Capital Gain Tax - Long Term & Short Term in India

Capital Gain Tax (Long Term & Short Term) in India is a tax on profit and gain arising from transfer of capital assets. Gain on sale of property, shares, mutual fund, bonds etc. are covered under capital gain.

If any capital asset is transferred then tax on gain should be calculated and that gain can be long term / short term capital gain.

While calculating long term / short term capital gain you can also avail certain tax exemptions if any under section 54, section 54B, section 54D, 54EC, 54EE & 54F and can save tax. 

In the following we have explained about Long Term Capital Gain & Short Term Capital Gain and how to calculate capital gain tax.

 

What is capital gain tax?

It is a tax on profit and gain arising from transfer of capital assets in which Income is chargeable under the head ‘capital gain’ and tax on such income is called capital gain tax. This capital gain can be short term capital gain or long term capital gain.

It is important to know before considering income as capital gain income that a capital asset has transferred or not. If a capital asset is transferred then only income is said to be the capital gain.

 

What is covered under the definition of transfer?

Transfer includes:

• Sale, exchange or relinquishment of the asset; or
• Extinguishment of the rights; or
• Compulsory acquisition under any law; or
• Conversion of capital asset into stock in trade; or
• Maturity or redemption of zero coupon bond
• Part performance of contract 

So, transfer of capital assets should take place for considering income as capital gain income.

Also Read: Capital Gain Tax on Sale of Property (Long Term / Short Term)

 

What is covered under the definition of Capital Asset?

It is not necessary that you sell any asset and capital gain tax is to be calculated on such gain on transfer.

For calculating tax on capital gain, asset transfer should be capital asset. 

Now, what cover under the definition of capital assets.

1. Capital Asset means property of any kind (whether movable / immovable / tangible / intangible) held by a person whether it is connected with his business / profession or not. 

Example:

Land, building, plant and machinery, shares, goodwill, securities, bond, debenture etc.

2. Any securities held by Foreign Institutional Investor (FII).

3. Unit Linked Insurance Policy (ULIP) to which exemption under section 10 (10D) does not apply due to fourth and fifth proviso thereof.

 

What does not come under the category of capital asset?

Following are not considered to be capital asset:

1) Stock in trade, consumable or raw material held for business or profession.

2) Any personal use moveable items shall not considered capital asset (eg. AC, Furniture, Car etc. for personal use)

However following are the personal moveable items which are considered as capital asset whether these were used for personal purpose:

• Jewellery
• Drawing, Paintings
• Sculptures
• Archaeological Collections
• Any work art. 

3) Indian Agricultural Land in rural area

Rural agricultural land is a land which is not in urban area

Now let's understand what the definition of urban area is:

(a) Any Area where Municipality population 10000 or more; or

(b) Municipality population	Distance
More than 10000 upto 1 Lakhs	Land situated upto 2 kms from local limit of municipality
More than 1 Lakh upto 10 Lakhs	Land situated upto 6 kms from local limit of municipality
More than 10 Lakhs	Land situated upto 8 kms from local limit of municipality

4) Gold deposit bonds issued under Gold deposit scheme, 1999

5) Deposit certificates issued under gold monetization scheme, 2015.

6) Special bearer bonds, 1991

Also Read: Section 54: Exemptions on capital gain on transfer of residential property

 

How to determine whether gain is long term capital gain tax or short term capital gain tax?

For determining whether the gain on transfer of capital asset is long term gain or short term gain. You need to understand the long term capital asset and short term capital asset.

Once it is determined, then you can easily classify the gain as long term or short term and accordingly apply the tax rate.

 

Determining Long Term Capital Asset and Short Term Capital Asset

For determining whether the capital assets transfer contributes to LTCG or STCG, it depends on the period of assets.

