Sold an asset recently? Understand how to calculate the capital gains

When assets such as equity, property, gold, etc., are sold for a higher price than the purchase price, it results in capital gains, which are subject to taxation. In this article, we will examine how various asset classes are classified into short- or long-term capital assets based on the holding period and how capital gains are calculated and taxed.

What are short- and long-term capital assets?

According to the holding period, a capital asset can be classified as short-term or long-term. Based on this classification, short-term capital gains tax or long-term capital gains tax is applied.

Different asset classes are categorised based on the holding period as follows:

• Equities: If the equity shares or equity mutual fund units are sold within 12 months of purchase, the capital gains are termed as short-term capital gains. If the sale is after 12 months, the capital gains are termed as long-term capital gains. Apart from equities, the 12-month holding period for categorisation of short- or long-term capital gains also applies to listed securities such as units of UTI, debentures, zero coupon bonds, and government securities.
• Immovable property (land, building, etc.): If the holding period is less than 24 months, the capital gain is termed as a short-term capital gain. If otherwise, it is a long-term capital gain.
• Debt funds and gold: If the holding period is less than 36 months, the capital gain is termed as short-term capital gain, or else it is long-term capital gain.

As we saw in the above section, the taxation of mutual funds depends on the asset class (whether equity or debt mutual funds).

Also Read: How To Minimise The Effect Of Taxation On Long-Term Capital Gains

How to calculate capital gains

Let us understand the calculation of short-term capital gains with an example. Assume that an asset has been bought and sold as follows:

In the case of long-term capital gain calculation, instead of the purchase price, we have to take the indexed purchase price. The same applies to the amount spent on the improvement of the asset.

Now that we understand how capital gain is calculated, let us see how it is taxed.

Tax on capital gains

Any profit made on the sale of a capital asset is known as a capital gain. This is subject to a capital gains tax. The application of this tax depends on how long the capital asset was held before the sale.

How to calculate capital gains tax

Note: Long-term capital gains tax is exempted in specific cases, subject to certain terms and conditions. For example, in the case of Sovereign Gold Bonds (SGB), long-term capital gains are exempt from taxation if they are redeemed with the Reserve Bank of India (RBI).

Also Read: Looking For Ways To Save Tax On Long-Term Capital Gains? Here Are Some Solutions

Actionable insights

Whenever you sell a capital asset, take the following steps:

1. Calculate the capital gain
2. Based on the asset class and holding period, classify it as a short- or long-term capital asset
3. Calculate the short- or long-term capital gains tax