Capital gains tax: When do you have to pay it, how is it calculated

The profit you get when you sell an item that has appreciated in value is subject to capital gains tax

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When you sell stocks to cash in on your success in markets, remember you have to pay capital gains tax (CGT).

 

What is Capital Gain Tax?

 

The profit you get when you sell an item that has appreciated in value is subject to CGT, which covers a broad variety of assets like:

 

Stocks

 

Shares

 

Property

 

ULIP Funds

 

Mutual Funds

 

Cryptocurrencies

 

The profit you earn from selling these assets is called capital gain and it is taxable income. The gain is calculated on the basis of the difference between the purchase and selling prices of an asset. The tax you pay from this income is referred to as capital gains tax.

 

According to the Income Tax Act, there's no obligation to pay capital gains tax if an individual inherits property and doesn't sell it. However, if the inheritor decides to sell the property, they have to pay tax on the income.

 

Short-term capital gain tax

 

Short-term capital gains tax applies to assets held for less than 36 months, or 24 months in the case of immovable properties. Profits from the sale of such assets are considered short-term capital gains and are taxed accordingly.

 

Long-term capital gain tax

 

Assets held for more than 36 months are considered long-term assets. Profits from the sale of such assets are taxed accordingly.However, the rate of tax varies from asset to asset, and different provisions are applicable in different assets. For instance, when shares are sold after one year, LTCG tax comes into effect, but in the case of jewels, this time period is three years.

 

The following assets are classified as long-term assets if held for more than 12 months:

 

Zero coupon bonds (not dependent on whether they are quoted or not)

 

Unit Trust of India (UTI) units (not dependent on whether they are quoted or not)

 

Equity-based mutual funds units (not dependent on whether they are quoted or not)

 

Securities that are listed on a stock exchange.

 

Preference shares or equities that are held in a company that is listed on a stock exchange

 

How to calculate short-term capital gains?

 

Step 1: Begin with the full value of consideration.

 

Step 2: Deduct the following:

 

Expenditure incurred wholly and exclusively in connection with such transfer

 

Cost of acquisition

 

Cost of improvement

 

Step 3: Subtract any exemptions provided under sections 54B or 54D of income tax act from the resulting number.

 

Step 4: The remaining amount is considered a short-term capital gain and is subject to taxation.

 

How to calculate long-term capital gains?

 

Step 1: Start with the full value of consideration.

 

Step 2: Deduct the following:

 

Expenditure incurred wholly and exclusively in connection with such transfer

 

Indexed cost of acquisition

 

Indexed cost of improvement.

 

Step 3: From this resulting number, deduct exemptions provided under Sections 54, 54D, 54EC, 54F, and 54B of the income tax act.

 

One strategy to reduce the tax burden is by holding on to the assets for a longer period. Individuals can reduce their tax liability to a significant extent by holding onto their assets for over 12 months before selling. This is because the tax rate on long-term capital gains is typically lower than that on short-term capital gains, which works to their advantage.