What is Capital Gain Tax and How Long – Term Capital Gain is Different from Short Term Capital Gain?

Capital gain is a gain or profit that arises from the sale of a ‘capital asset’ and comes under the category of ‘income’, therefore a person is required to pay Capital gain tax for the amount in the year in which the transfer of the capital asset takes place. Capital gains tax is divided into two categories i.e. Short-term Capital Gain or Long-term Capital Gain. A Capital Gain is a gain that occurs on the property/security which has been sold higher than the price on which it has been purchased i.e. Purchase Price^[1].

Key points of the Capital Gain

1. Any profit or gain arises from the sale of the capital asset is termed as Capital Gain.
2. The Inherited property is not covered under the Capital gain as there is no sale. The inherited property represents a transfer of ownership.
3. Capital Gain is calculated based on the Full value consideration, Cost of Acquisition and cost of the improvement.
4. Capital Gain is categorized into 2 parts-Long term Capital Gain and short-term Capital Gain.

The Terminology used in the Capital Gain Tax Topic

Capital Asset

Capital assets include Land, Building, House property, Vehicles, IPRs (Trademark and patents). It also includes machinery and jewelry. The assets include having rights in relation to an Indian Company. A Capital asset is of two types-Short-term Capital Assets and Long-term Capital Assets.

An asset held for a period of 36 months or less than 36 months is termed as Short-term Capital Assets.

Exception–

1. In the case of immovable property, the criteria are of 24 months instead of 36 months.
2. Any income arising out of the immovable property sold after 31^st March 2017, will be treated as Long -term Capital Gain.

Whereas, Long-term Asset is an asset that is held for more than 36 months

The above-mentioned exception does not apply to the movable property such as jewelry, debt-oriented mutual funds, etc. and will be classified as a long-term capital asset if held for more than 36 months as earlier.

Exception

Some assets are considered as Long-term capital assets if are held for a period of more than12 months –

• In the case of Listed Company, Equity or preference shares of a company and also the securities i.e. Debenture/Bonds and government securities listed on a recognized stock exchange in India.
• Units of UTI, equity-oriented mutual fund and Zero-Coupon Bond whether Listed or not.

Full Value Consideration

Full value consideration is the consideration received by the seller as an outcome of the transfer of his/her Capital assets. However, even if no consideration is received the Capital gain is chargeable to tax in the year of transfer.

• Cost of Acquisition

The cost/Value at which the seller has acquired the Capital Asset

• Cost of Improvement

The cost of the improvement is a capital cost incurred in making any additions or alterations to the capital asset by the seller.

Exception – Improvements made before April 1, 2001, is not taken into consideration

Types of Capital Gain

Capital Gain is of two types-

• Short Term Capital Gain

When the securities are held for a period of 3 years or less than 3 years. Short term capital gain is considered as a profit where a seller gains from selling a property that was held by him for a period of fewer than 3 years.

How to calculate Short term Capital Gain?

To calculate the short-term capital gain, the following steps are required-

Considering the Full value of consideration

Deduct the below-mentioned expenses from the full value consideration-

• Expenditure incurred wholly and exclusively in connection with such transfer*
• Cost of acquisition
• Cost of improvement (if any done by the seller)

The remaining amount is termed as Short-term capital gain

• Long term Capital Gain

When the property is sold by the seller, that is owned by him/her for more than 3 years, any profit arising from such sale will be considered as Long-Term Capital Gain.

How to calculate Long-term capital gain?

1. Long term capital gain is calculated as the difference between Net sales consideration and Indexed cost of the property.
2. To set off the impact of inflation and to set the actual gains on the property to be taxed, the benefit of indexation is allowed from the gains made on the sale of the property. As because of inflation the value of money decreases constantly and hence, it is unfair to tax a long-term property holder for the nominal gains accruing to him.

Steps to calculate the Long-term Capital Gains

Considering the Full value of consideration –

Deduct the below-mentioned expenses from the full value consideration-

• Expenditure incurred wholly and exclusively in connection with such transfer*
• Less Indexed Cost of acquisition
• Less Indexed Cost of improvement (if any done by the seller)

Expenses that are deductible from the full value consideration*-

1. Brokerage, the commission at the time of selling the property/related to shares sold for securing the purchaser.
2. Cost of stamp papers for documentation of the property.
3. In the case of inheritance, expenditure incurred for the process associated with the inheritance and will process.

How to calculate the Indexed Cost of Acquisition and Indexed Cost of Improvement?

Indexed Cost of Acquisition and Indexed Cost of Improvement is calculated as mentioned below-

• Indexed cost of acquisition is calculated as –

• Indexed Cost of Improvement is calculated as –