In India, capital gains refer to profits earned from the sale of assets. The Union Budget of 1956–1957 established capital gains tax as a permanent fixture in the country’s taxation system. 

 

The tax is levied on both short-term and long-term capital gains, with several rates and exemptions. This depends on the type of assets and the period they were held. India’s capital gains tax system aims to encourage long-term investments while providing revenue for the government. 

Types of Capital Gain Tax

Based on the timeline of holding an asset, capital gains against investment can be categorised into two types:

1. Short-term Capital Assets (STCA)

Any asset held for less than 36 months is known as a short-term capital asset. For instance, if you sell a property after 27 months of its purchase, the gain will be calculated as short-term capital gains.

 

However, the time limit for unlisted shares and immovable properties from FY 2017-18 is 24 months. There are some assets with a holding period of 12 months or less termed as short-term ones. But this rule is valid if the transfer date is after July 10, 2014. 

 

A few examples of these assets include: 

  • Shares of a company listed on a recognised Indian stock exchange

  • Securities (e.g., debentures, government securities, or bonds) listed on a recognized Indian stock exchange

  • Units of UTI, regardless of quotation

  • Units of equity-oriented mutual funds, regardless of quotation

  • Zero-coupon bonds, regardless of quotation

2. Long-term Capital Assets (LTCA)

An asset held for more than 36 months is known as a long-term capital asset. Assets like buildings, house properties, and land will be considered LTCA if held for more than 24 months (from FY 2017-18). 

 

Certain short-term assets held for over 12 months, like zero-coupon bonds or debentures listed on the Indian stock exchange, are classified as LTCA.  

Tax on Debt and Equity Mutual Funds

The gains earned after you sell your debt and equity funds are calculated differently. Any fund which invests in equities (65% of the total portfolio or more) is known as an equity fund.

Funds

On or Before April 1, 2023

Effective from April 1, 2023

STCG

LTCG

STCG

LTCG

Debt Funds

As per the individual’s income tax

slab rates 

At 20% with indexation or 10% without indexation (whichever is lesser)

As per the income tax slab rate of the individual

As per the taxpayer’s slab rate 

Equity Funds

15%

10% on over ₹1 Lakh (indexation not included)

15%

10% on over ₹1 Lakh (without indexation)

Calculation of Capital Gains

Capital gains computation varies based on asset holding duration, differing for long-term and short-term holdings.

1. Computation of STCG

Follow these steps to calculate the short-term capital gains:

  1. Begin with the full value of consideration

  2. Subtract the below-mentioned factors:

  • Acquisition cost

  • Improvement cost

  • Expenses which are incurred exclusively and wholly with respect to such transfers

  1. Deduct the exemptions provided as per sections 54B and 54D

  2. This amount is an STCG

 

Here's a hypothetical example illustrating the computation of short-term capital gains tax. Suppose you earn a salary of ₹2.10 Lakhs and have ₹50,000 from other sources. Your short-term capital gains from shares amount to ₹1.80 Lakhs.

 

If you've invested ₹1.50 Lakhs in ELSS, your net taxable income, excluding STCG, is ₹2.60 Lakhs (₹2.10 Lakhs + ₹50,000 - ₹1.50 Lakhs). With a basic exemption limit of ₹2.50 Lakhs, the unutilized limit is ₹1.40 Lakhs. Hence, the net taxable STCG in this scenario is ₹40,000 (₹1.80 Lakhs - ₹1.40 Lakhs).

 2. Computation of LTCG

Follow these steps to compute the LTCG:

  1. Begin with the full value of consideration.

  2. Subtract the following:

  • Expenses which are incurred exclusively and wholly with respect to such transfers

  • Indexed improvement costs

  • Indexed acquisition costs

  1. Deduct the exemptions offered u/s 54, 54F, 54B, and 54EC

 

Consider the example to understand the LTCG calculation. Say Mr A purchased units of debt mutual fund worth ₹2 Lakhs in FY 2009-10. He sells them in FY 2018-19 at ₹4.50 Lakhs. 

 

Cost Inflation Index = CII of FY 2018-19/CII of FY 2009-10 = 280/148 = 1.89 approximately

 

Indexed cost of purchase = CII X purchase cost = 1.89 X 2,00,000 = ₹3.78 Lakhs

 

LTCG = Selling price – Indexed purchase cost = ₹4.50 Lakhs – ₹3.78 Lakhs = ₹72,000

 

Tax calculated on long-term capital gains = 20% of ₹72,000 = ₹14,400


Exception: The LTCG on the sale of equity shares or equity-oriented funds’ units released after March 31, 2018 remain exempt up to ₹1 Lakh p.a. This is in accordance with Budget 2018.

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Deductible Expenses

Here are some parameters included under deductible expenses:

1. Sale of House Property

The following expenses are deductible from the total selling price:

  • Expenses of the stamp papers

  • Commission or brokerage, which is paid for securing a buyer

  • Travelling expenditures with respect to the transfer - these could be incurred post the transfer gets affected

2. Sale of Shares

You are allowed to subtract the following expenses:

  • Commission of the broker for the shares which have been sold

  • Securities Transaction Tax (STT) is not permitted as a deductive expenditure

3. Sale of Jewellery

Expenses incurred for broker services facilitating the sale of jewellery can be deducted from the proceeds of the sale. Expenses which are deducted from the selling price of the assets for computing the capital gains are not permitted as a deduction under any other income head. This can only be claimed once.

Indexed Improvement/Acquisition Cost

The acquisition and improvement cost are indexed by applying the Cost Inflation Index (CII). It is computed to adjust for inflation across the holding period of the asset. This lessens your capital gains and raises your costs. 

 

The indexed acquisition cost is computed as follows:

Indexed acquisition cost 

(Acquisition cost X CII of the asset’s transfer year)/(CII of the financial year 2001-2002 or the year when the seller held the asset for the first time, whichever comes after)

The asset’s acquisition cost procured prior to April 1, 2001, must be the actual cost on April 1, 2001, according to the taxpayer’s option.

 

The indexed improvement cost is computed as follows:

Indexed improvement cost

Improvement cost x CII (year of asset transfer) / CII (year of asset improvement)

It must be noted that the improvements which are made prior to April 1, 2001, must not be taken into consideration.

FAQs on Capital Gains

What are the types of capital gains?

Capital gains can be classified into two types, namely, long-term capital gains (LTCG) and short-term capital gains (STCG). The classification is made based on the duration the assets are held.

What does a capital gain affect?

Capital gains are applicable to every type of investment and purchase for your personal usage.

Which income is charged to tax under ‘Capital Gains’?

Any profit which arises from the transfer of capital assets during the year is generally taxed under ‘Capital Gains’.

How can one calculate LTCG tax on shares?

All you have to do is check the sale price, associated costs and purchase cost. Then, subtract the acquisition cost and sale expenditures from the sale price to compute capital gains.

How can I save capital gains tax on property sale?

You can invest in the Capital Gains Account Scheme or bonds and offset all capital losses to save on capital gains tax.

What is the exemption applicable on capital gains tax?

Section 54 allows individuals or HUFs selling residential property to claim exemptions by reinvesting capital gains into another residential property's construction or purchase.

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