As per Section 55(2)(b) of the Income Tax Act, 1961, for a capital asset acquired before 1st April 2001, the taxpayer has a special option to calculate the cost of acquisition.

Section 55(2)(b) – Cost of Acquisition for Assets Acquired Before 1st April 2001:

“Where the capital asset became the property of the assessee before the 1st day of April, 2001, the cost of acquisition shall be deemed to be—
(i) the actual cost of acquisition of the asset; or
(ii) the fair market value (FMV) of the asset as on 1st April, 2001,
whichever is higher.”

Explanation in Simple Terms:

If you acquired a capital asset (such as land, a building, or unlisted shares) before 1st April 2001, you don’t have to stick to the original purchase price. Instead, you can choose to take the Fair Market Value (FMV) as on 1st April 2001, which could help reduce your capital gains tax liability.

How to Determine FMV (Fair Market Value) as on 1st April 2001?

1. For Land or Property: FMV can be determined through a registered valuer who assesses the asset’s value as of 1st April 2001.

2. For Listed Shares: FMV is generally taken as the highest price quoted on a recognized stock exchange on 1st April 2001.

3. For Other Assets: FMV can be determined based on market trends, valuation reports, or any government-approved reference rates.

The computation of Short-Term Capital Gain (STCG) is specified under Section 48 of the Income Tax Act, 1961. The key factor in determining whether a capital gain is short-term is the holding period of the asset.

Section 48 – Computation of Capital Gains:
“The income chargeable under the head ‘Capital Gains’ shall be the difference between the full value of consideration received or accruing from the transfer of a capital asset and the cost of acquisition of the asset and the cost of any improvement to the asset, as reduced by the expenditure incurred in connection with the transfer.”

Explanation:

1. Short-Term Capital Asset (STCA):

   • A capital asset held for 3 years or less is classified as a short-term asset.

   • For assets like immovable property (land or buildings), the holding period is 36 months.

   • For listed securities, shares, mutual funds, etc., the holding period is 12 months.

   • Other assets (e.g., jewelry, bonds, etc.) typically have a holding period of 36 months.

2. Computation of Short-Term Capital Gain (STCG):
   The capital gain is calculated as the difference between the sale consideration and the cost of acquisition of the asset. Unlike long-term capital gains, indexation is not applicable to short-term capital assets. However, the following factors must be considered:

   • Sale Consideration: This is the price you sold the asset for.

   • Cost of Acquisition: This is the original price you paid for the asset, including any additional costs incurred like brokerage fees, registration charges, etc.

   • Cost of Improvement: If you have made any improvements to the asset (like renovation, upgrades, etc.), these costs can also be included.

   • Expenditure on Transfer: This includes any expenses directly related to the sale, like brokerage fees, legal charges, etc.

3. Formula for STCG:

   STCG=Sale Consideration – (Cost of Acquisition+Cost of Improvement+Expenditure on Transfer)

4. Tax Rate:

   • The tax on Short-Term Capital Gains (STCG) depends on the type of asset. For listed securities or equity mutual funds, the tax rate is 15% (as per Budget 2025 changes).

   • For other assets (e.g., land, buildings), STCG is taxed at the applicable tax slab rates.

Section 48 of the Income Tax Act, 1961 provides the basic formula for computing capital gains:

Section 48 – Computation of Capital Gains:
“The income chargeable under the head ‘Capital Gains’ shall be the difference between the full value of consideration received or accruing from the transfer of a capital asset and the cost of acquisition of the asset and the cost of any improvement to the asset, as reduced by the expenditure incurred in connection with the transfer.”

Holding Period Criteria:

• Listed Equity Shares/Equity Mutual Funds: Assets held for 12 months or less are classified as short-term.

• Immovable Property (land, buildings): Assets held for 24 months or less are considered short-term.

• Other Assets (e.g., jewelry, debt funds): Generally, assets held for 36 months or less fall into the short-term category.

Note: Although Section 48 does not explicitly define “short-term” or “long-term” capital gains, the classification depends on the holding period prescribed for various asset types under the Act and subsequent notifications.

According to Section 48 of the Income Tax Act, 1961, the income chargeable under the head “Capital Gains” is determined as follows:

Section 48 – Computation of Capital Gains:
“The income chargeable under the head ‘Capital Gains’ shall be the difference between the full value of consideration received or accruing from the transfer of a capital asset and the cost of acquisition of the asset and the cost of any improvement to the asset, as reduced by the expenditure incurred in connection with the transfer.”

How Is This Gain Computed?
The gain is calculated by taking the full value of the consideration (i.e., the sale price or the value received) and subtracting:

• Cost of Acquisition: The amount you originally paid for the asset.

• Cost of Improvement: Any additional costs incurred to enhance or upgrade the asset.

• Expenditure on Transfer: Any expenses directly related to the sale (such as brokerage fees or legal charges).