Capital Gains Tax

Reviewed by Anjaneyulu | Updated on Aug 27, 2020

Introduction

To put it simply, any benefit or gain resulting from the selling of a capital asset is a capital gain. This benefit or profit comes into the 'income' category, and so you will have to pay tax on the amount in the year the capital asset is transferred. A capital gains tax can be of long or short-term.

Capital gains do not apply to inherited land, as there is no sale, only a transfer of ownership. The Income Tax Act has exempted properties which were obtained as gifts from an inheritance or will from capital gains tax. However, if the person who inherited the asset wants to sell it, then the tax on capital gains will apply.

Terms You Should Know

Capital gains for assets held for a longer period, and those held over a shorter period are calculated differently.

Total Value Consideration: The seller has received or is to obtain consideration as a result of the transfer of his capital assets. In the year of transition, capital gains are taxable even though no payment has been earned.

Cost of Acquisition: The value for which the seller acquired the capital asset.

Cost of Improvement Expenses: Expenses incurred in capital nature by the seller to make any changes or improvements to the capital asset. The improvements made before 1 April 2001 are not taken into account.

How to Calculate Short-Term Capital Gains

Step 1: Start with the full value of consideration Step 2: Deduct the following: - Cost of acquisition - Expenditure incurred in connection with such transfer - Cost of improvement Step 3: The resulting amount is a short-term capital gain

Short Term Capital Gain = Full value consideration deducted by expenses for such transfer Less: cost of acquisition Less: cost of the improvement

How to Calculate Long-Term Capital Gains

Step 1: Start with the full value of consideration Step 2: Deduct the following: - Indexed cost of acquisition - Expenditure incurred in connection with such transfer - Indexed cost of improvement Step 3: From this resulting number, deduct exemptions provided under Sections 54, 54EC, 54F, and 54B

Long-Term Capital Gain = Full value consideration Less: Indexed cost of acquisition Less: Expenses incurred exclusively for such transfer Less: Indexed cost of improvement Less: Expenses that can be reduced from full value for consideration