Capital gains is one of the five heads of income defined under the Income Tax Act, 1961. This guide by H&R Block India helps you understand capital gain, its types and their taxability.
Capital gain is one of the five heads of income which is taxable under the Income Tax Act 1961. Therefore, it is very important to understand the different provisions of capital gain, such as chargeability conditions, definition and meaning of capital gain, types of capital gain, etc. In this guide, we have covered the concept of “income from capital gains” and the criteria for considering an income to be capital gain.
Profits or gains resulting from the sale of a ‘capital asset’ are capital gains. Capital gains arise when you sell a capital asset for an amount, which is higher than its acquisition value. Similarly, in case there is a decrease in the value of an asset with respect to its purchase price, a capital loss is suffered.
A realised capital gain occurs only when you essentially sell the asset at a higher price than its original purchase price.
In simple words, capital asset means property of any kind held by the assessee, viz. any real estate product like land, house or any investment products like jewellery, mutual funds, stocks, and others.
In legal words, it has been defined under Section 2 (14) of the Income Tax Act 1961 as:
Jewellery, in the context of a capital asset, includes:
Under the head of capital gains, according to the Income Tax Act 1961, capital asset mainly distinguishes the business assets from other assets for taxation.
Long-term Capital Assets | Short-term Capital Assets |
Any capital asset (other than immovable property* and certain listed securities**) that is held by an assessee for more than 36 months | Any capital asset (other than immovable property* and certain listed securities**) that is held by an assessee for less than 36 months; in case of shares, debentures and bonds, less than 12 months |
Capital gains arising from the sale of such assets are recognised as long-term capital gains | Capital gains arising from the sale of such assets are recognised as short-term capital gains |
* Note: From FY 2017-18 onwards, the criteria of holding period needs to be at least 24 months instead of 36 months for immovable properties like land, building, and house property to be considered as long-term capital assets.
For example, if an assessee sells a house property after holding it for a period of 24 months, any income arising will be treated as long-term capital gain provided that property is sold after 31st March 2017.
However, this 24 months clause is not applicable to movable property such as jewellery, Debt Oriented Mutual funds etc. They will be classified as a Long-term capital asset if held for more than 36 months as earlier.
** Note: Assets that are recognised as short-term capital assets when held for 12 months or less, are:
If these assets are held for more than 12 months, they will be considered as long-term capital assets. This rule is valid if the date of transfer is after 10th July 2014, regardless of the date of purchase.
In case an asset is acquired by gift, will, succession or inheritance, the period this asset was possessed/held by the previous owner is also included in calculating holding period for determining whether it’s a short-term or a long-term capital asset. In case of bonus shares or rights shares, the holding period is computed from the date of allotment of bonus shares or rights shares respectively.
Particulars | Value in Rs | Value in Rs |
Full value of consideration received or accrued | XXX | |
Less: Indexed cost of acquisition | (XXX) | |
Less: Indexed cost of improvement | (XXX) | |
Less: Cost of transfer | (XXX) | |
Long-term capital gain | XXX |
Particulars | Value in Rs | Value in Rs |
Full value of consideration received or accrued | XXX | |
Less: Cost of acquisition | (XXX) | |
Less: Cost of improvement | (XXX) | |
Less: Cost of transfer | (XXX) | |
Short-term capital gain | XXX |
Here, indexed cost is computed using cost inflation index (CII)
Indexed cost of acquisition = Cost of acquisition x CII of the year of transfer/ CII of the year of acquisition
Indexed cost of improvement = Cost of improvement x CII of the year of transfer/ CII of the year of improvement
Cost of Transfer = Cost of advertising + Brokerage paid + Legal expenses incurred
Financial Year wise Cost Inflation Index | ||||
Fin. Year | Index | Fin. Year | Index | |
1981-82 | 100 | 1999-00 | 389 | |
1982-83 | 109 | 2000-01 | 406 | |
1983-84 | 116 | 2001-02 | 426 | |
1984-85 | 125 | 2002-03 | 447 | |
1985-86 | 133 | 2003-04 | 463 | |
1986-87 | 140 | 2004-05 | 480 | |
1987-88 | 150 | 2005-06 | 497 | |
1988-89 | 161 | 2006-07 | 519 | |
1989-90 | 172 | 2007-08 | 551 | |
1990-91 | 182 | 2009-09 | 582 | |
1991-92 | 199 | 2009-10 | 632 | |
1992-93 | 223 | 2010-11 | 711 | |
1993-94 | 244 | 2011-12 | 785 | |
1994-95 | 259 | 2012-13 | 852 | |
1995-96 | 281 | 2013-14 | 939 | |
1996-97 | 305 | 2014-15 | 1024 | |
1997-98 | 331 | 2015-16 | 1081 | |
1998-99 | 351 | 2016-17 | 1125 |
The process of calculating capital gains based on its type, that is whether it is short term capital gain or a long term capital gain, is very important.
Tax on short-term capital gain |
If securities transaction tax is not applicable: the short-term capital gain is added to your income tax return, and the taxpayer is taxed according to his income tax slab. |
If securities transaction tax is applicable: the short-term capital gain is taxable at the rate of 15% +surcharge and education cess. |
Tax on long-term capital gain* |
Long-term capital gain (post indexation) is taxable at 20% + surcharge and education cess. |
Long-term capital gain (without indexation) is taxable at 10% + surcharge and education cess. |
*Note: Long-term capital gain on listed equity shares and equity oriented mutual funds are exempt u/s 10(38) if such sell transaction is subjected to STT. Starting the 1st April 2017, this exemption will apply only if the STT was paid even at the time of purchase of the security being sold subject to certain notified exceptions.
H&R Block makes it very easy to e-file your Income Tax Return. We have qualified tax experts who can e-file your tax returns and minimise your tax liabilities by claiming different deductions and exemptions.