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Capital Gain - Long Term and Short Term - Income Tax Calculation

Amendments related to Capital Gains applicable from w.e.f. 01.04.2017
Calculate Indexed Cost & Long Term Capital Gain w.e.f. 01.04.2017 i.e (FY 2017-18) Calculate Indexed Cost & Long Term Capital Gain applicable upto FY 2016-17

Capital gain (or loss) is a profit (or loss) made while selling a capital asset.

Capital Asset

Capital asset roughly means property - a house, an apartment, office space, factory, godown or a plot of land.

Agricultural land is not considered as a capital asset, unless it is situated within the limits of, or within 8 kilometers of a municipality.

Investments such as shares and bonds are also considered as capital assets.

When does a Capital Gain or Loss arise?

When the sale price of a capital asset is more than its purchase price, you incur a capital gain.

Similarly, when the sale price of a capital asset is less than its purchase price, you incur a capital loss.

(In some cases of long term capital gains, we have to consider the indexed cost of acquisition - but we'll come to that later, while discussing long term capital gains)

Classification of Capital Gains

Capital gain is classified into two types, depending on the period of holding of the capital asset.

• Short Term Capital Gain (STCG)
• Long Term Capital Gain (LTCG)

Shares / Stocks / Equities and Equity Mutual Funds (MFs)

Short Term Capital Gain (STCG)

If shares or equity MFs are held for less than 12 months before selling, the gain arising is classified as Short Term Capital Gain.

[The only condition here is that the shares / equities should be sold on a recognized stock exchange, and a securities transaction tax (STT) should be paid on it. If the sale of shares is off-market (that is, if the sale is not on a stock exchange), the gain would be classified like that for other capital assets. More on this in later sections.]

A short term capital loss arising from sale of shares can be offset against a short term capital gain from sale of other shares, as long as both the sales occur in the same financial year.

Long Term Capital Gain (LTCG)

If shares or equity MFs are held for more than 12 months before selling, the gain arising is classified as Long Term Capital Gain.

In the case of long term capital gain arising out of the sale of shares or equity mutual funds, there is no income tax.

The long term capital gain in this case is tax free.

All Other Capital Assets

Short Term Capital Gain (STCG)

If the capital asset is held for less than 36 months (changed to 24 months) click here to view changes / amendments in claculations of capital gain w.e.f. 01.04.17 before selling, the gain arising from it is classified as Short Term Capital Gain.

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.

Indexation Using the Cost Inflation Index

This is a number derived for each financial year by the Reserve Bank of India (RBI), and it depends on the prevailing prices during that financial year.

The number in itself doesn't convey much. But the change in the cost inflation index figure is indicative of the inflation during those years.

It would give us an indication of the change in the value of the Rupee between these years.

Cost Inflation Index Table

Financial Year Cost Inflation Index (CII)

applicable upto 31.03.17

to view Cost Inflation Index effective from 01.04.17

How to find the Long Term Capital Gain

This is a three step process.

Step 1: Find Indexation Factor

You need to take the cost inflation index of the year of sale, and divide it by the cost inflation index of the year of purchase to find the indexation factor. Indexation Factor=Cost inflation index of the year of sale / Cost inflation index of the year of purchase

Step 2: Indexed Cost of Acquisition

The indexed cost of acquisition is actual purchase price multiplied by the indexation factor.

Step 3: Deduct the amount of step 2 from the amount of step 1 to calculate the long term capital gain

Know How to save Long Term Capital Gain (LTCG) Tax on Sale of a House

1. Invest in Bonds - Section 54EC (Sec 54EC of the Income Tax (IT) Act, 1961)

You can save the income tax on the LTCG from the sale of a house, if the long term capital gain is invested in specified bonds.

These include bonds issued by the National Highways Authority of India (NHAI), the Rural Electrification Corporation (REC), Small Industries Development Bank of India (SIDBI), National Housing Bank (NHB) or National Bank of Agricultural and Rural Development (NABARD).

How Much is Exempt

The amount of LTCG exempt from income tax is equal to the amount invested in these bonds.

Thus, if you invest the entire LTCG in these bonds, the full amount would be exempt from income tax.

Please note the amount of the long term capital gain, and not the entire sale proceeds. is considered here.

For example, you sell your house for Rs. 30 Lakhs, and your long term capital gain from this sale is Rs. 20 Lakhs.

Now, if you invest Rs. 10 Lakhs in these bonds, you would not pay any income tax on this gain!

When to Invest

The investment in these bonds has to be made within 6 months of the sale of the house in order to claim exemption (or relief) under section 54EC.

Availability of Bonds

Please note that the availability of these bonds might be limited, as each of these agencies has a cap on the amount of bonds it can issue.

Therefore, please check the availability of these bonds, and plan your sale accordingly if you are planning to take advantage of Sec 54EC.

2. Invest in Another House - Section 54 (Sec 54 of the Income Tax (IT) Act, 1961)

You can save the income tax on the LTCG from the sale of a house, if the long term capital gain is invested in another house.

You can save the LTCG by investing in a house even if you own other house(s).

How Much is Exempt

The amount of LTCG exempt from income tax is equal to the amount invested in the new house.

You can save the entire income tax on the LTCG from the sale of a house, if the entire long term capital gain is invested in another house.

