What is Capital Gain?
Capital gain is the sale consideration of a property minus the cost of purchase of such property.
Following conditions should be fulfilled for taxation of capital gain under the Income-tax Act, 1961:
- There is a capital asset;
- Such asset is sold during a financial year by the taxpayer.
- What is Capital Asset?
Capital asset means any property owned by the taxpayer. However, the following things shall not be treated as capital assets-
- Stock-in-trade held for business/profession;
- Personal belongings such as wearing apparel, car, furniture etc. owned by the taxpayer or his family. However, considering the monetary value, certain personal belongings are treated as capital assets namely Jewellery, Archaeological Collections, Drawings, Paintings, Sculptures or Any work of art.
- Agricultural land situated in rural areas of India;
As per the Income-tax Act, all capital assets are classified under two broad heads namely-
- Shares & securities (i.e. shares, bonds, debentures etc.; and
- Capital assets other than securities (i.e. Land, building, gold etc).
- Some important terms that a taxpayer must know:
Money received by the taxpayer on the sale of the capital asset is known as Sale consideration.
The expenses which are paid by the taxpayer while selling the capital asset are treated as Selling Expenses.
Eg. Selling commission to an agent, advertisement cost etc.
Cost of purchase/acquisition:
The money paid by the taxpayer to purchase the capital asset is known as the Cost of Acquisition.
Cost of improvement:
Cost of improvement means an amount spent by a taxpayer for making any additions/improvements to the capital asset.
Indexation is a technique that is to be used to consider the inflation effect on the cost of purchase or the cost of the improvement.
Every year Income-tax Department provides a cost-inflation index figure for that particular year. However, indexation benefit is applicable only for long term capital assets.
Eg.: Mr Abhay purchased land in May 2001 for Rs. 1,00,000/-. He wants to sell the land in June 2014 for Rs. 3,00,000/-. Compute his Indexed cost of Purchase as well as a capital gain on the sale of land.
The cost inflation index for the years 2001-2002 is 100 and for the year 2014-15 is 240.
Indexed cost of acquisition* Inflation index for year of sale/ Inflation index for year of purchase
However, sale consideration of land is Rs. 3,00,000/-
Hence, capital gain = 3,00,000 minus 2,40,000= 60,000/-.
Period of Holding:
Period of holding refers to the period between the date of acquisition of the capital asset up to the date of its sale.
Eg. If shares are purchased in April 2012 and sold in April 2015. Then it is said that they are held for three years or period of holding is three years.
- What is Short term capital gain?
- Shares and securities:- If a security is held for less than or equal to 1 year, then it is treated as a ‘Short term capital asset’. Short term capital gain on shares and securities is taxable at 15% if the taxpayer has paid securities transactions tax (STT) while selling the shares or securities. Whereas if STT has not been paid, then such short term capital gain is taxable as per the slab rates applicable to the taxpayer.
- Capital assets other than securities:- If such as asset is held for less than or equal to 3 years, then it is treated as ‘Short term capital asset’. Such short term capital gain is taxable as per the slab rates applicable to the taxpayer.
- What is Long Term Capital Gain?
- Shares and securities:- If a share or security is held for more than 1 year, it is treated as a ‘Long term capital asset’. Long term capital gain on shares and securities is charged at 10% above Rs. 1,00,000.
- Capital assets other than securities:- If such as asset is held for more than 3 years, it is treated as ‘Long term capital asset’. Such long term capital gain is taxable at 20%.