Capital Gain Calculation
CAPITAL GAINS are the profits earned on sale of capital assets. The profit earned is taxable in the hands of seller. Under section 45(1), if a capital asset is transferred by an assesse, then any profit or gain on such transfer is taxable as capital gain after the exemptions under sections 54, 54B, 54D, 54EC, 54F, 54G, 54GA and 54GB.
We first need to understand what exactly are capital assets?
Capital asset means any property whether movable or not. For assessment year 2015-16, capital asset also includes any securities held by Foreign Institutional Investor (FII) which has invested in such securities in accordance with SEBI guidelines.
The following properties are not included in “capital asset”
- Any stock in trade, consumable stores, raw material kept for the purposes of business or profession. For example gold ornaments are not treated as capital hands if the assessee is a jeweller.
- Personal effects used by the assessee or any family member dependent on the assessee. However, the following are capital assets despite of being personal assets:
- Archaeological collections, paintings, sculptures or any work of art.
- Agricultural land in India situated outside the “specified area.” Thus, an agricultural land is situated is situated in the “specified area”, then it must be treated as a capital asset.
- Gold bonds issued by Central Government including gold deposit bonds issued under the gold deposit scheme notified by the Central Government.
Calculations of Capital gain
Calculation of capital gain from transfer of long term capital assets is different from calculation of capital gain from short term capital assets.
Capital assets can be classified as long term capital assets and short term capital assets. Long term capital assets are the assets that have been with the seller for 36 months or more. If the asset has been with the seller for less than 36 months, it is called as short term capital asset. However in the following cases, the differentiating period reduces to 12 months:
- Securities listed in a recognized stock exchange in India
- Units of UTI
- A unit of an equity oriented fund
- Zero coupon bonds
Therefore, in the above cases, if the seller have had the assets for 12 months or more, it is said to be long term capital asset, otherwise it is called short term capital assets.
CALCULATION OF SHORT TERM CAPITAL GAIN
Short term capital gain can be computed in the following manner.
In this method above, Cost of consideration: the selling price or the amount received on selling the capital asset. If the capital asset is converted into stock in trade, then the market value of capital assets on the date of conversion is assumed as value of consideration. Such capital gain, however will be taxable in the year the asset converted as stock is sold. Cost of acquisition: The price for which the asset was purchased is the cost of acquisition. In case the asset was gifted or inherited, then the cost at which the original buyer purchased is treated as cost of acquisition. Cost of improvement: if the seller has made any expense on the improvement of the asset in the period of his ownership, for example, construction in case of house, then such cost is subtracted.
COMPUTATION OF LONG TERM CAPITAL GAIN
Gain from sale of long term capital asset can be computed in the following mannerProvisions for cost of consideration are same as in short term capital assets. Indexed cost: indexation is a Indexation is a technique to adjust tax payments by employing a price index which adjusts for inflation. Prices don’t remain constant through. They fluctuates from time to time. Therefore indexation is done to adjust for these fluctuations Cost Inflation index is used to ascertain indexed values. CII is a measure of inflation. If the purchase is before previous year 1981-82, CII of year 1981-82 is used. Following is the table of CII that tells CII of years for financial years 1981-2016
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|Full value of consideration (selling price)|
|Less: transferring costs|
|Net value of consideration|
|Less: cost of acquisition|
|Less: Cost of improvement(if any)|
|Short term capital Gain|
|Full value of consideration|
|Less: expenses on transfer|
|Net cost of acquisition|
|Less: Indexed cost of acquisition
Less: Indexed cost of improvement
|Long term capital Gain|
|Less: Exemptions under section 54, 54B, 54D, 54EC, 54G (If any)|
|Net long term capital gain|
Provisions for cost of consideration are same as in short term capital assets.
Indexed cost: indexation is a Indexation is a technique to adjust tax payments by employing a price index which adjusts for inflation.
Prices don’t remain constant throught. They fluctuates from time to time. Therefore indexation is done to adjust for these fluctuations.
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Cost Inflation index is used to ascertain indexed values. CII is a measure of inflation. If the purchase is before previous year 1981-82, CII of year 1981-82 is used. Following is the table of CII that tells CII of years for financial years 1981-2016.
- Calculation of indexed cost of acquisition:
Cost of acquistion × CII of the year of transfer
CII of 1981 −82 or CII of the year in which the assest was held by the owner whichever is later
- Calculation of indexed cost of improvement
Cost of improvement × CII of the year of transfer
CII of 1981 −82 or CII of the year of improvement by the owner whichever is later.