What is CAPITAL GAIN?                                                                                                            

The profits earned by investors on the sale of their capital assets is called as ‘Capital Gains’. You make gains by selling the capital asset for a price higher than what it was purchased for. These gains are considered as income and therefore, are added to the taxable income for the year when the capital asset was transferred. The tax that applies to such gains is called as Capital Gains Tax (CGT).

Any profits from capital assets that have been held for more than 3 years is considered to be a long-term capital gain. This, particularly for real estate is incurred at a tax rate of 20%. However, tax exemptions can be claimed in this case unlike in the case of short term capital gains.

                                                                                                                                                                                                                                                                                                                                 Long-term capital gains = A-(B+C+D), whereas,

A= Full value of consideration received

B= indexed cost of acquisition*

C= indexed cost of improvement**

D= cost of expenditure incurred wholly and exclusively in connection with such a transfer

*Indexed cost of acquisition = A X (B / C), wherein

A= Cost of acquisition

B= Cost of Inflation Index of the year of transfer

C= Cost of Inflation Index of the year of acquisition

**Indexed cost of improvement = A X (B / C), wherein,

A= cost of improvement

B= Cost of Inflation Index of the year of transfer

C= Cost of Inflation Index of the year of improvement

Cost of transfer is the brokerage paid for managing the deal, cost of advertising plus legal expenses incurred etc.

How do I calculate long-term capital gain?

In order to calculate long-term capital gains from a particular asset, you will have to take the overall value of consideration (the asset’s sales consideration) and subtract from it the expenditure incurred fully and exclusively with regard to the transfer of a capital asset (commission, brokerage, etc.). The figure that you get from this calculation is called the net sale consideration, from which you will have to subtract the indexed cost of acquisition and the indexed cost of improvement, if any, and you will get the long-term capital gain amount.

For Example:

Mr. X is a resident individual and he sells his house on 12/3/2018 for Rs.35,00,000. He had purchased the house on 5/7/2013 for Rs.10,00,000 and spent Rs.2,00,000 on its improvement during May 2014. During the previous year 2015- 2018], his income under all heads excluding capital gains was NIL.

Cost of Inflation Index of the year of transfer, 2018 : 272

Cost of Inflation Index of the year of acquisition, 2013 : 200

The indexed cost of acquisition will be 10,00,000 X 272/200 = 13,60,000

Cost of Inflation Index of the year of transfer, 2018 : 272

Cost of Inflation Index of the year of improvement, 2014 : 220

The indexed cost of improvement will be 2,00,000 X 272/220= 2,47,000

Cost of transfer (Assumption) : 50,000

Long-term capital gain: 35,00,000 – (13,60,000 +  2,47,000 + 50,000) = Rs 18,43,000

Mr X will be liable to pay taxes on this amount at the rate of 20%

I.e. Rs 3,68,600

The recent 2019 budget has revised the capital gains related to the sale of a residential property. Earlier, under Section 54 of the Income Tax Act, the capital gains earned by selling a residential property could be used for construction or to buy another house to save on capital gains tax. The benefit of rollover has been increased to two residential houses if the capital gains fall within the Rs.2 crore.  

To simplify, it means that if an individual has earned up to Rs.2 crore as capital gains on selling a house property, he/she can invest the amount in two house properties but this facility will be available only once in a lifetime. The purchase has to be made within 1 year of the sale of the property or 2 years after the property has been sold. In case the seller wishes to construct a new house with the gains he/she must do so within 3 years of the property/asset sale.