How to calculate capital gains tax?

Lack of knowledge amongst the taxpayers is a major reason for improper compliance of tax laws in India. People transfer their movable and immovable assets. But due to lack of awareness regarding the laws, they fail to understand their liability in connection with capital gains tax.

“Capital Gains”:

Profits or gains earned out of transfer of a capital asset in the earlier year are taxable under the head “Capital Gains”. The essence of capital gains is presence of a capital asset, transfer of which takes place and profits or gains arise out of it.

“Capital Asset”:

Capital Assets are the properties held by someone. Examples of capital asset are real estate, shares, etc. Fixed deposits and fixed returns are not considered as capital assets.

Short term capital gains:

Short term capital gains which arise from transfer of Equity Share or unit upon fulfilling the following conditions are taxable presently at the rate of 15%. This is provided in Section 111A of the Income Tax Act. On the other hand income other than Short term Capital Gains are taxed according to usual current slab rates for specific assesses.

The conditions are as follows:

1.       The transfer of the equity share or  unit is recorded on or after 1.10.2004;

2.       The transfer is chargeable under the provisions relating to Securities Transaction tax;

3.       The Equity shares are transferred by any recognized Stock Exchange or sold out to any Mutual Fund.

In the other cases, the short term capital gains are calculated after including it in the Total Income of an assessee and charging tax according to the Slab Rates which are applicable.

Calculation of short term Capital Gains:

First of all one has to find out the total consideration. Thereafter he has to deduct the following:

1. Expenses  in connection with the transfer;

2. Cost of acquiring the same; and
3. Cost of improvement, if any;

From the obtained amount the exemption under sections 54B, 54D, 54G is to be deducted. The balance amount is short term capital gain.

Long term Capital Gains:

The Long term Capital Gains which arise by any means other than transfer of listed securities through recognized stock exchanges or units of Mutual funds covered under section 10(23D)are  taxed under section 112 of the act at the rate of 20% for assessees . But in case of any Long term capital gains under section 115AB, 115AC, etc. the rate is fixed at 10%.  

Points to keep in mind:

Deductions under Section 80C to 80U of the Income Tax Act are not available in case of long term capital gains as well as short term capital gains.

Indexation:

Indexation is used in adjusting income payments through a price Index for the purpose of maintaining the purchasing power of people after price inflation. In practice, prices should not be used in computing the profits. Prices should be indexed according to Inflation to give people the real value from sale of the assets. This process is used in case of debts, gold and other assets.

Tax on Capital Gains varies from person to person:

Capital Gains tax varies from person to person depending upon which tax bracket is applicable to him. It also depends whether tax with Indexation or without the same is cheaper for him or not.