How to calculate short term and long term capital gains

Capital gains are taxable. Before filing your ITR, it is necessary to calculate short term and long term capital gains to decide how much tax you have to pay in total.

Understanding capital gains

Capital gain is the profit you make while buying or selling assets. The tax payable on these profits are called capital gains tax. There are two kinds of taxes on capital gains when a property is sold depending on the length of time for which you held the property before selling it.

Short time capital gains refer to the profit you make on the sales you do after holding property for less than 3 years from the date of acquiring it. Long term capital gains are those profits that you make on selling a property after holding it with you for more than 3 years from the date of acquiring it.

The taxation laws tax the short term and long term capital gains differently. To calculate the short term and long term capital gains, you must first learn some terms associated with them.

Full Value of Consideration

‘Full value of consideration’ means the total value of cash or kind that you get out of selling or transferring the property. In case of outright sales, the total amount received from the sales will be taken into account for taxation. If there is only an exchange of asset, the fair market value of the property will be considered. If the full value of the sales is realized only in installments over a few years, the market value of the property given in exchange will be considered.

Fair Market Value

Fair market value refers to the price for which the property can be sold in the open market on a given date.

Expenses on Transfer

Expenses on transfers are those that are incurred while the property is transferred like stamp duty, registration charges, legal fees, advertising expenses and stamp duty. If claims were made earlier on any of these expenses on other provisions of the income tax act 1961, then a claim cannot be made on it for the second time now.

Cost of Acquisition

Cost of acquisition is the total cost incurred while acquiring the property like registration and other expenses. In case the property is gifted, the cost of acquisition will be the cost incurred by the previous owner of the property for acquiring it.

Cost of Improvement

The improvements and developments made on the property by the owner will be deductible under the label ‘cost of improvement’. If the property was received as a gift or inheritance, the capital expenditure incurred by the previous owner will be treated as the cost of improvement.

Computing the long term capital gains

To compute long term capital gains, the cost of inflation index will be used for indexing the cost of acquisition and cost of improvement.

Indexed Cost = Actual Cost multiplied by the Cost Inflation Index during the year of sale divided by the cost of inflation during the year of purchase.

If calculated without indexation, the taxes on long term capital gains will be 10%.

Computing the short term capital gains

Short term capital gains are taxed depending on the present income tax slabs.

To calculate the short term capital gains, first add up expenses on transfer, cost of improvement, and cost of acquisition. Subtract this total from the full value of consideration. You will get the gross short term capital gain. From this, subtract the exemptions under sections 54B / 54D / 54G / 54GA. You will get the net short term capital gain. The resulting value will be taxed as per the rates of your current income tax slab.