Computation of Capital Gains I

Profits or Gains

The incidence of tax on Capital Gains depends upon the length for which the capital asset transferred was held before the transfer. Ordinarily a capital asset held for 36 months or less is called a short-term capital asset and the capital asset held for more than 36 months is called ‘long-term capital asset’. However, shares of a Company, the units of Unit Trust of India or any specified Mutual Fund or any security listed in any recognised Stock Exchange are to be considered as short term capital assets if held for twelve months or less and long term capital assets if held for more than twelve months.

Transfer of a short term capital asset gives rise to ‘Short Term Capital Gains’ (STCG) and transfer of a long term capital asset gives rise to ‘Long Term Capital Gains’ (LTCG). Identifying gains as STCG and LTCG is a very important step in computing the income under the head Capital Gains as method of computation of gains and tax payable on the gains and treatment of losses is different for STCG and LTCG.

Short Term Capital Gains (STCG)

Short Term Capital Gains is computed as below:

STCG=Full value of consideration – (Cost of acquisition + cost of improvement + cost of transfer)

The following example illustrates the difference between STCG and LTCG.

‘X’ a resident individual sells a residential house on 12.4.09 for Rs. 25,00,000/-. The house was purchased by him on 5.7.2007 for Rs. 5,00,000/- and he had spent Rs.1,00,000/-on improvement during May 2005. During the previous year 2010- 2011 his income under all other heads (other than capital gains) was NIL

Since ‘X’ has held the capital asset for less than 36 months, (5.7.2006 to 12.4.2009) it is a short term capital asset for him and its transfer gives rise to short term capital gains.

STCG on sale of house=25,00,000 – 5,00,000 – 1,00,000=19,00,000
Income under “Capital Gains”=19,00,000
Income under the heads other than Capital Gains=Nil
Income under “Capital Gains”=19,00,000
Gross Total Income=19,00,000
Total Income=19,00,000
Tax on total income=4,24,000

In case ‘X’ sells the same house on 12.3.2011 for the same consideration, the residential house becomes a long term capital asset as the period of holding would be more than 36 months (5.7.2007 to 12.3.2011) and its transfer gives rise to long term capital gains.

Sale consideration=25,00,000
Indexed cost of acquisition: 5,00,000 x 551/480=5,73,958
Add: Indexed cost of improvement: 1,00,000 x 551/497=1,10,865
Indexed cost of acquisition + Indexed cost of improvement=6,84,823
Income under the head “Capital Gains”=18,15,177
Income under the heads other than Capital Gains=Nil
Income under the head “Capital Gains”=18,15,177
Gross total income=18,15,177
TOTAL INCOME (rounded off)=18,15,180
Tax thereon:
Tax on income other than LTCG=Nil
Tax on LTCG @ 20% of (18,15,180-1,10,000)=3,43,036
*minimum slab for that assessment year
Total tax payable=3,43,036