Computation of Short Term & Long Term Capital Gain

At the time of Sale of an Asset, tax is liable to pay on gains earned on the sale of asset. Such gains could either be short term capital gain or long term capital gain.

Classification of Capital Gain

Short Term Capital Gain (STCG)

Capital asset held less than 36 months shall be deemed as short term capital asset. However, the following asset held less than 12 months shall be treated as short term assets:

  1. Equity or preference shares in a company which are listed in any recognized stock exchange in India.
  2. Other Listed Securities.
  3. Units of UTI.
  4. Units of equity oriented funds.
  5. Zero Coupon Bonds.
  • Long Term Capital Gain (LTCG)
  • Capital asset held more than 36 months or 12 months, as the case may be, is treated as long term capital asset.

Computation of Short Term Capital Gain

Gains on sale of shot term capital asset shall be computed in the following manner:-

Full Value of Consideration                                                              XXX

(Less)  Cost of Acquisition                                                               XXX

(Less)  Cost of Improvement                                                           XXX

Gross STCG                                                                                       XXX

(Less)  Exemption (if any) available u/s 54B/54D/54G/54GA       XXX

Net STCG                                                                                           XXX

Computation of Long Term Capital Gain

Gains on sale of Long Term Capital Asset shall be computed in the following manner:-

Full Value of Consideration                                                              XXX

(Less)  Indexed Cost of Acquisition                                                 XXX

(Less)  Indexed Cost of Improvement                                             XXX

Gross LTCG                                                                                       XXX

(Less)  Exemption (if any) available u/s 54B/54D/54G/54GA       XXX

Net LTCG                                                                                          XXX

Rates of Tax on Capital Gains

Short Term Capital Gains
  1. Short term capital gains shall be included in the gross total income of the taxpayer and will be taxed at the normal rates.
  2. STCGs arising from transfer of equity shares, units of an equity oriented funds or a unit of a business trust which is chargeable to securities transaction tax shall be taxed at 15% under Section 111A.
Long Term Capital Gains
  1. Long term capital gains are subject to tax at 20%
  2. LTCGs from transfer of listed securities, units or zero coupon bonds shall be taxable at lower of the following
    1. 20% after taking benefit of indexation or
    2. 10% without taking benefit of indexation.
  3. Long term capital gains arising from transfer of listed securities, units of equity oriented or a unit of business trust which is chargeable to STT shall be exempt from tax under section 10(38).

In case loss on the sale of an asset, the capital loss can be set-off against other Capital Gains in that year. If the loss cannot be set-off against capital gain in that year, it can be carried forward for next 8 years and set-off in the future years. However, lose can only be carried forward if the return was filed before due date.

Indexed Cost =Actual Cost*Cost Inflation Index of the Year of Sale/Cost Inflation Index of the Year of Purchase.

Introduction to Capital Gains

Any profits or gains arising from the transfer of a capital asset effect in the financial year will be chargeable to income-tax under the head Capital Gains.

Capital Assets

Capital assets include the following:

  • Any kind of property held by an assessee, whether or not connected with business or profession.
  • Any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the SEBI regulations.

However, capital assets exclude the following:

  • Stock-in-trade, consumable stores, raw materials held for the purpose of business or profession.
  • Movable property held for the personal use of taxpayer or for any dependent member of his family. However, jewellery, costly stones, and ornaments made of silver, gold, platinum or any other precious metal, archaeological collections, drawings, paintings, sculptures or any work of art shall be considered as a capital asset even if used for personal purpose.
  • Specified Gold Bonds and Special Bearer Bonds.
  • Rural agricultural land in India i.e., agricultural land in India which is not situated in any specified area.

Short Term Capital Asset

Capital asset held for not more than 36 months immediately prior to the date of transfer shall be deemed as a short-term capital asset. However, following assets held for not more than 12 months shall be treated as short-term capital assets:

  • Equity or preference share of a company which is listed on any  recognised stock exchange in India.
  • Other listed securities.
  • Units of UTI.
  • Units of equity oriented funds.
  • Zero Coupon Bonds.

Long Term Capital Asset

A capital asset that held for more than 36 months or 12 months, as the case may be, immediately preceding the date of transfer is treated as the long-term capital asset.

Meaning of Transfer

‘Transfer’, in relation to a capital asset, includes:

  • Sale, exchange or relinquishment of the asset.
  • Extinguishment of any rights in relation to a capital asset.
  • Compulsory acquisition of an asset.
  • Conversion of capital asset into stock in trade.
  • The maturity of redemption of a zero coupon bond.
  • Allowing possession of immovable properties to the buyer in part performance of the contract.
  • Any  transaction which has the effect of transferring an immovable property.
  • Disposing of or parting with an asset or any interest therein or creating any interest in any asset in any manner whatsoever.

Tax Rate on Capital Gains

Short Term Capital Gains

  • Short-term capital gains shall be included in the gross total income of the taxpayer and will be taxed at the normal rates.
  • Short-term capital gains arising from the transfer of Equity Shares, Units of an Equity Oriented Funds or a unit of a business trust which is chargeable to securities transaction tax will be taxed at 15% under Section 111A.

Now the benefit of reduced rate of tax (i.e., 15%) shall be available w.e.f. 1-4-2016 even in respect of income arising from of units of a business trust which were acquired by an assessee in lieu of shares of special purpose vehicle as referred  of special purpose vehicle as referred to in section 47(xvii).

Long Term Capital Gains

  • Long-term capital gains are subject to tax at 20%.
  • Long-term capital gains arising from the transfer of listed securities, units or a zero coupon bonds shall be taxable at lower of following:
    1. 20% after taking benefit of indexation.
    2. 10% without taking benefit of taxation.
  • Long-term capital gains arising from the transfer of listed securities, units of equity oriented or a unit of the business trust which is chargeable to STT shall be exempt from tax Section 10(38).

Now exemption from capital gains under Section 10(38) shall be available w.e.f 1-4-2016 even in respect of long-term capital gains arising from transfer of units of a business trust which were acquired in lieu of shares of special purpose vehicle as referred to in section 47(xvii) and on which securities transaction tax has been paid.