How To Calculate Capital Gain Tax In India?

Capital gains tax is a tax levied on the profit earned from the sale of a capital asset. Such as property, stocks, mutual funds, and other investments in India. The capital gains tax is calculated based on the difference between the sale price and the cost of acquisition of the asset. The tax liability can be either short-term or long-term depending on the holding period of the asset. If the asset is held for less than 24 months. It is considered a short-term capital asset, and the tax liability is calculated based on the individual’s income tax slab. If the asset is held for more than 24 months. It is considered a long-term capital asset, and the tax rate is either 10% /20% depending on the type of asset. This article will provide information that how to calculate capital gain tax in India with some other data.

A glimpse of Capital Gain Tax in India

It is a tax levied on the profit or gain earned from the sale or transfer of a capital asset. A capital asset can include real estate, stocks, mutual funds, bonds, and other investments. The tax is calculated based on the difference between the sale price of the asset and its cost of acquisition. If the asset is held for a short period, usually less than one year. It is considered a short-term capital asset and the tax is calculated based on the individual’s income tax slab. If the asset is held for a long period, usually more than one year. It is considered a long-term capital asset and the tax rate is usually lower than the tax rate for short-term capital assets.

Capital gains tax is a way for governments to raise revenue and can help discourage short-term speculative investments. However, many countries also offer exemptions and deductions for capital gains tax under certain conditions, such as reinvesting the proceeds from the sale of the asset into a similar asset. However, there are exemptions and deductions available under certain conditions. For example, if the capital gain is invested in certain specified assets within a certain time period, such as in a residential property or in specified bonds, then the tax liability can be reduced or waived off. It is recommended to consult a tax professional or accountant for more specific guidance on capital gains tax in India.

Define capital assets

Capital assets are assets that are acquired for long-term use and are not intended for resale in the normal course of business. Examples of capital assets can include real estate, stocks, bonds, mutual funds, intellectual property, and other investments. Capital assets are typically held for an extended period and are expected to provide a long-term benefit to the owner. For example, a person may purchase a house as a capital asset with the intention of using it as their primary residence or renting it out for a long period of time.

In the context of taxation, capital assets are subject to capital gains tax when they are sold or disposed of. The tax is calculated based on the difference between the sale price of the asset and its cost of acquisition. If the asset is held for more than a year, it is considered a long-term capital asset and the tax rate is usually lower than the tax rate for short-term capital assets.

Formula to calculate the capital gain

The formula to calculate capital gain is:

Capital Gain = Selling Price of the Asset – (Cost of Acquisition + Cost of Improvement + Cost of Transfer)

Where,

• The selling Price of the Asset is the price at which the asset is sold
• Cost of Acquisition is the original cost incurred by the taxpayer to acquire the asset, such as purchase price, stamp duty, registration fee, and legal fees
• Cost of Improvement is the expenses incurred by the taxpayer to make any improvement to the asset, such as renovation, extension, or modification, that increases the asset’s value
• Cost of Transfer is the expenses incurred by the taxpayer in connection with the transfer of the asset, such as brokerage, commission, and legal fees

If the resulting value is positive, it indicates a capital gain, and if it is negative, it indicates a capital loss. It is important to note that different rules apply for calculating short-term and long-term capital gains in India. There may be different tax rates and exemptions available based on the type of capital gains. It is advisable to consult a tax professional or accountant for more specific guidance on calculating capital gains in India.

Purpose of Calculating Capital Gain Tax

The purpose of calculating capital gain tax is to ensure that individuals/ entities who earn income from the sale of capital assets pay their fair share of taxes to the government. When an individual/ entity sells a capital asset on profit. It is considers a capital gain, and they require to pay taxes on the gain.

By calculating and collecting capital gain tax, the government is able to generate revenue. That can be used to fund various public services and infrastructure projects. Additionally, the tax system helps to promote fairness by ensuring that all taxpayers, regardless of their source of income, contribute to the country’s overall tax base.

Advantages of Capital Gain Tax in India

There are several advantages of capital gain tax in India, including:

• Revenue generation: Capital gains tax is an important source of revenue for the government. It helps the government to finance its expenditure on various developmental and welfare projects.
• Encourages long-term investment: Capital gains tax encourages long-term investment by taxing short-term capital gains at a higher rate than long-term capital gains. This incentivizes investors to hold on to their investments for a longer period of time, which is generally beneficial for the economy.
• Promotes fair taxation: Capital gains tax ensures that gains from the sale of assets are taxed, just like any other source of income. This promotes fairness in the taxation system by ensuring that everyone pays their fair share of taxes.
• Reduces speculation: Capital gains tax reduces speculative activities in the market by discouraging short-term trading. This helps in stabilizing the markets and prevents unnecessary volatility.
• Promotes economic growth: Capital gains tax encourages investment in productive assets, such as infrastructure and manufacturing, which helps in promoting economic growth and development.
• Provides a cushion against inflation: Capital gains tax takes into account the effect of inflation on the value of the asset, thus providing a cushion against inflation. This helps in ensuring that the tax burden is not too high when the asset is sold.

