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How to compute short-term capital gain?
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 ‘CapitalRead more
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.
Explanation:
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See lessShort-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.
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.
Formula for STCG:
STCG=Sale Consideration – (Cost of Acquisition+Cost of Improvement+Expenditure on Transfer)
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.
When is the benefit of indexation allowed while computing capital gain?
The benefit of indexation while computing capital gains is provided under Section 48 of the Income Tax Act, 1961. This provision allows for the adjustment of the cost of acquisition and improvement of a long-term capital asset to account for inflation, using the Cost Inflation Index (CII). Section 4Read more
The benefit of indexation while computing capital gains is provided under Section 48 of the Income Tax Act, 1961. This provision allows for the adjustment of the cost of acquisition and improvement of a long-term capital asset to account for inflation, using the Cost Inflation Index (CII).
See lessIn respect of capital asset acquired before 1st April, 2001 is there any special method to compute cost of acquisition?
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 propeRead more
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.
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?
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See lessFor Land or Property: FMV can be determined through a registered valuer who assesses the asset’s value as of 1st April 2001.
For Listed Shares: FMV is generally taken as the highest price quoted on a recognized stock exchange on 1st April 2001.
For Other Assets: FMV can be determined based on market trends, valuation reports, or any government-approved reference rates.
How cost of acquisition is calculated in capital gain?
The cost of acquisition of a capital asset is determined as per Section 55 of the Income Tax Act, 1961. It varies depending on whether the asset was purchased, inherited, gifted, or acquired before a specific date. Section 55(2) – Cost of Acquisition of a Capital Asset:“For the purposes of sectionsRead more
The cost of acquisition of a capital asset is determined as per Section 55 of the Income Tax Act, 1961. It varies depending on whether the asset was purchased, inherited, gifted, or acquired before a specific date.
Explanation in Simple Terms:
If You Purchased the Asset:
The cost of acquisition is the actual purchase price paid, including any registration fees, brokerage, or legal expenses.
If the Asset was Inherited or Gifted:
The original cost of acquisition of the previous owner is considered.
The holding period of the previous owner is also taken into account to determine whether the gain is short-term or long-term.
If the Asset was Acquired before 1st April 2001:
The taxpayer has an option to take either the actual purchase price or the Fair Market Value (FMV) as of 1st April 2001, whichever is higher.
For Assets Declared under the Income Declaration Scheme, 2016:
The cost of acquisition is deemed to be the FMV as of 1st June 2016 (as per Section 49(5)).
Indexed Cost of Acquisition (Applicable to Long-Term Capital Assets):
If the asset qualifies for indexation benefit (available for immovable property, unlisted shares, debt funds, etc.), the cost is adjusted for inflation using the Cost Inflation Index (CII).
Formula:
Indexed Cost of Acquisition=Original Cost×CII of Year of SaleCII of Year of Purchase\text{Indexed Cost of Acquisition} = \frac{\text{Original Cost} \times \text{CII of Year of Sale}}{\text{CII of Year of Purchase}}Indexed Cost of Acquisition=CII of Year of PurchaseOriginal Cost×CII of Year of Sale
Practical Example:
Suppose you bought a house in 1995 for ₹10 lakhs, and you are selling it in 2025.
Instead of ₹10 lakhs, you can take the FMV as of 1st April 2001 (say ₹25 lakhs).
If the CII for 2001-02 was 100 and the CII for 2025-26 is 400, then:
Indexed Cost=₹25,00,000×400100=₹1crore\text{Indexed Cost} = \frac{₹25,00,000 \times 400}{100} = ₹1 croreIndexed Cost=100₹25,00,000×400=₹1crore
If the house is sold for ₹1.5 crore, then:
Capital Gain=Sale Price−Indexed Cost=₹1.5crore−₹1crore=₹50lakhs.\text{Capital Gain} = \text{Sale Price} – \text{Indexed Cost} = ₹1.5 crore – ₹1 crore = ₹50 lakhs.Capital Gain=Sale Price−Indexed Cost=₹1.5crore−₹1crore=₹50lakhs.
Tax at 12.5% (as per Budget 2025 changes) would be ₹6.25 lakhs.
This method ensures fair tax computation by adjusting for inflation over the years.
See lessIf any undisclosed income [in the form of investment in capital asset] is declared under Income Declaration Scheme, 2016, then what should be the cost of acquisition of such capital asset?
According to Section 49(5) of the Income Tax Act, 1961, as inserted through the Income Declaration Scheme, 2016, the cost of acquisition of a capital asset declared under the scheme shall be deemed to be the fair market value (FMV) as on 1st June 2016. Section 49(5) – Cost of Acquisition in case ofRead more
According to Section 49(5) of the Income Tax Act, 1961, as inserted through the Income Declaration Scheme, 2016, the cost of acquisition of a capital asset declared under the scheme shall be deemed to be the fair market value (FMV) as on 1st June 2016.
See lessWhat constitutes ‘transfer’ while calculating capital gain as per Income-tax Law?
“'Transfer' means—(a) the sale, exchange, relinquishment, or extinguishment of any rights in a capital asset;(b) the gift of any such asset; and(c) any other mode of transferring such asset or any interest therein.” Explanation:This provision establishes a very broad definition of “transfer” for theRead more
“’Transfer’ means—
(a) the sale, exchange, relinquishment, or extinguishment of any rights in a capital asset;
(b) the gift of any such asset; and
(c) any other mode of transferring such asset or any interest therein.”
Explanation:
This provision establishes a very broad definition of “transfer” for the purposes of computing capital gains. It is not limited to a simple sale for money. Instead, any transaction that results in a change of the beneficial ownership of an asset is considered a transfer. This includes:
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See lessSale or Exchange: When you sell or exchange your asset for money or another asset.
Relinquishment/Extinguishment: When you give up or lose your rights in the asset.
Gift: When you transfer the asset without receiving any consideration, such as gifting it to a family member or through a will.
Other Modes: Any other method by which the ownership or the right to enjoy the benefits of the asset is passed on to someone else.
What are the provisions relating to computation of capital gain in case of transfer of asset by way of gift, will, etc.?
When an asset is transferred by way of gift, through a will, or by inheritance, the provisions for computing capital gains follow a “carry-forward” principle. This means: Cost of Acquisition:The cost that was originally incurred by the previous owner is carried forward. In other words, you will useRead more
When an asset is transferred by way of gift, through a will, or by inheritance, the provisions for computing capital gains follow a “carry-forward” principle. This means:
Cost of Acquisition:
The cost that was originally incurred by the previous owner is carried forward. In other words, you will use the original purchase cost (plus any improvement costs, if applicable) paid by the previous owner rather than a market value or zero-cost.
Holding Period:
The holding period of the asset is also inherited from the previous owner. This is important because if the asset had already been held for a long period (thus qualifying as a long-term asset), it will continue to be treated as such in your hands. This can have a significant impact on the applicable tax rate and the availability of indexation benefits.
Tax Implication:
When you eventually sell the asset, the capital gain is computed by subtracting the inherited cost (adjusted for inflation, if applicable) from the sale proceeds. Even though you did not pay anything for the asset at the time of receiving it, the earlier cost and holding period remain in effect for tax purposes.
This approach ensures that the tax benefits achieved by holding an asset over the long term (such as lower long-term capital gains tax rates) are not lost when the asset is transferred by gift or inheritance.
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