Imagine realising you owe the government a portion of your profit after selling your first property or cashing in on a stock you purchased years ago. Startled? That is the truth about one of the most disregarded but significant factors of personal finance: the capital gains tax (CGT). Knowing CGT could mean the difference between losing your hard-earned money due to poor planning or keeping more of it if you’re an investor, house owner, or someone planning your first big sale.
Let us help you understand Capital Gain Tax and the procedure to calculate it.
What Is Capital Gains Tax (CGT)?
As the name suggests, capital gain tax is the tax that is paid on the gain earned by the individual on the sale or transfer of a capital asset at a profit. This tax is paid to the government under the head of “Capital gains”.
CGT tax is applied to gains from an increase in asset value. It is essential to preserve tax equity because it guarantees that those who benefit from asset growth also pay taxes.
Features of the Capital Gains Tax:
- Applying to Asset Sales Profits: After subtracting acquisition and improvement costs, tax is only assessed on the net gain.
- Categorised as either short-term or long-term depending on how long the asset was held before being sold.
- Different Tax Rates: Long-term capital gains on listed equity shares and equity-oriented mutual funds above ₹1.25 lakh in a financial year are taxed at 12.5% (without indexation). Long-term capital gains on other assets such as real estate, gold, and debt mutual funds are generally taxed at 20% with indexation. Short-term capital gains on equity (u/s 111A) are taxed at 15%, while other short-term gains are taxed as per the applicable income tax slab.
- For long-term assets (apart from listed equity), the indexation benefit allows purchase costs to be adjusted for inflation.
Types of Capital Gains: Short-Term vs Long-Term
Capital gains are classified depending on the tenure for which the asset was held before being sold.
1. Short-Term Capital Gain (STCG)
STCG happens when a capital asset is sold during a short holding period:
- Shares of equity and listed mutual funds are held for less than a year.
- For gold, unlisted shares, and most other movable capital assets, a holding period of less than 36 months is considered short-term. For immovable property such as real estate, a holding period of less than 24 months is considered short-term.
Important features:
- Short-term capital gains on listed equity shares and equity-oriented mutual funds, where Securities Transaction Tax (STT) is paid, are taxed at 15% under Section 111A.
- Other assets are taxed at the appropriate income tax slab.
- Indexation benefits are not permitted.
2. Long-Term Capital Gain (LTCG)
When a capital asset is sold after a longer holding period, LTCG is earned:
- Listed mutual funds and equity shares: held for more than a year
- Gold and most other non-financial assets: Held for more than 36 months = long-term; Real estate: Held for more than 24 months = long-term.
Important Features:
- Long-term capital gains on listed equity shares and equity-oriented mutual funds are taxed at 12.5% (without indexation) for gains exceeding ₹1.25 lakh in a financial year
- Long-term capital gains on gold, real estate, debt mutual funds, and other non-equity assets are taxed at 20% after applying indexation benefits.
- Qualified for exemptions under several sections of the Income Tax Act (e.g., 54, 54EC)
The table below will assist in understanding the clear difference between STCG and LTCG
| Criteria | Short-Term Capital Gain (STCG) | Long-Term Capital Gain (LTCG) |
| Holding Period | Less than 12 months for equityLess than 24 months for other assets | More than 12 months for equity More than 24 months for other assets |
| Tax Rate | 15% on listed equity/equity mutual fund STCG (u/s 111A), slab rate for other assets’ STCG. | 12.5% (above ₹1.25 lakh, listed equity/equity mutual funds without indexation); 20% with indexation for other long-term assets. |
| Indexation Benefit | Not available | Available (except for equity) |
| Exemptions | Limited | Available under Sec 54, 54EC, 54F |
How to Calculate Capital Gain Tax?
The amount of capital gains tax owed depends on the asset’s characteristics and whether the gain is long-term or short-term. The fundamental concept is to deduct from the selling price the asset’s cost (LTCG adjusted for inflation). Let’s dissect this.
- STCG = Full Sale Value – (Cost of Acquisition + Cost of Improvement + Transfer Expenses)
- LTCG = Full Sale Value – (Indexed Cost of Acquisition + Indexed Improvement Cost + Transfer Expenses)
Indexation Formula for LTCG:
Cost Inflation Index (CII) provided by the Income Tax Department is taken into account for calculating the indexed cost.
Indexed Cost = Original Cost × (CII of Sale Year ÷ CII of Purchase Year)
Example 1: LTCG on Property
- Suppose a house is bought in 2013 for ₹20,00,000
- Then it is sold in 2024 for ₹55,00,000
- CII for 2013-14: 220
- CII for 2024-25: 348
Indexed Cost = ₹20,00,000 × (348 ÷ 220) = ₹31,63,636
LTCG = ₹55,00,000 – ₹31,63,636 = ₹23,36,364
Tax = 20% of ₹23,36,364 = ₹4,67,273
Example 2: STCG on Equity Shares
- Bought in Sep 2023 for ₹1,00,000
- Sold in Feb 2024 for ₹1,50,000
- STCG = ₹50,000
Tax rate for listed equity STCG is 15% under Section 111A. So, 15% of ₹50,000 = ₹7,500
Bottomline
The bottom line is that understanding CGT and its types helps in calculating them properly and making more informed decisions. It will assist in saving more and losing less in the name of taxes. Knowing the rule for exemption will assist in making tax-efficient decisions. The net returns will significantly increase as you will understand the tricks to avoid paying unnecessarily, and areas in which savings can be made.
Individuals own capital assets in one way or another, and knowing theoretically about them will help in making better sales decisions at the right time.
Written by: Tanya Kumari
