How Is Capital Gains Tax Calculated?

Capital gains tax in India is levied on the profit earned from the sale or transfer of capital assets such as property, stocks, bonds, or mutual funds. The tax is calculated based on the nature of the asset, the holding period, and exemptions available under the Income Tax Act. Capital gains are classified into short-term and long-term depending on the duration for which the asset is held.

Types of Capital Gains:

Short-Term Capital Gains (STCG):

These are gains arising from the sale of assets held for a period of less than 36 months for immovable property (land/buildings) and less than 12 months for listed equity shares, mutual funds, or debt funds.

Long-Term Capital Gains (LTCG):

These are gains from the sale of assets that are held for more than 36 months for immovable property, or more than 12 months for listed equity shares, mutual funds, or debt funds.

How Capital Gains Tax is Calculated:

1. Determine the Sale Price:

The sale price is the amount received from the sale of the asset. For example, if you sell a property for ₹10,00,000, this is the sale price.

2. Calculate the Cost of Acquisition:

The cost of acquisition is the amount you paid to acquire the asset. This may include the purchase price and any expenses incurred in acquiring the asset (e.g., registration fees, brokerage charges).

For property, it would be the purchase price + any improvement costs made to the asset during ownership.

3. Adjust for Indexed Cost of Acquisition (for LTCG):

For long-term capital assets, you can adjust the cost of acquisition using the cost inflation index (CII) to account for inflation.

The indexed cost of acquisition is calculated as follows:

Indexed Cost = Original Cost × (CII of the year of sale / CII of the year of purchase)

CII (Cost Inflation Index) is a government-provided index that helps adjust the asset's cost based on inflation.

4. Calculate the Capital Gains:

Short-Term Capital Gains (STCG):

STCG = Sale Price − Cost of Acquisition

Long-Term Capital Gains (LTCG):

LTCG = Sale Price − Indexed Cost of Acquisition

In both cases, if you incur any selling expenses (e.g., brokerage fees, transfer charges), these can also be deducted from the sale price.

5. Apply the Tax Rates:

The tax rates on capital gains depend on whether the gains are short-term or long-term and the type of asset.

Short-Term Capital Gains (STCG):

• For listed equity shares and mutual funds: The STCG tax rate is 15%.
• For other assets (e.g., property, gold, etc.): STCG is taxed at 20%.

Long-Term Capital Gains (LTCG):

• For listed equity shares and mutual funds: If the gain exceeds ₹1 lakh, the LTCG tax rate is 10% (without the benefit of indexation).
• For other assets (e.g., property, gold): The LTCG tax rate is 20% with indexation to reduce the taxable amount.

6. Apply Exemptions (if applicable):

• Section 54 allows exemption from LTCG tax on the sale of a residential property if the proceeds are used to purchase or construct another residential property within a specified period.
• Section 54EC provides an exemption if the capital gains are invested in specified bonds (e.g., bonds of NHAI, REC).
• Section 10(38) previously offered a complete exemption for long-term capital gains on listed equity shares sold after holding for more than 1 year, but this has been replaced with the ₹1 lakh exemption limit.

Example:

Let's consider the following example for capital gains tax calculation:

Scenario:

• Mr. Sharma sells a house property.
• Sale price: ₹50,00,000
• Purchase price (Cost of acquisition): ₹25,00,000
• Improvements: ₹5,00,000
• Period of holding: 5 years (long-term capital gain)

1. Calculate Indexed Cost of Acquisition:

Assume:

• CII for the year of purchase (2018-19): 280
• CII for the year of sale (2023-24): 348

The indexed cost of acquisition is:

Indexed Cost = 25,00,000 × (348 / 280) = 31,07,142

2. Calculate the LTCG:

LTCG = Sale Price − Indexed Cost of Acquisition = 50,00,000 − 31,07,142 = 18,92,858

3. Tax on LTCG:

Since the gain is over ₹1 lakh, tax is applicable at 20% with indexation:

Tax on LTCG = 18,92,858 × 20% = ₹3,78,572

Conclusion:

The calculation of capital gains tax involves determining the sale price, the cost of acquisition, and applying the appropriate tax rate based on the type of asset and holding period. Short-term capital gains are taxed at higher rates, while long-term capital gains can benefit from indexation and exemptions. Understanding these calculations helps ensure you pay the correct tax on your capital gains.