How to Calculate Capital Gains?

In the 2018-19 budget, the Indian finance ministry re-introduced the LTCG or long term capital gains taxes on equity mutual fund schemes. LTCG is taxed at a flat rate of 10% for long term capital gains of over Rs 1 lakh in a particular financial year. 

But calculating long term capital gains remains a challenge for most investors. This is partly because the complex calculation of capital gains depends upon the number and nature of transactions carried out by an assessee in a particular financial year. No wonder, most assessees prefer seeking the help of a professional chartered accountant for the calculation of capital gains. 

But here’s a shocker: calculating capital gains isn’t as difficult as it sounds and one can easily compute capital gains by following a simple step-by-step process. So if you too have been looking for ways to calculate your capital gains to file your ITR, without having to run from pillar to post, we suggest you spare a few minutes and get acquainted with the do-it-yourself process described below. 

So let’s get started! 

Assessees incur capital gains whenever capital assets are transferred to them by the way of sales or otherwise. There are 2 different types of capital gains depending upon the holding period of the asset. These are short term capital gains and long term capital gains. 

Income Tax Act 1961 offers a standard format to calculate STCG and LTCG. 

Here’s the deal: most assessees get confused with the terms mentioned herein and hence aren’t able to calculate capital gains. Keeping this in mind, we have decoded these terms and made it easy for you to understand the same. 

  1. Sale Value:Sale value is the value that the assessee has received or is set to receive on the sale of capital assets. For immovable assets like property, the stamp duty value of the property is considered to be the sale value if the actual property value is lesser than SDV. In case of mutual funds or equity shares, the value excluding the brokerage charge and the securities transaction tax is considered to be the sale value. 
  2. Costof Acquisition: Cost of acquisition as the name suggests refers to the purchase price for the asset. Purchase price includes the brokerage charges paid to buy the asset. 

If the assessee acquires the sold asset as a gift, then the cost of acquisition is the same as the cost of acquisition incurred by the party who is gifting the asset to the assessee. Here it is important to ensure that the holding period for the asset starts at the date when the said asset was purchased by the party who gifted the asset to the assessee. 

For units of equity-oriented mutual funds or equity shares purchased before 1st February 2018, the cost of acquisition will be computed in the following steps: 
Step 1: Calculate the fair market value of the investment by multiplying the number of MF units or equity shares with their respective highest prices as on 31st January 2018. 

Step 2: Make a note of the actual sale value of the investment. 

Step 3: Pick the lower value from the aforementioned. 

Step 4: Choose the higher value by comparing it with the value derived at step 3. This will be the final cost of acquisition.  

Please Note: If the security was not traded on 31st January 2018, the highest value on the immediately preceding trading day is to be considered. 

  1. Costof Improvement:Cost of improvement, as the term suggests, is the cost incurred on the improvement, repair or modifications of the asset. These costs may include the building of an additional floor, and major renovation of the property. Cost of improvement also includes any money paid by the landlord to their tenants to vacate the property. 
  2. Sale/Transfer Expenditure:These charges include brokerage charges, registry charges or other expenses made on the sale of the asset. In the case of mutual funds or equity shares, STT cannot be deducted when calculating capital gains. 
  3. Indexation:Indexation only applies to long term capital gains and is only considered when calculating long term capital gains taxes applicable to an assessee. Indexation helps incorporate the time value of the money, adjusting the inflation rate, when calculating gains. Cost Inflation Index (CII) is taken into account for indexation. 
  4. Holding Period:Holding period refers to the number of days or months when the assessee held the asset. Holding period starts at the day when the asset by acquired by the assessee and ends on the date immediately preceding the date of transfer of the asset. 

Here’s a table that illustrates the minimum holding period in order to categorize a capital asset as a long-term or short term. 

For FY 2017-18, holding period for some asset classes would charge when calculating capital gains.  Know  have an 

Please Remember – If the price for the transfer of the asset is lower than that of acquiring it, then the amount is termed as “loss under the head capital gains”. Depending upon the holding period of the asset, this loss will be classified as a short-term capital loss (STCL) or long-term capital loss (LTCL).

Here’s a list of items that are not considered to be capital assets. Any loss or profit their transfer/sale is not subject to capital gains tax:

  • Raw materials or stock in trade held for profession or business. 
  • Personal use items such as AC, TV, Fridge, etc. 
  • Agricultural land in rural areas.
  • Gold deposit bonds. 
  • Silver utensils kept for personal use. 

In the End 

Now that you know how to calculate capital gains and how to compute capital gains tax, you will not need to run from pillar to post. Simply go ahead, put this learning into practice and compute capital gains and the respective capital gains tax today. 

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