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Tax Implications On Capital Gains – Short Term & Long Term Capital Gain

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Capital Gain Tax (CGT) is a tax charged on Capital gains, an income that is derived from the sale of an asset is known as Capital gain. Capital assets can be in the form of a Real Estate, stocks, Bonds etc.It is computed as the Difference between Selling Price and Purchase Price. When any kind of property is purchased at a lower price & then sold at a higher price, the seller makes a gain. Then this sale of a capital asset is known as capital gain. It might be negative also, if Selling Price happens to be lesser than Purchase Price for an asset. In that case, it is called as Capital Loss.

Capital gains are subject to capital gains tax payable in the year in which such sale or transfer takes place. Capital gains tax laws vary from country to country. Usually individuals and corporations are subject to capital gains taxes on their annual net capital gains. It is important to note that it is net capital gains that are subject to tax because if an investor sells two stocks during the year, one for a profit and an equal one for a loss, the amount of the capital loss incurred on the losing investment will counteract the capital gains from the winning investment.

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Types Of Capital Gains

Capital gain is classified into two types, depending on the period of holding of the capital asset. The holding period is determined from the date you bought your investment until the date you sold your investment.

Long Term Capital Gain (LTCG)

If a capital asset are held for more than 12 months (1 years) for shares, debentures and units of mutual funds and 36 months(3 years) for all other assets like Real Estate, before selling, the gain arising is classified as Long Term Capital Gain.

Calculation For Long Term Capital Gain

For Calculating capital gain first we need to make the purchase price comparable to todays price.  For doing this, we need to use the inflation figures from both these years. But the Reserve Bank of India (RBI) has made our task easy here – for every year (starting in 1980), they have come up with a number. This is called the Cost Inflation Index (Cost Of Indexation).

Indexed Cost of Acquisition = (Actual cost of purchase +cost of improvement) * (Cost Inflation Index Of Year of Sale)/(Cost Inflation Index of Year of Purchase).

Capital Gain = Sale Price – Indexed Cost of Acquisition

Let’s assume Rohit purchase a piece of land on 12-1-1984 for Rs. 1,20,000. The land was sold by him on 2-9-2009 for Rs. 6,00,00. Total Expenses on Asset-Transfer was about 2% of the sale price. Now let’s go about computing the Capital Gain for  Financial Year 2010-11.

Selling price 6,00,000
Less: Expenses on transfer -16,000
Final Selling figure 5,84,000
Less: Indexed cost of acquisition – Rs. 1,20,000*432/100
(Note: 432 is CII (cost inflation index) for year 2009-10 and 100 is for 1983-84)
-5,18,400
Long term Capital Gain 6,56,00

 

Income Tax On Long Term Capital Gain (Shares & Mutual Funds) in India

What is the tax liability on long term Capital Gain from Shares and Equity Mutual Funds?

If we talk about Shares and Equity mutual funds then there is no tax liability on long term capital gains from Shares and Equity mutual funds. Security transaction tax (STT) is applied on all the stock market transactions. So long term capital gain is fully exempt from tax on shares or securities or mutual funds on which STT has been deducted and paid.

What is the tax liability on long term Capital Gain from debt Mutual Funds?

Debt funds are taxed at the flat rate of 20% if cost of indexation is considered and @10% if cost of indexation is not considered on Long term capital gain.

Note : You can carry forward your Long Term Capital losses for 8 consecutive years and can be settled against any Long Term Capital Gains made.


Short Term Capital Gain (STCG)

Any profit/gain arising out of sale of capital assets before a period of 12 months (1 year) in case of shares, debentures and units of mutual funds and 36 months(3 years) for all other assets like Real Estate is known as short-term capital gain.

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This short term capital gain is clubbed with your income for the year, and is taxed at a rate as per the applicable tax slabs / brackets.

Short Term Capital Gain = Sale Price – Purchase Price

Income Tax On Short Term Capital Gain (Shares & Mutual Funds) In India

What is the tax liability on short term capital gain from shares and equity mutual funds?

Tax on short term capital gain from shares and equity mutual funds would be 15%. Which means if you sale/transfer shares or equity mutual funds before 12 months from the date of purchase then you will be liable to pay tax on profit @15%.

In the case of short term capital loss, you can offset your losses against short term gain from sale of other shares or equity mutual funds given that both the sales occur in the same financial year.

What is the tax liability on short term capital gain from debt mutual funds?

In case of short term capital gain from debt mutual funds, the profit arises from sale of debt mutual funds will be clubbed in your income for the year and will be taxed as per the income tax slab. Which means if you fall under 20% tax bracket then your short term capital gain from debt mutual fund comes would be taxed @20%.


 

How is capital gain on bonus shares to be computed?

As name suggest, bonus shares comes in bonus which means we don’t pay any price to get these shares. So the net sale proceeds of the bonus shares are treated as capital gain and the period of holding will be counted from the date of allotment.

Can you offset long term capital gain against short term capital losses?

No, short term capital losses can only be offset against short term capital gains and that too
if both the transactions happens in the same financial year.

One comment

  1. What is the applicable rate of tax for Short Term Capital Gains/Long Term Capital Gains on listed debentures for Resident Debenture Holder and Non Resident Individual? Also, explain if any TDS is applicable on interest income / capital gain for Resident/Non-resident debenture holder?

    Looking for a tax recokner on the same. Kindly advice.

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