What is Capital Gains Tax? Types, Calculation and CII Number

The tax that is paid is called capital gains tax and it can either be long term or short term. The tax that is levied on long term and short term gains starts from 10% and 15%, respectively.

Types of Capital Gains Taxation

The two types of capital assets are mentioned below:

Long-term Capital Gain Tax

In case individuals own an asset for a duration of more than 36 months, the asset is a long-term capital asset. Debt-oriented mutual funds, jewelery, etc., that are held for a duration of more than 36 months will come under this category and there is no 24-month reduction period under such circumstances.

The below-mentioned assets are considered as long-term assets if they are held for a duration of more than 12 months:

• Zero coupon bonds (not dependent on whether they are quoted or not)
• Unit Trust of India (UTI) units (not dependent on whether they are quoted or not)
• Equity-based mutual funds units (not dependent on whether they are quoted or not)
• Securities that are listed on a stock exchange that is recognized in India.
• Preference shares or equities that are held in a company that is listed on a stock exchange that is recognized in India.

Short-term Capital Gain Tax

In case assets are held for a duration of 36 months or less, it can be defined as a short-term capital asset. However, for immovable assets such as house property, building, and land, the duration has been reduced from 36 months to 24 months.

Therefore, if an individual wishes to sell a land or house after holding it for a duration of 24 months, the profit that the individual makes from it comes under long term capital gain.

In case the property has been inherited or given as a gift, the amount of time the property was held by the previous owner is also considered when determining whether the property can be considered as a short-term capital asset or a long term capital asset. The date on which the bonus shares were allotted is considered when determining the category under which bonus shares or right shares fall.

How to Calculate Capital Gains?

Depending on the amount of time that the asset has been held, the calculation of Capital Gains will vary. Some of the important points that individuals should know when calculating capital gains are mentioned below:

1. Cost of improvement: If there are any expenses that have been incurred by the seller because of any alterations or additions that have been made to the property. However, any improvements made before 1 April 2001 cannot be considered.
2. Acquisition cost: The amount of money that the seller paid in order to acquire the property.
3. Full value consideration: The amount of money that the seller will receive because of the property transfer. Capital gains are charged from the year the transaction was made even if the money was not received in that particular year.

In certain cases where the capital asset is also the property of the taxpayer, the acquisition cost and the improvement cost of the previous owner will also be included.

Calculate Long Term Capital Gains

The procedure to calculate long term Capital Gains is mentioned below:

1. First, the individual must consider the full value of the asset.
2. Next, the individual must make the below-mentioned deductions:
   1. The costs that have been incurred due to the transfer.
   2. The amount of money that is spent on the acquisition.
   3. The amount of money that is spent on improvement.
3. From the number that has been calculated by following the above steps, the individual must subtract any exemptions that are provided under Section 54B, Section 54F, Section 54EC, and Section 54.

Example to Calculate long term Capital Gains

Given below is an example to calculate long term Capital Gains:

Assumptions:

Price house was purchased for: Rs.35 lakh

Financial Year house was purchased: 2011-2012

Financial Year house was sold: 2019-2020

Amount house was sold for: Rs.60 lakh

Inflation adjusted cost: (289/184) x 35 = 54.97 lakh

long term Capital Gains: 60 lakh - 54.97 lakh = Rs.5,03,000 (approx)

Calculate Short Term Capital Gains

The below-mentioned procedure must be followed by individuals in order to calculate short term capital gains:

1. First, the individual must consider the full value of the property.
2. Next, the below-mentioned points must be deducted:
   1. Expenses that have been incurred for the improvement of the property.
   2. The expenses incurred for acquiring the property.
   3. Any expenses that have been incurred for the transfer of the property.
3. The amount that is calculated after the deduction is the short term capital gain.

The formula for the calculation of short term capital gain is the full value consideration minus the expenses that have incurred for the transfer minus the cost for improving and acquiring the property.

Example for Calculation of short term Capital Gains

Given below is an example of how short term Capital Gains is calculated:

Assumptions:

Price the house was sold for: Rs.55 lakh

Expenses for brokerage, commissions etc: Rs.30,000

Net sale consideration: Rs.54,70,000

Price the house was bought for: Rs.35 lakh

Amount spend for the improvement of house: Rs.3 lakh

Gross short term Capital Gain: Rs.16,70,000

Tax exemptions under Sections 54, 54B, 54D, 54EC, 54ED, 54F, 54G: Nil

Net short term Capital Gain: Rs.16,70,000

Short Term Capital Gains: 30% of Rs.16,70,000: Rs.5,01.000

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

Long term Gain Tax Rate

Short Term Gains Tax Rate

Cost Inflation Index Number

Given in the table below is the CII Number from the financial year 2001-2002 to FY 2023-2024:

Indexed Cost of Improvement and Acquisition

The cost that is incurred on improvement and acquisition is indexed with the main aim of adjusting inflation for the number of years the property was held. This not only reduces capital gains but also increases the cost base.

Formula for calculation of indexed tax for improvement:

The expenses incurred for improvement x Cost Inflation Index (CII) for the year the property was sold divided by the CII of the year the improvement occurred.

Formula for calculation of indexed tax for acquisition:

The total expenses incurred for acquisition x CII of the year the property was sold divided by the CII of the year the property was initially acquired by the seller (or 2001-2002 whichever is later).

Capital Gains Tax Exemptions

Under the following clauses, tax exemptions on profit obtained against assets may be claimed:

Section 54

1. Section 54 provides tax exemption on capital gains from selling a residential property if the amount is reinvested in another property. However, certain conditions must be met:
2. The individual must purchase a second property within 2 years of the sale or 1 year before the property's transfer.
3. For under-construction property, the purchase of the second property should be completed within 3 years of transferring ownership.
4. The newly acquired property cannot be sold within 3 years of purchase.
5. The newly acquired property must be located in India.

Section 54F

1. Section 54F offers exemptions for capital gains from long-term assets other than residential property.
2. The exemption is invalid if the new asset is sold within 3 years of purchase or construction.
3. The purchase of a new property must be made within 2 years of earning the capital, or in the case of construction, completed within 3 years from the date of sale.

Section 54EC

1. Section 54EC allows individuals to claim tax exemptions by investing capital gains in specific bonds after selling a property.
2. The invested amount can be redeemed after 3 years, but the bonds cannot be sold within this period, which has been increased to 5 years from the financial year 2018-19. Investment in these bonds must occur within 6 months of property sale.
3. Effectively managing capital gains is facilitated by various advantageous investment options. Proper reinvestment can reduce tax liabilities, ensuring higher savings.

Conclusion

Capital gains tax can often be complicated to estimate. Apart from the taxes, there are also a small amount of cess and surcharge applicable. In terms of tax, having long-term holdings are better than short-term holdings, as you have to pay a 15% tax on short-term capital gains.

Investing in listed securities and equity-oriented mutual funds for long-term holdings also works out better as the capital gains from these sources is not subject to tax.