Capital Gain Tax - Long Term & Short Term in India

Capital Gain Tax (Long Term & Short Term) in India is a tax on profit and gain arising from transfer of capital assets. Gain on sale of property, shares, mutual fund, bonds etc. are covered under capital gain.

If any capital asset is transferred then tax on gain should be calculated and that gain can be long term / short term capital gain.

While calculating long term / short term capital gain you can also avail certain tax exemptions if any under section 54, section 54B, section 54D, 54EC, 54EE & 54F and can save tax.

In the following we have explained about Long Term Capital Gain & Short Term Capital Gain and how to calculate capital gain tax.

What is capital gain tax?

It is a tax on profit and gain arising from transfer of capital assets in which Income is chargeable under the head ‘capital gain’ and tax on such income is called capital gain tax. This capital gain can be short term capital gain or long term capital gain.

It is important to know before considering income as capital gain income that a capital asset has transferred or not. If a capital asset is transferred then only income is said to be the capital gain.

What is covered under the definition of transfer?

Transfer includes:

Sale, exchange or relinquishment of the asset; or
Extinguishment of the rights; or
Compulsory acquisition under any law; or
Conversion of capital asset into stock in trade; or
Maturity or redemption of zero coupon bond
Part performance of contract

So, transfer of capital assets should take place for considering income as capital gain income.

Also Read: Capital Gain Tax on Sale of Property (Long Term / Short Term)

What is covered under the definition of Capital Asset?

It is not necessary that you sell any asset and capital gain tax is to be calculated on such gain on transfer.

For calculating tax on capital gain, asset transfer should be capital asset.

Now, what cover under the definition of capital assets.

Capital Asset means property of any kind (whether movable / immovable / tangible / intangible) held by a person whether it is connected with his business / profession or not.

Example:

Land, building, plant and machinery, shares, goodwill, securities, bond, debenture etc.

Also Read: IncomeTax Slab Rates: Individual, Senior Citizens (FY 2021-2022)

What does not come under the category of capital asset?

Following are not considered to be capital asset:

1) Stock in trade, consumable or raw material held for business or profession.

2) Any personal use moveable items shall not considered capital asset (eg. AC, Furniture, Car etc. for personal use)

However following are the personal moveable items which are considered as capital asset whether these were used for personal purpose:

Jewellery
Drawing, Paintings
Sculptures
Archaeological Collections
Any work art.

3) Indian Agricultural Land in rural area

Rural agricultural land is a land in area where:

(a) Municipality population is less than 10000; or

(b) Municipality population	Distance
More than 10000 upto 1 Lakhs	Land situated in 2 kms from local limit of municipality
More than 1 Lakh upto 10 Lakhs	Land situated in 6 kms from local limit of municipality
More than 10 Lakhs	Land situated in 8 kms from local limit of municipality

4) Gold deposit bonds issued under Gold deposit scheme, 1999

5) Deposit certificates issued under gold monetization scheme, 2015.

6) Special bearer bonds, 1991

Also Read: Section 54: Exemptions on capital gain on transfer of residential property

How to determine whether gain is long term capital gain tax or short term capital gain tax?

For determining whether the gain on transfer of capital asset is long term gain or short term gain. You need to understand the long term capital asset and short term capital asset.

Once it is determined, then you can easily classify the gain as long term or short term and accordingly apply the tax rate.

Determining Long Term Capital Asset and Short Term Capital Asset

If the following capital asset held by an assessee for 12 months or less immediately preceding the date of its transfer than these are called short term capital asset otherwise it is long term capital asset:

Listed Shares
Any other listed securities like. Debenture, bonds.
Units of UTI, Equity oriented mutual funds
Zero coupon bonds.

If assessee holding unlisted shares for 24 months or less immediately preceding the date of transfer then those are short term capital assets otherwise it is long term capital assets.
For Immovable property (land or building or both) period is 24 months, means if assessee held immovable property for 24 months or less immediately preceding the date of transfer it is short term otherwise it is long term asset.
The remaining capital assets period is 36 months. If a person holds assets for 36 months or less and transfers immediately then it is a short term capital asset but if he holds more than 36 months and transfers after holding for more than 36 months then it is considered long term capital asset.

Short Term Capital Gain Tax

If assessee transferred short term capital assets then short term capital gain is computed.

Long Term Capital Gain Tax

If assessee transferred long term capital assets then long term capital gain is computed.

Also Read: IncomeTax Rate: Companies, Partnership Firm, LLP (FY 2021-2022)

What is the rate of short term capital gain tax?

Short Term Capital Gain Tax
When STT (Securities Transaction Tax) is applicable	15%
When STT (Securities Transaction Tax) is not applicable	Tax will be calculated on normal slab rate basis

What is the rate of long term capital gain tax?

Long Term Capital Gain Tax
On sale of equity shares / units of equity oriented fund	10% on excess of Rs. 1 lakh
Any other long term capital asset	20%

How to calculate short term capital gain tax?

Computation of short term capital gain

Particulars	Amount Rs.
Full value of consideration (-) Cost of acquisition (-) Cost of Improvement (-) Expense on transfer	x x x x x x x x x x x x x x x x
Gross Short Term Capital Gain (-) Exemptions (if any)	x x x x x x x x
Taxable Short Term Capital Gain	x x x x

then calculate tax on taxable short term capital gain according to the tax rate mentioned above.

How to calculate long term capital gain tax?

Computation of long term capital gain

Particulars	Amount Rs.
Full value of consideration (-) Indexed Cost of acquisition (-) Indexed Cost of Improvement (-) Expense on transfer	x x x x x x x x x x x x x x x x
Gross Long Term Capital Gain (-) Exemptions (if any)	x x x x x x x x
Taxable Long Term Capital Gain	x x x x

then calculate tax on taxable long term capital gain according to the tax rate mentioned above.

Also Read: Section 206AB- Higher TDS rate for Non-filers of ITR

Important terms

Full Value of consideration

It is the amount received or to be received by the seller on transfer of capital assets.

Cost of Acquisition

It is the value at which the capital asset is acquired by the seller.

Indexed cost of acquisition

It is the cost of acquisition which is adjusted as per cost inflation index (CII)

Indexed cost of Acquisition = Cost of Acquisition * CII of the year of transfer / Cost Inflation Index (CII) of the year in which asset is first acquired by seller OR CII of 2001-02 whichever is later

This way long term capital gain gets the benefit of indexation and you have to pay less tax accordingly.

Cost of Improvement

It is the expense related to any additions or alterations made to capital assets by the seller. It is of capital nature.

Index cost of Improvement

It is the cost of improvement which is adjusted as per cost inflation index (CII)

Indexed cost of Improvement = Cost of Improvement * CII of the year of transfer / Cost Inflation Index (CII) of the year in which improvement took place

Also Read: Section 51 of CGST | TDS under GST | with Example

Summary

Capital Gain Tax (Long Term Capital Gain Tax and Short Term Capital Gain Tax) are of two types. You have to find that your transfer of capital asset comes under long term or short term and compute tax accordingly. You can avail exemption under Section 54, 54B, 54D, 54EC, 54EE, 54F while computing capital gain and can save tax.