Capital Gain Tax: Types, Rate & Calculation Process

What is Capital Gain Tax?

Capital Gain Tax (CGT) is a tax on the profit you make when you sell an asset that has increased in value. It applies to a wide range of assets, including the following:

• Stocks

• Shares

• Property

• ULIP Funds

• Mutual Funds

• Cryptocurrencies

The profit you earn from selling these assets is known as "Capital Gain," and it is considered taxable income. The capital gain is calculated on the basis of the difference between the Purchase Price (or "Cost Basis") of the asset and the Selling Price. The tax you pay from this income is referred to as Capital Gains Tax or CGT. 

The rate of Capital Gain Tax (CGT) varies depending on factors like:

• Asset type

• How long the asset was held

The Capital Gains Tax is paid by both individuals and businesses when they make a profit by selling their assets.

What are Capital Assets?

Capital assets are valuable possessions held for the purpose of long-term use or investment rather than for resale. For Example:

• Land

• House property

• Building

• Trademark

• Vehicles

• Leasehold rights

• Machinery

• Patents

• Jewellery

Any legal rights, as well as the rights of management and control, are also considered capital rights. 

EXCLUSIONS: The following assets are not included under the capital assets:

• Agricultural land in India (from A.Y. 2014-15)

• Any stock-in-trade

• consumable stores

• Personal used items such as clothes and furniture

• Raw materials and consumable stores held for professional or business

• Gold deposit scheme gold bonds.

• Special bearer bonds, 6.5% gold bonds (1977), 7% gold bonds (1980), and National Defence gold bonds (1980) issued by the Central Government

• Gold deposit bonds (1999) issued under the Gold Deposit Scheme, or Deposit Certificates issued under the Gold Monetisation Scheme, 2015, as notified by the Central Government.

Types of Capital Assets

Capital assets are generally categorised into two categories, i.e., short-term capital assets and long-term capital assets:

1. Short-term Capital Asset

   Short-term capital assets are the assets held for less than the specified period, which is:

   • 36 months for assets such as shares, equity-oriented mutual funds, and debt funds.

   • For immovable properties such as land, house property, and buildings, the main criteria are 24 months with effect from F.Y. 2017-18. 

   • This 24-month revised criterion does not apply to movable property like jewellery or debt-oriented mutual and others.

2. Long-term Capital Asset

   Long-term capital assets are considered an asset which is held by the taxpayers for more than a specified period, which is:

   • More than 36 months for assets such as shares, equity-oriented mutual funds, and debt funds.

   • 24 months or more for immovable properties such as land, house property, and buildings (with effect from F.Y. 2017-18). 

Types of Capital Gain Tax

There are two types of Capital Gain tax in India, which are as follows:

1. Short-Term Capital Gain Tax (STCG)

   Short Term Capital Gain (STCG) is levied on the profit earned from the sale of a capital asset held for less than one year.

   • The tax rate is 15% when the Security Transaction Tax (STT) applies.

   • If STT is not applicable, the STCG tax rate is the same as your income tax slab rate.

2. Long-Term Capital Gain tax (LTCG)

   LTCG is levied on the profit earned from the sale of a capital asset held for one year or more. 

   • The LTCG tax rate is 20% for most assets, but there are some exceptions. 

   • For example, LTCG on equity shares and units of equity-oriented mutual funds held for more than one year is taxed at 10% on profits exceeding Rs. 1 lakh.

Tax Rate on Long-Term Capital Gain and Short-Term Capital Gain

Note: The above-mentioned taxes do not consist of a surcharge levied on your income tax.

Key Terms For Calculating Capital Gain Tax

Capital gain tax is computed differently for assets held for a shorter period and assets held for a longer period. To understand the calculations, you must first learn the following key terms:

1. Full Value Consideration

   • The full value consideration is the market value of an asset at the time of its transfer.

   • It is the amount of money to be received or already received by you as a result of the transfer of the capital asset.

   • Capital gain tax is taxable in the transfer year, even if you receive no consideration.

2. Cost of Acquisition

   • The cost of acquisition is the charge for which you acquire the capital asset.

   • It includes all direct and indirect costs associated with the acquisition, such as purchase price, legal fees, brokerage fees, and commissions.

3. Cost of Improvement

   • Any expenses that occur in making any alteration or additions to the capital asset by the sellers are known as the cost of the improvement. 

   • It is important to consider that the improvements made before 1 April 2001 are not taken into consideration.

4. Indexation of Cost

   Indexed Cost of Acquisition= Cost of Acquisition CII of the year of capital asset transferCII of the year of acquisition

   • Indexation of cost is an accounting method that adjusts the cost of an asset to reflect the effects of inflation.

   • This is done by multiplying the cost of acquisition of the asset by a cost inflation index (CII).

   • The CII is a measure of the change in the value of money over time.

5. Indexation of Cost of Transfer

   This is the brokerage paid for arranging legal expenses incurred, deals cost of advertising, etc.

6. Indexation of Cost of Improvement

   This is the cost of improvement multiplied by the Cost of Inflation Index (CII) of the improvement year/cost of inflation index of the transfer year.

   Indexed Cost of Improvement= Cost of Improvement CII of the year of capital asset transferCII of the year of capital asset transfer in long-term

7. Cost of Inflation Index (CII)

   It is a measure of inflation that is used to calculate long-term capital gains tax in India. It is published annually by the Central Board of Direct Taxes (CBDT) and is based on the Consumer Price Index for Industrial Workers (CPI-IW).

