In Simple words, Capital gains means any profit or gain that arises from the sale of a ‘capital asset’. This gain or profit comes under the category ‘income’, and Therefore you need to pay tax for that amount in the year in which the transfer of the capital asset takes place. This is called capital gains tax, which can be short-term or long-term.

Capital gains will not be applicable to an inherited property as sale doesn’t takes place, only a transfer of ownership. The Income Tax Act has specifically exempted assets received as gifts by way of an inheritance or will. However, if the person who inherited the asset decides to sell it, then the capital gains tax will attract.

Defining Capital Assets

Land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewellery are a few examples of capital assets. This includes having rights in or in relation to an Indian company. It even includes the rights of management or control or any other legal right.

The category that doesn’t comes under capital assets:

  • Any stock, consumables or raw material, held for the purpose of business or profession
  • Personal goods such as clothes and furniture held for personal use
  • Agricultural land in rural India
  • 6½% gold bonds (1977) or 7% gold bonds (1980) or national defense gold bonds (1980) issued by the central government
  • Special bearer bonds (1991)
  • Gold deposit bond issued under the gold deposit scheme (1999) or deposit certificates issued under the Gold Monetization Scheme, 2015

Types of Capital Assets

  1. Short-term capital asset –An asset which is held for a period of 36 months or less. This criteria of 36 months have been reduced to 24 months for immovable properties such as land, building and house property from FY 2017-18.
  2. Long-term capital asset –An asset that is held for more than 36 months is a long-term capital asset. The reduced period of 24 months is not applicable to movable property such as jewellery, debt-oriented mutual funds etc. They are classified as a long-term capital asset if held for more than 36 months as earlier.

Some assets are considered as short-term capital assets when they are held for 12 months or less.

In case an asset is acquired by gift, will, succession or inheritance, while determining whether a capital asset is a short term or a long-term capital asset, the period for which the asset was held by the previous owner is also included . In the case of bonus shares or rights shares, the period of holding is counted from the date of allotment of bonus shares or rights shares respectively.

Calculating Capital Gains

How to Calculate Short-Term Capital Gains?

Step 1: Start with the full value of consideration

Step 2: Deduct the following items:

  • Expenditure incurred wholly and exclusively in connection with such transfer
  • Cost of acquisition
  • Cost of improvement

Step 3: This amount is a short-term capital gain

Short term capital gain =

Full value consideration

Less: expenses incurred exclusively for such transfer

Less: cost of acquisition

Less: cost of improvement.

How to Calculate Long-Term Capital Gains?

Step 1: Start with the full value of consideration

Step 2: Deduct the following items:

  • Expenditure incurred wholly and exclusively in connection with such transfer
  • Indexed cost of acquisition
  • Indexed cost of improvement

Step 3: From this resulting number, deduct exemptions provided under sections 54, 54EC, 54F, and 54B

Long-term capital gain=

Full value consideration

Less: Expenses incurred exclusively for such transfer

Less: Indexed cost of acquisition

Less: Indexed cost of improvement

Less: expenses that can be deducted from full value for consideration*

(*Expenses from sale proceeds from a capital asset, that wholly and directly relate to the sale or transfer of the capital asset are allowed to be deducted. These are the expenses which are necessary for the transfer to take place.)

In the case of sale of house property:

These expenses are deductible from the total sale price:

  • Brokerage or commission paid for securing a purchaser
  • Cost of stamp papers
  • Travelling expenses in connection with the transfer – these may be incurred after the transfer has been affected.
  • Where property has been inherited, expenditure incurred with respect to procedures associated with the will and inheritance, obtaining succession certificate, costs of the executor, may also be allowed in some cases.