How to Calculate Income Under Capital Gain

What is Capital gains?

Capital gains are profits that are received from the sale of capital assets. There are two types of capital gain namely, long-term capital gain and short-term capital gain. A Long term capital assets are those assets which can be held for more than 36 months whereas short term capital assets are held for duration less than 36 months.

Capital gains arise due to sale of a capital asset for the amount that is more than what you paid for the same. Capital assets can be investments including stocks, mutual funds, house, land or any other real estate product. A rise in the value of any of the aforesaid product in case of sale is termed as capital gain. Similarly, a loss suffered in case of sale or decrease in the asset value for its purchase price. It is to be noted that capital gains occurs only if the asset is sold at a higher price than its actual purchase price.

Tax on Capital Gains:

The capital gain tax calculation is dependent upon capital gain types such as;

✅ The tax calculation of short-term capital gains is much simpler as compared to long term capital gains, In case of short-term gains, gains are added to total income and tax is calculated basing on the relevant tax bracket.

✅ The tax calculation of long-term capital gains is a slightly tricky work to do. As long-term capital assets are held for longer durations, the factors such as inflation plays a crucial role while calculating long-term capital gains.

Capital Gains Calculator:

Capital gains can be calculated using different online tools designed to do so. The following information must be entered while calculating capital gain tax with the use of a calculator;

✓ Sale price

✓ Purchase price

✓ Information about the purchase including date, month and year of the purchase.

✓ Information about Sales including the date, month and year of sale.

✓ Details of Investment including investment in shares, real estate, gold, debt funds, equity funds, or fixed maturity plans.

After providing the aforesaid information, the below mentioned details will be displayed towards computation of capital gains payable;

✓ Investment Type

✓ Type of Gain (Long Term or Short Term)

✓ Difference between Purchase and Sale price

✓ Cost Inflation Index of purchase year

✓ Cost Inflation Index of Sale year

✓ Purchase Index Cost

✓ Duration between Sale and Purchase

✓ Long Term Capital Gain with Indexation

✓ Long Term Capital Gain without Indexation

Formula for Short-term Capital Gains Tax:

In the case calculation of short term capital gains, the formula for computation is provided below;

✅ Short-term capital gain= 

Full value consideration – (acquisition cost+ improvement cost + transfer cost)

Formula for Long-term Capital Gains Tax:

The following formula has to be used for calculation of long-term capital gains tax payable;

✅ Long-term capital gain = 

Full value of consideration received– (indexed acquisition cost+ indexed improvement cost + transfer Cost)

Where:-

✅ Indexed acquisition cost = acquisition cost x cost inflation index of transfer year /cost inflation index of acquisition year

✅ Indexed improvement cost= improvement cost x cost inflation index of transfer year/cost inflation index of improvement year

Also learn; How to File ITR-2 for Capital Gains 2022-23

Cost Inflation Index (CII):

Cost inflation Index is an index that is declared and fixed by government each year. While calculating capital gain indexation is used for long term assets.

How to Calculate Capital Gains Tax using Cost Inflation Index:

Cost Inflation Index is meant to be used for calculation of long term capital gain tax. The same is notified by the Income Tax Department every financial year. For the financial year 2020-21, the cost inflation index is 301.  It is important for individual to ascertain indexed acquisition cost while calculating capital gains that will be deducted from the full value. Hence, Cost Inflation Index is applicable to the acquisition cost, following which figures can become index acquisition cost.  Following the same, the formula for calculation of long term or short term capital gains is computed.

While computing capital gains arising due to transfer of a long term capital gains asset and accordingly deduction will be claimed by indexing acquisition cost and improvement cost.

Illustration of Taxation on Long-Term Capital Gains (Real Estate) :

1. With Use of Indexation:

Mr. Singh in the year 2005 purchased a plot of land for Rs.1, 00,000. In January 2015 after 10 years had passed, he sold his land for Rs.40, 00,000.

✅ Cost Inflation Index = Index for financial year 2014-15/Index for financial year 2005-2006 = 1024/480 = 2.13

✅ Indexed cost of purchase = Cost Inflation Index x Purchase Price = 2.13 x 1, 00,000 = 21, 30,000

✅ Long-term capital gain = Selling Price – Indexed cost = 40, 00,000 – 21, 30,000 = Rs. 37,8 70,000

✅ Capital Gain Tax= 20% of 37,870,000 = 75, 74,000

2. Tax on capital gains without Indexation meant for stocks and mutual funds:

There is an alternate to not follow the complicated way of indexation and computing the capital gain tax directly. In such case, 10% is charged as tax for non-indexed capital gain. Hence, individuals are free to choose the methods of indexation.  They can pay 20% tax and ignore the indexation method. Accordingly, they have to pay 10% of capital gains.

For more information, Visit us at: https://academy.tax4wealth.com/