What is Capital Gains?

Capital gain is an excess in the value of a capital assets (investment or real estate) than the purchase price of the asset. The surplus is not realized until the asset is sold. A capital gain may be short or long term, i.e., less than one year or more than one year and must be claimed on income taxes.

While capital gains are generally associated with stocks and funds due to their inherent price fluctuating nature, a capital gain can occur on any security that has been sold for a higher price than its purchase price. Similarly, capital loss is suffered when there is a fall in the capital asset value compared to an asset’s purchase price.

How to calculate Capital Gains?

There are separate methods to calculate Capital Gains for Long-term Assets and Short-term Assets.

Things you need to know:

• Full value consideration (FVC) – This is the amount received by the seller after the sale of his/her capital assets.
• Cost of acquisition (COA) – The value at which the capital assets was acquired by the seller.
• Cost of improvement (COI) – The capital expenses made by the seller to make alterations and additions to the capital asset.

Calculation of Short-term Capital Gains:

Step 1: Start with the FVC

Step 2: Deduct the following:

• Expenditure incurred wholly and exclusively in relation with such transfer
• COA
• COI

Step 3: The final Value is Short-Term Capital Gains

Calculation of Long-term Capital Gains:

Step 1: Start with the FVC

Step 2: Deduct the following:

• Expenditure incurred wholly and exclusively in relation with such transfer
• Indexed COA
• Indexed COI

Step 3: Deduct exemptions provided under sections 54, 54EC, 54F, and 54B from the resulting value

In case of House Property Sale:

The following expenses are to be deducted from the Gross sale price:

1. Commission and brokerage paid for securing a client
2. Stamp Paper purchase cost
3. Travelling expenses related to the transfer
4. In case of property inheritance, expenditure incurred with respect to procedures associated with the will and inheritance, obtaining certificate of succession, execution costs, may also be allowed in some cases.

In case of Shares sale:

The following expenses may be deducted from the Gross sale price:

1. Commission and brokerage for selling the shares
2. Security Transaction Tax is not allowed to be deducted

Exemptions on Capital Gains.

Amendments to Section 54 – Capital Gains Exemption
Assesses can get an exemption by investing long term capital gains from the sale of house property in up to two house properties against the earlier provision of investment in one house property with same conditions. However, the capital gains on the sale of house property must not exceed Rs.2 crores.

Section 54: Exemption on Sale of House Property on Purchase of another House Property

Section 54F: Exemption on capital gains on sale of any asset other than a house property

Section 54EC: Exemption on Sale of House Property on Reinvesting in specific bonds

Section 54B: Exemption on Capital Gains from Transfer of Land Used for Agricultural Purpose

What is Capital Gains Tax?

Capital Gains Tax is the tax that is levied on capital gains. This tax is calculated on the profit between the sale price and the original purchase price of the asset.

How Capital Gains Tax works?

Capital gains tax is only triggered when an asset is realised, or sold, not while it is held by an investor. This implies someone can own shares for instance, that appreciate every year but will not owe a capital gains tax on the shares until they are sold, no matter how long they’re held.

 Net Capital gains:

The term “net capital gains” refers to the total amount of capital gains after deducting all capital losses.

For example, if an investor sells 2 stocks during the financial year, one for loss and an equal one for a profit, the amount of the capital loss on the losing investment nullifies the capital gain from the profitable investment. As a result, the taxpayer has a zero net capital gains, meaning he or she will not have to incur any capital gains tax.

Long-Term vs Short-Term Capital gains:

The gain an investor realizes on an asset that has been held for longer than 12 months before its sale is known as Long-Term Capital Gains. A short-term capital gain is the gain that rises from an asset that’s been held for less than 12 months.

Investors with both long- and short-term gains and losses can easily calculate their final net capital gain. First, it is necessary to add all kind gains and losses together.

For example, if an investor has four short-term gains, these gains are to be summed up together to get a gross total of all short-term gains. The same thing must be done with long-term gains and long- and short-term losses. Once we have the gross total short and long term gains and losses then, the short-term losses are deducted from the short-term gains to produce a net short-term gain or loss. The same thing is done with the long-term gains and losses. Then, these two numbers are netted against each other to produce a final net value that is reported on the tax return.

Capital Gains Tax in India.

Short and Long Term Capital Gains Tax rates:

TAX TYPE	CONDITION	TAX APPLICABLE
Long-term capital Gains Tax	Except on sale of equity shares/units of equity oriented fund	20%
Long-term Capital Gains Tax	On sale of equity shares/ units of equity oriented fund	10% over and above Rs.1 Lakh
Short-term Capital Gains Tax	When securities transaction tax is not applicable	The short-term capital gain is added to the income tax return and the taxpayer is taxed according to his income tax slab.
Short-term capital gains tax	When securities transaction tax is applicable	15%