Capital Gain Tax Definition Tax Rate Real Estate Short Term Capital Gain(STCG) Long Term Capital Gain (LTCG) Tax Benefits

Have not we heard this term Capital Gain before ?? May be, may be not, so what exactly is Capital Gain ?? Capital  Gain is Gains/Profits that result from the Transfer of Capital Assets such as Real Estate, Stocks, Bonds etc. It is computed as the Difference between Selling Price and Purchase Price. So it might be negative also, if Selling Price happens to be lesser than Purchase Price for an asset. In that case, it is called as Capital Loss.

So when we talk about Capital Gain,essentially there are three terms, which come into picture : Gains/Profits, Transfer and Capital Assets. We will discuss all of these terms one by one.

Gain/Profits :
On the basis of time period, for which the asset is held before it’s transfered, Gain is divided into two types. First one is Short Term Capital Gain (STCG) and second  is Long Term Capital Gain (LTCG). For a capital asset gain to qualify as Short Term Capital Gain (SCTG), the duration-criteria is 1 year for Shares/Stocks, and 3 years for all other assets, like Real Estate.

Most of us may think that Gain is just the difference between Selling Price and Purchasing Price, but it’s not 100% correct. A house which was bought for, say Rs 10 Lakh, 5 years ago can very well be sold off with a Rs 20 Lakh pricetag, so does that mean Capital Gain will be computed as 20 – 10 = 10 Lakh, which is what, 50% of the final selling price ?? No, it won’t. It will be grossly unfair, if it does that. So a Cost Inflationary Index is multiplied into sum of Cost of Improvement and Purchasing Price to arrive at your Real Purchase Cost and then its compared against selling price to arrive at capital gain.

So the simple formula for Capital Gain Calculation can be given as follows

Capital Gain = Selling Price – (Purchase Price + Cost Of Improvement) * Indexation Factor, where Cost Of Improvement is your cost incurred towards maintaining the asset and Indexation Factor is the ratio of Cost Inflationary Index(CII) of selling year to that of purchasing year.

So one natural question arises as to what exactly can be called as an Asset Transfer ?? If a husband hands over his long-cherished diamond-collection, inherited from ancestors, to his wife, will that be counted as an Asset Transfer. An Asset Transfer includes Sale/Extinguishment of Rights, Conversion of an Asset into trade stock, Transfer of rights in properties by societies and companies, Transfer of assets by a person(partner) to a firm, or by a body of individuals or association of persons.

Capital Assets:
It includes all kinds of properties except trade stock, raw materials used for business purpose, Personal Items such as furniture, clothes and motor vehicles but not jewellery, Agricultural Land (unless it is situated within the limits of or within 8 kilometers of a municipality).

Capital Gain Tax:
I know it can get damn confusing and sound like too many jargons for a layman to understand. So let’s take a simple example to understand how Capital Gain Tax is calculated.

Let’s assume David purchase a piece of land on 12-1-1982 for Rs. 1,20,000. The land was sold by him on 2-9-2009 for Rs. 8,00,00. Total Expenses on Asset-Transfer was about 2% of the sale price. Now let’s go about computing the Capital Gain for  Financial Year 2010-11.

To calculate the capital gain first expense on transfer is calculated which may include  brokerage or commission paid, cost of stamp fee and registrations fee, traveling expenses etc. It is deducted from selling price to arrive at Final Selling Figure. Then, Indexed Cost of Acquisition is calculated which is  nothing but the Multiplication of purchasing price and ratio of cost inflation index for selling year to that for purchasing year. This amount is counted as Real Purchase Cost and is subtracted from Final Selling Figure to arrive at the capital gain.

Selling Price 8,00,000/-
Expenses on transfer -16,000/-
Final Selling Figure 7,84,000/-
Less: Indexed cost of acquisition – Rs. 1,20,000*632/100; Note: 632 is CII (Cost Inflation Index) for year 2009-10 and 100 is for 1981-82 -7,58,400/-
Long-term Capital Gain 25600/-

There are some very interesting resources on Web discussing every minute details of Capital Gains and the underlying Taxation Structures. So if you could not get what you were looking for, you can always go for more details at following places


4 responses to “Capital Gain Tax Definition Tax Rate Real Estate Short Term Capital Gain(STCG) Long Term Capital Gain (LTCG) Tax Benefits

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