Overall, it plays an important role in promoting economic growth, ensuring fairness in the taxation system, and generating revenue for the government.

Types of capital gain tax in India

In India, there are two types of capital gains tax:

Short-term capital gains tax

Short-term capital gains tax is levied on the profits earned from the sale or transfer of short-term capital assets. Short-term capital assets are those that are held for a period of up to 24 months. The short-term capital gains tax rate is based on the individual’s income tax slab rate.

How to calculate short-term capital gains tax

To calculate short-term capital gains tax in India, follow these steps:

• Determine the sale value: This is the amount you received from the sale of the asset.
• Calculate the cost of acquisition: This is the amount you paid to acquire the asset, including any expenses related to the purchase such as brokerage fees, stamp duty, etc.
• Calculate the cost of improvement: If any improvements were made to the asset, such as renovations or repairs, you can deduct the cost of improvement from the cost of acquisition.
• Calculate the net sale value: Subtract the cost of acquisition and the cost of improvement (if any) from the sale value.
• Calculate the short-term capital gain: Short-term capital gain is calculated as the net sale value minus the cost of acquisition and cost of improvement (if any).
• Calculate the tax liability: The tax liability is calculated based on your income tax slab rate. For the financial year 2022-23, the income tax slab rates for individuals are as follows:
• Up to Rs. 2.5 lakh: Nil
• Rs. 2.5 lakh to Rs. 5 lakh: 5%
• Rs. 5 lakh to Rs. 7.5 lakh: 10%
• Rs. 7.5 lakh to Rs. 10 lakh: 15%
• Rs. 10 lakh to Rs. 12.5 lakh: 20%
• Rs. 12.5 lakh to Rs. 15 lakh: 25%
• Above Rs. 15 lakh: 30%
• Pay the tax liability: The short-term capital gains tax liability is added to your total income tax liability for the financial year and needs to be paid by the due date for filing income tax returns.

Long-term capital gains tax

 Long-term capital gains tax is levied on the profits earned from the sale or transfer of

. Long-term capital assets are those that are held for a period of more than 24 months. The long-term capital gains tax rate is either 10% or 20%, depending on the type of asset. However, from 1st April 2021, for equity shares or equity-oriented mutual funds held for more than 24 months but sold on or after April 1, 2021, long-term capital gains exceeding Rs. 1 lakh in a financial year will be taxed at 10%.

It is important to note that there are exemptions and deductions available under certain conditions. Such as investing the capital gains in specified assets like a residential property or specified bonds. The exact rules and conditions for exemptions and deductions may vary based on the type of asset and other factors.

How to calculate long term capital gain tax

To calculate long-term capital gains tax in India, follow these steps:

• Determine the sale value: This is the amount you received from the sale of the asset.
• Calculate the indexed cost of acquisition: The indexed cost of acquisition is the cost of acquisition adjusted for inflation. It is calculated by multiplying the cost of acquisition by the cost inflation index (CII) for the year of sale and dividing it by the CII for the year of acquisition. The CII is released by the government every year.
• Calculate the indexed cost of improvement: If any improvements were made to the asset, such as renovations or repairs, you can deduct the indexed cost of improvement from the indexed cost of acquisition.
• Calculate the net sale value: Subtract the indexed cost of acquisition and the indexed cost of improvement (if any) from the sale value.
• Calculate the long-term capital gain: Long-term capital gain is calculated as the net sale value minus the indexed cost of acquisition and indexed cost of improvement (if any).
• Calculate the tax liability: The long-term capital gains tax rate is 10% (for shares and equity-oriented mutual funds) or 20% (for other assets), plus cess and surcharge as applicable. However, for equity shares or equity-oriented mutual funds held for more than 24 months but sold on or after April 1, 2021, long-term capital gains exceeding Rs. 1 lakh in a financial year will be taxed at 10%.
• Apply any exemptions or deductions: There are various exemptions and deductions available under certain conditions, such as investing the capital gains in specified assets like a residential property or specified bonds. It is recommended to consult a tax professional or accountant for more specific guidance on exemptions and deductions.
• Pay the tax liability: The long-term capital gains tax liability is added to your total income tax liability for the financial year and needs to be paid by the due date for filing income tax returns.

Taxation on capital gain tax in India

In India, capital gains tax is levied on the gains arising from the sale of capital assets. The taxation on capital gains in India depends on whether the gains are short-term or long-term.

For short-term capital gains, which are gains arising from the sale of assets held for a period of up to 36 months. The tax rate is based on the taxpayer’s income tax slab rate. Short-term capital gains are added to the taxpayer’s income and taxed at the applicable income tax rates.

For long-term capital gains, which are gains arising from the sale of assets held for a period of more than 36 months. The tax rate is generally 20% (excluding surcharge and cess), with indexation benefit. However, for long-term capital gains on the sale of equity shares or equity-oriented mutual funds held for more than 24 months but sold on or after April 1, 2021, long-term capital gains exceeding Rs. 1 lakh in a financial year will be taxed at 10%. Additionally, for certain specified assets, such as residential property and specified bonds, there are provisions for exemptions and deductions that can reduce the tax liability.