Again, please note that you have to consider the amount of the long term capital gain, and not the entire sale proceeds.

When to Invest

The investment in a new house has to be made within a range in order to claim exemption (or relief) under section 54EC.

This range is: Upto 1 year before the sale of the house, or within 2 years after the sale of the house.

If the new house is being constructed (and not bought), such construction should be finished within 3 years of the sale of your house.

Capital Gains Scheme of Deposit Account (CGSDA) (Also sometimes known as Escrow Account)

If your intention is to buy a new house using the money received from the sale of your house, but you are unable to purchase it by the time you file your income tax return (this is 31st July in most cases), you have to deposit the money in a Capital Gains Scheme of Deposit Account (CGSDA) to claim the benefits of Sec 54.

The amount deposited in this account is deemed to be invested in another house. That is, the amount deposited in this account is treated as if you have invested it to buy another house.

The CGSDA can be opened in any branch of a public sector bank.

The amount deposited in a CGSDA has to be utilized for buying a new house within 3 years. If a new house is not purchased within 3 years using this amount, the entire amount is treated as long term capital gain for the previous year.

If only a portion of the amount is spent in purchasing a new house, the remaining amount is treated as long term capital gain for the previous year.

Period of Holding for the NEW House

There is one more condition for saving the income tax under section 54: The new house that is purchased has to be held for at least 3 years from the date of purchase, or from the date of completion of its construction.

This clause is very important, because if you do not follow this, you would undo all the benefit that you received through section 54.

What happens if this condition of holding the new house for 3 (2 years w.e.f. 01.04.17) click to view for more amendments w.e.f.01.04.2017 is not satisfied?

When you sell this new house, while calculating the capital gain on its sale, the cost of this house will be reduced by the amount of long term capital gain (LTCG) that you invested in this house.

That is, the cost of this house will be reduced by the amount you claimed as exempt from tax when you purchased this house.

This effectively ends up increasing the profit that you show on the sale of this new house, and therefore, end up paying a lot more income tax than you should.

Understanding, for an example, if you sell your house (House A) for Rs. 15 Lakhs, and your long term capital gain from this sale is Rs. 10 Lakhs.

You buy a new house (House B) for Rs. 20 Lakhs, and invest your gain of Rs. 10 Lakhs in it. You claim this investment of Rs. 10 Lakhs u/s 54, and therefore, you don't pay any income tax on this gain.

Now, if you sell House B after 3 years (2 years w.e.f. 01.04.17) (click to view for more amendments w.e.f.01.04.2017) for, say Rs. 25 Lakhs, you have to pay income tax on gain of Rs. 5 Lakhs ) after taking into the cost of indexation.

Set Off and Carry Forward of Losses - Capital Gains and House Property

Capital loss and loss from house property.

We all know we have to pay income tax on any income that we earn or profit that we make.

In case of losses, the income tax laws provides - you can set off your losses against your profits, and can even carry them forward to subsequent years.

What is Set Off of Losses?

When you have a loss under one of the heads of income (like income from house property), and for the same year, you also have a profit (or income) under the same or some other head of income, you can reduce your profit / income by the amount of the loss.

This means that your total income also gets reduced by that much, and you end up paying that much lesser income tax!

What is Carry Forward of Losses?

In case if your income / profit is less than your loss, you would not be able to set off the full loss. In such a case, you can carry forward the loss to the next year, so that you can set it off against your income / profit in the subsequent year(s).

Now, the rules around carry forward and set off of losses are relatively complex - not all types of losses can be set off against income from another heads, and there are rules restricting carry forward of losses as well.

Rules Regarding Set Off and Carry Forward of Losses

1. A very important rule to remember is that losses that are carried forward have to be set off against income from the same head in the subsequent years - they can not be set off against income from any other head of income.
(Understanding, if you have a loss from house property, you can set it off against income from house property or income from salary in the year of the loss. But if you carry it forward, in the next year, you can set it off only against income from house property.)
2. A carried forward loss can be set off against income in subsequent years only if the loss has been declared in the income tax return filed by you.
You have to file a loss return (or a return of loss) as per section 139 (3) if you want to carry forward the loss to subsequent years.
3. A loss for a particular year can be carried forward only if the income tax return for that year is filed by the due date. The only exception to this rule is loss from house property - this loss can be carried forward even if the IT return is not filed in time.
4. Loss from a source of income which is exempt from income tax (for example, an agricultural loss) can not be set off against income from a taxable source of income.

Short Term Capital Gains Tax Calculations in India

What period is Short term

Short term means that your profits from shares/equity mutual funds that are held for a period of less than 12 months.

Tax rate

Profits from shares/equity mutual funds that are held for a period less than 12 months would be taxed @ 15%.

Clarifications of Short Term gain taxability

Any short term capital loss arising from sale of shares or equity mutual funds can be offset against a short term capital gain from sale of other shares or equity mutual funds given that both the sales occur in the same financial year.

Short Term Capital Gain is calculated as : (Sale Price - Expenses) - (Purchase Price + Expenses)

Can long term capital gain offset with short term capital loss gain ?

One can not offset long term capital gain against short term capital losses? However, short term capital losses can only be offset against short term capital gains and that too if they happen in the same calendar year.