If Capital asset transferred till 22/07/2024 then period to be looked as per below table:

Capital Assets Transferred	STCG	LTCG
1) Any securities (other than units) listed in recognised stock exchange of India, Units of UTI, Units of equity oriented Mutual Fund, Zero-coupon Bond	If transferred asset held for not more than 12 months	If transferred asset held for more than 12 months
2) Shares of any company ( of India or foreign ) (other than mentioned in point 1) , immovable property (land or building or both)	If transferred asset held for not more than 24 months	If transferred asset held for more than 24 months
3)  Other capital asset	If transferred asset held for not more than 36 months	If transferred asset held for more than 36 months

If Capital asset transferred on or after 23/07/2024 then period to be looked as per below table:

Capital Assets Transferred	STCG	LTCG
1) Any securities listed in recognised stock exchange of India, Units of UTI, Units of equity oriented Mutual Fund, Zero-coupon Bond	If transferred asset held for not more than 12 months	If transferred asset held for more than 12 months
2) Shares of any company ( of India or foreign ) (other than mentioned in point 1) , immovable property (land or building or both)	If transferred asset held for not more than 24 months	If transferred asset held for more than 24 months
3)  Other capital asset	If transferred asset held for not more than 24 months	If transferred asset held for more than 24 months

 

What is the rate of short term capital gain tax?

Short Term Capital Gain Tax
When STT (Securities Transaction Tax) is applicable	Transfer till 22/07/2024 = 15% Transfer on or after 23/07/2024 = 20%
When STT (Securities Transaction Tax) is not applicable	Tax will be calculated on normal slab rate basis

 

What is the rate of long term capital gain tax?

Long Term Capital Gain Tax
On sale of equity shares / units of equity oriented fund / units of business trust (if STT paid)	Transfer till 22/07/2024 = 10% Transfer on or after 23/07/2024 = 12.5% (on excess of Rs.125000)
Any other long term capital asset	Transfer till 22/07/2024 = 20% (with indexation) Transfer on or after 23/07/2024 = 12.5% (without indexation)

 

How to calculate short term capital gain tax?

Computation of short term capital gain

Particulars	Amount Rs.
Full value of consideration (-) Expense on transfer   Net consideration (-) Cost of acquisition (-) Cost of Improvement	x x x x x x x x   x x x x x x x x x x x x
Gross Short Term Capital Gain (-) Exemptions (if any)	x x x x x x x x
Taxable Short Term Capital Gain	x x x x

then calculate tax on taxable short term capital gain according to the tax rate mentioned above.

 

How to calculate long term capital gain tax?

Computation of long term capital gain 

Particulars	Amount Rs.
Full value of consideration (-) Expense on transfer	x x x x x x x x
Net consideration (-) Cost of acquisition (or indexed if applicable) (-) Cost of Improvement (or indexed if applicable)	x x x x x x x x x x x x
Gross Long Term Capital Gain (-) Exemptions (if any)	x x x x x x x x
Taxable Long Term Capital Gain	x x x x

then calculate tax on taxable long term capital gain according to the tax rate mentioned above.

Also Read: Section 206AB- Higher TDS rate for Non-filers of ITR

 

Important terms

Full Value of consideration

It is the amount received or to be received by the seller on transfer of capital assets.

 

Cost of Acquisition

It is the value at which the capital asset is acquired by the seller.

 

Indexed cost of acquisition

It is the cost of acquisition which is adjusted as per cost inflation index (CII)

Indexed cost of Acquisition = Cost of Acquisition * CII of the year of transfer / Cost Inflation Index (CII) of the year in which asset is first acquired by seller OR CII of 2001-02 whichever is later

This way long term capital gain gets the benefit of indexation and you have to pay less tax accordingly.

 

Cost of Improvement

It is the expense related to any additions or alterations made to capital assets by the seller. It is of capital nature.

 

Index cost of Improvement

It is the cost of improvement which is adjusted as per cost inflation index (CII)

Indexed cost of Improvement = Cost of Improvement * CII of the year of transfer / Cost Inflation Index (CII) of the year in which improvement took place

Also Read: Section 51 of CGST | TDS under GST | with Example

 

Summary

Capital Gain Tax (Long Term Capital Gain Tax and Short Term Capital Gain Tax) are of two types. You have to find that your transfer of capital asset comes under long term or short term and compute tax accordingly. You can avail exemption under Section 54, 54B, 54D, 54EC, 54EE, 54F while computing capital gain and can save tax.