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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].
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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–
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 –
See Our Recommendation: Tax Provisions Relating to Capital Gains .
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.
The cost/Value at which the seller has acquired the Capital Asset
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
Capital Gain is of two types-
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.
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-
The remaining amount is termed as Short-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.
Steps to calculate the Long-term Capital Gains
Considering the Full value of consideration –
Expenses that are deductible from the full value consideration*-
Indexed Cost of Acquisition and Indexed Cost of Improvement is calculated as mentioned below-
Also, Read: What are the Income Tax Laws for Startups in India .
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