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How to calculate Capital Gain?

Capital gains are calculated differently for assets held for a longer period and for those held over a shorter period.

Formula for computation of Capital Gain on short term capital assets:

Gain arising from transfer of Short-term capital asset should be computed in the following manner:

ParticularsAmount
Full value of considerationxxx
Less: cost of acquisitionxxx
Less: cost of improvementxxx
Less: expenditure incurred wholly and exclusively in connection with such transferxxx
Capital gains on short term capital assetxxx

Gain arising from transfer of Long-term capital asset should be computed in the following manner:

ParticularsAmount
Full value of considerationxxx
Less: Indexed cost of acquisitionxxx
Less: Indexed cost of improvementxxx
Less: Expenditure incurred wholly and exclusively in connection with such transferxxx
Capital gains on long term capital assetsxxx

Notes on how to compute indexed cost of acquisition and indexed cost of improvement*

  • 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

Fair Value of Consideration

Fair value consideration means what the transferor receives or is entities to receive as a consideration for the sale of property/assets. This value may be in cash or in kind i.e. In exchange for the assets.

In case of exchange of an asset, the full value of consideration of capital gain shall be the fair market value of the property generated in exchange.

Cost of Acquisition

Cost of Acquisition is the price which the assessee has paid, or the amount which assessee has incurred for acquiring the asset. The expenses incurred at the time of completing the title are a part of the cost of acquisition.

In case of Intangible asset (like goodwill of a business, trademark or brand name associated with business, tenancy rights, loom hours etc.)

  • if self-generated then, cost of acquisition will be nil and
  • in case of acquired/purchased, cost of acquisition will be purchase price paid for acquisition of asset.

In case of shares/securities, cost of acquisition will be given below:

ParticularsCost of Acquisition
Original SharesPurchase price
Right SharesPrice actually paid under right issue
Bonus sharesNil
Renouncement of right to subscribe shares:
A) In the hands of the person who renounces the right
B) In the hands of the purchaser of right

A) Nil

B) Total expense incurred including price paid to the person who renounces the right.

Cost of Improvement

Cost of Improvement means all the expenditure incurred in making any addition or alteration to capital asset by the assessee. Cost of Improvement incurred before 01.04.2001 is to be ignored in all cases.

Capital AssetsCost of Improvement
Goodwill of businessNil
Right to manufacture, produce or process any article or thingsNil
Right to carry on any business or professionNIl
Whether other capital asset is acquired by the assessee or the previous ownerAll capital expenditure incurred on or after 01.04.2001

Expenditure incurred wholly and exclusively in connection with such transfer

Expenses incurred that wholly and directly relate to the sale or transfer of the capital asset is allowed to be deducted. These are the expenses which are necessary for the transfer to take place.

In the case of sale of house property:

These expenses are deductible from the total sale price:

  1. Brokerage or commission paid
  2. Cost of stamp papers
  3. Advertisement Expenses
  4. Stamp duty paid
  5. Travelling expenses in connection with the transfer – not to be included if incurred after the transfer taken place
  6. Where property has been inherited, expenditure incurred with respect to procedures associated with the will and inheritance, obtaining succession certificate, costs of the executor, may also be allowed in some cases.

In the case of sale of shares:

You may be allowed to deduct these expenses:

  1. Broker’s commission related to the shares sold
  2. STT or securities transaction tax is not allowed as a deductible expense

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