A Detailed Guide on How to Calculate Capital Gains in India

When you sell a capital asset, such as property or stocks, any profit you make is considered ‘income from capital gains’. Such profit is subject to taxation in the year when the ownership of the asset is transferred. To understand how much tax you owe, it is crucial to calculate capital gains accurately. This blog focuses on how to do so. 

What Is Capital Gain Tax in India?

As we have already discussed, profits from the sale of capital assets are termed capital gains. The transfer of capital assets through sale is taxable in India and the tax is known as capital gains tax. In other words, capital gains are the increased value of capital assets that you realise on selling your capital holdings. 

Examples of capital assets include stocks, bonds, mutual funds, land, buildings, house properties, vehicles, patents, trademarks, leasehold rights, machinery and jewellery. It also covers rights related to or within an Indian company, including management, control or any other legal rights.

What Are the Different Types of Capital Gains? 

Capital gains and the subsequent tax can be categorised into the following groups:

• Short-term Capital Gains Tax: The tax applicable on capital gains when sold before 1 year of holding is short-term capital gains tax (STCG).
• Long-term Capital Gains tax: The tax that you need to pay when you sell capital assets after a holding period of 12 months, is long-term capital gains tax (LTCG).

Notably, the capital gains tax rates for LTCG and STCG differ based on the category of capital assets. To calculate capital gains tax, you need to apply the applicable rates to your capital gains based on the holding period and asset class.

How to Calculate Capital Gains?

To calculate capital gains, you need to know the following terms:

• Full Value Consideration

It indicates the consideration that you receive or are about to receive as a seller due to the ownership transfer of capital assets. The capital gains that you receive are subject to taxation in the year of transfer, even if you do not receive any consideration. 

• Cost of Acquisition

It is the value at which the seller acquired capital assets. 

• Cost of Improvement

It indicates the expenses of a capital nature that you incur as a seller to make alterations or additions to your capital assets. Notably, improvements exercised prior to 1^st  April, 2001 are not considered.

How to Calculate Short-term Capital Gains?

Follow the steps below to calculate capital gains for the short term:

Step 1: Evaluate the full value of consideration.

Step 2: Deduct the expenses incurred in transferring your capital assets, cost of acquisition and cost of improvement.

Step 3: Deduct exemptions under Section 54B/54D from the value.

Step 4: The value you get is your short-term capital gain which is taxable.

How to Calculate Long-term Capital Gains?

Follow the process below to calculate capital gains for the long term: 

Step 1: Estimate the full value of consideration.

Step 2: Deduct expenditure on capital ownership transfer, indexed cost of acquisition and indexed cost of improvement.

The formula to calculate the indexed cost of acquisition is as follows:

• Indexed Cost of Acquisition = (Cost of Acquisition * Cost Inflation Index (CII) in the year of asset transfer) / CII of the first year of asset holding or FY 2001-02, whichever is later.
• Indexed Cost of Improvement = (Cost of Improvement * CII of the year of asset transfer) / CII of the year of asset improvement

Step 3: From the amount obtained in Step 2, deduct exemptions under Sections 54, 54D, 54EC, 54F and 54B to get your long-term capital gains.

Notably, if you transferred your long-term capital assets prior to 23^rd July 2024, LTCG tax will apply at 10% on shares and equity unit-oriented funds of value more than ₹1.25 lakh in a financial year without the indexation benefit. If you transferred the assets after the mentioned date, a 12.5% tax will apply with an exemption limit of ₹1.25 lakh.

Alternatively, you can use a capital gains tax estimator or capital gains tax calculator to save your time. This helps in figuring capital gains tax seamlessly, ensuring accuracy.

Deductible Expenses

Here are the deductible expenses during the sale of the following capital assets:

1. Sale of House Property

You need to deduct the following expenses in case there is a property ownership transfer:

• Commission or brokerage
• Cost of stamp papers
• Travelling and conveyance expenses
• If there is property inheritance, the cost incurred in obtaining a succession certificate, the cost of executor and other relevant costs need to be deducted.

1. Sale of Shares

You need to deduct the commission paid to the broker. However, securities transaction tax (STT) does not fall under the deductible expenses category.

1. Sale of Jewellery

If a broker is associated with the sale or purchase of jewellery, the cost incurred towards the broker's services is deductible.

