The profits or gain made from the transfer of a capital asset in the previous year are taxable under the head Capital Gain. The rate of Capital Gain Tax in India is different for different types of Capital Gain.
Capital Gain Tax in India is broadly divided into two categories:
- Short Term Capital Gain(STCG)
- Long Term Capital Gain(LTCG)
Capital Gain Tax in India – Short Term
The Capital Gain in the case of a transfer of capital asset without holding it for 36 months is called Short Term Capital Gain.
But in the case of assets like shares of a company, units of mutual fund etc., if the holding period is less than 365 days, such gain will be treated as Short Term Capital Gain.
Short Term Capital Gain is calculated by reducing the cost of acquisition, cost of improvement and cost of transfer from the sale consideration.
Imagine, you have purchased a flat for Rs. 20 Lakhs in 2012 and spent Rs. 3 Lakhs on modification work. You sold the flat in 2013 for Rs. 28 Lakhs and the cost of transfer is Rs. 1 Lakh.
Short Term Capital Gain = 28 – (20+3+1) = 4 Lakhs.
Rate of Short Term Capital Gain Tax in India
Short Term Capital Gain Tax in India is the same as the tax rate of the individual. So, in the above example, you have to add Rs. 4 Lakhs to your income of that year and pay the tax.
If you sell property, gold, e gold etc within 36 months of its purchase, you have to pay Short Term Capital Gain Tax by adding the gain to your income. In the case of shares and mutual funds, instead of 36 months, it is 365 days. In this case, the gain are Long Term after 365 days.
Capital Gain Tax in India – Long Term
The Capital Gain in the case of a transfer of a capital asset after holding it for 36 months is called Long Term Capital Gain.
In the case of assets like shares of a company, units of mutual fund etc, instead of 36 months, the period required is only 365 days.
Long Term Capital Gain is calculated as follows:
Long Term Capital Gain = Sales Consideration – (Indexed Cost of Acquisition + Indexed Cost of Improvement + Cost of Transfer)
Where, Indexed Cost of Acquisition = Cost of Acquisition x CII of the Year of Transfer/ CII of the Year of Acquisition. (CII stands for Cost of Inflation Index released by RBI every year)
Indexed Cost of Improvement = Cost of Improvement x CII of the Year of Transfer/CII of the Year of Improvement
Rate of Long Term Capital Gain Tax in India
Long Term Capital Gain are taxed at a concessional rate in India. You have to pay tax at the rate of 20% after indexation benefits as explained above. In periods of high inflation like these, your actual tax liability will be very less.
How to save Long Term Capital Gain Tax in India?
If you invest the Long Term Capital Gain from the sale of a property in another residential property, such gain can be exempted from paying tax under Section 54 of the IT Act. Or if you invest such gain in the specified Capital Gain Bonds of National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC), then such gain will be exempted from paying tax under Section 54 EC of the IT Act.
You can use Indexation, Section 54 and Section 54 EC effectively to save Long Term Capital Gain Tax in India. But no such options exist for Short Term Capital Gain Tax in India.