Capital gain is the difference between the purchase price and the sale price of an asset. The formula for capital gain is:
Sale Price - Purchase Price = Capital Gain
Tax paid on gains earned on sale of asset are of two types such as
- Short term capital gain-Asset less than 2 years.
- Long term capital gain-Asset more than 2 years.
Capital gain is calculated as
- Consider the full value of sales.
- Deduct these from full value of sales consideration
- Transfer expenditure like brokerage, legal expenses etc.
- Cost of acquisition of the capital assets/indexed cost of acquisition in case of long term capital assets.
- Cost of improvement to the capital asset/indexed cost of improvement in case of long term capital asset.
- The balance left-over is the gross capital gain/loss.
- Deduct the amount of permissible exemptions u/s 54 of Income Tax Act as explained below.
- The balance is the net capital gain/loss, chargeable to income tax.
Rates of Tax on Capital Gains
Different rate of income tax are charged on short term capital gains and long term capital gains as explained below:
- Income Tax on Short term Capital Gains on non-equity oriented funds and other assets, are included in gross total income of the assessee and after allowing permissible deductions under chapter VI-A, tax is charged at normal rates i.e. as per income tax slabs of the assessee.
- Income Tax on Long Term Capital Gains in respect of other than equity shares or equity oriented mutual fund subject to Securities Transaction Tax(STT) Flat rate of Income tax is charged @ 20% on Long term capital gains in respect of debt oriented mutual funds and other assets.
Tax on long term capital gains can be saved by investing them in securities for period of time.No indexation done in short term gains in funds and losses can be carried forward.No deduction allowed on long term capital gains under chapter VI-A.