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Capital Gains

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When you sell an investment, be it land or stocks or a business, at a price higher than that of procurement, the gain is called capital gains. Capital gain is calculated on one-time sale and not on recurrent income such as rent.

Calculation of capital gains is based on the following:

  • A capital asset must be sold.

  • The sale of this asset must have taken place in the financial year that is being assessed.

  • The sale or transfer of the asset must have resulted in a gain.

  • This gain must not be exempt u/s 54, 54B, 54D, 54EC, 54 ED, 54F, 54G or 54GA.

Typically capital gains occur when you sell house, land or farmhouses, paintings etc. There is no capital gain on the proceeds of sale of bonus shares. Here the cost of the bonus shares is taken as nil. Capital gains are categorized as:

Long Term Capital Gains (LTCG)

When an asset held from more than 3 years is sold or transferred, the gain is referred to as long term capital gains. In the case of listed securities and mutual fund units, the period is 1 year – to be considered for long term capital gains. Long term capital gains are taxed at a fixed 20% for individuals.

Long term capital gains are taxed at 20%. Since inflation reduces the asset value over time, the entire difference between purchase price and selling price is not considered for LTCG. Indexation allows you to inflate the purchase price of the asset. This is done based on the inflation index provided by the Government for each year. The inflation index helps you to adjust the purchase price of the asset against the inflation over the years. With this, the asset price is brought on par with prevailing market price.

You can be exempted from long term capital gains if the profits of the sale of a residential house are reinvested in another residential house. Also, if the gains are invested in notified bonds, individuals can claim exemption from long term capital gains. The reinvestment must be done within prescribed time and there are certain conditions to it. When calculating LTCG, certain expenditure related to improvement of the capital asset as well as that relating to its sale and transfer is deducted.

Cost inflation Index

2014-2015 1024
2013-2014 939
2012-2013 852
2011-2012 785
2010-2011 711
2009-2010 632
2008-2009 582
2007-2008 551

Short term capital gains (STCG)

When an asset is sold within 3 years from date of purchase, the gain accruing from such a transaction is said to be short term capital gains. In the case of mutual funds units and shares, the period is within 1 year. With this kind of capital gains, you have to add the amount gained to your total annual income. The tax is calculated for the total taxable amount. On Short Term capital gains no Indexation benefit is applicable.

Capital Gains