Capital gain is any profit or gain that occurs from the sale of a ‘capital asset’. Capital assets are investments like houses, land, stocks, mutual funds, jewelry, trademarks etc. The gain/profit is considered an ‘income’, and therefore, you are required to pay tax for that particular amount in the same year you have transferred the capital asset. 

Also, capital gains are not applicable when it comes to an inherited property as there is only a transfer of ownership and no sale. The Income Tax department has specifically exempted the assets that are received as gifts or are inherited. However, if an individual who has inherited the property plans to sell it, capital gains tax would be applicable in such a case.

WHAT ARE THE TYPES OF CAPITAL ASSETS?

1. Short-Term Capital Assets (STCA): STCA is an asset that is held for a tenure of 36 months or less. However, when it comes to immobile properties like buildings, houses or land, the tenure of 36 months has been reduced to 24 months in the FY 2017-18. Therefore, if you sell your property after keeping it for a tenure of 24 months, the income arising will be considered a short-term capital gain

2. Long-Term Capital Assets (LTCA): LTCA is an asset that is held for a tenure of more than 36 months. Therefore, if you sell your property after keeping it for more than 36 months, the income arising from it will be considered a long-term capital gain

HOW TO CALCULATE CAPITAL GAIN TAX ON PROPERTY?

Capital gains calculation for a property depends on the tenure for which the property has been held. However, before we begin with the formulas to calculate capital gains, let us first understand a few terms that are necessary for calculation:

1. Full Value Consideration (Final Sale Price): A consideration the seller received in return for his capital asset

2. Cost of Acquisition: It is the value of an asset when it is acquired by the seller

3. Cost of Improvement: The expenses incurred by a seller in making changes or additions to the capital asset

4. Cost of Transfer: Cost of transfer includes registry charges, brokerage charges or any other expense made during the asset sale

5. Indexed Cost of Acquisition: It is calculated by applying the Cost Inflation Index (CII) to adjust the values of inflation that had taken place over the years when the asset was held. Also, this cost can be considered as the ratio CII of the year when the seller sold an asset and of the year when either the asset was acquired or the FY- 2001-2002 (whichever is multiplied by the cost of acquisition later)

6. Indexed Cost of Improvement: It is calculated by multiplying the cost of improvement that was necessary to the Cost Inflation Index of the year divided by the CII of the year in which the improvement has taken place

FORMULA FOR CALCULATION OF SHORT-TERM CAPITAL GAINS

In order to calculate short-term capital gains, the computation is as below:

Short Term Capital Gain = Final Sale Price – (Cost of Acquisition + Home Improvement Cost+ Cost of Transfer)

FORMULA FOR CALCULATION OF LONG-TERM CAPITAL GAINS

In order to calculate long-term capital gains, the computation is as below:

Long-term capital gain = Final Sale Price – (indexed cost of acquisition + indexed cost of improvement + cost of transfer), where:

Indexed cost of acquisition = cost of acquisition x cost inflation index of the year of transfer/cost inflation index of the year of acquisition.

Indexed cost of improvement = cost of improvement x cost inflation index of the year of transfer/cost inflation index of the year of improvement.

LET US TAKE AN EXAMPLE TO UNDERSTAND THE CALCULATIONS OF LONG-TERM CAPITAL GAINS BETTER

Suppose, Mr. Saxena purchased a piece of land for Rs. 15 lakh in 2006. In 2016, due to some personal reasons, he sold the plot for Rs. 40 lakh.

Let’s assume, Cost Inflation Index, CII= Index for the financial year 2016-17/Index for the financial year 2006-2007 = 1024/480 = 2.13

Indexed cost of purchase = CII x Purchase Price = 2.13 x 15,00,000 = 31,95,000

Long term capital gain = Selling price - Indexed cost = 40,00,000 - 31,95,000 = Rs. 8,05,000

Tax on Capital Gain = 20% of 8,05,000 = Rs. 1,61,000

HOW TO EXEMPT YOURSELF FROM PAYING THE CAPITAL GAIN TAX?

If you wish to avoid paying the capital gains tax, here are a few options:

• You can purchase a new house from the gains of the transaction, and you won’t have to pay any tax. However, you will have to buy a new house before the filing of your income tax within that year itself.  

• You can also invest your long-term capital gains in bonds of Rural Electrification Corporation Limited and the National Highways Authority of India for 3 years. However, please note that you can invest a maximum of Rs. 50 lakhs in these bonds in a financial year

• In case you don’t wish to purchase another property immediately, you can still save tax on the capital gains. All you need to do is to deposit the gains in the Capital Gains Accounts Scheme (CGAS) in any of the public sector banks, and you can keep the money there for 2 to 3 years. By the end of the period, however, you need to make sure that the money is invested in a property, as otherwise it will be treated as a capital gain and you will have to pay the tax on it. If you are buying a ready-made property the investment must be done within 2 years, but if you opt for an under-construction property then you get a time period of 3 years to make the purchase.  

With so many investment options available in the market, getting capital gains has become easy. Also, if you reinvest smartly, the tax that is incurred on capital gains can be reduced, ensuring a good amount of savings.