Irrespective of the amount gained or lost, one must disclose capital gains or losses while filing Income Tax Return (ITR).
What is Capital Gain?
Capital gains are the profits accrued through the sale of capital assets. The 2 types of capital gains are long-term and short-term. Long-term capital assets are those held for 36 months or more, while short-term assets are held for a shorter duration. Capital gains arise when you sell a capital asset for an amount that is more than what you paid for it.
Capital assets are any investment products like mutual funds, stocks, or any real estate product like land, house, etc. An increase in the value of any of these when you sell them is termed as a capital gain. Similarly, a capital loss is suffered in case there is a decrease in the value of an asset for its purchase price. A realized capital gain occurs only when you sell the asset at a higher price than its original purchase price.
How to calculate Capital Gains?
a) Short-term Capital Gains Tax
In the case of short-term capital gains, the formula used is Short-term capital gain= full value consideration – (cost of acquisition + cost of improvement + cost of transfer).
b) Long-term Capital Gains Tax
To calculate the long-term capital gains tax payable, the formula is to be used namely Long-term capital gain = full value of the consideration received or accruing – (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.
c) Capital Gains Rate
The rate at which capital gains is calculated varies from year to year. In the case of long-term capital gains, individuals are taxed at 20.6% (including education cess). There are no deductions that can be availed under capital gains tax. Short-term capital gains tax is levied at the tax slab under which the individual falls.
d) Gains made from the transfer of immovable property
Gains made from the transfer of immovable property (land, house, apartment) within two years of purchase are considered short-term capital gains (STCG); after two years, they become long-term capital gains (LTCG). The LTCG rate is 20% with indexation, while STCG is taxed at the slab rate.