Capital gain in general sense means profit arising out of sale or transfer of capital assets such as share, bonds, land, etc. When selling price exceeds the actual cost of the asset, that difference is considered as a profit. For example, if you bought a piece of land for Rs 400,000 in Financial Year (FY) 2018-19 and sold it for Rs 600,000 in FY 2019-20, you would need to report total capital gain of Rs 200,000.
As per section 45 of Income Tax Act, 1961 any profits or gains arising from transfer of a capital asset effected in the Previous Year will be chargeable to Income Tax under the head ‘capital gain’ unless such capital gain is exempt under section 54, 54B, 54D, 54EC, 54EE, 54F.
However, the following points must be satisfied.
- There must be a capital asset.
- The capital asset must have been transferred.
- There must be profits or gains on such transfer, which will be known as capital gains.
- Such capital gain should not be exempted.
Penalty for not showing the income in Income Tax Return
Types of capital gains :
Short-term capital gains:– gains or losses on the ‘transfer’of a short term capital asset are referred to as short term capital gain(STCG) or short term capital loss(STCL).
Long-term capital gains:– Gains or losses on transfer of long-term capital asset are referred to as long-term capital gain(LTCG) or long term capital loss(LTCL).
How do we categorize between a short term capital asset and long term capital asset?
In order to determine whether a capital asset is short term or long term, the period of holding of that particular asset is to be determined. The provision in this regard has been summarized as under :-
| Capital asset covered | Short term | Long term |
| -Listed shares(equity or preference) -Listed securities -Units of unit trust of India (listed/ Unlisted) -Unit of equity oriented mutual fund (listed/ Unlisted) -Zero coupon bonds (listed/ Unlisted) | If period of holding is less than 12 months | If period of holding is more than 12 months |
| -Unlisted shares (equity/ preference) -Immovable property | If period of holding is less than 24 months | If period of holding is more than 24 months |
| Any other capital asset other than above | If period of holding is less than 36 months | If period of holding is more than 36 months |
How to calculate capital gain?
Short Term Capital Gain
| Full value of consideration | xxxx |
| Less: expenses incurred wholly and exclusively for transfer | (xxxx) |
| Less: cost of acquisition (purchase cost) | (xxxx) |
| Less: cost of improvement | (xxxx) |
| STCG/STCL | xxxx |
Long term capital gain
| Full value of consideration | xxxx |
| Less: expenses incurred wholly & exclusively for transfer | (xxxx) |
| Less: indexed cost of acquisition | (xxxx) |
| Less: indexed cost of improvement | (xxxx) |
| LTCG/LTCL | xxxx |
Important Income Tax Penalties under Income Tax Act, 1961
For example, Ram purchased a house on April 10, 2019. If ram sells his house on March 10, 2020 for Rs. 60,00,000 receivable in 4 instalment of Rs 15 lakhs each payable on 15 March 2020, 15 September 2020 , 15 March 2021, 15 June 2021.
Capital gain computation:
| Sale consideration | 60,00,000 |
| Less: cost of acquisition (assumed) | 10,00,000 |
| Less: cost of improvement (assumed) | 5,00,000 |
| Capital Gain | 45,00,000 |
This is taxable in PY 19-20 irrespective of the fact that entire consideration was not yet been received.
Here is an another example relating to indexed cost and how it works –
Mr. BabaTax bought a house for Rs. 64 Lakh in May 2004. The full value of consideration of the house on sale in the FY 2016-17 stood at Rs. 2 Crore. The above property was held for more than 36 months and therefore consider as a long-term capital asset.
After taking into consideration the inflation, the cost price was adjusted, and the indexed cost of acquisition was also taken into account.
Calculation of Indexed Cost of acquisition (ICOA) is as follows,
The indexed cost of acquisition of the property after calculation came at Rs. 1.5 Crore, which means Mr. BabaTax accrued a net capital gain worth Rs. 50 Lakh (2 crore- 1.5 crore). Now a long-term capital gain tax at the rate of 20% would be levied on the net capital gain, the tax liability that was to be paid by Mr. B arrived at a total of Rs. 10 lakh.
Points to remember-
- Income includes negative income as well, so there can be a capital loss in place of capital gain.
- General rule is that capital gain is taxable in the AY relevant to PY in which transfer take place except in some cases.
- In some cases, capital gain is taxable even if no transfer take place (withdrawal of exemption u/s 54, 54B etc.)
- In case capital asset purchased before 1st April 2001, taxpayers can take higher of actual cost or FMV as on 1st April 2001 as the purchase price and avail benefit of indexation.
- Ignore the improvement cost incurred before 1st April 2001.
For any questions, you may reach us at Discussion Forum
The author of above article is Shruti Jain.
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