How to Calculate Capital Gains Tax?

Any profits or gains resulting from the sale of capital assets, including real estate, stocks, bonds, automobiles, etc., are taxable under the "Income from Capital Gains." There are two types of capital assets: short-term and long-term. Calculating capital gains tax in India involves determining the profit from the sale of a capital asset and applying the appropriate tax rates based on the holding period and asset type. Here is how to calculate capital gains tax. 

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1. Short-Term Capital Gain (STCG): Profit from assets held for less than 36 months (24 months for real estate). STCG = Sale Price – (Purchase Price + Expenses)

2. Long-Term Capital Gain (LTCG): Profit from assets held for 36 months or more (24 months for real estate).​ LTCG = Sale Price – (Indexed Cost of Acquisition + Indexed Cost of Improvement + Expenses)

To know more on how is capital gains tax calculated, you can read my previous answer here.

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How to calculate long term capital gain on property

I have shared the details about how is capital gains tax calculated. Calculating capital gains tax in India involves understanding the nature of the asset, the holding period, and the applicable tax rates. Capital gains are classified into two categories: Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG). The method of calculation differs for each.

How Do You Calculate Capital Gains Tax?

Long-Term Capital Gains

If the asset is held for more than two years (for real estate) or one year (for equities), it qualifies for LTCG. The formula to calculate this is (full value of consideration received or accruing) - (indexed cost of acquisition + cost of transfer + indexed cost of improvement)

• The formula for calculating the indexed cost of acquisition is: cost of acquisition x cost inflation index of the transfer year / cost inflation index of the acquisition year.

• Cost of improvement x cost inflation index of the year of transfer / cost inflation index of the year of improvement equals the indexed cost of improvement.

The Cost Inflation Index (CII) is notified by the government annually and reflects inflationary trends.

Short-Term Capital Gains

If the asset is sold within these time frames, it is classified as STCG.

Short-Term Capital Gain = full value consideration – (cost of acquisition + cost of improvement + cost of transfer)

• Cost of Acquisition: This includes the original purchase price of the asset.

• Cost of Improvement: Any additional costs incurred to enhance the value of the asset.

• Expenses related to transfer: This can include brokerage fees, legal fees, etc.

Tax Calculation:

• For LTCG: Taxed at 12.5%.

• For STCG: Taxed at the individual's applicable income tax slab rate.

This is all about how to calculate capital gains tax.

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When you are new to managing your finances there are so many terms that may baffle you. I recently started filing returns and when I came across ‘capital gains’ I didn’t know what it really meant and what tax am I supposed to pay. But thankfully, Ankit, my CA friend, helped me out. Although he offered his services for free to me, I wanted to understand at least the basics. I asked him what the capital gains tax is and how to calculate capital gains tax. He explained it in detail. I can share what he told me.

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What are capital gains tax?

Capital gains as I understand are the gains or profits you make out of capital assets. Capital assets including:

• Land

• Building

• House 

• Vehicles

• Patents

• Trademarks

• Leasehold rights

• Machinery

• Jewelry, etc.

Types of capital gains tax

So interestingly, I learned that there are two types of capital gains taxes - Long term capital gains and Short term capital gains. 

Long term capital gains or LTCG is earned on assets held for more than 36 months. If you sell an immovable property after 24 months post March 31, 2017 then it will be categorized as LTCG

Short term capital gains or STCG is earned on assets held for less than 36 months. Assets like equity or preference shares, securities, Units of UTI, units of equity oriented mutual funds, and zero coupon bonds if held for less than 12 months are classified as STCG. This is applicable on transfers made after July 10, 2014.

How to calculate the capital gain tax?

Ankit told me that there are set formulas to calculate capital gain tax. I am sharing them below:

Long-term capital gain = full value of consideration received or accruing – (indexed cost of acquisition + indexed cost of improvement + cost of transfer)

Short-term capital gain= full value consideration – (cost of acquisition + cost of improvement + cost of transfer)

The tax is calculated at the rate of 15% (plus surcharges and applicable cess) when transaction is based on securities. All other transactions are added during filing Income Tax Returns and tax rates are applicable based on income tax slabs.

I hope now you understand better

how to calculate capital gains tax. If this is too overwhelming, you must get a friend like Ankit or just hire a CA :P

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