Capital Gains Tax : What is Capital Gains, Types, & Exemptions

What is Capital Gain?

Capital gain is the profit made from the sale of a capital asset, such as real estate, stocks, or bonds. The capital gain is the difference between the purchase price of the asset and the selling price. If the selling price is lower than the purchase price, the result is a capital loss.

Types of capital gain

There are two types of capital gains: short-term capital gain and long-term capital gain.

Short-term capital gain

A short-term capital gain occurs when a capital asset is held by the taxpayer for a period of not more than 36 months immediately preceding the date of its transfer. However, period of holding to be considered as 24 months instead of 36 months in case of unlisted shares of a company or an immovable property being land or building or both.

Short term capital assets includes:

• Immovable property: Less than 24 months 
• Listed equity shares: Less than 12 months
• Unlisted shares: Less than 24 months
• Equity mutual funds: Less than 12 months
• Debt mutual funds: Less than 36 months
   

Tax Rate On Short-Term Capital Gains

• When the securities transaction tax is not applicable - The STCG is added to the ITR of the taxpayer and the individual is taxed as per his income tax slab
• When the securities transaction tax is applicable - 15%

Short-Term Capital Gains Formula

Short-term Capital Gain = Selling Price - (Cost of Acquisition + Incidental costs of transfer + Cost of improvement)

• Selling Price: The price at which the asset was sold.
• Cost of Acquisition: The cost of acquiring the asset, including any expenses related to the purchase such as brokerage fees or stamp duty.
• Incidental costs of transfer: Costs incurred in connection with the transfer of the asset, such as legal fees or registration charges.
• Cost of improvement: Any expenses incurred for the improvement of the asset, such as repairs or renovations.

Long-term capital gain

A long-term capital gain occurs when a capital asset is held by the taxpayer for a period of more than 36 months immediately preceding the date of its transfer. However, period of holding to be considered as 24 months instead of 36 months in case of unlisted shares of a company or an immovable property, being land or building or both.

Long term capital includes:

• Immovable property: More than 24 months 
• Listed equity shares: More than 12 months
• Unlisted shares: More than 24 months
• Equity Mutual funds: More than 12 months
• Debt mutual funds: More than 36 months
   

Tax Rate On Long-Term Capital Gains

• Except on the sale of equity-oriented funds or equity shares - 20%
• On the sale of equity-oriented funds or equity shares - 10% over and above Rs.1,00,000

Long-Term Capital Gain Formula

Long-term Capital Gain = Selling Price - (Index Cost of Acquisition + Incidental costs of transfer + Index Cost of improvement)

Indexed Cost of Acquisition  =    [(Cost of Acquisition) × (CII for the year of transfer)]  / CII for the year of acquisition         

Indexed Cost of Improvement = [(Cost of Improvement) × (CII for the year of transfer)]  / CII for the year of Improvement

Deductions For Reducing Capital Gains Tax

There are several deductions available to reduce capital gains tax in India:

• Section 54: Under this section, if an individual sells a long-term capital asset and reinvests the capital gain in a residential property within a specified time period, the capital gain is exempt from tax. Purchase of another Property within 1 year or 2 years after the transfer of the Property sold and Construction of house Property within a period of 3 years from the date of transfer of property
• Section 54EC: Under this section, if an individual sells a long-term capital asset and invests the capital gain in specified bonds within a specified time period, the capital gain is exempt from tax.
• Section 54F: Similar to Section 54, this section allows an individual to claim exemption from capital gains tax on the sale of a long-term capital asset if the capital gain is invested in a residential property within a specified time period. The purchase should be within 2 years of earning the capital and in the case of construction, should within 3 years from the date of sale.