Taxability of Capital Gains

During sale of an asset, income tax is paid on the profits earned from such sale. Such gains are either short term capital gain or long term capital gain.

What are capital gains?

Capital gains are profits arising out of the sale of a capital asset, like shares of a corporate body, a business, a piece of land, a residential house, a piece of art, etc.
Capital gains are normally included in taxable income but are taxed at a lower rate. Presently most of the long-term capital gains are taxed at 15%.

However some rules puts different tax rates on different types of capital gains which make it difficult for taxpayers to calculate their tax liability.

When does a capital gain take place?

A capital gain takes place when a capital asset is sold or exchanged at a price higher than its purchase price and the cost of its improvement.

A capital loss takes place when an asset is sold for less than its purchase price and the cost of its improvement.

A gain or loss of capital income is measured in normal terms without adjustments.

Short term capital gain and long term capital gain:

Capital gains are either short term capital gain or long term capital gain.
If an asset is held for more than 36 months, it becomes Long term capital gain and if it is held for less than 36 months, it becomes Short term capital gain.

Which capital gains are taxable?

Long-term capital gains on stocks and equity mutual funds are normally not liable to be taxed. But short-term gains are taxed. However for debt mutual funds, short-term as well as long-term capital gains are taxed.

Short-term capital gains are added to the income and taxed according to the income tax slab of an individual. Long-term capital gains from debt mutual funds are taxed at 20% with indexation and 10% without it.

What is indexation?

Indexation is adjusting the purchase price in case of inflation. This results in increase of the purchase price and lowers the gain.

From where can we get the capital gains statement?

Calculating capital gains is not an easy task. One can visit the official websites of Registrar and Transfer Agents and get the statement through their e-mail services. One should enter the email id registered with the fund house. However, all brokerage houses do not give the statement.

Rate of tax for Short term capital gain and long term capital gain:

Short term capital gains are taxed as per normal income tax slabs. On the other hand, Long term capital gains are taxed at the rate of 20%.

How to Calculate Short-term Capital Gains?

To calculate Short-term Capital Gains one should deduct expenses incurred in connection with such transfer along with cost of acquisition and improvement from the value of consideration.

How to Calculate Long-term Capital Gains?

To calculate Long-term Capital Gains one should deduct indexed cost of improvement along with expenses incurred exclusively in connection with such transfer and cost of acquisition from the value of consideration.

What is Full Value of Consideration?

Full Value of Consideration is the total amount against which a capital asset is conveyed. It may be in cash or money’s worth or both.

Where the transfer is through exchange of an asset for another, fair market value of the asset is its full value of consideration. If the consideration is partly in cash and partly in kind, fair market values of both the portions together make the full value of consideration.