Capital gain is an increase in the value of a capital asset that gives it a higher
worth than the purchase price. A capital loss is incurred when there is a
decrease in the capital asset value compared to an asset's purchase price. The
gain/loss is not realized until the asset is sold.
In other words Capital Gains Profits or gains arising from transfer of a capital
asset are called “Capital Gains” and are charged to tax under the head “Capital
Gains”. Capital asset is defined to include: (a) Any kind of property held by an
assessee, whether or not connected with business or profession of the
assessee. (b) Any securities held by a FII which has invested in such securities
in accordance with the regulations made under the SEBI Act, 1992.
Classification of capital Gains
Income from capital gains is classified as “Short Term Capital Gains” and
“Long Term Capital Gains”.
A capital gain may be short term in which term is one year or less than one
year must be claimed on income tax.
A capital gain may be Long term which is more than one year and must be
claimed on income tax.
Computation of Long Term capital Gain
Capital gain is computed by deducting the cost of acquisition, cost of
improvement and any expenditure incurred in connection with transfer from the
(*) Indexation is a process by which the cost of acquisition is adjusted against
inflationary rise in the value of asset. The benefit of indexation is available only
to long-term capital assets. For computation of indexed cost of acquisition
following factors are to be considered:
• Year of acquisition/improvement • Year of transfer
• Cost inflation index of the year of acquisition/improvement
Computation of Long Term capital Gain (LTCG
Full value of consideration(i.e., Sales consideration of asset) XXXXX
Less: Expenditure incurred wholly and exclusively in connection
with transfer of capital asset (E.g., brokerage, commission,
advertisement expenses, etc.).
Net sale consideration XXXXX
Less: Indexed cost of acquisition XXXXX
Less: Indexed cost of improvement if any (*) XXXXX
Long-Term Capital Gains XXXXX
Things we should know about Capital Gains Tax
Capital gains aren't just for rich people
Anyone who sells a capital asset should know that capital gains tax may apply. If
we sell something for more than our "basis" we’ll need to report that gain on our
taxes. Basis includes the price of the item and any other costs we had to pay to
acquire it, including:
● Sales taxes, excise taxes and other taxes and fees
● Shipping and handling costs
● Installation and setup charges
Home is exempt:
The single biggest asset many people have is their home, and depending on the real
estate market, a homeowner might realize a huge capital gain on a sale. The tax
code allows us to exclude some or all of such a gain from capital gains tax, as long
as we meet three conditions:
● we owned the home for a total of at least two years in the five-year period
before the sale.
● we used the home as our primary residence for a total of at least two years in
that same five-year period.
● we haven't excluded the gain from another home sale in the two-year period
before the sale.
If we meet these conditions, we can exclude up to $250,000 of our gain if we are
single, $500,000 if we are married filing jointly.
Length of ownership:
If we sell an asset after owning it for more than a year, any gain we have is a
"long-term" capital gain. If we sell an asset we have owned for a year or less,
though, it's a "short-term" capital gain. And the tax bite from short-term
gains is significantly larger than that from long-term gains.
People in the lowest tax brackets usually don't have to pay any tax on long-
term capital gains. The difference between short and long term, then, can
literally be the difference between taxes and no taxes.
Capital losses can offset capital gains:
If we sell something for less than its basis, we have a capital loss. Capital losses
from investments; but not from the sale of personal property can be used to
offset capital gains. So if we have $80,000 in long-term gains from the sale of
one stock, but $50,000 in long-term losses from the sale of another, then you
may only be taxed on $30,000 worth of long-term capital gains.
If capital losses exceed capital gains, you may be able to use the loss to offset up
to $3,000 of other income. If you have more than $3,000 in capital losses, the
excess can be carried forward to future years to offset income in those years.
Business income isn't a capital gain:
If you operate a business that buys and sells items, your gains from such sales
will be considered and taxed as business income rather than capital gains. For
example, many people buy items at antique stores and garage sales and then
resell them in online auctions. Do this in a businesslike manner and with the
intention of making a profit, and the IRS will view it as a business.
The money you pay out for items is a business expense, the money you receive is
business revenue and the difference between them is treated as income, subject
to the same taxes as income from employment.