Computation Of Capital Gains Tax (Short Term & Long Term)

Hi friends, you all are much aware of Capital Gain i.e Short Term Capital Gain(STCG) and Long Term Capital Gain(LTCG). To make you more clear about these topics let us go in Brief.

So What is Capital Gain....?

A capital gain is a profit that results from a disposition of a capital asset, such as stock, bond or real estate, where the amount realized on the disposition exceeds the purchase price. The gain is the difference between a higher selling price and a lower purchase price.

Capital Loss....?

Capital loss arises if the proceeds from the sale of a capital asset are less than the purchase price.

Capital Gains Tax

Capital gains may refer to "investment income" that arises in relation to real assets, such as property; financial assets, such as shares/stocks or bonds; and intangible assets such as goodwill.At the time of Sale of any Asset, Tax is liable to be paid on the Gains earned on the sale of Asset. Such Gains could either be Short Term Capital Gains or Long Term Capital Gains.

Long Term Capital Gain

1. The Gain arising from Long Term Capital Asset is called Long Term Capital Gain.(LTCG)
2. Long Term Capital Asset : It is a Capital Asset  which is not a Short Term Capital Asset.
3. Long-term capital gains are usually taxed at a lower rate than regular income. This is done to encourage entrepreneurship and investment in the economy. 

Short Term Capital Gain

1. The Gain arising from Short Term Capital Asset is called Short Term Capital Gain(STCG)
2. Short Term Capital Asset: If the Asset is held for not more than 36 Months immediately preceeding the date of transfer.

Execeptions

• In case of Financial Asset the period should be considered as 12 months instead of 36 months.
• Financial Asset held for a period of 12 months or less than 12 months            -  Short Term
• Financial Asset held for a period of more than 12 months                                  -  Long Term
• In case of non Financial Assets the period is considered as 36 months only.

Capital Gain Tax Rate

Short Term Capital Gain Tax Rate: As per normal Income Tax Slabs

Long Term Capital Gain Tax Rate: 20%

Capital Gains arising on the sale of Shares

• In case the Asset is held in the form of Shares (on which STT has been paid), Equity Oriented Mutual Fund (as specified u/s 10(23D)), Units of UTI or a Zero Coupon Bond – the period of such classification shall be 12 Months and not 36 Months.
• The Short Term Capital Gains Tax Rate in such a case shall be 15% u/s 111A of the Income Tax Act 1961 and the Long Term Capital Gains in this case shall be exempt from Income Tax u/s 10(38) provided that such transaction is subject to Securities Transaction Tax
• The Security Transaction Tax (STT) leviable on the sale of shares and units of equity oriented mutual fund shall not be allowed as deduction in computing the income chargeable under the head “Capital Gains”. In other words, the STT paid shall neither form a part of the cost in case of purchase nor be allowed as deduction as expense of transfer in case of sale of such equity shares and units.

Computation of Short Term Capital Gain

Gains arising at the time of sale of Short Term Capital Asset shall be computed as follows:-

	Full Value of Consideration	xxx
(Less)	Expenditure incurred wholly and exclusively in connection with such Transfer/Sale	xxx
(Less)	Cost of Acquisition	xxx
(Less)	Cost of Improvement	xxx
	Gross Short Term Capital Gain	xxx
(Less)	Exemption (if any) available u/s 54B/54D/54G/54GA	xxx
	Net Short Term Capital Gain	xxx

Tax as per the Income Tax Slab Rates shall be payable on the Short Term Capital Gain computed above

Computation of Long Term Capital Gain

Gains at the time of sale of Long Term Capital Asset shall be computed as follows:-

	Full Value of Consideration	xxx
(Less)	Expenditure incurred wholly and exclusively in connection with such Transfer/Sale	xxx
(Less)	Indexed Cost of Acquisition	xxx
(Less)	Indexed Cost of Improvement	xxx
	Gross LTCG	xxx
(Less)	Exemption (if any) available u/s 54/54B/54D/54EC/54ED/54F/54G	xxx
	Net LTCG	xxx

Tax @ 20% shall be payable on the Long Term Capital Gain computed above and Advance Tax shall also be liable to be paid on such Capital Gain.

In case a loss arises on the sale of an asset, the capital loss can be set-off against other Capital Gains in that year. If the Loss cannot be set-off against capital gain in that year, it can be carried forward for the next 8 years and set-off in the future years. However, loss can only be carried forward if the return was filed before the due date.

I think you are a little bit confused regarding the terms used in the computation of Capital Gain....So let us go in Brief about the terms used....... 

Full Value of Consideration

• Full Value of Consideration means what the transferor receives or is entitled to receive as consideration for the Sale of Property /Asset. This Value may be in cash or in kind i.e. in exchange for an Asset.
• In case of exchange of an asset, the full value for the computation of Capital Gains shall be the Fair Market Value of the Asset granted in exchange.
• In case, the full value of consideration is received in Instalments in different years, the entire value of consideration shall be the Market Value of the Property/Asset granted in exchange.

NOTE

• Fair Market Value in relation to Capital Gains means the price which the Asset would normally fetch if sold in the open market on the Relevant Date.

Expenses on Transfer

Expenses on Transfer include any expenditure incurred, whether directly or indirectly, for the purpose of transfer like Stamp Duty, Registration Fees, and Legal Expenses, Advertisement Expense, Brokerage Expense, etc. However, any expense which has been claimed as a deduction under any other provision of the Income Tax Act cannot be claimed as a deduction under this Clause.

Cost of Acquisition

Cost of Acquisition is the price which the assessee has paid, or the amount which the assessee has incurred, for acquiring the Property /Asset. 

If in case the Capital Asset has become the property of the Assessee in any of the manners mentioned below, the cost of acquisition shall be deemed to be the cost for which the previous owner of the property acquired it:-

• By Succession, Inheritance or Devolution
• Under a Gift or Will
• On Distribution of Assets on Liquidation of a Company
• On the Distribution of Assets/ Total Partition of HUF

Where the cost for which the previous owner of the capital asset acquired the property cannot be ascertained, the cost of acquisition to the previous owner shall be the fair market value of the asset on the date on which the asset has become the property of the previous owner. The Interest on money borrowed for acquiring the capital asset will also form a part of the cost of Asset 

Cost of Improvement

• All Capital Expenditures incurred in making any additions or alterations to the Capital Asset by the Assessee is called Cost of Improvement. After it became his property Cost of Improvement shall be deducted. If the Asset was transferred to the assessee under the cases specified immediately above, the capital expenditure incurred by the previous owner shall also be treated as cost of improvement.
• However, the Cost of Improvement does not include any capital asset which is deductible in computing the chargeable under head- “Income from House Property”, “Profits or Gains of Business or Profession”, or “Income from Other Sources”. Only the Capital Expenses are considered as a cost of Improvement and routine expenses on Repairs and Maintenance do not form part of cost of improvement.

In Computation of Long Term Capital Gain

For the purpose of Computation of Long Term Capital Gain, Indexation using the Cost Inflation Index shall be done to the Cost of Acquisition & Cost of Improvement and the resultant figure shall be the Indexed Cost of Acquisition & Indexed Cost of Improvement for the purpose of computation of LTCG

Indexed Cost = Actual Cost * Cost Inflation Index of the Year of Sale                                           Cost Inflation Index of the Year of Purchase 

The Assessee also has the option of not opting for Indexation and the Long Term Capital Gain Tax Rate in this case shall be 10%