How to Calculate Capital Gains(CG)

Tax on Capital Gains

Calculation of tax is dependent upon the type of capital gain.

1. Calculation of tax on short-term capital gains is simpler than that on long-term gains. For short-term gains, the gain is added to the total income and then the Income Tax is calculated based on the tax bracket that you fall in.
2. Calculation of tax on long-term capital gains is a slightly trickier business. Since long-term capital assets are held for longer periods, inflation also factors in while computing tax on long-term capital gains.

Capital Gains Calculator

Calculating capital gains tax can be done using one of the online tools designed for the purpose. When calculating capital gains tax using a calculator, the following information is to be entered:

1. Sale price.
2. Purchase price.
3. Details of the purchase such as the date, month and year of the purchase.
4. Sale details such as the date, month and year of sale.
5. Investment details, if any. The capital gains could have been invested in shares, debt funds, equity funds, real estate, gold or fixed maturity plans.

Once you have entered the information, the following details will be generated towards the calculation of your capital gains payable:

1. The type of investment.
2. Type of gain (whether short or long-term).
3. Cost inflation index of the year of purchase.
4. Cost inflation index of the year of sale.
5. Difference between the purchase price and sale price.
6. Time between the purchase and sale.
7. Purchased index cost.
8. Long-term capital gain without indexation.
9. Long-term capital gain with indexation.

Capital Gains Formula for Calculation

How is Short-term Capital Gain Calculated?

In the case of short term capital gains, the computation is as given below:

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

How is Long-term Capital Gain Calculated?

To calculate the long-term capital gains tax payable, the following formula is to be used:

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

where:

Indexed cost of acquisition = cost of acquisition x cost inflation index of the year of transfer/cost inflation index of the year of acquisition.

Indexed cost of improvement = cost of improvement x cost inflation index of the year of transfer/cost inflation index of the year of improvement.

How to Calculate Capital Gain Tax? 

The following are the steps to calculate the capital gain tax:

1. Start with determining your basics
2. Basics include the purchase price plus any commissions or fees paid
3. The basic value may increase by reinvesting the dividends on stocks and other factors
4. Next calculate the realized amount, which is any commissions or fees paid subtracted from sale price 
5. Next to determine the difference, subtract your basics from the realised amount to find out whether it is gain or loss.

1. If selling price of asset is more than your purchase price, then it is capital gain
2. If selling price is less than that of the purchase price of the asset, then it capital loss

Tax Rates on Short-term and Long-term Capital Gains

The tax rates on short-term capital gains and long-term capital gains are as follows.

The deduction on Capital Gain Tax, as per the Union Budget 2023 is capped to Rs.10 crore. This is applicable for reinvestments under section 54 and 54F in residential properties. 

Cost Inflation Index(CII)

Cost Inflation Index (CII)is a term that comes into play when we talk about long-term capital gains. This index is fixed and is declared every year by the government. For calculating capital gains on long-term assets, indexation is used.

How to Calculate Capital Gains Tax using CII

CII or Cost Inflation Index is used in the computation of long-term capital gains tax. The CII is notified through a notification issued by the Income Tax Department each financial year. The CII for the financial year 2023-24 is 348. Individuals who are calculating their capital gains will have to use the CII in order to ascertain the indexed cost of acquisition, which is to be deducted from the full value in consideration.

Thus, the CII is applied to the cost of acquisition, following which the figure becomes the indexed cost of acquisition. Following this, the formula for computation of long-term or short-term capital gains is calculated.

When calculating the capital gains from the transfer of a long-term capital gains asset, a deduction can be claimed by indexing the cost of acquisition and the cost of improvement.

Example of Taxation on Long-Term Capital Gains (Real Estate)

Using Indexation

Mr. Mishra bought a plot of land for Rs.10 lakh in the year 2015. After 10 years had elapsed, in January 2025, he sold off his land for Rs.30,00,000.

Cost Inflation Index, CII= Index for financial year 2024-25/Index for financial year 2015-2016 = 1024/480 = 2.13

Indexed cost of purchase = CII x Purchase Price = 2.13 x 10,00,000 = 21,30,000

Long-term capital gain = Selling Price - Indexed cost = 30,00,000 - 21,30,000 = Rs.8,70,000

Tax on capital gain = 20% of 8,70,000 = 1,74,000

Tax on capital gains without Indexation (for stocks and mutual funds): There is an option of not going the complicated route of indexation and directly computing capital gain tax. In this case, only 10% of the non-indexed capital gain is charged as tax. Individuals are free to choose to use indexation and pay 20% tax or ignore indexation and pay 10% on their capital gains.

Quick Tip: In case the asset (mutual fund, stocks) is held for a very long time and its value has multiplied manifold, chances are inflation wouldn't affect profits drastically and as such it would be beneficial to pay 10% tax on the non-indexed gain instead of using indexation and paying 20%.

