Capital Gains Calculation
Capital Gains Calculation
Capital gains refer to the profit a taxpayer earns from the appreciation in value of a capital asset when it is sold. Under the Income Tax Act, capital gains are applicable when an individual or entity sells a capital asset and makes a profit from the transaction. Technically, a capital gain arises from the transfer of a capital asset, where the sale price exceeds the original cost of the asset. Transfers can occur through a sale, inheritance, gift, or other means. A capital asset is typically something held for investment purposes—not as stock-in-trade for regular business. The income earned from the profitable sale of such assets is treated as capital gains income. The Income Tax Act categorizes capital gains into two types: Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG). In this article, we’ll explain both types in detail.
Capital Gains Rate for Land & Building
The classification of capital gains—as short-term or long-term—depends on the type of asset and the duration for which it is held. For immovable assets like land, buildings, or apartments, if the asset is sold after being held for more than 36 months (3 years), the profit is treated as a long-term capital gain (LTCG). Long-term gains on such properties are taxed at a concessional rate of 20%. Additionally, sellers can take advantage of the Cost Inflation Index (CII) to adjust the purchase price for inflation, thereby reducing their taxable capital gain and overall tax liability.
Capital Gains Rate for Gold & Jewellery
If an individual holds gold, diamonds, jewellery, or other precious stones for more than 36 months before selling them, the resulting profit qualifies as long-term capital gains. Such gains are taxed at a 20% rate, along with the benefit of indexation to account for inflation.
Capital Gains Rate for Shares, Mutual Funds and Financial Securities
The holding period for financial assets like shares, mutual funds, and securities differs from that of immovable assets and jewellery. When shares, debentures, or financial securities are sold after being held for more than 12 months, any resulting profit is considered long-term capital gains.
Short-Term Capital Gains on Equity Shares:
Short-term capital gains (STCG) on equity shares and equity-oriented mutual funds are subject to a 15% tax under the Income Tax Act, provided the securities are sold on a recognized exchange and subject to Securities Transaction Tax (STT). If the securities are sold outside a recognized exchange, the tax rate will depend on the holding period, and gains will be taxed either as short-term or long-term.
For Foreign Institutional Investors (FIIs), long-term capital gains are taxed at 10% (without indexation), while short-term capital gains are taxed at 30%.
Long-Term Capital Gains on Equity Shares:
Long-term capital gains (LTCG) on equity shares and equity-oriented mutual funds are exempt from tax if the sale is subject to Securities Transaction Tax (STT). However, this exemption was valid only until 31st March 2018. From FY 2018-19, LTCG exceeding ₹1 lakh is taxable at 10% without indexation. If the sale of unlisted securities is involved, LTCG is taxed at 20% after adjusting for inflation via indexation.
Capital Gains Set-Off
At present, long-term capital losses cannot be set off against short-term capital gains. Instead, these losses must be offset only against long-term capital gains of the taxpayer. Additionally, capital losses cannot be deducted from any other type of income for the year. However, both long-term and short-term capital losses can be carried forward for up to eight years to offset future capital gains.