Capital Gains – Income Tax
Capital Gains – Income Tax
Capital gain is the profit gained when an investor sells a capital asset for a price which is more than its purchase price. Capital gains are taxable under the Income Tax Act. However, an exemption is available for capital gains in specialised circumstances, such as when an assessee is making a sale of land which is used for agricultural purposes.
What is a Capital Asset?
A Capital Asset includes any kind of property held by an assessee. The asset may or may not be related to the assessee’s profession or business or not. Examples: Land, vehicle, house property, machinery, jewellery, building and so on. This list includes having rights in or in relation to an Indian company. The different kinds of capital assets are explained below:
A short-term capital asset is an asset which is held not more than 36 months or less. Any gain from selling a short-term capital asset is termed as a short-term capital gain.
A long-term capital asset is an asset which is held for more than 36 months. Any gain from selling a long-term capital asset is termed as a long-term capital gain.
When is Capital Gain applicable?
Capital gains are not applicable when an asset is inherited, as merely transfer is happening and there is no sale involved. However, after inheriting, when the asset is sold by the person who inherits it, income tax will be applicable. The gain or profit will be charged in a year for that asset.
How is Capital Gain calculated?
The formula for Short-term capital gain and Long-term capital gain is as follows :
Short-term capital gain = Full value consideration- (cost of acquisition + cost of improvement + cost of transfer)
Long-term capital gain = Full value of the consideration received or accruing – (indexed cost of acquisition + indexed cost of improvement + cost of transfer)
Indexed cost of acquisition = Cost of acquisition X cost inflation index of the year of transfer/ cost inflation index of the year of acquisition
Indexed cost of improvement = cost of improvement X cost inflation index of the year of transfer/cost inflation index of the year of improvement
Cost of transfer is a brokerage paid for arranging the deal, legal expenses incurred, cost of advertising, etc.
Mrs. A is a resident individual and she purchases a house on 6th Jun 2011 for Rs. 7,00,000. She spends Rs. 1,50,000 on its improvement in Jun 2012.
Case 1: Mrs. A sells the house for Rs. 20,00,000 on 19th May 2013. What would be the capital gain?
Since the asset was held for less than 36 months, it is a short term capital asset and the Short-term capital gain shall be 20,00,000 – 7,00,000 – 1,50,000 = Rs. 11,50,000
Case 2: Mrs. A sells the house for Rs. 20,00,000 on 9th Mar 2015 What would be the capital gain?
Since the asset was held for more than 36 months, it is a long term capital asset.
The indexed cost of acquisition will be 7,00,000 X 852/711 = Rs. 8,38,819
The indexed cost of improvement will be 1,50,000 X 852/785 = Rs. 1,62,803
The long-term capital gain = 20,00,000 – (8,38,819 + 1,62,803) = Rs. 9,98,378
To know more about the concept of Capital Gains Accounts Scheme in Income Tax, click here.