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Every individual generally possesses some asset to be it in the form of any property, gold, jewellery or shares. And so one must be aware of tax implications on the gain/loss arising from the sale of such assets. Tax liability on these assets depends on the holding period of the asset and is calculated under the head ‘Capital Gains’. We have covered the following in this article: This article covers the following:
  1. What is Capital Gains?
  2. Tax Rate Chart for Income on Sale of Assets
  3. Calculation of Tax on Short term and Long term gain from sale of assets
 

1. What is Capital Gains?

Profit or gain arising from the sale of assets such as property, gold, jewellery or shares is called a capital gain. Capital Gains are divided into two categories:

a. Long term Capital Gain

  From FY 2017-18 Onwards For instance, if you sell a house in FY 2017-18 after 24 months from the date of acquisition, then profit arising will be termed as LTCG. This holding period differs across capital assets.

b. Short term Capital Gain  

If the asset is sold within a certain holding period from its acquisition, then it is called a short-term capital gain (STCG). For instance, if you sell a house in FY 2017-18 within 24 months from the date of acquisition, then profit arising will be termed as STCG. However, the classification of long-term and short-term capital gain is different in the case of shares/mutual funds. In the case of listed shares and equity-oriented mutual funds, a long-term capital gain arises if they are sold after holding it for one year only and short-term capital gain if sold within one year. Now, let’s analyse the tax rate applicable to income from these assets such as property, gold, jewellery, shares, etc. based on the duration for which they are held.

2. Tax Rate Chart for Income on Sale of Assets

   
Asset Duration of the Asset Tax Rate
Short-Term Long-Term Short-Term Long-Term
Immovable Property, e.g. House property Less than 2 years More than 2 years Income tax slab rate 20.8% with indexation
Movable Property, e.g. Gold/Jewellery Less than 3 years More than 3 years Income tax slab rate 20.8% with indexation
Listed Shares* Less than 1 year More than 1 year 15.60% Exempt
Equity-Oriented Mutual Funds Less than 1 year More than 1 year 15.60% Exempt
Debt-Oriented Mutual Funds Less than 3 years More than 3 years Income tax slab rate 20.8% with indexation
(Tax rates mentioned above are excluding surcharge at 10% on income between Rs 50 lakh and Rs 1 crore and at 15% on income above Rs 1 crore) * Applicable only for the shares sold through the stock exchanges in India on which a security transaction tax (STT) has been paid.

3. Calculation of Tax on Short term and Long term gain from sale of assets

a. Short term Gain/Loss

Short-term capital gains are taxed as per the income tax slab rates applicable to the individual. For instance, if the short-term capital gain is Rs 6 lakh and the person falls in the 30% tax bracket, then he/she has to pay 31.20% on Rs 6 lakh, i.e. Rs 1,87,200. Gain/loss from the sale of the asset is calculated by deducting the cost of purchase, cost incurred for improvement of the asset and expenses incurred exclusively in connection with the sale from the sale proceeds of the asset.
Short Term Capital Gain = Sale Consideration – Cost of acquisition- Cost of improvement (if any) – Expenses incurred exclusively for the sale of the Asset.
 

Exception:

In the case of a short-term capital gain on listed shares/equity-oriented mutual funds (if sold within a period of one year), it will be taxable at the rate of 15.60% (including health and education cess). But in case of sale of unlisted shares, i.e. sale not made through Indian stock exchange, will be subject to tax as per the income tax slab rate applicable to the individual.

b. Long Term Capital gain/Loss

Long-term capital gains are taxed at the rate of 20.8% (rate including health and education cess) with indexation. Indexation is basically a technique to adjust the cost of the asset according to the inflation index. It will increase your cost and reduce your gains and thereby, tax liability. So under long-term capital asset, the benefit of indexation is available plus the person who falls in the tax bracket of 30% also get the advantage of paying the lower tax rate of 20%. Long-term capital gains are calculated in the same way as short-term capital gains, but the purchase cost and cost of improvement are replaced with the indexed cost of acquisition and indexed cost of the improvement.
Long Term Capital Gain = Sale consideration –Indexed cost of acquisition- Indexed cost of improvement (if any)-Expenses incurred exclusively for the sale of the Asset-Exemption u/s 54, 54F, 54EC if any availed.
The calculation of Indexed cost can be done with the help of following formula:
Indexed Cost of acquisition = Cost of acquisition * Cost Inflation Index of the year of sale
Cost Inflation Index of the year in which asset was first held by the seller or 1981-82 whichever is later.
Indexed Cost of Improvement=Cost of improvement * Cost Inflation Index of the year in which improvement took place
Cost Inflation Index of the year in which improvement cost is incurred.

Exception:

Before, In the case of Listed Shares/ Equity oriented Mutual funds, long term capital gain (if sold after a period of one year) was exempt. But it was applicable only for the shares listed on Indian Stock exchange whether it is an Indian company or foreign company. And the shares must be sold through the Indian stock exchange platform only.

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