Tax Exemptions on Capital Gains

Government provides a number of exemptions which can be claimed on capital profits made. Here is a list of all the exemptions that can be claimed with respect to gains from capital assets.

1. Section 54 of the Income Tax Act: Entitles a person to tax exemption on profit earned if that entire profit amount is used to buy another house. The seller can buy a new house within 2 years from the date of sale of his previous property or construct a new house within 3 years from the date of sale.
2. Section 54 EC : Entitles an individual for tax exemption if the entire capital profit is invested in bonds issued by NHAI that is National Highway Authority of India or REC which is Rural Electrification Corporation. There is a limit to exemption under Section 54 EC and is Rs.50 lakh.

1. Section 54F: Under this section, tax exemptions can be claimed on long-term capital gain for selling properties other than housing property. The amount received from selling the property must be reinvested within one year or two years after selling the property in buying a new residential property. The individual must complete the construction of the new house within three years of selling the old residential property. 
2. Section 54B: Under this section, tax exemption can be claimed from selling agricultural land on capital gains. Tax exemption can be claimed by Hindu Undivided Family and individual taxpayers. The assesses must reinvest the amount on new agricultural land within two years of selling the old agricultural property. 
3. Under the Capital Gains Accounts Scheme (CGAS) 1988, the capital gain cannot be invested until you fill in the income tax return in the financial year in which you sold the property, but the profit can be deposited in the public sector bank. After a specific duration, if the amount is not reinvested then the amount will be taxed. 

1. Age-specific tax exemption for Indian citizen: 
   1. Tax exemption on short-term capital gain is available, if taxable income earned by Indian citizen of age below 60 years, is Rs.2.50 lakh.
   2.  Tax exemption offered to senior citizens within age group of 60 to 80 years for taxable income earned up to Rs.3 lakh
   3. Tax exemptions on short-term capital gain can be availed by Indian citizen above 80 years of age for taxable income above Rs.5 lakh 

1. Capital gains are not applicable to the sale of property if the entire amount is invested to set up a small scale or a medium scale industry. However, to avail tax exemption, the tools and machinery for manufacturing should be bought within 6 months of the date of sale.   

For tax computations, capital losses can be used to offset the effect of tax on capital gains. However, long-term capital losses can be set off against long-term gains only. Short-term capital losses can be set off against short-term as well as long-term capital gains.

Quick Tip: Long-term capital losses can be carried forward to a maximum of 8 years and set off against long-term capital gains.

How do I Avoid capital gains tax?

Some of the ways through which you can enjoy an exemption on the payment of capital gain tax are given below:

For long term capital gains tax:

The following are the ways to avoid tax for long-term capital gains: 

1. Under Section 54, if you sell a property and reinvest the money in another property by buying or constructing at least two houses, then you will be exempted from paying the capital gain tax. However, in order to enjoy the exemption, the capital gains on the sale of the property must not exceed Rs.2 crore. You can avail this benefit only once in your life.
2. You can also get an exemption on the payment of capital gain tax by investing your capital gains in Capital Gains Account Scheme (CGAS).
3. Even if you have availed a home loan, tax on capital gains is exempted from being taxed if you used the amount to repay your loan.
4. Under Section 54EC of the Indian Income Tax Act, 1961, you can enjoy an exemption on the payment of capital gain tax. The maximum amount that you can invest is up to Rs.50 lakh. In order to claim the exemption, you will have to invest in this type of scheme before the final date of the filing of your income tax returns.

For short-term capital gain tax:

The following are the ways to avoid tax for short-term capital gains: 

1. If an Indian citizen below the age of 60 years whose profit or total taxable income is below Rs.2.5 lakh will be exempted from paying the short-term capital gain tax.
2. Senior citizens aged between 60 years and 80 years will not be required to pay any tax if the total taxable income stays up to Rs.3 lakh.
3. Citizens above the age of 80 years will be exempted from paying the capital gain tax if the income stays within Rs.5 lakh.
4. Hindu Undivided Families (HUFs) and Non-resident Indians (NRIs) will be exempted from paying the short-term capital gain tax if the total taxable income is up to Rs. 2.5 lakh only.

What Incomes are Charged to Tax Under The Head "Capital Gains"?

Income that are charged to tax under the head 'Capital Gains' are:

1. Any kind of property owned by you which may or may not be related to your business or profession will attract taxes on its sale and will be considered as a capital asset.
2. Any kind of securities held by any foreign investor in SEBI regulated securities will be considered income under capital gains.

Exemptions

1. Stocks, consumables, or raw materials to be used for business purposes.
2. Properties such as clothes or furniture to be used for personal use.
3. Agriculture land in India.
4. 6½% Gold Bonds, 7% Gold Bonds, or National Defence Gold Bonds.
5. Special Bearer Bonds.
6. Gold Deposit Bonds