How to calculate Long Term and Short Term Capital Gains

Gains from Capital Assets are called Capital Gains – these may be Long Term or Short Term Capital Gains depending upon the holding period. Usually, assets held for 36 months or less are termed short term capital assets and gain on their sale is short term capital gain. There are a few exceptions here – some assets are considered short term when held for 12 months or less. Assets sold after 36 months are called Long Term Capital Assets. For example – Land held for more than 3 years is termed as long term capital asset, Equity Funds are considered short term when held for 12 months or less, whereas Debt Funds are long term assets when held for more than 36 months .Therefore, its important to find out the specific holding period applicable to your asset, since it impacts how the capital gains will be calculated.

To arrive at the Short Term Capital Gains – From the total Sale Price of the asset deduct cost of acquisition, expenses directly to sale, cost of improvements(if any) also deduct exemptions allowed under section 54(as applicable) – > the resulting amount is the Capital Gain. In case of Long Term Capital Assets, the only difference is, one is allowed to deduct Indexed Cost of Acquisition/Indexed Cost of Improvements from the sale price. Indexation is done by applying CII (cost inflation index). This increases your cost base (and lowers your gains) since the purchase price is adjusted for the impact of inflation.

For e.g., if you purchased a house on 28th February 2007 for Rs 50lakhs, and sell it on 30thAugust 2014. Indexed Cost shall be calculated by applying CII to Rs 50lakhs. Therefore Rs 50lakhs x CII for 2014-15/ CII for 2006-07 or Rs 50lakhs x 1024/519 = 98.65lakhs is your cost of acquisition for calculating Long Term Capital Gains.

It is important to consider the nature of asset and the period of holding to assess whether it is a Short Term/Long Term Capital Asset since it also impacts the rate of tax on its gains. Short Term Capital Gains form part of regular income and attract tax at the tax slabs applicable to you. However in case of sale of shares & equity oriented funds, Short Term Gains are taxed at 15%. Usually, Long Term Capital Gains are taxed at a special rate of 20%, but Long Term gains on Shares (on which STT is chargeable) and Equity Mutual Funds are not taxed.

Given the complex nature of capital gains tax, as a taxpayer it would be wise to maintain details regarding your purchase/sale activity for capital assets.