Capital gains refer to the ‘gains’ made from the sale of fixed capital assets. Capital assets may include, among others, vehicles, house property, building, land, jewellery, machinery, trademarks, patents, jewellery and even leasehold rights. Since the gains are a source of income for the seller, they are taxed based on the duration for which the seller held them. This gives rise to either long term capital gains tax or short term capital gains tax, which must be paid in the year in which the sale was made. To calculate long term capital gains tax liability, it is necessary to know the terms provided below.
1. Full Value Consideration:This is the consideration that the seller receives in return for transfer of capital assets. The tax is charged on the year of transfer, regardless of whether the seller gets consideration in that year or not.
2. Cost of Acquisition:This is the value at which the seller acquired the capital asset.
3. Cost of Improvement:This is the cost the seller incurred in making additions, alterations or enhancements to the capital asset. However, improvements made before April 1, 2001, are not to be taken into consideration.
If the seller has acquired the capital asset as gift or inheritance, the costs of acquisition and improvement incurred by the previous owner are also to be taken into account to calculate long term capital gains tax liability.
Once the full value of consideration is known, it is easy to calculate long term capital gains tax liability. From the total amount of consideration, deduct the expenses incurred for the transfer, indexed costs of acquisition and improvement, and any other expenses that can be deducted from the total value of consideration. These expenses may include expenses that relate to the sale or transfer of the capital asset. The amount that remains is long term capital gain.
It is important to know that transfer, in the form of inheritance, of capital assets does not have a tax implication. However, if the person who inherits or acquires the asset through will, inheritance, succession or gift; sells it, they are liable to pay capital gains tax. To calculate long term capital gains tax liability on such an asset, it is essential to take the period for which the original owner owned it into consideration.
Capital assets which were transferred or sold after July 10, 2014, and were held for 12 months or lesser before that, are to be considered short-term capital assets. These include:
1. Equity or preference shares owned in a company that has been listed on any of India’s recognised stock exchanges
2. Securities such as bonds, debentures and government securities that have been listed on any of India’s recognised stock exchanges
3. UTI units, regardless of whether they have been quoted or not
4. Equity-oriented mutual fund units, regardless of whether they have been quoted or not
5. Zero-coupon bonds, regardless of whether they have been quoted or not
Sale of these assets are considered long-term capital gains if they have been held for 12 months or longer.