How to calculate capital gains tax?

When you are new to managing your finances there are so many terms that may baffle you. I recently started filing returns and when I came across ‘capital gains’ I didn’t know what it really meant and what tax am I supposed to pay. But thankfully, Ankit, my CA friend, helped me out. Although he offered his services for free to me, I wanted to understand at least the basics. I asked him what the capital gains tax is and how to calculate capital gains tax. He explained it in detail. I can share what he told me.

What are capital gains tax?

Capital gains as I understand are the gains or profits you make out of capital assets. Capital assets including:

• Land

• Building

• House 

• Vehicles

• Patents

• Trademarks

• Leasehold rights

• Machinery

• Jewelry, etc.

Types of capital gains tax

So interestingly, I learned that there are two types of capital gains taxes - Long term capital gains and Short term capital gains. 

Long term capital gains or LTCG is earned on assets held for more than 36 months. If you sell an immovable property after 24 months post March 31, 2017 then it will be categorized as LTCG

Short term capital gains or STCG is earned on assets held for less than 36 months. Assets like equity or preference shares, securities, Units of UTI, units of equity oriented mutual funds, and zero coupon bonds if held for less than 12 months are classified as STCG. This is applicable on transfers made after July 10, 2014.

How to calculate the capital gain tax?

Ankit told me that there are set formulas to calculate capital gain tax. I am sharing them below:

Long-term capital gain = full value of consideration received or accruing – (indexed cost of acquisition + indexed cost of improvement + cost of transfer)

Short-term capital gain= full value consideration – (cost of acquisition + cost of improvement + cost of transfer)

The tax is calculated at the rate of 15% (plus surcharges and applicable cess) when transaction is based on securities. All other transactions are added during filing Income Tax Returns and tax rates are applicable based on income tax slabs.

I hope now you understand better

how to calculate capital gains tax. If this is too overwhelming, you must get a friend like Ankit or just hire a CA :P

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