   The CII has changed since the change in the base year for calculating the inflation rate as determined by the Government of India. These CII values are as follows:

   Financial Year (F.Y.)	Cost Inflation Index (CII)
   2001-02	100
   2002-03	105
   2003-04	109
   2004-05	113
   2005-06	117
   2006-07	122
   2007-08	129
   2008-09	137
   2009-10	148
   2010-11	167
   2011-12	184
   2012-13	200
   2013-14	220
   2014-15	240
   2015-16	254
   2016-17	264
   2017-18	272
   2018-19	280
   2019-20	289
   2020-2021	301
   2021-2022	317
   2022-2023	331

How to Compute Short-Term Capital Gains?

Have a look at the following table to understand the calculation of short-term capital gains:

How to Compute Long-term Capital Gains?

Let us understand the calculation of Long-Term Capital Gains:

*Indexed cost accounts for inflation adjustments
Data Source: Income Tax Department website

Deduction of Expenses Allowed from the Final Value of Consideration

There are some essential costs that are incurred while purchasing an asset. These costs are allowed to be deducted from the Final Value of Consideration. This reduces the selling price, increases the cost of acquisition, and lowers the capital gain. 

These deductions are as follows:

Illustration of Long – Term Capital Gain Tax and Short – Term Capital Gain Tax Calculation

If you purchase a house on 1 January 2000, for Rs. 30 lakhs. On 1 January 2005, you spent Rs. 8 lakhs on repairs. On 1 January 2023, you sold the house for Rs. 85 lakhs, with a brokerage fee of Rs. 1 lakh. Then your capital gains will be as follows:

Capital Gains Tax Calculator

You can also make use of the online  Capital Gain Tax Calculator in a very simple and hassle-free way to determine the capital gains that have been made on the sale. 

To calculate the capital gains tax, the taxpayer will need to fill in the following details:

• Sale price

• Purchase price

• Number of units

• Details of purchase, such as the date, year, and month it was bought

• Sale details such as the year, month, and date it was sold

• Investment details: Investing gains toward debt mutual funds, shares, real estate, equity mutual funds, fixed maturity plans, and gold

Now, follow the steps mentioned below to use a capital gains tax calculator:

Step 1: Go to the Policybazaar Capital Gains Tax Calculator  page on the website.

Step 2: Select the following details in the calculator: 

• Type of asset you are selling

• Purchase price of the asset

• The sale price of the asset

• Date of purchase

• Date of sale

Step 3: Enter any other relevant information, such as the cost of any improvements made to the asset.

Once you have entered all of the required information, the calculator will automatically show you the long-term capital gains or short-term capital gains, as well as the amount of tax you owe.

Exemptions on Capital Gain Tax 

To reduce the impact of capital gains tax on your earnings, it is important to explore tax-saving options. The government offers a list of exemptions, known as capital gains exemptions, to help individuals lower their tax burden on capital gains. They are as follows:

1. Exemption Under Section 54 - Sale of House Property on Purchase of Another House Property

   • One-time lifetime exemption for taxpayers if capital gains do not exceed Rs. 2 crores.

   • Investment of capital gains, not the entire sale proceeds, is required.

   • Conditions: Purchase a new property within one year before or two years after selling the old one. Construction must be completed within three years.

   • Only one house property can be purchased or built to claim the exemption.

   • The exemption is revoked if the new property is sold within three years.

2. Exemption Under Section 54B - Transfer of Land Used for Agricultural Purposes

   • Applies to short-term or long-term capital gains from agricultural land transfer.

   • Invest in new agricultural land within two years of transfer.

   • The new land must not be sold within three years.

   • If unable to buy land, deposit the gains in a specified bank account before the due date.

3. Exemptions Under Sections 54E, 54EA, and 54EB - Profits from Investments in Certain Securities

   • Apply to long-term capital gain exemptions.

   • Reinvest in specified securities within six months.

   • Selling new securities before 3 years reduces the exemption amount.

   • Loans against these securities are treated as capital gains.

4. Exemption Under Section 54EC - Profits from Sale of Long-Term Capital Asset

   • Exempt long-term capital gains when reinvested in Rural Electrification Corporation or NHAI bonds.

   • Reinvest within six months.

   • Capital gains should not exceed the amount invested.

   • Hold the assets for a minimum of 36 months.

5. Exemption Under Section 54EE - Profits from Transfer of Investments

   • Reinvest proceeds within six months.

   • Selling new securities before 3 years reduces the exemption amount.

   • Loans against new securities are taxable.

   • Investment should not exceed Rs. 50 lakh in the current and following fiscal years.

6. Exemption Under Section 54F - Capital Gains on Sale of Non-Residential Asset

   • Invest the entire sale consideration in a new residential property.

   • Purchase one year before or two years after the sale.

   • Use gains for construction, completed within three years.

   • Only one house property can be purchased or built.

   • Exemption is revoked if the new property is sold within three years.

7. Amendment to Section 54 - Capital Gain Exemption

   According to the amendment made to Section 54, under budget 2019, the assesses can avail of tax exemption by investing in long-term capital gains from the sale of up to two house properties. Earlier, the provision of investment was limited to up to 1 house property with the same conditions.  However, the profit gains on the sale of house property should not exceed more than Rs. 2 crores.