Calculation of Capital gains

We learnt that capital gain is Sale price less purchase price. But how do we arrive at the sale price and purchase price to ensure we pay the correct tax (not excess). Most of the details are taken from the Income Tax India Site.

Let us look at each

SHORT TERM CAPITAL GAINS (STCG)

Short Term Capital Gains is computed as below:

1.    Find the Value of consideration.

2.    Deduct the following

a.     Expenditure incurred wholly and exclusively in connection with such sale

b.    Cost of acquisition (purchase price as well as other charges incurred to acquire the asset)

c.     Cost of improvement

3.    The balance amount is STCG

LONG TERM CAPITAL GAINS (LTCG)

Long Term Capital Gains is computed as below:

1.    Find the Value of consideration.

2.    Deduct the following

a.     Expenditure incurred wholly and exclusively in connection with such sale

b.    INDEXED Cost of acquisition (purchase price as well as other charges incurred to acquire the asset)

c.     INDEXED Cost of improvement

d.    Deduct exemptions available under section 54

3.    The balance is LTCG

Now if you noticed we have mentioned indexed cost. How do we get the indexed cost? The indexed cost is based on cost inflation index (CII). CII is available the Income Tax India site. (Click here) 

Indexed cost of acquisition =

Cost of acquisition   x	CII of year of sale
	CII of year of acquisition

Indexed cost of improvement = 

Cost of improvement  x	CII of year of Sale
	CII of year of improvement

Deduction under Chapter VIA should not be given from LTCG.

COST OF SALE

This may include brokerage paid for arranging the deal, legal expenses incurred for preparing conveyance and other documents, cost of inserting advertisements in newspapers for sale of the asset and commission paid to auctioneer, etc. However, it is necessary that the expenditure should have been incurred wholly and exclusively in connection with the transfer.

Besides an expenditure which is eligible for deduction in computing income under any other head of income, cannot be claimed as deduction in computing capital gains.

COST OF ACQUISITION

Cost of acquisition of an asset is the sum total of amount spent for acquiring the asset.

Where the asset was purchased, the cost of acquisition is the price paid.

Any expenditure incurred in connection with such purchase e.g. brokerage paid, registration charges and legal expenses also forms part of cost of acquisition.

The cost of acquisition of bonus shares is nil.

COST OF IMPROVEMENT

The cost of improvement means all expenditure of a capital nature incurred in making additions or alternations to the capital asset. However, any expenditure which is deductible in computing the income under the heads Income from House Property, Profits and Gains from Business or Profession or Income from Other Sources would not be taken as cost of improvement.