Exemption on Capital Gains

To calculate capital gains, you need to consider the following exemptions as per various sections:

Section 54

Taxpayers can claim an exemption on long-term capital gains from the sale of house property by investing in up to two house properties, instead of the previous provision of just one. However, the capital gain from the sale of the house property must not exceed ₹2 crore. 

This exemption for two house properties is available only once in a taxpayer’s lifetime. The exemption applies to the amount of capital gains, not the entire sale proceeds. If the cost of the new property exceeds the capital gains, the exemption will be limited to the total capital gain from the sale.

Here are the additional conditions that taxpayers need to adhere to to avail exemptions under Section 54:

• You need to purchase the new property either 1 year prior to the sale of the old property or 2 years after the sale of the old property.
• Taxpayers can invest the gains in property construction provided construction is completed within 3 years from the sale of the old property.
• The tax authorities reserve the right to take back this exemption if taxpayers sell the new property within 3 years of construction or purchase.
• Exemptions under Sections 54 to 54F are limited to a threshold of ₹10 crore.
• In case the capital gains amount is more than ₹2 crore, taxpayers need to purchase 1 residential house property within 1 year before the date of sale of the old property. Alternatively, taxpayers can construct a house property within 3 years from the date of sale of the old property.

Section 54F

Taxpayers can avail exemptions under Section 54F when they invest sales proceeds (not only capital gains) from the sale of long-term capital assets other than property to purchase a new residential property. 

You need to purchase the new property either 1 year before the sale date or 2 years after the sale date. You can invest the amount of gains in property construction provided construction is completed within 3 years from the date of the sale. 

Taxpayers can invest in 1 property as per Budget 2014-15 clarifications. The tax authorities reserve the right to take back the exemptions when taxpayers deviate from regulations.

If you invest the entire amount, you will be eligible for exemption on the entire capital gains when you meet the above-mentioned criteria. In case you invest the sales proceeds partially, you will be eligible for the proportionate amount calculated using the following formula:

LTCG Exemption = (Capital Gains * Cost of New House) / Net Consideration

Section 54EC

You can avail tax exemptions under Section 54EC if you invest capital gains from the sale of your first property into the following bonds or follow the below-mentioned conditions:

• Bonds (Capital Gain Bonds) up to ₹50 lakh that the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC) issues.
• You can redeem the invested amount after 5 years but cannot sell the bonds before the lapse of 5 years from the sale date.
• Property owners can invest the profit in bonds within 6 months. However, to claim exemptions they need to invest it prior to the tax filing deadline.

Section 54B

When there is a sale of land located in an urban area, which was used for agricultural purposes for 2 years before the sale, by individuals, their parents or Hindu Undivided Families (HUF), taxpayers can avail exemption under the Section 54B. You need to, however, invest the exempted amount in new agricultural land either in rural or urban areas within 2 years from ownership transfer. The exempted amount will be the lesser of the capital gains or the investment made in a new asset.

As a taxpayer, you cannot sell the new land within 3 years from the date of purchase to claim the exemption. Alternatively, if you cannot purchase new agricultural land, you need to deposit the capital gains amount in a bank account (except any rural branch) of a public sector bank or IDBI Bank in accordance with the Capital Gains Account Scheme, 1988.

You can claim exemptions on the deposited amount. Nevertheless, if you do not use the deposited amount within 2 years for agricultural land purchase, it is considered as capital gains.

Section 54D

Taxpayers can avail tax exemption under Section 54D when there are capital gains from ownership transfer of a building or land used for industrial undertaking under the following conditions:

• The assessee needs to use the concerned land or building 2 years prior to the transfer date.
• To re-establish the existing undertaking, the assessee needs to purchase or construct a building or land within 3 years from the transfer date.
• If the taxpayer does not invest the capital gains before filing income tax returns, the amount needs to be deposited under the Capital Gains Account Scheme.
• When the cost of a new asset is more or equivalent to the sales consideration, taxpayers will receive a complete exemption; if it is lower, they will receive a proportionate exemption amount.

Final Word

While you calculate capital gains and the applicable taxes, make sure to consider the holding period. Based on whether you hold capital assets for the short term or long term, the tax rates will apply. Accurate calculation of LTCG and STCG helps you avail exemptions under various sections, thereby reducing your tax liability. 

If you are a conservative investor focusing on fixed deposits, the interest income you earn will be subject to TDS (Tax Deducted at Source), rather than capital gains tax. So, you can enhance your portfolio by diversifying between both capital assets and fixed-income instruments like fixed deposits. 

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