In addition to the above, there are also provisions for calculating the taxable gains in cases of gifts, inheritance, and other situations. 

Taxation for short-term capital gain tax

Short-term capital gains tax in India is levied on gains arising from the sale of assets held for a period of up to 36 months. The taxation for short-term capital gains is based on the taxpayer’s income tax slab rate, which varies depending on the taxpayer’s income. The tax rate for short-term capital gains is the same as the applicable income tax rate for the taxpayer.

For example, let’s say a taxpayer earns an annual income of Rs. 8 lakh and sells a capital asset after holding it for 6 months, resulting in a short-term capital gain of Rs. 1 lakh. The taxpayer’s income tax slab rate is 20%. In this case, the short-term capital gains tax liability would be 20% of Rs. 1 lakh, which is Rs. 20,000. The short-term capital gains tax liability is added to the taxpayer’s income tax liability for the year and needs to be paid by the due date for filing income tax returns.

It is important to note that short-term capital gains are taxed more than long-term capital gains. That are gains arising from the sale of assets held for more than 36 months. Long-term capital gains are taxed at a lower rate, generally 20% (excluding surcharge and cess) with indexation benefits. Therefore, it is generally advisable to hold on to an asset for a longer period of time to reduce the tax liability on the gains arising from its sale.

Taxation on long-term capital gain tax

Long-term capital gains tax in India is levied on gains arising from the sale of assets held for a period of more than 36 months. The tax rate for long-term capital gains in India is generally 20% (excluding surcharge and cess), with indexation benefit. However, for long-term capital gains on the sale of equity shares or equity-oriented mutual funds held for more than 24 months but sold on or after April 1, 2021, long-term capital gains exceeding Rs. 1 lakh in a financial year will be taxed at 10%.

Indexation benefit is a method used to adjust the cost of acquisition of the asset based on the inflation rate. It helps to reduce the tax liability on the gains by taking into account the inflationary effect on the asset’s cost over the holding period. The indexed cost of acquisition is calculated by multiplying the actual cost of acquisition by the ratio of the Cost Inflation Index (CII) of the year of sale and the year of acquisition.

For example, let’s say a taxpayer sells a property after holding it for 10 years, resulting in a long-term capital gain of Rs. 10 lakh. The actual cost of acquisition of the property was Rs. 5 lakh, and the cost inflation index (CII) for the year of acquisition was 100, while the CII for the year of sale was 200. In this case, the indexed cost of acquisition would be Rs. 10 lakh (i.e., Rs. 5 lakh x (200/100)). Therefore, the taxable long-term capital gain would be Rs. 5 lakh (i.e., Rs. 10 lakh – Rs. 5 lakh), and the tax liability would be Rs. 1 lakh (i.e., 20% of Rs. 5 lakh).

It is important to note that there are provisions for exemptions and deductions available for certain specified assets. Such as residential property and fixed bonds, which can reduce the tax liability on long-term capital gains. 

How to Calculate Capital Gain Tax in India

To calculate capital gain tax in India, you need to follow these steps:

• Determine the type of asset: Capital gains tax in India is levied on the sale of capital assets such as property, stocks, mutual funds, and other investments.
• Determine the holding period: The holding period is the duration for which the asset was held before it was sold. If the asset is held for less than 24 months, it is considered a short-term capital asset. If it is held for more than 24 months, it is considered a long-term capital asset.
• Calculate the sale price: The sale price is the amount for which the asset was sold.
• Determine the cost of acquisition: The cost of acquisition is the amount paid to acquire the asset. This includes the purchase price, any brokerage or commission paid, and any other expenses related to the acquisition.
• Determine the cost of improvement: If any improvements were made to the asset during the holding period, such as renovations to a property, the cost of improvement can be added to the cost of acquisition.
• Calculate the capital gain: The capital gain is calculated by subtracting the cost of acquisition and any cost of improvement from the sale price.
• Determine the tax rate: The tax rate depends on whether the asset is a short-term or long-term capital asset. For short-term capital assets, the tax rate is based on the individual’s income tax slab. For long-term capital assets, the tax rate is either 10% or 20% depending on the type of asset.
• Calculate the tax liability: The tax liability is calculated by multiplying the capital gain by the applicable tax rate.

It is important to note that exemptions and deductions are available under certain conditions. For example, if the capital gain invests in certain specific assets within a certain time period. Such as in a residential property or in specific bonds, then the tax liability can be reduced or waived off. 

Takeaway

The capital gain tax also serves as an incentive for individuals and entities to hold on to their capital assets for a longer period of time. As long-term capital gains are generally taxed at a lower rate than short-term capital gains. This can help to promote long-term investment and economic growth. As investors encourage to hold on to their assets for a longer period of time. That can lead to greater stability and growth in the economy. Overall, the purpose of calculating the capital gain tax is to ensure that individuals and entities who earn income from the sale of capital assets contribute their fair share of taxes to the government and to promote long-term investment and economic growth.