital Gains Account Scheme).
You can avail tax benefits under Section 54F, provided you meet certain requirements.
If your income falls under the category of capital gains, note that you should not be filing ITR 1. Instead, you will have to report all the details of such income by filing ITR 2.
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