Capital gain Taxation

19 Oct 2022

Capital Gain Tax 


A capital gain is any profit or gains derived from the sale of a "capital asset." This gain or profit falls under the category of 'income,' and you need to pay the tax in the year the capital asset is transferred. This is known as capital gains tax, and it can be either short-term or long-term. Since there is no sale, only a transfer of ownership, capital gains are not applicable to inherited property. The Income Tax Act specifically exempts assets obtained as gifts as a result of an inheritance or will. If the individual who inherited the asset decides to sell it, capital gains tax will apply.


What is a capital asset.?

As per section 2(14), Capital Assets mean-

  1. Property of any kind owned by the assessee, whether or not connected with business or profession.

  2. Any securities held by a Foreign Institutional Investors (FII) but capital Assets do not include (Excludes)

  3. Stock in trade (RM/WIP/FG)

  4. Movable personal property(used by the assessee or his dependent family members for personal purposes)

  5. But Excludes Jewellery, Drawings, Paintings, Sculpture, Archaeological 

  6. collections, or any other work of Art.

  7.                         Rural Agricultural Land in India 

  8. Gold Deposit Bonds,1999


Types of Capital Gain


1. Short-Term Capital Gain (STCG): A short-term capital asset is one that is kept for less than 36 months.


From FY 2017-18, the holding period for immovable properties such as land, buildings, and housing property is 24 months. For example, if an individual sells his/her house after holding it for 24 months, any gain incurred will be considered a long-term capital gain if the property is sold after March 31, 2017.


The reduced time of 24 months stated above does not apply to movable property such as jewelry, debt-oriented mutual funds, and so on.




Some assets are classified as short-term capital assets if they are held for less than a year. These are the assets:


  • Equity or preference shares in a company listed on an Indian stock market

  • Securities (such as debentures, bonds, and government securities) listed on a recognized Indian stock exchange

  • UTI units, whether quoted or not

  • Equity-oriented mutual fund units, whether listed or not

  • Whether quoted or not, zero coupon bonds


Logn term Capital Assets: A long-term capital asset is one that has been held for more than 36 months. If they are held for more than 36 months, they will be considered long-term capital assets.


Land, buildings, and home property are considered long-term capital assets if the possessor retains it for a period of 24 months or more (from FY 2017-18).


Whereas the assets listed below, if kept for more than 12 months, are considered long-term capital assets.


  • Equity or preference shares in a company listed on an Indian stock market

  • Securities (such as debentures, bonds, and government securities) listed on a recognized Indian stock exchange

  • UTI units, whether quoted or not

  • Equity-oriented mutual fund units, whether listed or not

  • Whether quoted or not, zero coupon bonds


Debt mutual funds must be held for at least 36 months in order to qualify as a long-term capital asset. It means that you must hold these assets for at least three years in order to profit from long-term capital gains tax. If redeemed within three years, the capital gains are added to your income and taxed at your income tax rate.


How to Calculate Capital Gain?

For calculating capital gain we must keep in mind some important points which are mentioned below:


Full Value of consideration(FVOC): The amount of money received or to be received by the seller as a result of the transfer of his capital assets. Capital gains are taxable in the year of transfer, even if no compensation is received.


Cost of Acquisition (COA): The cost at which the seller acquired the capital asset.


Cost of Improvement (COI): Capital expenses incurred by the seller in making additions or adjustments to the capital asset.


How to calculate the Short term capital gain?


Particulars AmountFull Value ConsiderationxxxLess: Cost of AcquisitionLess: Cost of ImprovementLess: Expenses incurred exclusively for such                transferNet Short-Term Capital Gain/(Loss)


How to calculate Long-Term Capital Gains?


Particulars AmountFull Value ConsiderationxxxLess: Transfer related ExpensesxxxNet Full Value of ConsiderationxxxLess: Indexed Cost of AcquisitionxxxLess: Indexed Cost of ImprovementxxxLess: Expenses incurred exclusively for such                transferxxxNet Short Term Capital Gain/(Loss)xxx


Indexed Cost of Acquisition/Improvement


The cost of improvement and acquisition is indexed with the primary goal of compensating inflation for the number of years the property has been held. This decreases capital profits while simultaneously increasing the cost base.


Formula for Cost of Acquisition :


(Cost of acquisition X CII of the year in which the asset is transferred) / CII of the year in which the asset was first time owned by the seller, or FY 2001-02, whichever is later.  


Formula for Cost of Improvement:


Expenses related to cost of Improvement x the Cost Inflation Index (CII) for the year the property was sold divided by the CII for the year the improvement occurred

Long-Term Capital Gains and Short-Term Capital Gains Tax Rates


Sr No.Tax TypeRate of TaxAEquity Oriented Funds or Sharesi.Long-term capital gains tax (LTCG)10% over and above Rs 1 lakhii.Short-term capital gains tax (STCG)15%BDebt-oriented Fundi.Long-term capital gains tax (LTCG)At 20% with indexationii.Short-term capital gains tax (STCG)This short-term capital gain is added to regular income and taxed at the income tax slab rates.COthersi.Long-term capital gains tax (LTCG)At 20% with indexationii.Short-term capital gains tax (STCG)This short-term capital gain is added to regular income and taxed at the income tax slab rates.


Amrita Thakur