As long as you own a property or any asset in your name you are not liable to pay a capital gain tax. But the moment you sell this, it is only then you will need to pay this tax. Capital gain tax falls on you solely based on the amount of profit you are making by selling your asset.
Your car, personal house, precious jewellery, any machinery, trademarks, bonds, funds, etc. are basically your capital assets. Therefore, if you try to sell them, you will directly become liable to pay the capital gain tax. So, let us take a detailed note of the whereabouts of this essential tax right here.
What is Capital Gain Tax?
Capital gain tax is a tax that everyone pays yearly on their capital gains. A capital gain is basically any profit that a person receives through selling of the capital assets. This profit is considered as their yearly income.
Therefore, the government both central and local can impose a capital gain tax on this income of yours. The capital gain tax rate depends on whether it is a long-term or a short-term capital gain.
What Are The Main Types of Capital Gain?
Depending on how long you are holding your asset, your capital gain and tax imposition on them are categorised. Here are the two basic divisions of capital gains;
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Short-Term Capital Gain
In general, short-term capital gains or “STCG” occur whenever you sell your property within 36 months of its purchase. However, this tenure can often vary depending on the type of assets. Just like in the case of mutual funds and stocks, the tenure of STCG is only one year.
On the other hand, for immovable assets such as your land, personal houses, office buildings, etc. the tenure is now reduced from 36 months to 24 months. For gifting property, the holding of that property by its previous owner determines whether it will fall under STCG or LTCG.
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Long-Term Capital Gain
Long-term capital gain (LTCG) taxation imposes when you sell an asset that you have owned for “36 months” or more. However, as of after 31st March 2017, the holding period of non-movable properties is now “24 months” instead of “36 months”.
Assets like equity shares, security bonds, debentures, UTI units, zero coupon bonds, etc., fall under LTCG if you hold them for more than 12 months. However, the duration of movable assets like mutual funds, stocks, and jewellery is still 36 months.
How Can I Calculate Capital Gains Today
The calculation of capital gain tax will vary according to the tenure of asset holding. Other important factors of capital gain tax calculation are;
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Acquisition cost:
This is the amount that the seller paid at the time of acquiring the property
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Full Value Consideration:
This is the amount that the seller will get during the property transfer. Capital gain tax will fall on this profit considering the year when the transaction takes place.
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Cost of Improvement:
This is the amount that the seller may spend while holding the property for its renovation, modifications or improvements. Note, the expenses you make before 1 April 2001 will not fall under this.
Now that you know the factors that affect the calculations of capital gain taxes, let’s just understand how to calculate them.
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Calculate STCG
To get your short-term capital gain you will at first have to consider the full value of your property. Out of this, you will have to deduct the expenses of acquiring it improving it, and the expenses during the transfer of the property.
Therefore, the basic formula for calculating STCG is- Full value consideration – expenses of property transfer – expenses of improving and acquiring the property.
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Calculate LTCG
The calculation methodology for LTCG is the same as that of the STCG. The only difference lies in the inflation rates that increase with time. Also, consider deducting exemption facilities that you get under sections 54B and 54D.
The indexed cost acquisition plays a crucial part during the calculation of both STCG and LTCG. These are the terms that apply to get the cost of inflation from the time of asset purchase to the time of asset selling.
Aster all these calculations the capital gain tax rates impose on the STCG or LTCG amount. On yearly capital gains of over 1.25 lakh, this tax is imposed. The capital gain tax rates on different sorts of movable and non-movable assets are;
- On debt and equity STCG funds- As per the tax slab rates of the individual
- On debt and equity LTCG funds- 10% tax without indexation or 20% with indexation
- Equity funds- 15% for STCG and 10% in LTCG of over 1 lakh capital gain without indexation
- Listed equity shares- 12.5% in case of LTCG and 20% in case of STCG after application of STT
Conclusion
Knowing the metrics of calculating the capital gains tax is important for you to accurately file taxes. The capital tax implications are far more relaxed in the case of LTCG than STCG. For a comprehensive understanding of the capital gain taxes, you can take the help of a finance expert initially.
Also, Read – Difference Between Sales Tax and VAT: A Detailed Guide
FAQs
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Is my capital gain a taxable income?
Yes, the amount of profit you are making after selling your assets is basically your income. And this income if surpasses over 1.25 lakh annually, will directly fall under the obligations of capital gains tax.
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How to calculate capital gain?
You can calculate capital gain by a simple formula. This is; Capital Gain = (The Total Amount of Money after Property transfer) – (cost of property acquisition+ cost of improvement + cost of property transfer)
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How my capital gains will be taxed?
Your short-term capital gain taxes according to your ordinary income on the basis of your tax filing status and gross income. In the case of LTCG, it calculates at a lower rate than your regular income.
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What sections of the Income Tax Act exempt some taxable amount from your capital gain?
The Income Tax Act of 1961 provides tax exemptions on your capital gains. The sections that offer you this tax exemption are Section 54, Section 54B, Section 54EC, Section 54D, and Section 54F.
