Capital Gains Tax: Meaning, Types, Rates & How To Calculate

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!

Types of Capital Gains Tax

There are two types of capital gains tax based on the types of capital assets that you earn from. These are as follows: 

1. Long-Term Capital Gains Tax (LTCG Tax) 

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: 

• Various securities such as bonds, debentures, government securities on a recognised stock exchange of the country
• Shares of a company listed on any recognised stock exchange
• Zero coupon bonds, regardless of being quoted or not
• Units of different equity-oriented mutual funds
• Units of UTI, irrespective of being quoted or not

2. Short-Term Capital Gains Tax (STCG Tax)

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

Taxation Rate on Debt Mutual Funds

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

Calculating Capital Gains Tax

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: 

• Full value consideration: The consideration that you receive for the transfer of a capital asset is full value consideration. Capital gains will be liable to taxation in the year of asset transfer even if you do not receive any consideration. 
• Cost of acquisition: The amount for which the seller acquired an asset is the cost of acquisition. 
• Cost of improvement: Expenses that a seller incurs for making alterations to an asset. 

To calculate short-term capital gains, take the full value into consideration and deduct the following: 

• Expenses incurred for the transfer of an asset
• Cost of improvement 
• Cost of acquisition

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: 

• Long term capital gains tax

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

• Short term capital gains tax 

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

Final Word

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. 

FAQs on Capital Gains Tax

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