Computation of Capital Gains
Sec 45 of The Income Tax Act talks about Capital Gains and computation of Capital Gain. In general, whenever a person sells any “Asset” belonging to him, he incurs capital gains.
What kind of assets is subject to Capital Gains tax?
Capital Assets include all the movable, as well as immovable properties owned by a person. For example houses, land, buildings, vehicles, computers, software, items of furniture, etc, are capital assets. A capital asset also includes Securities i.e. shares, debentures, bonds, etc.
However, the following assets will not constitute Capital Assets and hence will not be subject to Capital Gain Tax.
- Stock in trade: Any stock-in-trade does not constitute Capital Asset, for example, Vehicles manufactured for a Car manufacturer is stock in trade
- Personal belongings of a person will not be considered as Capital Asset. For eg. clothes/apparels owned for personal use, Furniture held for personal use, etc
- Agricultural land situated in certain locations
- Certain Gold Bonds, Deposit Certificates, and Special bearer bonds also are not considered as Capital Asset
So a person incurs capital gains once he satisfies the following conditions
- He should own a capital asset
- He sells or transfers the ownership of the asset to some other person for consideration and
- The buyer becomes the owner of the asset
You owned a capital asset and it is damaged in floods. The insurance company gives you the claim money. Will an Insurance claim received from the Insurance Company subject to Capital Gain Tax?
Yes. As mentioned in section 45 (1A) of the Income Tax Act, in case if any person receives any Insurance claim on account of damage or destruction of any Capital Asset as a result of
(i) natural calamities like flood, typhoon, hurricane, cyclone, earthquake, etc or
(ii) riot or civil disturbance; or
(iii) accidental fire or explosion; or
(iv) action by an enemy or action taken in combating an enemy (whether with or without a declaration of war),
Then the profit from the receipt of the claim is subject to Capital Gain Tax.
How to compute Capital Gain?
Capital Gain = Consideration received on sale of the asset minus the cost of the asset minus incidental charges minus cost of improvements.
The consideration is the total sale value of the asset. and the cost of the asset is the value at which the asset is bought including incidental costs thereto like transport charges, brokerages, stamp duty etc.
At times, the owner carries some improvements to the asset, such cost of improvements will also be deducted to compute capital gains.
Sometimes; especially for businesses; the depreciated value of the asset will be considered as the cost of the asset as the depreciation will be claimed as expenses by the business.
Long term/Short Term Capital Gain
The Income-tax Act has classified the capital gains into Long Term Capital Gain (LTCG) and Short Term Capital Gain (STCG). This classification depends on the holding period of the asset. Generally, if an asset is owned/ held for more than 36 months, the capital gain arising on a sale, will be considered as Long Term Capital Gain. However, in the case of the sale of Equity shares or Preference Shares or Equity oriented mutual funds, the holding period of more than 12 months is considered as Long Term.
What is the Indexation benefit?
Indexation benefit is nothing but the benefit of the time value of money. An indexation benefit is available only for Long-Term Assets.
For example, 5 years back an asset cost was Rs 100. Due to inflation, the cost of the asset keeps increasing every year and today it might be worth Rs 150. This inflated cost will be considered as the cost of the asset while computing LTCG. However, to compute today’s worth of the long-term asset, we should consider the Cost Inflation Index (CII) published by the government.
For Eg. An asset was bought at Rs.10,000 in FY 2001-02. The same is sold for Rs 50,000 in FY 2017-18. CII for FY 2001-02 is 100 and CII for FY 2017-18 is 272. Hence the long-term Capital Gains will be:
Sales Value Rs 50,000
Less: Indexed cost of asset = Rs 10,000 * 272/100 = Rs. 27,200
Total LTCG = Rs. 22,800 (i.e. Rs. 50,000 – Rs. 27200 ).
What is the rate of tax on LTCG and STCG?
The rate of tax to be applied on Capital Gains is notified by the Government in the budget. LTCG and STCG are taxed at different rates as per the Income Tax Act.
|FY 2017-18||FY 2018-19|
|Particulars||STCG Tax rate||LTCG Tax rate||STCG Tax rate||LTCG Tax rate|
|Sale of Equity shares/equity oriented Mutual Fund (STT paid)||15%||NIL||15%||NIL upto the gain of Rs 1,00,000/- Balance at 10% without indexation|
|Others||Respective income tax slab rates||20% with indexation or 10%
for listed securities/units/zero-coupon bonds
|Respective income tax slab rates||20% with indexation or 10%
for listed securities/units/zero-coupon bonds
Education cess/surcharge is applicable over and above the tax rates mentioned above.
Can I claim an indexation benefit on equity shares/debt funds?
From 1 April 2018, LTCG on a sale of equity shares is taxable at 10% (above Rs. 1 lacs). Indexation benefit is not allowed on these gains, however, an assessee is allowed to take the cost of shares as the market price of the shares as of 31st Jan 18. In the case of debt funds, an option is available to pay taxes either at 20% after taking indexation benefit or at 10% without taking indexation benefit.