Capital gains tax refers to the gains gained from transfer or sales of capital assets such as property, gold, shares, and bonds. These gains are taxed under the title ‘capital gains’. These capital gains are differentiated based on the period of their holdings, into two types. The two types of capital gains tax are short-term capital gains tax and long-term capital gains tax. The method of calculating capital gains tax varies from asset to asset.
Based on the capital gains tax filed, there are two types of capital assets;
A capital asset that is held on for 36 months or more is considered as a long term capital asset, and any profit gained from them is liable to be filed for long term capital gains tax. Debt-oriented mutual funds, jewelry, etc. will come under this category, with no option for a 24-month reduction period.
Certain assets are considered as long term assets if they are held for more than 12 months:
A capital asset that is held on for 36 months or less is considered as a short-term asset, and any profit gained from them is liable to be filed for short-term capital gains tax. However, assets that are immovable such as property, land, etc. the duration has been reduced from 36 months to 24 months.
Hence, when a property that has been held longer than the duration of 24 months is sold off, the profit that is earned from the sale comes under long term capital gain. If the property has been given as a gift, the period held by the previous owner is also considered when determining whether the property can be considered as a short term capital asset or a long term capital asset.
When it comes to gains generated from the sale of an immovable property (land, house, shop or office) within 24 months of its purchase, it is considered as short-term gains and applicable for. short-term capital gains tax, as per the standard rate. However, if the period extends beyond 24 months, it is applicable for long-term capital gains tax charged as per long term capital gain tax rate at 20%, after indexation.
If stocks or equity-oriented mutual funds held for 1 year or less are sold off, the profits gained from that sales are considered short-term gains and taxed at 15%. However, if the stocks or equity-oriented mutual funds held for more than 1 year the profits gained from that sales are considered long-term gains, which are considered as capital gains exemption for profits up to Rs. 1,00,000/-. If the profits generated are more than Rs. 1,00,000/-, it will be taxed as per long term capital gain tax rate at 10%.
Profits generated from the sale of physical gold (jewelry, coins, bars) held for less than three years are considered as short-term gains and taxed as short-term capital gains tax. However, if sold after three years, it is considered as long-term gains and taxed as long-term capital gains tax as per the long-term capital gain tax rate 20% after indexation. When it comes to sovereign gold bonds introduced by the RBI, they have capital gains exemption if they are held until their maturity. If sold prematurely, the gains are taxed as per profits generated through the sale of gold.
As opposed to equity-based securities and stocks, debt and other types of funds do not have the same tax benefits. However, these debt-based funds and hybrid funds are considered to be more tax-efficient than fixed deposits. For this reason, gains generated from them are considered as long-term gain, if held over three years. Gains from debt-oriented funds are considered as long-term gains, if they are held for over three years, and taxed as per the long-term capital gain tax rate of 20% after indexation.
When it comes to calculating capital gains required to file capital gains tax, it is important to consider the holding period concerning the capital assets in hand. Listed below are checkpoint factors that are required for calculating capital gains
The procedure to calculate long term Capital Gains is mentioned below:
Here is the below example to help calculate long-term capital gains
The procedure to calculate short-term capital gains is mentioned below:
To summarise, for short-term capital gains, the full value of the asset (or the cost) is taken and then the following costs are deducted from it. Deductions include the cost involved in the transfer, cost of buying the capital asset and the additional cost for improvement.
Here is the below example to help calculate short-term capital gains
Is there a specific way to calculate the cost of acquisition of the capital asset for assets acquired before 1st April 2001?
Generally, the cost of acquisition of a capital asset is the cost incurred in acquiring the capital asset. It also includes purchase consideration and the costs incurred exclusively for acquiring the capital asset. Now, if the capital asset was purchased before 1st April 2001, the cost of procuring the asset will be higher than the cost of the asset or the market value be higher than on the date, 1st April 2001. However, the same option is not applicable for depreciable assets.
What should be the cost of acquiring a capital asset in case of undisclosed income in the form of investment on the asset as declared under the Income Declaration Scheme, 2016?
In such a case, the cost of acquisition will be based on the market value of the capital asset on 1st June 2016, as consideration for the declaration scheme, 2016. Applicable from April 1, 2017.
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