The tax implications on the value of gains or loss emerging from the sale of these assets or possessions differ, depending on the holding period of the asset. So, everyone should be aware of the tax liability on their assets and also, should know how to calculate capital gains tax. Let us first understand what capital gain and capital gains tax means.
Any profit or increase in a capital asset’s value is its capital gain. This gain is realized when these possessions are sold and can be further categorized into short-term (one year or less) capital gain and long-term (more than one year) capital gain. These gains must be claimed on income taxes.
Short-term capital gains are such gains occurred from the assets held for one year or less and the Long-term capital gains are the ones occurred from the securities held for more than one year.
WHAT IS MEANT BY CAPITAL GAINS TAX IN INDIA?
Any profit that occurs from the sale of a capital asset is called capital gain and the tax paid for that profitable amount is called capital gains tax. The capital gains tax is dependent solely upon the type of capital gain. The short-term capital gains tax is applied on the securities that are held for a shorter duration period of less than 36 months whereas the long-term capital gains tax is applied on the securities held for a longer duration of more than 36 months.
HOW CAPITAL GAINS TAX IS CALCULATED ON PROPERTY?
Capital gains tax on the sale of property is calculated differently for the two types of capital gains.
The calculation of tax on short-term capital gains is uncomplicated and straightforward. In case of short-term capital gains tax, the gain is added directly to the total income of the individual to get the calculated income tax based on the tax bracket the individual belongs to.
The calculation of tax on long-term capital gains is difficult as it also takes inflation into account while evaluating the tax. The inflation is added due to holding of the property for a longer time.
THE CAPITAL GAINS TAX FORMULA
The capital gains tax on the property can be calculated with the help of two different formulas, applicable to two types of capital gains.
For Short term capital gains tax on property
The formula applicable to the short term capital gains tax is;
Short-term capital gain = Full value consideration – (cost of acquisition + cost of improvement + cost of transfer)
For Long term capital gains tax on property
The formula applicable to calculate long term capital gain tax is;
Long-term capital gain = Full value of consideration received or accruing – (indexed cost of acquisition + indexed cost of improvement + cost of transfer),
Indexed cost of acquisition = cost of acquisition x cost of 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
Full value consideration is the consideration that is received or to be received by the seller after selling his property.
Cost of acquisition can be defined as the value for which the property was obtained by the seller.
Cost of improvement is defined as the additional charges of a capital nature sustained in making any additions or modifications to the property by the seller.
With Maxworth Realty India Reviews get detailed information on the capital gains and capital gains tax. Refer to the Maxworth Realty reviews to get the best property prices and the most accurately calculated income tax on your assets to save you from extra expenses.
SOME COMMON FAQs
Are Capital gains applicable to the inherited property?
No. The Capital Gains Tax is only applied to the profit that an individual makes by selling a property or an asset. Since, there is no sale involved in the case of an inherited property, only a transfer of ownership such properties are not liable to Capital Gains tax.
How are capital gains taxed?
The capital gains are taxed differently for long-term and short-term capital gains. The short-term capital gains are taxed at standard income based on tax filing status and the long-term capital gains are taxed at a lower rate than the regular income.
What happens if I sell a gifted or inherited property?
In case you sell a property that you did not buy in the first place, you are liable to pay capital gains tax on it. In such cases, the cost of purchase is calculated on the basis of the cost to the previous owner, indexed to the year of purchase.
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