Almost everyone has some kind of asset, such as a house, gold, jewelry, stocks, or other investments. So, it’s important to know how taxes affect the gain or loss from selling such assets. How much tax you have to pay on these assets depends on how long you’ve had them. This is done under the heading “Capital Gains.” Learn more about Capital Gains in our account taxation course in Ahmedabad for detail understanding and how to manage this in your business.
What is Capital Gain?
A capital gain is a profit or gain made from selling something like a house, gold, jewelry, or stocks. There are two different kinds of capital gains:
Long-term Gain in Capital
For example, if you bought a house in FY 2017-18 and sold it 24 months later in FY 2017-18, the money you made would be called LTCG. Different types of capital assets have different holding periods.
Capital Gain in the Short Term
When an asset is sold before a certain amount of time has passed since it was bought, it is called a short-term capital gain (STCG). For example, if you bought a house in FY 2017-18 and sold it within 24 months, the money you made would be called STCG. But shares and mutual funds are treated differently when it comes to long-term and short-term capital gains. When it comes to listed shares and equity-oriented mutual funds, you get a long-term capital gain if you hold them for more than a year and a short-term capital gain if you sell them before a year has passed. Now, let’s figure out the tax rate that applies to the income from these assets, such as property, gold, jewelry, stocks, etc., based on how long they’ve been owned.
When you sell a capital asset and make a profit, this is called a “capital gain.” The profit that is made is an example of income. So, a tax has to be paid on the money that comes in. Capital gains tax is the name of the tax that is paid, and it can be either long term or short term. The tax on long-term gains starts at 10%, and the tax on short-term gains starts at 15%.
Under India’s Income Tax Act, a person doesn’t have to pay capital gains tax if they inherit property and don’t sell it. But if the person who got the property as an inheritance decides to sell it, taxes will have to be paid on the money made from the sale. Jewellery, machinery, leasehold rights, trademarks, patents, vehicles, house property, buildings, and land are all examples of capital assets.
Indexed Cost of Buying and Making Changes
The costs of making improvements and buying a property are indexed to account for inflation over the number of years the property has been owned. This lowers capital gains and also makes the cost base bigger.
How to figure out the indexed tax on improvements:
Cost of improvements multiplied by the Cost Inflation Index (CII) for the year the property was sold and divided by the CII for the year the improvements were made.
How to figure out the indexed tax on an acquisition:
The total costs of buying the property multiplied by the CII of the year it was sold and divided by the CII of the year it was bought by the seller (or 2001-2002 whichever is later).
How to figure out how much tax to pay on short-term and long-term gains from selling assets
Gain/Loss in the Short Term
Short-term capital gains are taxed at the same rate as the person’s income tax slab. For example, if a person has a short-term capital gain of Rs 6 lakh and is in the 30% tax bracket, he or she must pay Rs 1,87,200 (31.20% of Rs 6 lakh). The gain or loss from the sale of an asset is found by taking the sale proceeds and subtracting the cost of buying the asset, the cost of making improvements to the asset, and any costs that were only related to the sale.
Short-Term Capital Gain = Sale Consideration – Cost of Acquisition – Cost of Improvements (if any) – Expenses Paid Only for the Sale of the Asset.
Exception
If you sell listed shares or equity-oriented mutual funds within a year, you will have a short-term capital gain. This gain will be taxed at a rate of 15.60% (including a 4% health and education cess). But if you sell unlisted shares, which means you don’t sell them through the Indian stock exchange, you will have to pay taxes based on the income tax slab rate that applies to you.
Long-Term Gain/Loss on Capital
Long-term capital gains are taxed at a rate of 20.8%, which includes a 4% surcharge for health and education. Indexation is a way to change the price of an asset so that it matches the inflation index. It will raise your costs and lower your profits, so you will owe less tax. So, the benefit of indexation is available for long-term capital assets, and people in the 30% tax bracket also get the benefit of paying the lower 20% tax rate. Long-term capital gains are calculated the same way as short-term capital gains, but the purchase cost and cost of improvement are replaced with the indexed cost of acquisition and the indexed cost of improvement.
Long-Term Gain in Capital = Sale Price Indexed cost of improvement Indexed cost of acquisition (if any) -Expenses that were only used to sell the asset. -Exemptions under sections 54, 54F, and 54EC, if any were used.
The following formula can be used to figure out what the Indexed cost is:
Indexed Cost of Acquisition = Cost of Acquisition * Cost Inflation Index (CII) of the year of sale / CII of the year the property was first held or FY 2001-2002, whichever is later.
Note: If the property was bought before April 1, 2001, the actual cost of the property or its fair market value (FMV) as of April 1, 2001, should be considered the cost of acquisition.
Indexed Cost of Improvement = Cost of Improvement * CII of the year of sale / CII of the year of improvement
Note: Costs for improvements made before FY 2002-02 shouldn’t be counted.
Exception
Before, long-term capital gains on Listed Shares and Equity-oriented Mutual Funds were not taxed if they were sold after a year. But it only applied to shares that were listed on the Indian Stock exchange. This was true for both Indian and foreign companies. And the shares can only be sold on the platform of the Indian stock exchange.
